Document:

Exhibit 10.5

 

XPLORE TECHNOLOGIES CORP.,

 

XPLORE TECHNOLOGIES CORPORATION OF AMERICA,

 

PHOENIX VENTURE FUND LLC

 

AND

 

EACH OF THE LENDERS LISTED

ON SCHEDULE 1 ATTACHED HERETO

 

 

 

SEPTEMBER 2005 DEBENTURE PURCHASE
AGREEMENT

 

September 15, 2005

 

 

 

 

SEPTEMBER 2005 DEBENTURE PURCHASE
AGREEMENT

 

THIS AGREEMENT is made the 15th day of September, 2005, by and among Xplore Technologies Corp., a corporation
incorporated under the laws of Canada (the “Corporation”),
Xplore Technologies Corporation of America,
a corporation incorporated under the laws of Delaware and a wholly-owned
subsidiary of the Corporation (the “US
Subsidiary”), Phoenix Venture Fund
LLC, a limited liability company organized under the laws of the
State of Delaware (“Phoenix”) and
each of the other lenders listed on Schedule 1 attached to this
Agreement (each such lender, a “Lender”
and collectively, the “Lenders”).

 

WHEREAS the Corporation and the US Subsidiary (each a “Borrower” and together the “Borrowers”) are in the business of
engineering, developing, integrating and marketing ruggedized mobile wireless
pen-based computing systems;

 

WHEREAS on the terms and subject to the conditions hereof, the Lenders
agree to subscribe for and purchase from the Borrowers, and the Borrowers agree
to issue to the Lenders, senior secured debentures of the Borrowers (the “Debentures” and each, a “Debenture”) in an aggregate principal
amount of up to Five Million United States Dollars ($5,000,000);

 

WHEREAS the proceeds to the Borrowers paid by the Lenders for the
Debentures will be used by the Borrowers solely in accordance with the terms of
this Agreement;

 

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
mutual covenants hereinafter contained, the parties hereto agree as follows:

 

ARTICLE 1.

TRANSACTIONS

 

Section 1.1.                                   Issuance
of Debentures to the Lenders.

 

On the terms and subject to the conditions hereof, upon the request of
the Borrowers, the Lenders agree to subscribe for and purchase from the
Borrowers up to an aggregate principal amount of $5 million of Debentures. The
terms and conditions of the Debentures are as set forth herein and are
evidenced by the Debenture Certificates in the form attached hereto as Exhibit A.
The aggregate principal amount of Debentures to be purchased (the “Purchase Price”) by the Lenders and sold by
the Borrowers shall be determined as follows:

 

(a)                                  Subject
to the terms and conditions of this Agreement, at the Initial Closing (as
hereinafter defined), Phoenix, The Philip S. Sassower 1996 Charitable Remainder
Annuity Trust (the “CRAT”) and MAG
Multi Corp. (“MAG Multi” and
together with Phoenix and the CRAT, the “Initial
Lenders”) shall purchase, and the Borrowers shall sell and issue to
the Initial Lenders, Debentures in an aggregate principal amount of $3 million
(the “Initial Debentures”), in the
following amounts: (i) Phoenix shall purchase Initial Debentures in an
aggregate principal amount of $2,500,000, (ii) the CRAT shall purchase
Initial Debentures in an aggregate principal amount of $250,000, and (iii) MAG
Multi shall purchase Initial Debentures in an aggregate principal amount of
$250,000; and

 

 

(b)                                 Subject
to the terms and conditions of this Agreement, the Borrowers have the right,
but not the obligation, to, upon fifteen (15) Business Days prior written
notice (such notice to specify the aggregate principal amount of Debentures to
be subscribed for), require Phoenix to subscribe for and purchase additional
Debentures (the “Additional Debentures”)
in aggregate principal amount increments of $500,000, but in no event shall
Phoenix be required to subscribe for or purchase Additional Debentures for more
than an aggregate principal amount of $2 million. Phoenix may at any time,
without the consent of the Borrowers, make an assignment of its interests,
rights and obligations under this Agreement, including, without limitation, all
or a portion of its Commitment.

 

Section 1.2.                                   Closings

 

(a)                                  The
consummation of the purchase and sale of the Initial Debentures shall occur on
the date when all of the conditions set forth in Sections 7.1 and 7.2 have been
satisfied in full (or waived in writing) or at such later time and place as may be
mutually agreed upon by the Borrowers and Phoenix (the “Initial Closing”).

 

(b)                                 From
time to time after the Initial Closing, but no later than sixty (60) days prior
to the Maturity Date, the Borrowers shall have the right to issue and sell to
Phoenix, and Phoenix shall purchase, Additional Debentures up to an aggregate
principal amount of $2 million (each an “Additional
Closing”), subject to the terms of Section 1.1(b).

 

Section 1.3.                                   Purchase
Price

 

(a)                                  On
the terms and subject to the conditions hereof, on the Initial Closing Date,
each Initial Lender shall pay the Purchase Price for the Initial Debentures to the Borrowers by surrendering an equal
amount of indebtedness as follows: (A) in the case of Phoenix as an
Initial Lender, an amount equal to the aggregate principal amount of the
Phoenix Notes then outstanding, (B) in the case of the CRAT as an Initial
Lender, an amount equal to the aggregate principal amount of the CRAT Note then
outstanding, and (C) in the case of MAG Multi as an Initial Lender, an
amount equal to the aggregate principal amount of the MAG Multi Note then
outstanding, which in each case shall represent, subject to Section 1.4(c) hereof,
payment in full for such notes.

 

(b)                                 On
the terms and subject to the conditions hereof, on each Additional Closing
Date, Phoenix shall pay the Purchase Price, equal
to the aggregate principal amount of Debentures then being purchased by
Phoenix, to the Borrowers by way of certified check, bank draft or wire
transfer, less any unpaid fees and expenses payable by the Borrowers pursuant
to Section 1.4. The Borrowers hereby irrevocably direct Phoenix to
withhold such fees and expenses from the payment of its Purchase Price and
Phoenix hereby agrees that the withholding of such fees and expenses shall
constitute its acknowledgement and agreement that the Borrowers shall not
thereafter have any further obligation to Phoenix under Section 1.3 hereof,
except as set forth in Section 7.2(e).

 

Section 1.4.                                   Fees
and Expenses

 

(a)                                  The
Borrowers acknowledge and agree that they will be, jointly and severally,
responsible for and will promptly pay or reimburse each Lender on demand for
all

 

 

reasonable
fees, expenses and other out-of-pocket expenses paid or incurred by such
Lender, its representatives and consultants relating to its investigation of
the Corporation, the Subsidiaries and its respective businesses, the
negotiation, preparation and review of this Agreement and the other Instruments
and related agreements and all other matters pertaining to the transactions
hereby contemplated, including, without limitation, all reasonable fees,
expenses and other out-of-pocket expenses paid or incurred by such Lender for
legal advice and services in connection with such transactions.

 

(b)                                 The
Borrowers acknowledge and agree that they will be responsible for and will
promptly pay all such reasonable fees (including, but not limited to, legal
fees), expenses and other out-of-pocket expenses whether or not the
transactions hereunder are completed and even if it is the Lenders who
terminate this Agreement pursuant to Section 7.3.

 

(c)                                  On
the Initial Closing Date, the Borrowers shall pay, by wire transfer of immediately
available funds, (i) to Phoenix an amount equal to all accrued and unpaid
interest on the Phoenix Notes, (ii) to the CRAT an amount equal to all
accrued and unpaid interest on the CRAT Note, and (iii) to MAG Multi an
amount equal to all accrued and unpaid interest on the MAG Multi Note.

 

Section 1.5.                                   Use
of Proceeds

 

Each of the Borrowers hereby covenants, agrees, represents and warrants
with and to the Lenders that such Borrower will use the net proceeds from the
issuance and sale of the Debentures to the Lenders solely to finance its
product development and for working capital and general corporate purposes; provided, that $3,000,000 from the
proceeds of the Initial Closing will be used to repay the outstanding principal
balance on the Initial Closing Date of (i) the Phoenix Notes, (ii) the
CRAT Note, and (iii) the MAG Multi Note.

 

ARTICLE 2.

PAYMENT OBLIGATIONS

 

Section 2.1.                                   Principal
Sum

 

For value received, the Corporation and the US Subsidiary, each having
its principal business office at 14000 Summit Drive, Austin, Texas 78728,
shall, jointly and severally, pay to the order of each of the Lenders the
principal amount of each Debenture held by such Lender, unless such Debenture
has been prepaid in full, plus all accrued and unpaid interest thereon in
lawful money of the United States on March 31, 2006 (the “Maturity Date”), or such earlier date as
the Obligations shall become due and payable hereunder, at the offices of the
respective Lenders set forth on Schedule 1 or such other place as
the Lenders may designate in writing not less than two Business Days prior
to the Maturity Date.

 

Section 2.2.                                   Interest

 

The principal outstanding on each Debenture from time to time shall
bear interest from and including the applicable Closing Date to the date of
repayment in full at 10% per annum (the “Interest
Rate”) calculated and payable in arrears on the Maturity Date. After
the occurrence of an Event of Default and for so long as it continues, all
Obligations shall bear interest at a rate that

 

 

is 5% per annum
in excess of the interest rate otherwise payable under this Agreement with
respect to the Debentures (the “Default
Interest Rate”).

 

This Agreement and the other Transaction Documents are subject to the
express condition that at no time shall the Borrowers be required to pay
interest on the principal balance of the Debentures at a rate which could
subject Lenders to either civil or criminal liability as a result of being in
excess of the maximum amount permissible under applicable usury or similar laws
(the “Maximum Legal Rate”). If by
the terms of this Agreement or the other Transaction Documents, the Borrowers
are at any time required or obligated to pay interest on the principal balance
due under the Debentures at a rate in excess of the Maximum Legal Rate, the
Interest Rate, or the Default Interest Rate, as the case may be, shall be
deemed to be immediately reduced to the Maximum Legal Rate and all previous
payments in excess of the Maximum Legal Rate shall be deemed to have been
payments in reduction of principal and not on account of the interest due
hereunder. All sums paid or agreed to be paid to Lenders for the use,
forbearance, or detention of the sums due under the Debentures, shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full stated term of the Debentures until payment in full
so that the rate or amount of interest on account of the Debentures does not
exceed the Maximum Legal Rate from time to time in effect and applicable to the
Debentures for so long as the Debentures are outstanding.

 

Section 2.3.                                   Repayments

 

Each Borrower jointly and severally agrees to pay to each Lender the
principal amount, any accrued and unpaid interest and any other monies owing in
respect of the Debentures in full on the Maturity Date or on such earlier date
as the Obligations shall become due and payable in full hereunder. Each payment
of principal amount of the Debentures hereunder (whether at maturity, by way of
prepayment of otherwise), and each payment of interest on the Debentures shall
be made and applied to the Lenders pro rata
based on the ratio that each Lender’s Debentures bears to the total number of
Debentures issued to the Lenders hereunder.

 

Section 2.4.                                   Prepayments

 

The Borrowers may, upon at least fifteen (15) days prior notice to the
Lenders, prepay the Debentures (a “Voluntary
Prepayment”), without premium or penalty, in whole or in part at
any time (any such date, the “Prepayment Date”);
provided that upon any such prepayment all accrued and unpaid interest as of
the date immediately preceding the Prepayment Date shall be paid in cash. To
the extent that outstanding Debentures are not all prepaid at the same time,
the Debentures shall be prepaid in chronological order of issuance.

 

Section 2.5.                                   Acceleration
Events/Mandatory Prepayments

 

(a)                                  Subject
to the terms of the Intercreditor Agreement, the SVB Loan Agreement and the
Wistron Intercreditor Agreement, the unpaid principal amount of the Debentures,
together with any accrued and unpaid interest thereon, shall become immediately
due and payable on a first priority basis prior to any repayment of the
Existing Debentures (an “Acceleration Event”),
in whole or in part, to the extent of fifty percent (50%) of the proceeds
received by the Borrowers in any one or more financing transactions (a “Financing”) involving

 

 

the sale and
issuance by the Borrowers of equity or debt securities (other than proceeds
from the exercise of share options, stock purchase warrants or other
convertible securities of the Corporation outstanding at or prior to the
Initial Closing or any Warrant). Subject to the terms of the Intercreditor
Agreement, the SVB Loan Agreement and the Wistron Intercreditor Agreement, any
remaining proceeds of any such Financing allocated to the repayment of Funded
Indebtedness of the Borrowers shall first be applied to repayment of the
Debentures prior to any repayment of the Existing Debentures or any other
Funded Indebtedness of the Borrowers.

 

(b)                                 The
Borrowers shall, subject to the terms of the Intercreditor Agreement, the SVB
Loan Agreement and the Wistron Intercreditor Agreement, promptly upon the
consummation of a sale or disposition of assets in bulk (other than as part of
a bankruptcy or insolvency proceeding or a liquidation of the Corporation or
any Subsidiary) by the Corporation or any Subsidiary in which the Corporation
or Subsidiary, as applicable, shall receive aggregate proceeds in excess of
$5,000,000, prepay the Debentures, on a first priority basis prior to any
repayment of the Existing Debentures (a “Mandatory
Prepayment”), to the extent of all such proceeds.

 

Section 2.6.                                   Payment
in US Dollars.

 

All payments made in cash by the Borrowers shall be made in U.S.
Dollars in immediately available funds.

 

Section 2.7.                                   Taxes

 

Any and all payments or reimbursements made under the Debentures shall
be made free and clear of, and without deduction for, any and all taxes,
levies, deductions, charges or withholdings, and all liabilities with respect
thereto (all such taxes, deductions, charges or withholdings and all
liabilities with respect thereto, excluding such taxes imposed on net income, “Tax Liabilities”), excluding, however, (i) any
taxes imposed on income or any franchise tax imposed in lieu of a net income
tax; (ii) any taxes imposed on any Lender (or any Person or entity with an
interest in Lender), and (iii) any taxes for which any Lender (or any
Person or entity with an interest in such Lender) would be entitled to claim a
credit against its income tax liability in the country in which the Lender is
organized or otherwise subject to taxation. If the Borrowers shall be required
by law to deduct any such amounts from or in respect of any sum payable
hereunder to a Lender then, the Borrowers shall pay such amounts to the appropriate
Governmental Body and provide such Lender with satisfactory documentary
evidence of such payment within ten (10) days after such payment and the
sum payable hereunder shall be increased as may be necessary so that,
after making all required deductions, such Lender receives an amount equal to
the sum it would have received had no such deductions been made.

 

ARTICLE 3.

INTERPRETATION

 

Section 3.1.                                   Defined
Terms

 

As used herein the following expressions shall have the following
meanings:

 

 

“Accounts Receivable”
means all of the Person’s accounts, contract rights, chattel paper,
instruments, general intangibles and rights to payment of every kind, now or at
any time hereafter arising.

 

“Affiliate” means,
in respect of any corporation, any Person which, directly or indirectly,
controls or is controlled by or is under common control with the Corporation;
and for the purpose of this definition, “control” (including, with correlative
meanings, the terms “controlled by” and “under common control with”) means the
power to direct, or cause to be directed, the management and policies of such
Person whether through the ownership of Voting Shares or by contract or
otherwise.

 

“Applicable Law”
means, in respect of any Person, property, transaction or event, all applicable
laws, statutes, rules, by-laws and regulations, and all applicable official
directives, orders, judgments and decrees of Governmental Bodies.

 

“Business Day” means
any day other than Saturday, Sunday or a day on which chartered banks are
closed for business in New York, New York.

 

“Capital Lease Obligations”
means, as to any Person, the obligation of such Person to pay rent or other
liquidated amounts under a lease of (or other agreement conveying the right to
use) real or personal property, which obligations are required to be classified
and accounted for as a capital lease on a balance sheet of such Person under
generally accepted accounting principles and, for purposes of this Agreement,
the amount of such obligations shall in each case be the capitalized amount
thereof, determined in accordance with generally accepted accounting
principles.

 

“Cash Equivalents” means: (i) marketable
direct obligations issued or unconditionally guaranteed by the United States or
Canadian Government or issued by any agency thereof and backed by the full
faith and credit of the United States or Canada, in each case maturing within
one (1) year from the date of acquisition thereof; (ii) commercial
paper maturing no more than one (1) year from the date issued and, at the time
of acquisition, having a rating of at least A-1 from Standard & Poor’s
Rating Service or at least P-1 from Moody’s Investors Service, Inc.; (iii) certificates
of deposit or bankers’ acceptances maturing within one (1) year from the
date of issuance thereof issued by, or overnight reverse repurchase agreements
from, any commercial bank organized under the laws of Canada or the United
States of America or any state thereof or the District of Columbia having
combined capital and surplus of not less than $500,000,000; and (iv) time
deposits maturing no more than thirty (30) days from the date of creation
thereof with commercial banks having membership in the Federal Deposit
Insurance Corporation or the Canadian Deposit Insurance Corporation in amounts
at any one such institution not exceeding the lesser of $100,000 or the maximum
amount of insurance applicable to the aggregate amount of the Corporation’s
deposits at such institution.

 

“Change of Control” means
any of:

 

(i)                                     a
merger, consolidation, amalgamation or reorganization involving the
Corporation, unless such merger, consolidation, amalgamation or reorganization
is one in which the shareholders of the Corporation, immediately before such
merger,

 

 

consolidation,
amalgamation or reorganization, own, directly or indirectly immediately
following such merger, consolidation, amalgamation or reorganization, at least
fifty-one percent (51%) of the combined voting power of the outstanding voting
securities of the corporation resulting from such merger or consolidation,
amalgamation or reorganization in substantially the same proportion as their
ownership of the voting securities immediately before such merger,
consolidation, amalgamation or reorganization,

 

(ii)                                  the
individuals who, as of the date hereof, are members of the Board (the “Incumbent Board”), cease for any reason to
constitute at least two-thirds of the members of the Board; provided, however,
that (i) if the election, or nomination for election by the Corporation’s
common shareholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board or (ii) if any new director has been
designated by the December 2004 Lenders pursuant to the December 2004
Debenture Agreement, such new director shall, for purposes hereof, be considered
as a member of the Incumbent Board; provided
further, however, that no individual (other than an
individual designated pursuant to the rights of the December 2004
Debenture Holders) shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened election contest or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Incumbent Board
(a “Proxy Contest”) including by
reason of any agreement intended to avoid or settle any election contest or
Proxy Contest;

 

(iii)                               the
Corporation shall cease to own and control all of the economic and voting
rights associated with ownership of at least 100% of the outstanding shares of
all classes of the Subsidiaries on a fully diluted basis, other than pursuant
to the dissolution or winding-up of a Subsidiary pursuant to which all of the
assets of such Subsidiary are transferred or conveyed to the Corporation or a
Subsidiary; and

 

(iv)                              with
respect to any of the Corporation or Subsidiaries, the time when the
Corporation or such Subsidiary has sold, transferred, conveyed assigned or
otherwise disposed of all or substantially all of its assets, other than
pursuant to a transaction in which such assets are sold, transferred, conveyed,
assigned or disposed of to the Corporation or a Subsidiary.

 

“Closing” means the
Initial Closing together with each Additional Closing, if any.

 

“Closing Date” means
the date on which a Closing is consummated.

 

“Commitment” shall mean
the commitment of each Lender to purchase the aggregate principal amount of
Debentures set forth opposite its name on Schedule 1.

 

“Common Shares” means
the common shares, no par value, of the Corporation.

 

“Contingent Liabilities”
means, as applied to any Person, any direct or indirect contingent liability of
that Person: (i) with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto; or (ii) with respect to any letter of
credit issued for the account of that Person or 

 

 

as to which
that Person is otherwise liable for reimbursement of drawings. Contingent
Liabilities shall also include (A) the direct or indirect guaranty,
endorsement (other than for collection or deposit in the ordinary course of
business), co-making, discounting with recourse or sale with recourse by such
Person of the obligation of another, (B) the obligation to make
take-or-pay or similar payments if required regardless of nonperformance by any
other party or parties to an agreement, other than pursuant to routine
agreements entered into in the ordinary course of business, and (C) any
liability of such Person for the obligations of another through any agreement
to purchase, repurchase or otherwise acquire such obligation or any property
constituting security therefore, to provide funds for the payment or discharge
of such obligation or to maintain the solvency, financial condition or any
balance sheet item or level of income of another. The amount of any Contingent
Liabilities shall be equal to the amount of the obligation so guaranteed or
otherwise supported or, if not a fixed and determined amount, the maximum amount
so guaranteed.

 

“CRAT Note” means
that Secured Promissory Note, dated July 19, 2005, in the aggregate
principal amount of $250,000, issued by the US Subsidiary to the CRAT.

 

“Default” means any
event which, but for the lapse of time, giving of notice or both, would
constitute an Event of Default.

 

“December 2004 Debenture Holders”
means those Persons in their capacity as lenders under the December 2004
Agreement.

 

“Encumbrance” means
any mortgage, lien, pledge, assignment, charge, security interest, title
retention agreement, hypothec, levy, execution, seizure, attachment,
garnishment, right of distress or other claim in respect of property of any
nature or kind whatsoever howsoever arising (whether consensual, statutory or
arising by operation of law or otherwise) and includes arrangements known as
sale and lease-back, sale and buy-back and sale with option to buy-back.

 

“Environmental Laws”
means all applicable federal, provincial, state, municipal or local laws,
statutes, regulations or ordinances relating to the environment, occupational
safety, health, product liability and transportation.

 

“Environmental Order”
means any prosecution, order, decision, notice, direction, report,
recommendation or request issued, rendered or made by any Governmental Body in
connection with Environmental Laws.

 

“Event of Default”
has the meaning ascribed to such term in Section 8.1.

 

“Existing Debentures”
means those debentures of the Corporation issued pursuant to (i) that
certain Debenture Purchase Agreement, dated November 5, 2002, by and among
Xplore Technologies Corp (as Borrower), Phoenix Enterprises LLC and the lenders
listed on Schedule 1 thereto, as amended (the “November 2002 Debenture Agreement”), (ii) that
certain December 2002 Debenture Purchase Agreement, dated December 6,
2002, by and among Xplore Technologies Corp (as Borrower), Phoenix Enterprises
LLC and the lenders listed on Schedule 1 thereto, as amended (the “December 2002 Debenture Agreement”), (iii) that
certain April 2003 Debenture Purchase Agreement, dated April 9, 2003,
by and among Xplore Technologies Corp (as Borrower), Phoenix Enterprises LLC
and the lenders listed on Schedule 1 thereto, as

 

 

amended (the “April 2003 Debenture Agreement”) (iv) that
certain Second April 2003 Debenture Purchase Agreement, dated April 28,
2003, by and among Xplore Technologies Corp (as Borrower), Phoenix Enterprises
LLC and the lenders listed on Schedule 1 thereto, as amended (the “Second April 2003 Debenture Agreement”),
and (v) that certain December 2004 Debenture Purchase Agreement,
dated December 17, 2004, by and among Xplore Technologies Corp. (as
Borrower), Phoenix and the lenders listed on Schedule 1 thereto, as
amended ( the “December 2004 Debenture
Agreement”).

 

“Existing Debenture Agreements”
means (i) the November 2002 Debenture Agreement, (ii) the December 2002
Debenture Agreement, (iii) the April 2003 Debenture Agreement, (iv) the
Second April 2003 Debenture Agreement and (v) the December 2004
Debenture Agreement.

 

“Existing Debenture Holders”
means those Persons in their capacity as lenders under (i) the November 2002
Debenture Agreement, (ii) the December 2002 Debenture Agreement, (iii) the
April 2003 Debenture Agreement, (iv) the Second April 2003
Debenture Agreement and (v) the December 2004 Debenture Agreement.

 

“Funded Indebtedness”
means, with respect to any Person at any particular time, any of the following
amounts determined in accordance with generally accepted accounting principles
on a consolidated basis at such time:

 

(i)                                     indebtedness
for money borrowed and indebtedness represented by notes payable and drafts
accepted representing extensions of credit (including, as regards any note or
draft issued at a discount, the face amount of such note or draft) and
including the face amount of bankers’ acceptances and letters of credit;

 

(ii)                                  all
obligations (whether or not with respect to the borrowing of money) which are
evidenced by bonds, debentures, notes or other similar instruments or not so
evidenced but which would be considered to be indebtedness for borrowed money
in accordance with generally accepted accounting principles;

 

(iii)                               all
indebtedness for borrowed money secured by an Encumbrance on any property of
such Person;

 

(iv)                              all
indebtedness upon which interest charges are customarily paid;

 

(v)                                 Capital
Lease Obligations and all other indebtedness issued or assumed as full or
partial payment for property or services or by way of capital contribution; and

 

(vi)                              any
of the foregoing amounts in respect of any Subsidiary of the Person whose accounts
are not required under generally accepted accounting principles to be
consolidated with the accounts of such Person, including (without limitation)
the aggregate outstanding amount of the Obligations at such time.

 

Notwithstanding
the foregoing, trade payables, expenses, costs and charges accrued in the
ordinary course of business in accordance with customary trade terms and not
overdue for more than 90 days (or which, if overdue for more than 90 days, are
being and continue to be actively

 

 

and diligently
contested in good faith or in respect of which no legal proceedings for payment
of any such amount have been commenced and are continuing), customer advance
payments and deposits received in the ordinary course of business shall not
constitute Funded Indebtedness.

 

“Governmental Body”
means any government, parliament, legislature, or any regulatory authority,
agency, commission or board of any government, parliament or legislature
(including, without limitation, the Ontario Securities Commission), or any
court or (without limitation to the foregoing) any other law, regulation or
rule-making entity (including, without limitation, any central bank, fiscal or
monetary authority or authority regulating banks), having or purporting to have
jurisdiction in the relevant circumstances, or any Person acting or purporting
to act under the authority of any of the foregoing (including, without
limitation, any arbitrator).

 

“Hazardous Substance”
means any substance or combination of substances which is or may become
hazardous, toxic, injurious or dangerous to persons, property, air, land,
water, flora, fauna or wildlife, and includes but is not limited to any
contaminants, pollutants, dangerous substances, liquid wastes, industrial
wastes, hauled liquid wastes, toxic substances, hazardous wastes, hazardous
materials or hazardous substances as defined in or pursuant to any
Environmental Laws or Environmental Orders pursuant thereto.

 

“Instrument” means
this Agreement, the Debenture Certificates and any other agreement or
instrument (whether now existing, presently arising or created in future)
delivered by or on behalf of the Borrowers to the Lenders.

 

“Intellectual Property”
means all right, title, interest and benefit of the Corporation and its
Subsidiaries in and to any registered or unregistered world wide trade marks,
trade or brand names, service marks, copyrights, copyright applications,
designs, inventions, patents, patent applications, patent rights, licenses,
sub-licenses, franchises, formulas, processes, know-how, technology, computer
rights and other intellectual or industrial property of the Corporation or any
of its Subsidiaries or pertaining to the Corporation’s business.

 

“Intercreditor Agreement”
means that Second Amended and Restated Consent, Amendment and Intercreditor
Agreement, dated as of the date hereof, by and among the Corporation, the U.S.
Subsidiary, Phoenix Enterprises LLC, Phoenix and each of those persons and
entities listed on Schedule A attached thereto.

 

“Inventory” means any and
all goods, merchandise and other personal property located in the United
States, including, without limitation, goods representing returns upon any
accounts, and whether now owned or hereafter acquired by the Borrowers that is
free and clear of all Encumbrances and is not unsellable, damaged, obsolete or
otherwise not readily saleable at market value in the ordinary course of
business, consistent with past practice.

 

“MAG Multi Note” means
that Secured Promissory Note, dated July 19, 2005, in the aggregate
principal amount of $250,000, issued by the US Subsidiary to MAG Multi.

 

“Material Adverse Effect” means
any change or effect that is materially adverse to (i) the business,
financial condition, or results of operations of such Person and its
Subsidiaries, taken as a whole, other than any change or effect relating to general
political, financial or

 

 

economic
conditions or the state of financial markets in general or (ii) the
rights, remedies and benefits available to, or conferred upon, the Lenders
under the Transaction Documents.

 

“Material Authorization”
means, with respect to any Person, any approval, permit, license or similar
authorization (including any trademark, trade name or patent) from, and any
filing or registration with, any Governmental Body or other Person required by
such Person to own its property and assets or to carry on its business as
presently carried on by it or as contemplated hereunder to be carried on by it
in each jurisdiction in which it does so or is contemplated to do so or where
the failure to have such approval, permit, license, authorization, filing or
registration would have a Material Adverse Effect upon such Person or upon its
ability to perform its obligations under any of the Instruments.

 

“Maturity Date”
shall mean March 31, 2006.

 

“Management Committee”
means the Corporation’s Executive Management Committee.

 

“MC Operational Procedures”
means the operational procedures of the Management Committee as in effect from
time to time.

 

“Obligations” means
all monies now or at any time and from time to time hereafter owing or payable
by the Borrowers to the Lenders and all obligations (whether now existing,
presently arising or created in the future) of the Borrowers in favor of the
Lenders, and whether direct or indirect, absolute or contingent, matured or
not, each in connection with or relating to the Debentures, this Agreement or
any of the other Transaction Documents.

 

“Operating Expenses”
means, as of any date, the sum of the line items entitled “Sales, marketing and
support”, “Research, development and engineering”, and “General and
administrative” on the Corporation’s consolidated statement of loss included in
the Corporation’s Financial Statements, and each such line item shall have the
value that such line item has on such statement of loss as of that date.

 

“Overhead Costs” means
Operating Expenses less (i) sales commissions and (ii) non-cash
charges as determined in accordance with GAAP.

 

“Order” means any
order, notice, direction, report, recommendation or decision rendered by any
Governmental Body or other regulatory agency.

 

“Permitted Encumbrances”
means:

 

(i)                                     Encumbrances
for taxes, assessments or governmental charges incurred in the ordinary course
of business that are not yet due and payable or the validity of which is being
actively and diligently contested in good faith by the Corporation or any
Subsidiary, as applicable, provided reserves reasonably deemed adequate
therefor by the Corporation or Subsidiary, as applicable, with respect thereto
are maintained on the books of the Corporation or the Subsidiary, as
applicable, in accordance with generally accepted accounting principles;

 

 

(ii)                                  construction,
mechanics’, carriers’, warehousemen’s and materialmen’s liens and liens in
respect of vacation pay, workers’ compensation, employment insurance or similar
statutory obligations, provided the obligations secured by such liens are not
yet due and payable and, in the case of construction liens, which have not yet
been filed or for which the applicable has not received written notice of an
Encumbrance;

 

(iii)                               Encumbrances
arising from court or arbitral proceedings, provided that the claims secured
thereby are being contested in good faith by the Corporation or any Subsidiary,
provided reserves reasonably deemed adequate by the Corporation or Subsidiary,
as applicable, with respect thereto are maintained on the books of the
Corporation or Subsidiary in accordance with generally accepted accounting
principles, execution thereon has been stayed and continues to be stayed and such
Encumbrances do not result in an Event of Default;

 

(iv)                              good
faith deposits made in the ordinary course of business to secure the
performance of bids, tenders, contracts (other than for the repayment of
borrowed money), leases, surety, customs, performance bonds and other similar
obligations;

 

(v)                                 deposits
to secure statutory obligations or in connection with any matter giving rise to
an Encumbrance described in (ii) above;

 

(vi)                              deposits
of cash or securities in connection with any appeal, review or contestation of
any Encumbrance or any matter giving rise to an Encumbrance described in (i) or
(iii) above;

 

(vii)                           zoning
restrictions, easements, rights of way, leases or other similar encumbrances or
privileges in respect of real property which in the aggregate do not materially
affect the value of such property and any related Security Document nor impair
the use of such property by the Corporation or any Subsidiary, in the operation
of its business, and which are not violated in any material respect by existing
or proposed structures or land use;

 

(viii)                        Encumbrances
in favor of (i) each Lender pursuant to this Agreement and (ii) the
Existing Debenture Holders pursuant to the Existing Debenture Agreements;

 

(ix)                                Encumbrances
pursuant to Purchase Money Security Interests;

 

(x)                                   security
given by the Corporation or any Subsidiary to a public utility or any
Governmental Body, when required by such utility or Governmental Body in
connection with the operations of the Corporation or such Subsidiary, in the
ordinary course of its business, which singly or in the aggregate do not
materially detract from the value of the asset concerned or materially impair
its use in the operation of the business of the Corporation or such Subsidiary;

 

(xi)                                Encumbrances
granted to Wistron under to the Wistron Intercreditor Agreement;

 

(xii)                             Encumbrances
granted to SVB under the SVB Loan Agreement;

 

 

(xiii)                          Encumbrances
granted to secure obligations under the Phoenix Notes, the CRAT Note and the
MAG Multi Note; provided, that immediately after the Initial Closing this
clause shall be deemed to have been deleted in its entirety and shall be of no
force or effect;

 

(xiv)                         any
other Encumbrance which Phoenix approves in writing as a Permitted Encumbrance
subsequent to the date hereof; and

 

(xv)                            the
Encumbrances listed under the heading “Permitted Encumbrances” in Schedule 3.1.

 

“Person” means a
natural person, partnership, corporation, joint stock company, trust,
unincorporated association, joint venture or other entity or governmental entity,
and pronouns have a similarly extended meaning.

 

“Phoenix Notes” means
(i) that Secured Promissory Note dated May 20, 2005 in the aggregate
principal amount of $1,500,000 and (ii) that Secured Promissory Note dated
July 19, 2005 in the aggregate principal amount of $1,000,000, each issued
by the US Subsidiary to Phoenix.

 

“Premises” means any
premises owned or occupied by the Corporation or its Subsidiaries from time to
time.

 

“Purchase Money Security Interest”
means an Encumbrance on any asset, other than accounts receivable or inventory,
of a Person which is assumed, created, guaranteed or reserved to secure the
unpaid purchase price of such asset, provided that any such Encumbrance is
limited to the asset so acquired and does not secure in excess of the purchase
price thereof, such purchase price not to exceed the fair market value of the
purchased asset.

 

“Receiver” means one
or more of a receiver, receiver-manager or receiver and manager of all or a
portion of the undertaking, property and assets of the Corporation appointed by
Phoenix pursuant to this Agreement, any of the Security Documents or by or
under any judgment or order of a court.

 

“Release” includes
abandon, add, deposit, discharge, disperse, dispose, dump, emit, empty, escape,
leach, leak, migrate, pour, pump, release or spill.

 

“Restatement” means
the restatement of the Corporation’s (i) annual consolidated financial
statements for the fiscal years ended March 31, 2002 and 2003, (ii) 
interim and annual consolidated financial statements for the fiscal year ended March 31,
2004, and (iii) interim consolidated financial statements for the fiscal
year ended March 31, 2005.

 

“Reserve Pool” means
those 10 million Common Shares issuable to key management and employees of the
Corporation as performance awards pursuant to the Corporation’s 1995 Share
Option Plan.

 

“Secured Property”
has the meaning assigned to such term in the Security Agreement.

 

 

“Security Agreement” means
that Security Agreement, dated the date hereof, between the Borrowers and
Phoenix, as agent for the benefit of the Lenders.

 

“Security Documents”
means, collectively, this Agreement and all other agreements and other
instruments (whether now existing or presently arising) for the purpose of
establishing, perfecting, preserving or protecting any security for the benefit
of any Lender in respect of any Obligations, including, but not limited to, the
Security Agreement.

 

“Shareholders’ Equity”
of the Corporation at any particular time means the difference between (i) the
aggregate of Total Assets of the Corporation and (ii) the Total
Liabilities of the Corporation at such time.

 

“Subsidiary” means a
corporation controlled by the Corporation, as the term “control” is defined in
the Business Corporations Act
(Ontario) as in effect at the date hereof and without reference to any
amendments thereto after the date hereof and includes the corporations set out
in Schedule 5.1(q) hereto.

 

“SVB Loan Agreement”
means that Loan and Security Agreement, dated as of September 15, 2005,
between Silicon Valley Bank (“SVB”)
and the US Subsidiary, which replaces and supercedes that Loan and Security
Agreement, dated as of April 22, 2005, between SVB and the US Subsidiary.

 

“Taxes” means all
taxes of any kind or nature whatsoever including, without limitation, income
taxes, sales or value-added taxes, levies, stamp taxes, royalties, duties, and
all fees, deductions, compulsory loans and withholdings imposed, levied,
collected, withheld or assessed as of the date hereof or at any time in the
future, by any Governmental Body of or within Canada or any other jurisdiction
whatsoever having power to tax, together with penalties, fines, additions to
tax and interest thereon.

 

“Total Assets” of
any Person means the aggregate book value amount of all assets of the Person
which would, on a consolidated basis in accordance with generally accepted
accounting principles, be reflected on a balance sheet of the Person.

 

“Total Liabilities”
of any Person means the aggregate amount of all indebtedness and liabilities
determined on a consolidated basis, which would, in accordance with generally
accepted accounting principles, be reflected on a balance sheet of the Person
including, for greater certainty, deferred taxes, together with, without
duplication:

 

(i)                                     the
amount of all Funded Indebtedness and all Contingent Liabilities of the Person,
whether or not reflected on a balance sheet;

 

(ii)                                  the
amount for which any shares in the capital of the Person (if it is a
corporation) may be redeemed if the holders of such shares are entitled at
any time to require the Person to redeem such shares or if the Person has
called such shares for redemption; and

 

(iii)                               the
amount of all Capital Lease Obligations of the Person, provided that if the
rights and remedies of the lessor under such Capital Lease Obligations in the
event of default are limited to repossession or sale of property, such amount
shall be deemed to

 

 

be equal to
the lesser of (A) the amount of the Capital Lease Obligations and (B) the
book value of such property.

 

“Transaction Documents” means
this Agreement, the Share Purchase Warrant Certificates, the Debenture
Certificates, the Security Agreement and any other documents, instruments or
agreements entered into by the Corporation or the U.S. Subsidiary in connection
with any of the foregoing.

 

“Voting Shares”
means capital stock of any class of a corporation which carries voting
rights under any circumstances, provided that shares which carry the right to
vote conditionally upon the happening of an event shall not be considered
Voting Shares until the occurrence of such event and then only during the
continuance of such event.

 

“Wistron  Intercreditor  Agreement” means that Intercreditor, Trade Credit
Restructuring and Security Agreement, dated as of November 24, 2004 by and
among the Corporation, the U.S. Subsidiary, Phoenix Enterprises LLC, Phoenix,
the Philip S. Sassower 1996 Charitable Remainder Annuity Trust and Wistron
Corporation (“Wistron”).

 

Section 3.2.                                   Interpretation

 

(a)                                  “This Agreement”,  “hereto”, “hereby”,
“hereunder”, “herein”, and similar expressions refer to
the whole of this Agreement and not to any particular Article, Section,
paragraph, clause, subdivision or other portion hereof.

 

(b)                                 The
expression “Arm’s Length” has the
meaning ascribed to such term in the Income
Tax Act (Canada).

 

(c)                                  All
references herein to the Income Tax Act (Canada) shall refer to such act and
the regulations thereunder as the same may be amended or replaced from
time to time.

 

(d)                                 Words
importing the singular number only include the plural and vice versa and words importing gender
shall include all genders.

 

(e)                                  All
financial or accounting determinations, reports and statements provided for in
this Agreement shall be made or prepared in accordance with generally accepted
accounting principles applied in a consistent manner and shall be made and
prepared on a consolidated basis.

 

(f)                                    The
division of this Agreement into Articles and Sections and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement.

 

(g)                                 The
schedules and exhibits annexed hereto shall, for all purposes, form an
integral part of this Agreement.

 

(h)                                 References
to sums of money herein are to US dollars, unless otherwise specified.

 

 

(i)                                     Time
is of the essence hereof.

 

(j)                                     Where
the word “including” or “includes” is used in this Agreement, it means “including
(or includes) without limitation”.

 

(k)                                  Wherever
in this Agreement reference is made to generally accepted accounting principles
or GAAP, such reference shall be deemed to mean the generally accepted
accounting principles from time to time approved by the Canadian Institute of
Chartered Accountants, or any successor institute, applicable as at the date on
which a given calculation is made or required to be made in accordance with
generally accepted accounting principles.

 

Section 3.3.                                   Invalidity
of Provisions

 

Each of the provisions contained in this Agreement is distinct and
severable and a declaration of invalidity, illegality or unenforceability of
any such provision or part thereof by a court of competent jurisdiction
shall not affect the validity or enforceability of any other provision hereof
or thereof. Without limiting the generality of the foregoing, if any amounts on
account of fees or otherwise payable by the Borrowers to the Lenders hereunder
or under the Debenture Certificates exceed the maximum amount recoverable under
applicable law, the amounts so payable hereunder shall be reduced to the
maximum amount recoverable under applicable law.

 

Section 3.4.                                   Day
Not A Business Day

 

In the event that any day on or before which any action is required to
be taken hereunder is not a Business Day, then such action shall be required to
be taken at or before the requisite time on the next succeeding day that is a
Business Day.

 

Section 3.5.                                   Governing
Law

 

This Agreement shall be governed by and interpreted and enforced in
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable therein. Each of the parties hereby agrees to the
non-exclusive jurisdiction of the courts of the Province of Ontario. For the
purpose of all legal proceedings, this Agreement will be deemed to have been
performed in the Province of Ontario and the courts of the Province of Ontario
will have non-exclusive jurisdiction to entertain any action arising under this
Agreement.

 

ARTICLE 4.

SECURITY

 

Section 4.1.                                   Charge

 

(a)                                  In
consideration of the sum of Ten Dollars ($10.00) now paid to it by each Lender
(receipt of which is hereby acknowledged), and to secure the due payment of the
Obligations hereunder, the Corporation hereby grants to each Lender a security
interest in, and charges with payment to each Lender of all sums payable
hereunder as and by way of a fixed and a floating charge, the whole of the
undertaking of the Corporation and all of its property and

 

 

assets, real
and personal, movable and immovable, tangible and intangible, of every nature
and kind whatsoever, whosesoever situate, both present and future.

 

(b)                                 The
Corporation and each Lender hereby acknowledge that (i) value has been
given to the Corporation by such Lender, (ii) the Corporation has rights
in the property and assets of the Corporation subject to the security interest
granted under Section 4.1 (other than after-acquired property), and (iii) they
have not agreed to postpone the time of attachment of the security granted
hereunder.

 

Section 4.2.                                   Habendum

 

The Lenders shall have and hold the property and assets of the
Corporation subject to the security interest granted under Section 4.1 and
all of the rights hereby conferred unto the Lenders, their successors and
assigns forever, but subject nevertheless to the provisions and with the powers
herein set forth.

 

Section 4.3.                                   Charge
Valid Irrespective of Advance of Money

 

The charges and security interests hereby created shall have effect and
be deemed to be effective whether or not the monies or obligations hereby
secured or any part thereof shall be advanced or owing or in existence
before or after or upon the date of this Agreement and neither the giving of
charges and security interests hereunder nor any advance of funds shall oblige
each Lender to advance any funds or any additional funds.

 

Section 4.4.                                   Supplemental
Indentures

 

The Corporation shall from time to time on demand by each Lender and at
the expense of the Corporation execute and deliver such further deeds or
indentures supplemental hereto, which shall thereafter form part hereof,
for the purpose of charging, or securing in favor of each Lender any property
now owned or hereafter acquired by the Corporation, for correcting or
amplifying the description of any property hereby charged or secured or
intended so to be, or for any other purpose not inconsistent with the terms of
this Agreement.

 

Section 4.5.                                   Continuing
Security

 

Any and all payments made at any time in respect of the Obligations and
the proceeds realized from any securities held therefore (including moneys
realized from the enforcement of this Agreement) shall be applied in accordance
with the Intercreditor Agreement. Each Lender may hold as additional
security hereunder any increase or profits or other proceeds realized from the
property and assets of the Corporation subject to the security interest granted
under Section 4.1 (including money) for such period of time as each Lender
sees fit. The Corporation shall be accountable for any deficiency.

 

Section 4.6.                                   Defeasance

 

If the Corporation, its successors or assigns or any of them, make or
cause to be made due payment or performance of all Obligations, without any
reduction or abatement, and all taxes, rates, levies, charges or assessments
payable by the Corporation upon the Secured

 

 

Property or in
respect thereof no matter by whom or by what authority imposed which each
Lender shall have paid or shall have been rendered liable to pay, then, subject
to Article 8 and Sections 9.6 and 9.16 hereof, everything in this
Agreement shall be absolutely null and void and each Lender shall on request
therefor by the Corporation, and at the expense of the Corporation, at that
time surrender the Debenture to the Corporation, but until that time it shall
remain in full force and effect despite the repayment or satisfaction from time
to time of the whole or any part of the Obligations.

 

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES

 

Section 5.1.                                   General
Representations and Warranties of the Borrowers

 

The Corporation and the US Subsidiary, jointly and severally, represent
and warrant to each Lender as follows and shall continue to represent and
warrant to each Lender as follows for so long as the Obligations are
outstanding:

 

(a)                                  Incorporation and Status. Each of the
Corporation and the US Subsidiary is duly incorporated and validly existing
under the laws of its jurisdiction of incorporation and has the corporate power
and capacity to own its properties and assets and to carry on its businesses as
presently carried on by it or as contemplated hereunder to be carried on by it
and holds all Material Authorizations.

 

(b)                                 Power and Capacity. Each of the Corporation
and the US Subsidiary has the corporate power and capacity to enter into this
Agreement and each Instrument to which it is a party and to do all acts and
things as are required or contemplated hereunder or thereunder to be done,
observed and performed by it.

 

(c)                                  Due Authorization. Each of the Corporation
and the US Subsidiary has taken all necessary corporate action to authorize the
execution, delivery and performance of each of this Agreement and each
Instrument to which it is a party.

 

(d)                                 No Contravention. The execution and
delivery of this Agreement and the other Instruments to which the Corporation
or the US Subsidiary is a party and the performance by each of the Corporation
or the US Subsidiary of their respective obligations hereunder or thereunder (i) does
not and will not contravene, breach or result in any default under (A) the
articles, memorandum of association, by-laws, or other organizational documents
of the Corporation or the US Subsidiary, or (B) any mortgage, lease,
agreement or other legally binding instrument, license, permit or Applicable
Law to which the Corporation or the US Subsidiary is a party or by which any of
the Corporation or the US Subsidiary or any of its properties or assets may be
bound, (ii) will not oblige the Corporation or the US Subsidiary to grant
any Encumbrance to any Person other than each Lender, and (iii) will not
result in or permit the acceleration of the maturity of any indebtedness,
liability or obligation of the Corporation or the US Subsidiary under any mortgage,
lease, agreement or other legally binding instrument of or affecting the
Corporation or the US Subsidiary.

 

(e)                                  No Senior or Pari Passu Indebtedness. Other
than the Corporation’s indebtedness to SVB under the SVB Loan Agreement
(including all accrued and unpaid interest

 

 

thereon, but
excluding any refinancing or other modification which increases the amount of
such indebtedness) and Wistron, and after complying with Section 1.5, the
Borrowers do not have, and shall not have, any indebtedness for borrowed money
which ranks senior to or pari passu
with the Debentures. Except for the Intercreditor Agreement, the SVB Loan
Agreement and the Wistron Intercreditor Agreement, nothing herein, including
pursuant to Section 6.4(a), shall operate to subordinate the security
interest provided for in the Security Documents to or in favor of any
Encumbrance or Permitted Encumbrance, or to postpone any of the Obligations to
any of the obligations, indebtedness or liabilities owed by the Corporation or
its Subsidiaries to the holder of any Permitted Encumbrances or Encumbrance.

 

(f)                                    No Consents Required. No authorization,
consent or approval of, or filing with or notice to, any Person (including any
Governmental Body) is required in connection with the execution, delivery or
performance of this Agreement by the Corporation or the US Subsidiary or any
other Instrument by the Corporation or the US Subsidiary, as applicable, other
than (i) the consent of the
Existing Debenture Holders, (ii) the approval of the Toronto Stock
Exchange and the satisfaction of any conditions to such approval, (iii) the
filings required by applicable securities laws, and (iv) the registration
of a financing statement under the UCC, (the consents and approvals in clauses (i) through
(iv) collectively, the “Required
Consents”).

 

(g)                                 Enforceability. Each of this Agreement and
the other Instruments to which it is a party constitutes, or upon execution and
delivery will constitute, a valid and binding obligation of the Corporation and
the US Subsidiary, as the case may be, enforceable against it in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting the rights of creditors generally and except as limited by the
application of equitable principles.

 

(h)                                 No Work Orders. As at each Closing Date, no
work orders, directions or notices have been issued and remain outstanding
pursuant to any Applicable Law relating to the business of the Corporation or
any Subsidiary or any part of the Secured Property or any environmental
matters affecting the foregoing, except such orders, directions and notices
that would not have a Material Adverse Effect. As at each Closing Date, neither
the Corporation or any Subsidiary have received any notification from any
Governmental Body, that has not been satisfied, that any work, repairs,
construction or capital expenditures are required to be made in respect of the
Secured Property or any part thereof as a condition of continued
compliance with any Applicable Law or any Material Authorization issued
thereunder.

 

(i)                                     Permits and Compliance with Laws. The
Corporation and each Subsidiary has all licenses, permits, approvals and
franchises that it requires, or is required to have, to own its properties and
assets and to carry on its business as presently conducted, except where the
failure to have such license, permit approval or franchise would not have a
Material Adverse Effect. All such licenses, permits, approvals and franchises
are in good standing and no actions, proceedings, investigations or other steps
of any kind are in process, pending, or to the knowledge of the Corporation,
threatened, or would result in any such license, permit, approval or franchise
being terminated, revoked, withdrawn, suspended or otherwise made unavailable
to the Corporation or any Subsidiary for any period of time, except where such
termination, revocation, withdrawal, suspension or unavailability would not
have a Material Adverse Effect. Except as set forth on Schedule 5.1(i),
the Corporation and each Subsidiary is conducting its

 

 

business in
material compliance with all applicable laws, regulations, by-laws and
ordinances of each jurisdiction in which its business is carried on.

 

(j)                                     Financial Statements. Phoenix, on behalf of
the Lenders, has been furnished with a copy of:

 

(i)                                     the
unaudited consolidated financial statements of the Corporation and its
Subsidiaries for its financial year ended March 31, 2005; and

 

(ii)                                  the
unaudited consolidated financial statements of the Corporation and its
Subsidiaries for the fiscal quarter ended June 30, 2005.

 

Subject to the
Restatement, such financial statements, including the notes thereto (the “Financial Statements”) have been prepared
in accordance with generally accepted accounting principles and fairly,
completely and accurately present the financial condition of the Corporation
(including each Subsidiary) and the financial information presented therein in
all material respects for the periods and as at the dates thereof. As at each
Closing Date, the Corporation and each of the Subsidiaries has no outstanding
liabilities (including Funded Indebtedness, Contingent Liabilities or
otherwise) other than those disclosed in the Financial Statements and other
than the indebtedness owed by the Corporation to the Existing Debenture
Holders, to Wistron, to SVB and trade or business obligations subsequently
incurred in the ordinary course of business, which such trade and business
obligations are currently in good standing in accordance with their respective
terms, except as previously disclosed in writing to Phoenix. Since March 31,
2005 and except as set forth in the June 30, 2005 Financial Statements,
there has been no development which has had or would reasonably be expected to
have a Material Adverse Effect upon the ability of the Corporation or any
Subsidiary to perform its obligations under this Agreement or any other
Transaction Document to which it is a party, except for the management cease
trade order, dated July 15, 2005, imposed by the Ontario Securities
Commission with respect to securities of the Corporation.

 

(k)                                  Non-Arm’s Length Transactions. During the
period from March 31, 2005 through each Closing Date, none of the
Corporation or Subsidiaries has entered into any transaction or agreement with
any Affiliate other than on commercially reasonable terms and within the
limitations of the other provisions hereof, except as disclosed in the
Financial Statements or in any document filed by the Corporation with the
Ontario Securities Commission that is publicly available.

 

(l)                                     No Litigation. Except as has previously
been disclosed in writing by the Corporation or its counsel to Phoenix or in
any document filed by the Corporation with the Ontario Securities Commission
that is publicly available, (i) as at each Closing Date, there is no
court, administrative, regulatory or similar proceeding (whether civil,
quasi-criminal, or criminal), arbitration or other dispute settlement
procedure, investigation or enquiry by any Governmental Body, or any similar
matter or proceeding (collectively “proceedings”)
against or involving any of the Corporation or any Subsidiary (whether in
progress or threatened) which, if determined adversely to the Corporation or
Subsidiary would have or would reasonably be expected to have a Material
Adverse Effect or have a material adverse effect upon its ability to perform any
of the provisions of this Agreement or any other Transaction Document to which
it

 

 

is a party or
which purports to affect the legality, validity and enforceability of this
Agreement or any other Transaction Document; and (ii) as at each Closing
Date, no event has occurred which would reasonably be expected to give rise to
any proceedings and there is no judgment decree, injunction, rule, award or
order of any Governmental Body outstanding against the Corporation or any
Subsidiary which has or would reasonably be likely to have a Material Adverse
Effect.

 

(m)                               No Default. Except with respect to the
Restatement, as at each Closing Date, neither the Corporation nor any of the
Subsidiaries are in default or breach (other than any breach for which the
Corporation has received a written waiver from Phoenix Enterprises LLC) under
any material commitment or obligation (including, without limitation,
obligations in relation to Funded Indebtedness) or, except with respect to the
Restatement, under the terms and conditions relating to any Material
Authorizations, and, to the best knowledge of the Borrowers, as at each Closing
Date, there exists no state of facts which, after notice or the passage of time
or both, would constitute such a default or breach; and as at each Closing
Date, there are no proceedings in progress, pending or, to the knowledge of the
Borrowers, threatened which would result in the revocation, cancellation
suspension or any adverse modification of any Material Authorization.

 

(n)                                 Hazardous Substances. Neither the
Corporation nor any of the Subsidiaries are aware of any Hazardous Substances
located at, on or under the Secured Property or the Premises, and the Secured
Property, the Premises and the operations conducted thereat are not and have
not been in breach of any Environmental Law which has resulted or could result
in the Secured Property being materially adversely affected. Neither the
Corporation nor any Subsidiary has caused or permitted, nor does the
Corporation or any Subsidiary have any knowledge of the Release of any
Hazardous Substance on, from, under or to the Secured Property or the Premises or
of any Release from a facility owned or operated by third parties, including
previous owners, for which the Corporation or any Subsidiary may have
liability and which has resulted or could result in the Secured Property or the
Premises being adversely affected. Neither the Corporation nor any of the
Subsidiaries has been charged with or convicted of an offence for
non-compliance with any Environmental Law or has been fined or otherwise
sentenced or have settled any prosecution short of conviction; and neither the
Corporation nor any Subsidiary has received any notice of judgment or
commencement of proceedings of any nature or experienced any search and seizure
or are under investigation related to a breach or alleged breach of any
Environmental Law.

 

(o)                                 All Material Information Supplied. The
Borrowers have provided to Phoenix all information which the Borrowers, acting
reasonably, determined was material relating to the financial condition,
business, assets and results of operations (including forecasts and budgets) of
the Corporation and the Subsidiaries, taken as a whole, and all such
information, taken as a whole (other than forecasts and budgets) is true,
accurate and complete in all material respects and omits no material fact
necessary to make such information not misleading in light of the circumstances
in which such information was made and there has been no change in such
information, taken as a whole, that would have or would reasonably be likely to
have a Material Adverse Effect. The forecasts and budgets provided to Phoenix
in connection with the entering into of this Agreement were prepared prudently
and upon reasonable assumptions (which assumptions remain reasonable at each
Closing Date), the forecasts and budgets are, as at each Closing Date,
reasonable and attainable as at the date hereof, such forecasts and budgets
have

 

 

not, as of the
date hereof, changed or been amended or updated, and it would, as of the date
hereof, be reasonable for Phoenix to rely upon these forecasts and budgets. Each
Lender acknowledges the Corporation’s obligation to perform the
Restatement as a result of the matters identified by the Ontario Securities
Commission in its letter to the Corporation dated June 3, 2005 and agrees
that the representations and warranties made by the Corporation and the US
Subsidiary in this Section 5.1(o) are qualified by the Restatement.

 

(p)                                 Taxes and Claims. The Borrowers have:

 

(i)                                     delivered
or caused to be delivered all required income tax returns, sales, property,
franchise and value-added tax returns and other tax returns to the appropriate
Governmental Body; and

 

(ii)                                  withheld
and collected all Taxes required to be withheld and collected by them and
remitted such Taxes when due to the appropriate Governmental Body,

 

and no material
assessment, appeal or claim is, as far as the Borrowers are aware, being
asserted or processed with respect to such claim, Taxes or obligations, except
as previously disclosed to Phoenix in writing.

 

(q)                                 Authorized and Issued Capital. Schedule 5.1(q)
accurately describes the authorized and issued share capital of the Corporation
and each of the Subsidiaries, as at each Closing Date. As at each Closing Date,
the Corporation has no Subsidiaries except as set forth in Schedule 5.1(q).
Except as set out in Schedule 5.1(q), as at each Closing Date,
there are no agreements, options, warrants, rights of conversion or other
rights pursuant to which the Corporation or any of the Subsidiaries is or may become
obligated to issue any shares or any securities convertible into, or
exchangeable for, shares.

 

(r)                                    Insurance. The Corporation and each of the
Subsidiaries insures with reputable insurance companies all of its property and
other assets of an insurable nature against fire and other casualties in the
same manner and to the same extent as such insurance is carried by prudent
corporations carrying on a similar business and owning similar property and
maintains with reputable insurance corporations adequate insurance against
business interruption with respect to any rental properties or properties under
construction and liability on account of damage to persons or property, and
under all applicable worker’s compensation laws, in the same manner and to the
same extent as such insurance is carried by prudent corporations carrying on a
similar business and owning similar property.

 

(s)                                  Funded Indebtedness.
Schedule 5.1(s) sets forth a complete and
accurate list of all Funded Indebtedness of each of the Corporation and the
Subsidiaries at each Closing Date and accurately describes the security
therefor and the dollar amount thereof.

 

(t)                                    Directors and Officers Insurance. The Corporation has a
directors’ and officers’ insurance policy in place to the same extent as such
insurance is carried by prudent public corporations and the premiums on such
insurance policy are paid to date.

 

(u)                                 Solvency. None of the Corporation or any of
the Subsidiaries has committed an act of bankruptcy, proposed a compromise or
arrangement to its creditors

 

 

generally, had
any petition for a receiving order in bankruptcy filed against it, taken any
proceeding to have itself declared bankrupt or wound-up or taken any proceeding
to have a Receiver appointed over it or any part of its assets.

 

(v)                                 Articles, Memorandum, By-Laws, Etc. True
and complete copies of the articles of incorporation (including all amendments
thereto), memorandum of association and by-laws and all other organizational
documents of each of the Borrowers in effect on each Closing Date have been
delivered to Phoenix on behalf of the Lenders. On each Closing Date, there are
outstanding no applications or filings which would alter in any way the
organizational documents or corporate status of any of the said corporations. As
in effect on each Closing Date, the respective minute books of the Borrowers
contain all by-laws and resolutions of the respective directors and
shareholders of the Borrowers currently in effect and the corporate and other
records of the Borrowers have been maintained in all material respects in
accordance with all Applicable Law.

 

(w)                               Location of Business and Assets. As of each
Closing Date, the only locations at which the Corporation and the Subsidiaries
have any place of business or material assets are as set forth in Schedule 5.1(w).

 

(x)                                   Title. Subject only to the Permitted
Encumbrances, the Corporation and each Subsidiary has good and marketable title
to all of its undertaking, property and assets, free and clear of any
Encumbrances and no person has any agreement or right to acquire its interest
in any of such properties out of the ordinary course of business.

 

(y)                                 Employment Matters. As of each Closing
Date, except as is disclosed in Schedule 5.1(y) neither the
Corporation nor any Subsidiary is a party to or is bound by any:

 

(i)                                     written
or oral contract or commitment for the employment of any senior management
employee or officer;

 

(ii)                                  written
contract or commitment for the employment of any employee or officer providing
for an annual salary (including benefits) of in excess of $100,000 or a payment
on termination of in excess of six months salary and benefits;

 

(iii)                               oral
contract or commitment for the employment of any employee or officer, except
for contracts of indefinite hire terminable by the Corporation without cause on
reasonable notice;

 

(iv)                              contract
with or commitment to any trade union, council of trade unions, employee
bargaining agent or affiliated bargaining agent (collectively called “labor representatives”) and the Borrowers
have not conducted negotiations with respect to any such future contracts or
commitments; no labor representatives hold bargaining rights with respect to
any employees of the Corporation or any Subsidiary; no labor representatives
have applied to have the Corporation or any Subsidiary declared a related
employer pursuant to the applicable labor legislation; and, to the knowledge of
either of the Borrowers, there are no current or threatened attempts to
organize or establish any trade union or employee association with respect to
the Corporation or any Subsidiary; or

 

 

 

(v)                                 except
as is disclosed in Schedule 5.1(y), there is no bonus, pension,
multi-employer, profit sharing, deferred compensation, retirement, disability,
health insurance or similar benefit plan, with respect to any of its employees
or others (including without limitation any agreements in respect of employee
share ownership plans), other than Canada Pension Plan, the Ontario Health
Insurance Plan and other similar health plans established and administered by
any other governmental authority or workers’ compensation insurance provided
pursuant to statute.

 

As of each
Closing Date, the Corporation and each of the Subsidiaries has paid all sums
due to its employees and its independent contractors and has observed in all
material respects the provisions of (i) all agreements binding upon it or (ii) any
pension, bonus, profit sharing, compensation, retirement, deferred
compensation, illness or other plan, agreement, trust, fund or arrangement for
the benefit of or with its employees, directors, officers or shareholders and (iii) all
applicable laws and regulations respecting employment, including, but not
limited to, labor standards legislation and regulations and legislation and
regulations prohibiting discrimination; and there is no complaint, civil action
or other proceeding in process alleging a violation of any such agreement,
plan, trust, fund, arrangement, law or regulation.

 

As of each
Closing Date, none of the Corporation nor any Subsidiary has received any
remedial order or notice of offence under any applicable laws and regulations
respecting employment, and each of the Corporation and the Subsidiaries has
performed all of its financial or monetary obligations under such laws and
regulations towards its employees and independent contractors, and there are no
facts which may give rise to a claim for which the Corporation or any
Subsidiary might be held liable under the provisions of the said laws or
regulations.

 

(z)                                   Intellectual Property. The Corporation and
each Subsidiary owns all right title and interest in or to, or have valid and
enforceable rights to use all of the Intellectual Property including the trade
marks, trade or brand names, corporate names and service marks set out in Schedule 5.1(z),
free and clear of all Encumbrances except Permitted Encumbrances. As of each
Closing Date, neither the Corporation nor any Subsidiary uses or owns any trade
marks, trade or brand names, corporate names or service marks except as set out
in Schedule 5.1(z). The conduct of the business of, and the use of
the Intellectual Property by, the Corporation and the Subsidiaries does not,
nor to the Borrowers’ knowledge, will the proposed conduct of the business and
the proposed use of the Intellectual Property, infringe (and neither the
Corporation nor any Subsidiary, except as previously disclosed to Phoenix in
writing, has received any notice, complaint, threat or claim alleging
infringement of) any patent, trade mark, trade name, copyright, industrial
design, trade secret or other propriety right of any other Person. The
Intellectual Property which is not owned by the Corporation or the Subsidiaries
is being used with the consent of, and in accordance with, the consent or
license from, the rightful owner thereof. The Corporation and each of the
Subsidiaries has taken all commercially reasonable steps to establish, preserve
and protect its rights in the Intellectual Property which is material to the
Corporation or such Subsidiary.

 

(aa)                            Disclosure Restricted. Each of the
statements contained in Section 5.1 is true and correct except as set
forth in the specific disclosure schedule qualifying such statement or in
any document filed by the Corporation with the Ontario Securities Commission
and that is

 

 

publicly
available. The disclosure in any disclosure schedule shall qualify only
the corresponding statement.

 

Section 5.2.                                   Representations
and Warranties of Lenders

 

Each of the Lenders, severally and not jointly, represents and warrants
to the Borrowers as follows:

 

(a)                                  Authorization. Such Lender is an
individual, corporation, limited partnership or limited liability company duly
organized, validly existing and in good standing under the laws of its
jurisdiction of formation, and each Lender has full power and authority to
enter into this Agreement and the other Transaction Documents to which it is a
party, and has duly authorized, executed and delivered the same. This
Agreement, when executed and delivered by a Lender, will constitute valid and
legally binding obligations of such Lender, enforceable in accordance with its
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and any other laws of
general application affecting enforcement of creditors’ rights generally, or (ii) as
limited by laws relating to the availability of a specific performance,
injunctive relief, or other equitable remedies.

 

(b)                                 Disclosure of Information. Each Lender has
had an opportunity to discuss the Borrowers’ business, management, financial
affairs (including the Restatement) and the terms and conditions of the
offering of the Debentures with the Borrowers’ management and has had an
opportunity to review the Borrowers’ facilities. Each Lender understands that
such discussions, as well as any other written information delivered by the Borrowers
to such Lender, were intended to describe the aspects of the Borrowers’
business which it believes to be material. Each Lender has had all of its
questions related to the Borrowers and the purchase of Debentures answered by
the Borrowers.

 

(c)                                  Experience; Speculative Nature of Investment.
Each Lender has substantial experience in evaluating and investing in private
placement transactions of securities in companies similar to the Borrowers so
that it is capable of evaluating the merits and risks of its investment in the
Borrowers and has the capacity to protect its own interests. Each Lender
acknowledges that its investment in the Borrowers is highly speculative and
entails a substantial degree of risk and such Lender is in a position to lose
the entire amount of such investment.

 

(d)                                 Investment. The Lenders are acquiring the
Debentures and Warrants (if and when issued) for investment for their own
account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof. By executing this Agreement, each
Lender further represents that it does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or
grant participations to such person or to any third person, with respect to any
of the Debentures, Warrants or Common Shares.

 

(e)                                  Restricted Securities. The Lenders
understand that the Debentures, Warrants (if and when issued) and Common Shares
issuable upon exercise of the Warrants as contemplated hereby have not been
registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or qualified for
distribution in any province or territory of Canada and are issued pursuant to
a specific exemption from the registration provisions of the Securities Act and

 

 

the
registration and prospectus requirements of the Securities Act (Ontario), the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Lenders’ representations as expressed
herein. Each Lender is an “accredited investor” within the meaning of Section 1.1
of Rule 45-501 of the Ontario Securities Commission and each Lender, which
is resident in the United States, is also an “accredited investor” within the
meaning of Regulation D, Rule 501(a), promulgated by the U.S. Securities
and Exchange Commission. If any Lender is resident in or otherwise subject to
the securities laws of a jurisdiction other than the Province of Ontario or the
United States, the issuance by the Corporation, and the acquisition by such
Lender, of the Debentures, Warrants (if and when acquired) and Common Shares
issuable upon exercise of the Warrants as contemplated by this Agreement is in
full compliance with all applicable securities laws, statutes, regulations,
policy statements and orders in such jurisdiction and no authorization, consent
of, or filing with or notice to, any person is required in connection
therewith.

 

(f)                                    Legends. The Lenders understand that the
Debentures, Warrants (if and when issued) and Common Shares issuable upon
exercise of the Warrants (each, for purposes of this paragraph, a security) may bear
the following legend and any other legends that may be required by
applicable securities law and stock exchange rules:

 

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION
WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL (WHICH COUNSEL SHALL BE BROWN RAYSMAN MILLSTEIN FELDER &
STEINER LLP OR OTHER COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION) IN A FORM REASONABLY
SATISFACTORY TO THE CORPORATION, OR OTHER EVIDENCE REASONABLY SATISFACTORY TO
THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933.

 

(g)                                 No Public Market. The Lenders understand
that no public market now exists for any of the Debentures or Warrants issued
by the Borrowers and that the Borrowers have made no assurances that a public
market will ever exist for the Corporation’s securities except to the extent
made pursuant to Section 6.2(c).

 

Section 5.3.                                   Survival
of Representations and Warranties

 

The statements made in any certificate hereafter delivered by the
Corporation or any of the Subsidiaries to the Lenders shall be deemed to
constitute representations and warranties made by the party delivering the
same. The Borrowers covenant that the representations and warranties made by
them in this Article 5 shall be true and correct on each day that any of
the Obligations remain outstanding, with the same effect as if such
representations and warranties had been made and given on and as of such day,
notwithstanding any investigation made at any time by or on behalf of each
Lender or its counsel and notwithstanding any foreclosure or enforcement
pursuant to any Security Documents; except that if any such representation and

 

 

warranty is
specifically given as of the date hereof or in respect of a particular date or
particular period of time and relates only to such date or period of time, then
such representation and warranty shall continue to be given as at such date or
for such period of time.

 

ARTICLE 6.

COVENANTS OF THE CORPORATION

 

Section 6.1.                                   General
Covenants

 

So long as the Obligations remain outstanding, the Borrowers covenant
and agree as follows:

 

(a)                                  Securities Compliance. Subject to the
representations and warranties of the Lenders in Section 5.2(e) being
true and correct on the date of issuance of the Debentures and Warrants (if and
when issued), the Borrowers shall take all necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation for the
legal and valid issuance of the Debentures and the Warrants (if and to the
extent issued) to be acquired by the Lenders, hereunder and the issuance of the
Common Shares upon exercise of the Warrants.

 

(b)                                 Books and Reserves. From the date hereof
until the payment in full of all Obligations (the “Termination Date”), the Corporation shall (i) maintain,
and cause its Subsidiaries to maintain, at all times, true and complete books,
records and accounts in which true and correct entries shall be made of its
transactions in accordance with GAAP consistently applied and consistent with
those applied in the preparation of the Financial Statements (to the extent
same are consistent with GAAP), and (ii) by means of appropriate quarterly
entries, reflect in its accounts and in all financial statements, proper
liabilities and reserves for all taxes and proper reserves for depreciation,
renewals and replacements, obsolescence and amortization of its properties and
bad debts, all in accordance with GAAP consistently applied, as above described,
and all subject to normal year end adjustments.

 

(c)                                  Ordinary Course of Business. The Borrowers
shall operate their respective businesses only in the ordinary course and will
use commercially reasonable efforts to preserve their respective business, organization,
goodwill and relationships with Persons having business dealings with them.

 

(d)                                 To Use Proceeds. The Borrowers shall use
the net proceeds from the sale of the Debentures in accordance with Section 1.5.

 

(e)                                  To Pay Costs. The Borrowers shall pay all
reasonable costs, charges and expenses of or incurred by any Lender in
inspecting the Secured Property or in or about taking, recovering or keeping
possession of any of the Secured Property or in any other proceedings taken in
enforcing the remedies provided herein or otherwise in relation to this
Agreement or the Secured Property, or by reason of non-payment of the moneys
hereby secured, costs of any sale proceedings hereunder, whether such sale
proceedings prove abortive or not, and costs of any Receiver with respect to,
and all expenditures made by any Lender or any Receiver in the course of, doing
anything hereby permitted to be done by any Lender or such Receiver. All such
costs and expenses and other monies payable hereunder, together with interest
at the Maximum Legal Rate applicable to such Obligations, shall be payable on 

demand and
shall constitute a charge on

 

 

the Secured
Property. Without limiting the generality of the foregoing, such reasonable
costs shall extend to and include any legal costs incurred by or on behalf of
each Lender or the Receiver as between attorney and his own client.

 

(f)                                    To Pay Certain Debts. The Corporation shall
and shall cause each of the Subsidiaries to punctually pay and discharge every
obligation, the failure to pay or discharge of which would reasonably be likely
to result in any Encumbrance or right of distress, forfeiture, termination or
sale or any other remedy being enforced against the Secured Property and
provide to Phoenix, on behalf of the Lenders, when required by Phoenix, on
behalf of the Lenders, acting reasonably, satisfactory evidence of such payment
and discharge, but the Borrowers may, on giving the Lenders such security (if
any) as Phoenix, on behalf of the Lenders, may require, refrain from paying
or discharging any obligation the liability for which is being contested in
good faith.

 

(g)                                 To Comply with Obligations and Maintain Corporate
Existence and Security. The Corporation shall and shall cause each
Subsidiary to:

 

(i)                                     pay
or cause to be paid all Obligations falling due hereunder on the dates and in
the manner specified herein and comply with its obligations hereunder, under
the Security Documents and the other Instruments;

 

(ii)                                  create
an annual business plan, approved by the Board of Directors of the Corporation
and implemented by the Management Committee in accordance with the MC
Operational Procedures, for each year in which the Debentures remain
outstanding (the “Annual Business Plan”), and immediately notify Phoenix, on behalf
of the Lenders of any material deviation from the Annual Business Plan;

 

(iii)                               maintain
its corporate existence;

 

(iv)                              use
commercially reasonable efforts to preserve all its rights, licenses, powers,
privileges, franchises and goodwill;

 

(v)                                 observe
and perform all of its obligations and comply with all conditions under
leases, licenses and other agreements to which it is a party or upon or under
which any of the Secured Property is held;

 

(vi)                              carry
on and conduct its business in a proper and efficient manner so as to preserve
and protect the Secured Property and income therefrom;

 

(vii)                           observe
and conform to all Applicable Laws and of any Governmental Body having
jurisdiction over the Corporation or any Subsidiary;

 

(viii)                        repair
and keep in repair and good order and condition all property, including the
Secured Property, the use of which is necessary or advantageous in connection
with its business;

 

 

(ix)                                immediately
notify Phoenix, on behalf of the Lenders, in writing of any proposed change of
name of the Corporation or any Subsidiary or of chief place of business of any
of the foregoing;

 

(x)                                   keep
Phoenix, on behalf of the Lenders, regularly informed in writing as to the
location of the Secured Property and the books of account and other records of
each of the Corporation and the Subsidiaries to the extent that the Secured
Property or such books of account are not located at 14000 Summit Drive, Suite 900,
Austin, Texas 78728;

 

(xi)                                pay
all Taxes levied, assessed or imposed upon it or its property as and when the
same become due and payable save and except where it contests in good faith the
validity thereof;

 

(xii)                             forthwith
notify Phoenix, on behalf of the Lenders, of any default (or event, condition
or occurrence which with the giving of notice and/or the lapse of time would
constitute a default) in connection with any indebtedness, Funded Indebtedness
or Contingent Liability in an amount exceeding $300,000;

 

(xiii)                          advise
Phoenix, on behalf of the Lenders, forthwith upon becoming aware of any Default
or Event of Default hereunder with detailed particulars thereof and deliver to
Phoenix, on behalf of the Lenders, upon request a certificate in form and
substance satisfactory to Phoenix, on behalf of the Lenders, signed by a senior
officer of the Corporation certifying that no Default or Event of Default has
occurred or, if such is not the case, specifying all Default or Events of
Default and their nature and status;

 

(xiv)                         use
commercially reasonable efforts to collect all accounts receivable in the
ordinary course of business;

 

(xv)                            promptly
cure or cause to be cured any defects in the execution or delivery of any
Instrument and any defects in the validity or enforceability of any security
hereunder and at its expense duly execute and deliver or cause to be duly executed
and delivered all documents as the Lenders may consider necessary or
desirable for such purposes;

 

(xvi)                         retain
auditors approved by the Audit Committee of the Board of Directors of the
Corporation;

 

(xvii)                      at
its cost and expense, upon the request of Phoenix, on behalf of the Lenders,
duly execute and deliver, or cause to be duly executed and delivered, to
Phoenix, on behalf of the Lenders, such documents and do or cause to be done
such acts as may be necessary or desirable in the reasonable opinion of
Phoenix, on behalf of the Lenders, to carry out the purposes of this Agreement;
and

 

(xviii)                   effect
such registrations as may be required by Phoenix, on behalf of the
Lenders, from time to time to protect the security granted under the
Transaction Documents.

 

(h)                                 To Insure. The Borrowers shall keep the
Secured Property insured in such amounts as is carried by prudent corporations
carrying on a similar business and owning

 

 

similar
property, and against loss or damage by fire and such other risks as Phoenix,
on behalf of the Lenders, may from time to time specify, acting
reasonably, with reputable insurers. The Borrowers shall, whenever from time to
time requested by Phoenix, on behalf of the Lenders, provide Phoenix, on behalf
of the Lenders, satisfactory evidence of such insurance and any renewal thereof
which shall at all times be subject to charging clauses in a form approved
by Phoenix, on behalf of the Lenders, and shall cause the Lenders to be shown
as loss payees under the policy or policies. Evidence satisfactory to Phoenix,
on behalf of the Lenders, of the renewal of every policy of insurance shall be
left with Phoenix, on behalf of the Lenders, at least seven (7) days
before the termination thereof. Each policy of insurance shall be in form and
substance acceptable to Phoenix, on behalf of the Lenders, acting reasonably,
and shall not be subject to any co-insurance clause.

 

(i)                                     Notice of Litigation and Damage. The
Borrowers will promptly give written notice to Phoenix, on behalf of the
Lenders, of (a) all claims or proceedings pending or threatened against
any of the Corporation or Subsidiaries which may give rise to uninsured
liability in excess of $300,000 or which may have a material adverse
effect on the business or operations of the Corporation or Subsidiaries and (b) all
damage to or loss or destruction of any property comprising part of the
Secured Property which may give rise to an insurance claim in excess of
$300,000; and will supply Phoenix, on behalf of the Lenders, with all information
reasonably requested in respect of any such claim.

 

(j)                                     To Furnish Proofs. The Borrowers shall
forthwith on the happening of any loss or damage furnish or cause to be
furnished at their expense all necessary proofs and do all necessary acts to
enable each Lender to obtain payment of the insurance monies, which, in the
sole discretion of the Lenders, may be applied in reinstating the insured
property or be paid to the Corporation or any Subsidiary or be applied in
payment of the monies owing hereunder, whether due or not then due, or paid
partly in one way and partly in another.

 

(k)                                  Financial Statement Presentation. In any press
release, or public disclosure document required by securities regulatory
authorities, that contains the Corporation’s quarterly or annual financial
statements, subject to compliance with applicable securities law and other
regulatory requirements, such financial statements shall be prepared in
accordance with Canadian GAAP and, if requested by Phoenix, contain a note
reconciliation to U.S. generally accepted accounting principles (“US GAAP”). At such time as the Corporate
Migration has been completed, the Corporation’s quarterly and annual financial
statements shall be prepared in accordance with US GAAP and shall also be
prepared in accordance with, or reconciled to, Canadian GAAP to the extent
required by Applicable Law.

 

Section 6.2.                                   Specific
Covenants

 

So long as the Obligations remain outstanding, the Corporation
covenants and agrees as follows:

 

(a)                                  Cost Maintenance Program. The Corporation
shall continue its previously implemented cost-cutting program (the “Cost Maintenance Program”) in a manner
satisfactory, in its sole discretion, to Phoenix. The Cost Maintenance Program (A) shall
result in (i) total quarterly recurring payroll costs of not more than 5%
above amounts in the Corporation’s

 

 

forecast
approved by Phoenix and attached hereto as Exhibit E, and (ii) total
quarterly recurring Overhead Costs of not more than $150,000 higher than the
Corporation’s forecast approved by Phoenix and attached hereto as Exhibit E,
and (B) shall remain in effect until (i) the Corporation has achieved
positive net income and positive cash flow from operations for at least two (2) consecutive
fiscal quarters, and (ii) management of the Corporation then reasonably
projects continued positive net income and positive cash flow from operations
for the Corporation for at least the next four (4) following fiscal
quarters.

 

(b)                                 Corporate Migration. The Corporation shall
take all commercially reasonable actions necessary, subject only to (i) compliance
with Applicable Law and stock exchange requirements, (ii) any required
approval of the Corporation’s shareholders, (iii) obtaining of any
required third-party consents, and (iv) avoidance of any material adverse
tax consequences, to re-incorporate, continue or otherwise cause the
Corporation or a successor thereof to be redomiciled, directory or indirectly,
as a Delaware corporation (the “Corporate
Migration”), by no later than January 31, 2006.

 

(c)                                  U.S. Listing. The Corporation shall use
reasonable commercial efforts to obtain a listing of the Common Shares on the
American Stock Exchange or other registered national stock exchange or
quotation system in the United States (the “U.S.
Listing”) by no later than January 31, 2006, subject to the
satisfaction or elimination of all regulatory, legal, tax and financial
requirements to such U.S. Listing. The U.S. Listing may be either in lieu
of, or in addition to, the Corporation’s current listing of the Common Shares
on the Toronto Stock Exchange. In the event a U.S. Listing is obtained, the
Corporation shall promptly enter into a registration rights agreement, with and
for the benefit of the Lenders and the Existing Debenture Holders, providing
for the registration for resale of the Common Shares underlying the Warrants
(if and to the extent issued) and the warrants and convertible debentures held
by the Existing Debentures Holders with the U.S. Securities and Exchange
Commission and containing, among other things, customary demand and piggy-back
registration rights, and all on terms satisfactory to the Corporation, the
Lenders and the Existing Debenture Holders, each acting reasonably and taking
into consideration the need for future free-transferability for the Common
Shares underlying the warrants and the debentures in the U.S. securities
markets. In this Section 6.2(c), “Common Shares” includes any shares of
voting common stock of any corporation (a “Successor
Corporation”) carrying on the business of the Corporation and having
a listing on the Toronto Stock Exchange which are issued in exchange for the
Common Shares of the Corporation in connection with the Corporate Migration,
and “Corporation” includes any such Successor Corporation.

 

(d)                                 MC Operational Procedures. The Corporation
shall at all times conduct its day-to-day operations in strict compliance with
the MC Operational Procedures.

 

Section 6.3.                                   Financial
Covenants.

 

(a)                                  Budget. The Corporation shall not, and
shall cause its Subsidiaries not to, expend any funds nor incur any expenses
except as provided for in the budget delivered to Phoenix, on behalf of the
Lenders (the “Budget”), which
shall also included a detailed income statement, balance sheet and statement of
cash flows. The Borrowers and Phoenix, on behalf of

 

 

the Lenders,
hereby agree that aggregate expenditures, if any, exceeding the total budgeted
amount by 5% or less shall be deemed to be within the Budget.

 

(b)                                 Financial Statements and Other Reports. The
Corporation will maintain, and cause each of its Subsidiaries to maintain, a
system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements in conformity
with GAAP (it being understood that quarterly financial statements are not
required to have footnote disclosures). The Corporation will deliver or cause
to be delivered each of the financial statements and other reports described
below to Phoenix, on behalf of the Lenders and, if requested by a Lender or
Phoenix, to each Lender directly, in addition to copies of any other financial
statements prepared by the Corporation for filing with securities commissions
and other regulatory authorities.

 

(i)                                     Monthly Financials. As soon as available
and in any event within forty-five (45) days after the end of each month, the
Corporation will deliver or cause to be delivered its consolidated balance
sheet, as at the end of such month, and the related consolidated statements of
loss and deficit and cash flows for such month, and for the period from the
beginning of the then current fiscal year of the Corporation to the end of such
month, along with a comparison to the operating budget for such quarter.

 

(ii)                                  Quarterly Financials; Other Quarterly Reports. As
soon as available and in any event within forty-five (45) days after the end of
each fiscal quarter, the Corporation will deliver or cause to be delivered (A) its
consolidated balance sheet, as at the end of such fiscal quarter, and the
related consolidated statements of income, shareholders’ equity, loss and
deficit (or income) and cash flows for such fiscal quarter and for the period
from the beginning of the then current fiscal year of the Corporation to the
end of such quarter, (B) a copy of its consolidating financial statements
for such fiscal quarter, but only if material to an understanding of the
Corporation’s operations and financial condition, and (C) a schedule of
investments made by the Corporation or any of its Subsidiaries since the date
such information was last provided to Lenders.

 

(iii)                               Year-End Financials. As soon as available
and in any event within ninety (90) days after the end of each fiscal year of
the Corporation, the Corporation will deliver or cause to be delivered (A) its
consolidated balance sheet, as at the end of such year, and the related
consolidated statements of loss and deficit (or income), cash flows, and
shareholders’ equity for such fiscal year, (B) a copy of its consolidating
financial statements for such fiscal year, but only if material to an
understanding of the Corporation’s operations and financial condition, and (C) a
report with respect to the financial statements received pursuant to this Subsection from
certified public accountants nationally recognized in the United States or
Canada, selected by the Corporation.

 

(iv)                              Other Weekly/Monthly Reports. As soon as
available, and in any event within four (4) Business Days after the end of
each week, the Corporation will deliver or cause to be delivered (A) a
report of sales booked by the Corporation during such week, (B) a report
of pending and projected order activity as of the end of such week, and (C) a
report providing detailed accounts receivable as of the end of such week. As
soon as available, and in any event within ten (10) days after the end of
each month, the Corporation will deliver or cause

 

 

to be
delivered a report providing detailed accounts payable aging information as of
the end of such month.

 

(c)                                  Compliance Certificates. Together with each
delivery of financial statements of the Corporation or its Subsidiaries (other
than those financial statements delivered pursuant to Section 6.3(c)(iv)),
the Corporation or the Subsidiary, as the case may be, will deliver or
cause to be delivered to Phoenix, on behalf of the Lenders and, if requested by
a Lender or Phoenix, to each Lender directly a fully and properly completed
compliance certificate substantially in the form attached hereto as Exhibit C
(each, a “Compliance Certificate”)
signed by the chief executive officer, chief operating officer or chief
financial officer of the Corporation or such Subsidiary.

 

Section 6.4.                                   Negative
Covenants

 

At all times, the Borrowers hereby covenant and agree that, except as
expressly contemplated by Section 6.2, for so long as any portion of the Obligations
remains unpaid, unfulfilled and/or unsatisfied, the Borrowers shall not, nor
shall the Corporation permit any Subsidiary to:

 

(a)                                  Encumbrances. Create, grant, assume or
suffer to exist any Encumbrance upon any of their properties or assets other
than Permitted Encumbrances or enter into or assume any agreement (other than
the documents entered into in connection herewith, the Intercreditor Agreement
or the SVB Loan Agreement) prohibiting the creation or assumption of any
Encumbrance upon its or their respective properties or assets, whether now
owned or hereafter acquired.

 

(b)                                 Capital Expenditures. Incur or commit or
agree to incur capital expenditures in any fiscal year, including Capital Lease
Obligations and Purchase Money Security Interests, involving aggregate payments
in any twelve (12) month period in excess of 5% over the amount of capital
expenditures provided for in the Budget.

 

(c)                                  Sell. Remove, destroy, lease, transfer,
assign, sell or otherwise dispose of any of the Secured Property, except for
sales in the ordinary course of business.

 

(d)                                 Funded Indebtedness. Incur or become liable
for any Funded Indebtedness, other than the Obligations hereunder and those
obligations existing on the date hereof; provided such obligations do not exceed
the amount outstanding as of the date hereof.

 

(e)                                  Indebtedness. Incur or repay any debts,
liabilities or obligations (including Funded Indebtedness and Contingent
Liabilities) whether direct or indirect, actual or contingent, material or not,
other than those specifically permitted hereunder (including indebtedness to
the Existing Debenture Holders, Wistron and SVB in the aggregate amounts
existing as of the date hereof) or under the Security Documents, except for
normal trade debts, liabilities or obligations to Persons dealing at Arm’s
Length with the Borrowers arising in the ordinary course of business and with
customary payment terms; provided,
however, that in the event any
indebtedness consists of trade payables, expenses, costs and charges accrued in
the ordinary course of business in accordance with customary trade terms which
are overdue for

 

 

more than 180
days (the “Qualified Indebtedness”),
the aggregate amount of such Qualified Indebtedness shall not exceed
$1,500,000.

 

(f)                                    Executive Officers. Appoint, hire, remove
or change any executive officer without the prior written consent of Phoenix,
which consent will not be unreasonably withheld or delayed.

 

(g)                                 MC Operational Procedures Compliance. Take
any action, incur any expenses or incur any debts, liabilities or obligations,
unless duly and properly authorized by the Management Committee in strict
accordance with the MC Operational Procedures.

 

(h)                                 Make Certain Changes.

 

(i)                                     change
their financial year end;

 

(ii)                                  purchase,
establish or acquire in any manner any new business entity;

 

(iii)                               change
the nature of their business as presently carried on;

 

(iv)                              amalgamate,
consolidate or merge or enter into a partnership, joint venture (other than
joint business arrangements with the third parties for the sale of goods and
services in the ordinary course of business) or syndicate with any other
Person, except an amalgamation, consolidation or merger involving only the
Corporation and the US Subsidiary, unless otherwise consented to by Phoenix;

 

(v)                                 sell,
transfer, convey, assign or otherwise dispose of all or substantially all of
its assets;

 

(vi)                              dissolve
or wind-up the Corporation or any Subsidiary, other than pursuant to the
dissolution or winding-up of a Subsidiary (other than the US Subsidiary) pursuant
to which all of the assets of such Subsidiary are transferred or conveyed to
the Corporation or the US Subsidiary;

 

(vii)                           enter
into any transaction outside the ordinary course of business;

 

(viii)                        acquire
or invest in any securities or investments, other than Cash Equivalents;

 

(ix)                                make
any loans in any other Person other than the giving of trade credit or
consistent with the Business Plan;

 

(x)                                   engage
in any commercial transactions with Persons not dealing at Arm’s Length with
the Corporation or any Subsidiary, other than transactions relating to the
compensation of any employee or director of the Corporation or a Subsidiary in
the ordinary course of business, including the grant of stock under the Reserve
Pool or the grant of options pursuant to the Corporation’s stock option plan,
as in effect on the date hereof, approved by a majority of the Board of
Directors (including a majority of the non-participating directors);

 

 

(xi)                                engage
in any sale-leaseback or similar transactions;

 

(xii)                             remove
any of the Secured Property or any of the books of account or other records of
the Corporation or any Subsidiary from the jurisdiction where same are
presently located, except for inventory sold in the ordinary course of
business;

 

(xiii)                          make
or commit to any form of distribution or reduction of the profits of the
Corporation or any Subsidiary or of its capital including any (i) declaration
or payment of any dividend (including stock dividends) on any present or future
shares; (ii) payment to purchase, redeem, retire or acquire any of its
shares, or any option, warrant or other right to acquire any such shares, or
apply or set apart any of its assets therefor; (iii) bonuses to
shareholders; (iv) payment on account of loans made to shareholders of the
Corporation or any of its Subsidiaries; or (v) payment of any bonuses or
management fees (other than bonuses paid to employees in the ordinary course of
business);

 

(xiv)                         other
than pursuant to any agreement, option, right, instrument or privilege set
forth on Schedule 5.1(q), create, allot or issue any shares in its
capital, or enter into any agreement, or grant any option, right or privilege,
whether pre-emptive, contractual or otherwise for the purchase of shares or
securities convertible into shares of the Corporation or any Subsidiary, amend
the articles, memorandum or association or by-laws, change the capital
structure, enter into any agreement, or make any offer, to do so; or

 

(xv)                            amend,
modify or change, or consent or agree to any amendment, modification or change
to, any of the terms of any material contracts, except to the extent such
change, amendment, modification or consent is not materially adverse to Lenders
and would not otherwise have a Material Adverse Effect.

 

Section 6.5.                                   Warrants.

 

In the event that any Debenture has not been paid in full, including
all outstanding principal and interest accrued thereon and all fees related
thereto, on or before the Maturity Date (each a “Past Due Debenture”), the Corporation shall promptly (but in
no event more than ten (10) days thereafter) issue share purchase warrants
(each a “Warrant”), substantially
in the form attached hereto as Exhibit B, to each holder of a
Past Due Debenture entitling the holder thereof to purchase that number of
Common Shares equal to the number of dollars representing the aggregate
Obligations due on such Past Due Debenture (including accrued interest and
expenses related thereto). Prior to, and as a condition of, the issuance of
such Warrants, the Corporation shall be entitled to receive a certificate from
such applicable Lender for a Past Due Debenture confirming that the
representations and warranties in Section 5.2(e) hereof are true and
correct on such date. The exercise price of the Warrants shall be the volume
weighted average trading price of the Common Shares, as reported on the Toronto
Stock Exchange, for the 5 trading days immediately prior to the Maturity Date.

 

 

ARTICLE 7.

CONDITIONS TO CLOSING

 

Section 7.1.                                   Conditions
to Initial Closing

 

The obligation of the Lenders (and in the case of Section 7.1(a))
the Borrowers, to effect the Initial Closing are subject to the satisfaction or
waiver in writing in whole or in part by Phoenix, on behalf of the Lenders
(and in the case of Section 7.1(a)) the Borrowers, of each of the following
conditions:

 

(a)                                  Receipt of Consent of Existing Debenture Holders.
Phoenix, on behalf of the Lenders, shall have obtained and delivered to the
Borrowers the consent of the Existing Debenture Holders, to the issuance of the
Debentures and security granted in respect thereof and waiver of certain rights
under the Existing Debentures.

 

(b)                                 Regulatory Approval. The Borrowers shall
have obtained and delivered to Phoenix, on behalf of the Lenders, the approval
of the Ontario Securities Commission, Toronto Stock Exchange and all other
applicable regulatory authorities with respect to the transactions contemplated
hereby, each in form and substance satisfactory to Phoenix.

 

(c)                                  Consent of the Board. The Borrowers shall
have obtained and delivered to Phoenix, on behalf of the Lenders, unanimous
written consents of their respective Boards of Directors authorizing and
approving the Corporation’s issuance of the Debentures, the Warrants and the
Warrant Shares.

 

(d)                                 Security Agreement. Phoenix, on behalf of
the Lenders, shall have received originally executed copies of the Security
Agreement duly executed by the Borrowers.

 

(e)                                  Legal Opinion. The Lenders shall have
received a legal opinion of McCarthy Tétrault LLP substantially in the form attached
hereto as Exhibit D regarding the validity and enforceability of
this Agreement and the Transaction Documents (other than those relating to the
US Subsidiary) and such other matters as Phoenix may reasonably require.

 

(f)                                    Existing Debentures. The Corporation and
the Existing Debenture Holders shall have extended the maturity date of the
Existing Debentures to April 30, 2007.

 

(g)                                 SVB Loan Agreement. The US Subsidiary shall
have entered into a $5 million senior secured working capital facility with SVB
pursuant to the SVB Loan Agreement, in such form as shall be acceptable to
the Phoenix.

 

(h)                                 Intercreditor Agreement. The Lenders, the
Existing Debenture Holders and the Borrowers shall have entered into the
Intercreditor Agreement.

 

Section 7.2.                                   Conditions
to each Closing

 

Notwithstanding anything herein contained, the obligation of each
Lender to consummate the purchase of the Debentures at the Initial Closing and
each Additional Closing, if any, and to pay the Purchase Price will be subject
to the fulfillment of the following conditions at or prior to

 

 

each Closing
Date, and the Borrowers covenant to use their respective commercially
reasonable efforts to ensure that such conditions are fulfilled.

 

(a)                                  Accuracy of Representations and Warranties and
Performance of Covenants. The representations and warranties of the
Borrowers contained herein or in any other Security Document shall be true and
accurate at each Closing Date. In addition, the Borrowers shall have complied
with all covenants and agreements herein agreed to be performed or caused to be
performed by it at or prior to each Closing Date. At each Closing Date, the
Borrowers shall have delivered to Phoenix, on behalf of the Lenders, a
certificate, substantially in the form attached hereto as Exhibit F,
confirming the facts with respect to each of the representations and
warranties, confirming that all such covenants and agreements have been
performed and confirming that all conditions set forth in this Sections 7.1 and
7.2 have been satisfied or waived.

 

(b)                                 Cost Maintenance Program. The Corporation
shall have provided to Phoenix, on behalf of the Lenders, evidence satisfactory
to Phoenix, acting reasonably, that the Cost Maintenance Program is continuing.

 

(c)                                  Default or Event of Default. No Default or
Event of Default shall have occurred and be continuing nor shall there be any
Default or Event of Default which will or will likely occur as a result of the
transactions contemplated by this Agreement, the Debenture Certificates or the
Instruments.

 

(d)                                 Consents. All consents, permits,
agreements, confirmations and acknowledgements, determined by the Phoenix on
behalf of Lenders, as required or necessary to be obtained in order to
effectively complete the transactions contemplated herein, including without
limitation, the Required Consents, shall have been obtained.

 

(e)                                  Payment of Fees. The Borrowers shall have
paid, by way of a deduction from the Purchase Price in accordance with Section 1.3(b),
to Phoenix all fees and expenses referred to in Section 1.4, and shall
have unconditionally waived and released, in form and content satisfactory
to Phoenix, any right to contest the reasonableness of such agreement, fees and
expenses or otherwise challenge the entitlement of Phoenix or the Lenders
thereto. Notwithstanding such payment, the Borrowers will remain liable for any
other fees and expenses referred to in Section 1.4 hereof which relate to
the transactions hereunder.

 

(f)                                    Perfection of Security. All steps necessary
or desirable (including without limitation, the registration of the security
interests created by the Security Documents in all public registries where such
registration is necessary or desirable to perfect the security interest granted
in favor of the Lenders) shall have been taken to constitute the Encumbrances
under the Security Documents as valid, enforceable and prior ranking to all
other Encumbrances, claims and interests in the Secured Property, subject only
to Permitted Encumbrances.

 

(g)                                 Receipt of Closing Documentation. All
documentation relating to the due authorization and completion of the issuance
of the Debentures provided for herein and the due execution and delivery of all
the Security Documents and other Instruments, and all actions and proceedings
taken on or prior to each Closing Date in connection with the performance by

 

 

the Borrowers
of their respective obligations hereunder shall be satisfactory to Phoenix, on
behalf of the Lenders, and Phoenix, on behalf of the Lenders, shall have
received copies of all such documentation or other evidence as it may reasonably
request in order to establish the consummation of the transactions contemplated
hereby and the taking of all corporate proceedings in connection therewith in
compliance with these conditions, in form and substance satisfactory to
Phoenix, on behalf of the Lenders.

 

(h)                                 Deliveries.

 

(i)                                     The
Borrowers shall have executed and delivered to the Lenders, such other
undertakings as they may reasonably request regarding the taking of
actions and delivery of documents following each Closing Date necessary or
desirable to give effect to the terms and conditions of this Agreement and the
other Transaction Documents; and

 

(ii)                                  The
Borrowers shall have executed and delivered to the Lenders the Debenture
Certificates.

 

(i)                                     No Material Adverse Change. There shall
have been no material adverse change with respect to the Corporation and the
Subsidiaries taken as a whole.

 

(j)                                     Due Diligence. The Lenders shall have been
satisfied in their absolute discretion with their due diligence review of the
Borrowers and their prospects.

 

Section 7.3.                                   Waiver
or Termination by the Lenders

 

Each of the conditions contained in Sections 7.1 (other than 7.1(a) and
(f)) and 7.2 hereof are inserted for the exclusive benefit of the Lenders and may be
waived in whole or in part by Phoenix, on behalf of the Lenders, at any
time. The Borrowers acknowledge that the waiver by Phoenix, on behalf of the
Lenders, of any condition or any part of any condition shall constitute a
waiver only of such condition or such part of such condition, as the case may be,
and shall not constitute a waiver of any covenant, agreement, representation or
warranty made by the Borrowers herein that corresponds or is related to such
condition or such part of such condition, as the case may be. If any
of the conditions contained in Sections 7.1 (other than 7.1(a) and (f))
and 7.2 hereof are not fulfilled or complied with as herein provided, the
Lenders may, at or prior to any Closing Date at their option, be released from
any and all of their respective obligations, covenants, agreements and
liabilities pursuant to this Agreement by notice in writing to the Borrowers
and in such event each Lender shall be released from all of its obligations,
covenants, agreements and liabilities hereunder.

 

ARTICLE 8.

EVENTS OF DEFAULT AND REMEDIES

 

Section 8.1.                                   Events
of Default

 

The occurrence of any of the following events shall constitute an Event
of Default under this Agreement:

 

 

(a)                                  If
default occurs in payment when due of any principal payable under this
Agreement.

 

(b)                                 If
default occurs in payment when due of any interest, fees or other amounts
payable under this Agreement and remains unremedied for a period of 10 days
after the receipt by the Borrowers of notice of such default.

 

(c)                                  If
default occurs in payment or performance of any other Obligation (whether
arising herein or otherwise) and such default remains unremedied for a period
of 10 days after receipt by the Borrowers of notice of such default.

 

(d)                                 If
default occurs in performance by any of the Borrowers of any covenant in favor
of any of the Lenders under this Agreement (excluding any of the covenants set
forth in Section 6.4) and remains unremedied for a period of 15 days after
the receipt by the Borrowers of notice of such default.

 

(e)                                  If
default occurs in performance by any of the Borrowers of any covenant in favor
of the Lenders set forth in Section 6.4 of this Agreement.

 

(f)                                    If
an event of default occurs in payment or performance of any obligation in favor
of any Existing Debenture Holder or any person from whom the Corporation or any
Subsidiary has borrowed money aggregating in excess of $300,000 which would
entitle the holder to accelerate repayment of the borrowed money, and such
default is not waived in writing within 10 days of the occurrence of such
default.

 

(g)                                 Either
the Corporation or the US Subsidiary institutes proceedings to be adjudicated
as bankrupt or insolvent, or the consent by it to the institution of bankruptcy
or insolvency proceedings against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under any applicable
federal, provincial or state law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or the consent by it to the filing of any
such petition or to the appointment under any such law of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of such
Borrower or of substantially all of its property, or the making by it of a
general assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due.

 

(h)                                 If
there is the entry of a decree or order by a court having jurisdiction in the
premises adjudging either the Corporation or the US Subsidiary as bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement or adjustment of or in respect of such Borrowers under any
applicable law relating to bankruptcy, insolvency, reorganization or relief of
debtors, or appointing under any such law a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of such Borrower or of
substantially all of its property, or ordering pursuant to any such law the
winding-up or liquidation of its affairs, and the continuance of any such
decree, petition, appointment or order unstayed and in effect for a period of
45 consecutive days.

 

(i)                                     If
any act, matter or thing is done to, or any action or proceeding is launched or
taken to, terminate the corporate existence of the Corporation or any
Subsidiary, whether by winding-up, surrender of charter or otherwise.

 

 

(j)                                     If
the Corporation or any Subsidiary ceases to carry on its business or makes or
proposes to make any sale of its assets in bulk or any sale of its assets out
of the usual course of its business.

 

(k)                                  If
any receiver, administrator or manager of the property, assets or undertaking
of the Corporation or any Subsidiary or a substantial part thereof is
appointed pursuant to the terms of any trust deed, trust indenture, debenture
or similar instrument or by or under any judgment or order of any court.

 

(l)                                     If
any balance sheet or other financial statement provided by the Corporation to
the Lenders after the date hereof pursuant to the provisions hereof is false or
misleading in any material respect.

 

(m)                               If
any proceedings are taken to enforce any Encumbrance affecting any of the
Secured Property or if a distress or any similar process is levied or enforced
against any of the Secured Property.

 

(n)                                 If
any judgment or order for the payment of money in excess of $200,000 shall be
rendered against the Corporation or any Subsidiary and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order, or (ii) there shall be any period of 10 consecutive days during
which a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect.

 

(o)                                 If
any action is taken or power or right be exercised by any Governmental Body
which has a Material Adverse Effect on the Corporation or any Subsidiary.

 

(p)                                 If
any representation or warranty made by any Borrower herein or in any other
Instrument or in any certificate, statement or report furnished in connection
herewith is found to be false or incorrect in any way so as to make it
materially misleading when made or when deemed to have been made.

 

(q)                                 If
any event occurs with respect to any Subsidiary which, if a like event had
occurred with respect to the Corporation, would have constituted an Event of
Default.

 

(r)                                    If
a Change of Control occurs with respect to the Corporation or any Subsidiary
and such Change of Control continues in effect for a period of 30 days.

 

(s)                                  If
there shall occur or arise any change (or any condition, event or development
involving a prospective change) in the business, operations, affairs, assets,
liabilities (including any contingent liabilities that may arise through
outstanding pending or threatened litigation or otherwise), capitalization,
financial condition, licenses, permits, rights or privileges, whether
contractual or otherwise, or prospects of the Corporation or any Subsidiary
which, in the judgment of Phoenix, on behalf of the Lenders, acting reasonably,
has or may have a Material Adverse Effect on any Borrower or on its ability
to perform its obligations hereunder or under the Security Documents.

 

(t)                                    Sixty
(60) days after the employment of any of the current Chief Executive Officer or
the Chief Financial Officer is terminated by the Corporation (other than a

 

 

termination by
the Corporation for “cause”), without the prior consent of Phoenix, on behalf
of the Lenders.

 

(u)                                 If
either Borrower commits an event of default pursuant to any other Transaction
Document and such default continues beyond any cure period provided for in such
Transaction Document.

 

Section 8.2.                                   Consequences
of an Event of Default

 

Upon the occurrence of any Event of Default, at the option of Phoenix
on behalf of the Lenders, all Obligations and all monies secured hereby shall
become forthwith due and payable, all of the rights and remedies hereby
conferred in respect of the Secured Property shall become immediately
enforceable and any and all additional and collateral security for payment of
this Agreement shall become immediately enforceable.

 

Section 8.3.                                   Enforcement

 

(a)                                  Upon
the happening of any Event of Default, Phoenix on behalf of the Lenders, may by
instrument in writing declare that the security hereof has become enforceable
and the Lenders shall have the following rights and powers:

 

(i)                                     to
enter into possession of all or any part of the Secured Property;

 

(ii)                                  to
preserve and maintain the Secured Property and make such replacements thereof
and additions thereto as it deems advisable;

 

(iii)                               to
collect any proceeds arising in respect of the Secured Property;

 

(iv)                              to
collect, realize upon or sell or otherwise deal with accounts;

 

(v)                                 to
institute proceedings in any court of competent jurisdiction for the
appointment of a Receiver of the Secured Property;

 

(vi)                              to
institute proceedings in any court of competent jurisdiction for the sale or
foreclosure of the Secured Property;

 

(vii)                           to
file proofs of claim and other documents to establish claims in any proceeding
relating to the Corporation or any Subsidiary

 

(viii)                        to
undertake any other remedy or proceeding authorized or permitted by law or
equity;

 

(ix)                                to
pay or otherwise satisfy in whole or in part any Encumbrances which, in
the opinion of Phoenix, may rank in priority to the security hereof;

 

(x)                                   after
entry by its officers or agents or without entry, to sell, lease or otherwise
dispose in any way whatsoever of all or any part of the Secured Property
either en bloc or separately at
public auction or by tender or by private agreement and at such time or times
and

 

 

on such terms
and conditions as the Lenders in their absolute discretion may determine
and without any notice to or concurrence of the Borrowers except as may be
required by applicable law; and

 

(xi)                                by
instrument in writing, to appoint any person or persons (whether an officer or
officers of the Lenders or not) as a Receiver (as defined herein to include a
receiver and manager) of the Secured Property and to remove any Receiver so
appointed and appoint another or others in its stead.

 

(b)                                 The
security of this Agreement may be realized and the rights enforced by any
remedy or in any manner permitted by this Agreement or by law or equity and no
remedy for the realization of the security hereof shall be exclusive of or
dependent upon any other remedy and all or any remedies may from time to time
be exercised independently or in any combination.

 

(c)                                  In
addition to the remedies of the Lenders set forth above, Phoenix on behalf of
the Lenders, may, whenever an Event of Default has occurred:

 

(i)                                     require
the Borrowers, at their expense, to assemble the Secured Property at a place or
places designated by notice in writing given by the Lenders to the Borrowers;

 

(ii)                                  require
the Borrowers, by notice in writing given by Phoenix on behalf of the Lenders
to the Borrowers, to disclose to the Lenders the location or locations of the
Secured Property;

 

(iii)                               repair,
process, modify, complete or otherwise deal with the Secured Property and
prepare for the disposition of the Secured Property, whether on the premises of
the Borrowers or otherwise;

 

(iv)                              carry
on all or any part of the business or businesses of the Borrowers and, to
the exclusion of all others including the Borrowers, enter upon, occupy and use
all or any of the premises, buildings, plant, undertaking and other property of
or used by the Borrowers for such time as the Lenders see fit, free of charge,
and the Lenders shall not be liable to the Borrowers for any act, omission or
negligence in so doing or for any rent, charges, depreciation or damages
incurred in connection therewith or resulting therefrom;

 

(v)                                 borrow
for the purpose of carrying on the business of the Borrowers or for the
maintenance, preservation or protection of the Secured Property and mortgage,
charge, pledge or grant a security interest in the Secured Property, whether or
not in priority to the Security Documents, to secure repayment;

 

(vi)                              advance
the Lenders’ own money to the Borrowers, in any case upon such terms as the
Lenders may deem reasonable and upon the security hereof; and

 

(vii)                           demand,
commence, continue or defend any judicial or administrative proceedings for the
purpose of protecting, seizing, collecting, realizing or obtaining possession
or payment of the Secured Property, and give valid and effectual receipts

 

 

and discharges
therefor and compromise or give time for the payment or performance of all or
any part of the accounts or any other obligation of any third party to
either of the Borrowers.

 

Section 8.4.                                   Disposition

 

(a)                                  Without
limiting the generality of the foregoing in connection with the exercise of remedies
under this Article 8, it shall be lawful for the Lenders:

 

(i)                                     to
make any sale, lease or other disposition of the Secured Property either for
cash or upon credit or partly for one and partly for the other upon such
conditions as to terms of payment as it in its absolute discretion may deem
proper;

 

(ii)                                  to
rescind or vary any contract for sale, lease or other disposition that the
Lenders may have entered into pursuant hereto and resell, release or
redispose of the Secured Property with or under any of the powers conferred
herein; and

 

(iii)                               to
stop, suspend or adjourn any sale, lease or other disposition from time to time
and to hold the same adjourned without further notice.

 

(b)                                 Upon
any such sale, lease or other disposition the Lenders shall be accountable only
for money actually received by them. The Borrowers shall be accountable for any
deficiency and the Lenders shall be accountable for any surplus. The Lenders may deliver
to the purchaser or purchasers of the Secured Property or any part thereof
good and sufficient conveyances or deeds for the same free and clear of any
claim by the Borrowers. The purchaser or lessee receiving any disposition of
the Secured Property or any part thereof need not inquire whether default
under this Agreement has actually occurred but may as to this and all
other matters rely upon a statutory declaration of an officer of Phoenix on
behalf of the Lenders, which declaration shall be conclusive evidence as
between the Borrowers and any such purchaser or lessee, and the purchaser or
lessee need not look to the application of the purchase money, rent or other
consideration given upon such sale, lease or other disposition, which shall not
be affected by any irregularity of any nature or kind relating to the
crystallizing or enforcing of the security hereof or the taking of possession
of the Secured Property or the sale, lease or other disposition thereof.

 

Section 8.5.                                   Powers
of Receiver

 

(a)                                  Any
Receiver appointed pursuant to Section 8.3(a)(xi) shall have the power
without legal process:

 

(i)                                     to
take possession of the Secured Property or any part thereof wherever the
same may be found;

 

(ii)                                  to
carry on the business of the Borrowers or any part thereof in the name of
the Borrowers or of the Receiver; and

 

(iii)                               to
exercise on behalf of each Lender all of the rights and remedies herein granted
to the Lenders,

 

 

and without in
any way limiting the foregoing, the Receiver shall have all the powers of a
receiver appointed by a court of competent jurisdiction. Any Receiver appointed
by Phoenix shall act as agent for the Lenders for the purposes of taking
possession of the Secured Property, but otherwise and for all other purposes
(except as provided below), as agent for the Borrowers.

 

(b)                                 The
Receiver may sell, lease, or otherwise dispose of Secured Property as
agent for the Borrowers or as agent for the Lenders, as Phoenix may determine
in its discretion. The Borrowers agree to ratify and confirm all actions of the
Receiver acting as agent for the Borrowers, and to release and indemnify the
Receiver in respect of all such actions. The Lenders, in appointing or
refraining from appointing any Receiver, shall not incur liability to the
Receiver, the Borrowers or otherwise and shall not be responsible for any
misconduct or negligence of such Receiver or for any loss resulting therefrom.

 

Section 8.6.                                   Application
of Moneys

 

All moneys and non-cash proceeds actually received by the Lenders or by
the Receiver in enforcing the security of this Agreement shall be initially
held in trust by such person and promptly thereafter shall be applied, subject
to the proper claims of any other person:

 

(a)                                  first,
to pay or reimburse each Lender and any Receiver the costs, charges, expenses
and advances payable by the Borrowers in accordance herewith;

 

(b)                                 second,
in or toward the payment to each Lender of all Obligations or amounts secured
hereby which payment shall be made and applied to the Lenders pro rata based on
the ratio that such Lender’s Debentures bears to the total number of Debentures
issued to the Lenders hereunder; and

 

(c)                                  third,
any surplus shall be paid to the Borrowers or their assigns or as a court of
competent jurisdiction may direct.

 

Section 8.7.                                   Care
and Custody of Secured Property

 

No Lender shall be bound to collect, dispose of, realize, protect or
enforce any of a Borrower’s right, title and interest in and to the Secured
Property or to institute proceedings for the purpose thereof and, without
limiting the generality of the foregoing, no Lender shall be required to take
any steps necessary to preserve rights against prior parties in respect of any
negotiable Secured Property. No Lender shall have any obligation to keep
Secured Property in its possession identifiable. Phoenix on behalf of the
Lenders may, after an Event of Default: (i) notify any person obligated on
an account or on chattel paper or any obligor on an instrument to make payment
thereunder to such Lender whether or not the Borrowers were theretofore making
collections thereon; and (ii) assume control of any proceeds arising from
the Secured Property.

 

Section 8.8.                                   Dealing
with the Secured Property

 

No Lender shall be obliged to exhaust its recourse against the
Borrowers or any other person or persons or against any other security it may hold
in respect of the Obligations before realizing upon or otherwise dealing with
the Secured Property in such manner as such Lender may consider desirable.
Phoenix on behalf of the Lenders may grant extensions or other

 

 

indulgences,
take and give up securities, accept compositions, grant releases and discharges
and otherwise deal with the Borrowers and with other parties, sureties or
securities as Phoenix may see fit without prejudice to the Obligations or
the rights of any Lender in respect of the Secured Property. No Lender shall be
(i) liable or accountable for any failure to collect, realize or obtain
payment in respect of the Secured Property; (ii) bound to institute
proceedings for the purpose of collecting, enforcing, realizing or obtaining
payment of the Secured Property or for the purpose of preserving any rights of
such Lender, the Borrowers or any other parties in respect thereof; (iii) responsible
for any loss occasioned by any sale or other dealing with the Secured Property
or by the retention of or failure to sell or otherwise deal therewith; or (iv) bound
to protect the Secured Property from depreciating in value or becoming
worthless.

 

Section 8.9.                                   Standards
of Sale

 

Without prejudice to the ability of the Lenders to dispose of the
Secured Property in any manner which is commercially reasonable, the Borrower’s
acknowledge that, subject to the terms of any Permitted Encumbrance, the rights
of Wistron and the rights of SVB, a disposition of Secured Property by the
Lenders which takes place substantially in accordance with the following
provisions shall be deemed to be commercially reasonable:

 

(a)                                  Secured
Property may be disposed of in whole or in part;

 

(b)                                 Secured
Property may be disposed of by public auction, public tender or private
contract, with or without advertising and without any other formality;

 

(c)                                  Any
purchaser or lessee of such Secured Property may be a customer of the
Lenders;

 

(d)                                 A
disposition of Secured Property may be on such terms and conditions as to
credit or otherwise as Phoenix on behalf of the Lenders, in its sole
discretion, may deem advantageous;

 

(e)                                  Any
Lender or any other Person may be the purchaser of all or any portion of
the Secured Property and thereafter hold the same absolutely, free from any
claim or right of whatever kind; and

 

(f)                                    Any
Lender may establish an upset or reserve bid or price in respect of
Secured Property.

 

ARTICLE 9.

GENERAL

 

Section 9.1.                                   Waiver

 

No act or omission by any Lender in any manner whatsoever shall extend
to or be taken to affect any provision hereof or any subsequent breach or
default or the rights resulting therefrom save only an express waiver in
writing. A waiver of default shall not extend to, or be taken in any manner
whatsoever to affect the rights of any Lender with respect to, any

 

 

subsequent
default, whether similar or not. The Borrowers waive every defense based upon
any or all indulgences that may be granted by the Lenders.

 

Section 9.2.                                   Other
Security

 

The rights of each Lender hereunder shall not be prejudiced nor shall
the liabilities of the Borrowers or of any other Person be reduced in any way
by the taking of any other security of any nature or kind whatsoever either at
the time of execution of this Agreement or at any time hereafter.

 

Section 9.3.                                   No
Merger or Novation

 

Neither the taking of any judgment nor the exercise of any power of
seizure or sale shall operate to extinguish the liability of the Corporation to
pay the moneys hereby secured nor shall the same operate as a merger of any
covenant herein contained or of any other Obligation, nor shall the acceptance
of any payment or other security constitute or create any novation.

 

Section 9.4.                                   Power
of Attorney

 

Each of the Borrowers, for valuable consideration for and after the
occurrence of an Event of Default, irrevocably appoints Phoenix, on behalf of
the Lenders, and its officers from time to time or any of them to be the
attorneys of such Borrower in the name of and on behalf of such Borrower to
execute such deeds, transfers, conveyances, assignments, assurances and things
which such Borrower ought to execute and do under the covenants and provisions
herein contained and generally to use the name of such Borrower in the exercise
of all or any of the powers hereby conferred on the Lenders.

 

Section 9.5.                                   License

 

Each Borrower hereby grants to Phoenix, on behalf of the Lenders, and
its employees and agents an irrevocable and non-exclusive license, subject to
the rights of tenants, to enter any of the Premises, during regular business
hours and acting in a reasonable manner, to conduct audits, testing and
monitoring with respect to Hazardous Substances and to remove and analyze any
Hazardous Substance at the cost and expense of the Borrowers (which cost and
expense shall be secured hereby).

 

Section 9.6.                                   Environmental
Indemnity

 

The Borrowers shall jointly and severally indemnify each Lender and
hold each Lender harmless against and from all losses, costs, damages and
expenses which each Lender may sustain, incur or be or become liable at
any time whatsoever for by reason of or arising from the past, present or
future existence, clean-up, removal or disposal of any Hazardous Substance
referred to in this Agreement or compliance with Environmental Laws or
Environmental Orders relating thereto, including any clean-up, decommissioning,
restoration or remediation of the Premises and other affected lands or property
(and this indemnification shall survive the satisfaction, release or
extinguishment of the indebtedness secured hereby).

 

 

Section 9.7.                                   Amalgamation

 

(a)                                  The
Corporation acknowledges that if it amalgamates with any other corporation or
corporations (a) the Secured Property and the lien created hereby shall
extend to and include all the property and assets of each of the amalgamating
corporations and the amalgamated corporation and to any property or assets of
the amalgamated corporation thereafter owned or acquired, (b) the term, “Corporation”, where used herein shall
extend to and include each of the amalgamating corporations and the amalgamated
corporation, and (c) the term, “Obligations”,
where used herein shall extend to and include the Obligations of each of the
amalgamating corporations and the amalgamated corporation. Nothing is this Section 9.7(a) shall
permit or authorize an amalgamation that is otherwise prohibited by the provisions
of this Agreement. For purposes solely of this Section 9.7(a), the
Corporate Migration shall be deemed to constitute an amalgamation.

 

(b)                                 The
US Subsidiary acknowledges that if it merges with any other corporation or
corporations (a) the Secured Property and the lien created hereby shall
extend to and include all the property and assets of each of the merging
corporations and the surviving corporation and to any property or assets of the
surviving corporation thereafter owned or acquired, (b) the term, “US Subsidiary”, where used herein shall
extend to and include each of the merging corporations and the surviving
corporation, and (c) the term, “Obligations”,
where used herein shall extend to and include the Obligations of each of the
merging corporations and the surviving corporation. Nothing is this Section 9.7(b) shall
permit or authorize an merger that is otherwise prohibited by the provisions of
this Agreement. For purposes solely of this Section 9.7(b), the Corporate
Migration shall be deemed to constitute a merger.

 

Section 9.8.                                   Holder
May Remedy Default

 

If the Borrowers fail to do anything hereby required to be done by it
each Lender may, but shall not be obliged to, do such thing and all reasonable
sums thereby expended by such Lender shall be payable forthwith by the
Borrowers, shall be secured hereby and shall have the benefit of the
Encumbrances hereby created, but no such performance by such Lender shall be
deemed to relieve the Borrowers from any default hereunder.

 

Section 9.9.                                   Notices

 

Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., (Austin, Texas
time), on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice later than 5:00 p.m.,
(Austin, Texas time), on any date and earlier than 11:59 p.m., (Austin,
Texas time), on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service or (iv) actual
receipt by the party to whom such notice is required to be given. The addresses
for such communications shall be addressed:

 

(a)                                  to
the Lenders at:

 

c/o Phoenix Venture Fund LLC

110 East 59th Street, Suite 1901

New York, NY 10022

Attention: Philip S. Sassower

Facsimile: (212) 319-4970

 

with a copy to:

Brown Raysman Millstein Felder & Steiner LLP

900 Third Avenue

New York, NY 10022

Attention:  Jonathan J. Russo, Esq.

Facsimile: (212) 895-2900

 

(b)                                 to
the Borrowers at:

 

Xplore Technologies Corp.

14000 Summit Drive, Suite 900

Austin, Texas 78728

Attention: Mr. Michael J. Rapisand

Facsimile: (512) 336-7791

 

Xplore Technologies Corporation of America

14000 Summit Drive, Suite 900

Austin, Texas 78728

Attention: Mr. Michael J. Rapisand

Facsimile: (512) 336-7791

 

with a copy to:

McCarthy Tétrault LLP

Suite 4700

Toronto Dominion Bank Tower

Toronto, ON M5K 1E6

Attention: Jonathan Grant, Esq.

Fax: (416) 868-0673

 

Section 9.10.                             Further
Assurances

 

Each of the Borrowers and the Lenders hereby covenant and agree that at
any time and from time to time after any Closing Date it will, upon the request
of the other, do, execute, acknowledge and deliver or cause to be done,
executed, acknowledged and delivered all such further acts, deeds, assignments,
transfers, conveyances and assurances as may be required for the better
carrying out and performance of all the terms of this Agreement including,
without limitation, such further and other security interests as the Lenders may reasonably
request.

 

 

Section 9.11.                             Remedies
Cumulative

 

The rights and remedies of the parties under this Agreement are
cumulative and in addition to and not in substitution for any rights or
remedies provided by law. Any single or partial exercise by any party hereto of
any right or remedy for default or breach of any term, covenant or condition of
this Agreement does not waive, alter, affect or prejudice any other right or
remedy to which such party may be lawfully entitled for the same default
or breach.

 

Section 9.12.                             Announcements

 

No announcement with respect to this Agreement, including any
disclosure of the identity of the Lender, will be made by any party hereto
without the prior approval of the other party. The foregoing will not apply to
any announcement by any party required in order to comply with laws pertaining
to timely disclosure, provided that such party consults with the other parties
before making any such announcement.

 

Section 9.13.                             Time
of the Essence

 

Time shall be of the essence of this Agreement.

 

Section 9.14.                             Entire
Agreement

 

This Agreement, the schedules referred to herein, and the other
documents referenced herein constitute the entire agreement between the parties
hereto pertaining to the matters therein set forth and supersede all prior agreements,
representations, warranties, statements, promises, information, arrangements
and understandings, whether oral or written, express or implied, with respect
to the subject matter thereof. Neither party hereto shall be bound or charged
with any oral or written agreements, representations, warranties, statements,
promises, information, arrangements or understandings not specifically set
forth in this Agreement or the schedules or such other documents. The parties
hereto further acknowledge and agree that, in entering into this Agreement and
in delivering the schedules and such other documents, they have not in any way
relied, and will not in any way rely, upon any oral or written agreements,
representations, warranties, statements, promises, information, arrangements or
understandings, express or implied, not specifically referenced or set forth in
this Agreement or in such schedules or such other documents.

 

Section 9.15.                             Invalidity
of any Provisions

 

Any provision of this Agreement or any provisions of the security
contemplated hereunder which is prohibited by the laws of any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition without invalidating the remaining terms and provisions hereof or
thereof and no such invalidity shall affect the obligation of the Borrowers to
repay the Obligations.

 

Section 9.16.                             Indemnification

 

The Borrowers agree to jointly and severally indemnify each Lender from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs,

 

 

expenses or
disbursements of any kind or nature whatsoever (except by reason of the gross
negligence or willful misconduct or breach of applicable laws of such Lender or
any of its employees) which may be imposed on, incurred by, or asserted
against such Lender and arising by reason of any action (including any action
referred to herein) or inaction or omission to do any act legally required of
the Borrowers.

 

Section 9.17.                             Successors,
Assigns and Participation, etc.

 

(a)                                  The
Corporation shall not assign or transfer all or any part of its rights or
obligations hereunder or under any other Instrument, or permit or cause any
Subsidiary to assign or transfer all or any part of its rights or
obligations under any Instrument without the prior written consent of Phoenix
on behalf of the Lenders.

 

(b)                                 Each
Lender may assign or grant participations in its Debentures or in all or part of
its rights in respect of this Agreement, the Obligations and the Instruments
and have its corresponding obligations hereunder assumed by any other Person
without the consent of the Borrowers, on a private sale basis to other “accredited
investors” within the meaning of Regulation D, Rule 501(a), promulgated by
the U.S. Securities and Exchange Commission and within the meaning of Section 1.1
of Rule 45-501 of the Ontario Securities Commission. An assignment under
this Section 9.17 shall become effective when the Borrowers have been
notified thereof by the applicable Lender and has received from the assignee an
undertaking to be bound by this Agreement and the other Security Documents and
to perform the obligations, if any, assumed by it. Any such assignee shall
be treated as a party to this Agreement for all purposes of this Agreement and
the other Security Documents and shall be entitled to the full benefit hereof
and thereof and shall be subject to the obligations of the applicable Lender to
the same extent as if it were an original party in respect of the rights
assigned to it and obligations assumed by it and such Lender shall be released
and discharged accordingly. Any Person to whom a Lender grants participations
in all or part of its rights and obligations under this Agreement and the
Instruments shall not have any rights under this Agreement and the Instruments
in respect of its participation interest, and shall only have, as against such
Lender, as grantor, those rights and obligations in respect of such
participation interest as are set forth in the agreement or agreements made
between such Lender and such participant.

 

Section 9.18.                             Amendments

 

This Agreement may only be amended by a written agreement signed
by the Borrowers and Phoenix, on behalf of the Lenders. Notwithstanding
anything to the contrary contained herein, any action to impose additional
obligations on the Lenders, or to amend Section 8.6 hereof or any other
provision hereof or in any of the Security Documents which would affect the pro
rata repayment, as among the Lenders, of the Obligations or the pro rata
disbursement, as among the Lenders, of moneys or other proceeds received in the
enforcement of the security interests created hereby, shall require the consent
of each Lender whose interests are adversely affected by such action.

 

 

Section 9.19.                             Consent
of Phoenix Enterprises LLC and Phoenix as Agent for the Existing Debenture
Holders; 

 

(a)                                  Phoenix
Enterprises LLC, for itself and as agent for the Existing Debenture Holders
(other than the December 2004 Debenture Holders) under (i) Section 9.20
of the November 2002 Debenture Agreement, (ii) Section 9.21 of
the December 2002 Debenture Agreement, (iii) Section 9.21 of the
April 2003 Debenture Agreement, and (iv) Section 9.21 of the
Second April 2003 Debenture Agreement, hereby acknowledges, agrees and
gives its consent to the Borrowers’ entering into and performing their
obligations under this Agreement under the terms and conditions contained
herein and the execution, delivery and performance of the Security Documents
and, if applicable, the issue and sale of the Warrants to the Lenders.

 

(b)                                 Phoenix
for itself and as agent for the December 2004 Debenture Holders under Section 9.21
of the December 2004 Debenture Agreement, hereby acknowledges, agrees and
gives its consent to the Borrowers’ entering into and performing their
obligations under this Agreement under the terms and conditions contained
herein and the execution, delivery and performance of the Security Documents
and, if applicable, the issue and sale of the Warrants to the Lenders.

 

Section 9.20.                             Appointment
and Authorization of Phoenix as Agent

 

(a)                                  Each
Lender hereby irrevocably appoints and authorizes Phoenix to (A) hold the
Secured Property for its own benefit and the pro rata benefit of the Lenders,
and (B) be its attorney in its name and on its behalf to exercise such
rights or powers granted to Phoenix or the Lenders under this Agreement and the
other Transaction Documents to the extent and on the terms specifically
provided herein and therein, together with such powers as are reasonably
incidental thereto. As to any matters not expressly provided for by this
Agreement, Phoenix shall not be required to exercise any discretion or take any
action, but shall be required 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 Debentures
outstanding (the “Requisite Lenders”),
and such instructions shall be binding upon all Lenders; provided, however,
that Phoenix shall not be required to take any action which exposes Phoenix to
liability in such capacity, which could result in Phoenix incurring any costs
and expenses or which is contrary to this Agreement or applicable law. For the
avoidance of doubt, Phoenix and its members, officers, agents, and employees
shall in no event be liable to the Lenders or to any of them for any action
taken or omitted to be taken by Phoenix pursuant to instructions received by it
from the Requisite Lenders or in reliance upon the advice of counsel. Notwithstanding
anything to the contrary contained herein, any action to impose additional
obligations on the Lenders, or to amend Section 8.6 hereof or any other
provision hereof or in any of the Security Documents which would affect the pro
rata repayment, as among the Lenders, of the Obligations or the pro rata
disbursement, as among the Lenders, of moneys or other proceeds received in the
enforcement of the security interests created hereby, shall require the consent
of each Lender whose interests are adversely affected by such action.

 

(b)                                 The
Borrowers shall be entitled to rely upon any certificate, notice or other
document or other advice, statement or instruction provided to it by Phoenix
pursuant to this Agreement, and the Borrowers shall generally be entitled to deal
with Phoenix with respect to

 

 

matters under
this Agreement which Phoenix is authorized to deal with without any obligation
whatsoever to satisfy itself as to the authority of Phoenix to act on behalf of
the Lenders and without any liability whatsoever to the Lenders for relying
upon any certificate, notice or other document or other advice, statement or
instruction provided to it by Phoenix, notwithstanding any lack of authority of
Phoenix to provide the same.

 

Section 9.21.                             Counterparts

 

This Agreement may be executed in separate counterparts (including
by facsimile), each of which when so executed and delivered shall be deemed to
be an original and all of such counterparts shall together constitute one and
the same instrument. Any party may execute this Agreement by facsimile
signature.

 

 

IN WITNESS WHEREOF
the parties have executed this Agreement.

 

 

	
   

  	
  XPLORE TECHNOLOGIES CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael
  J. Rapisand

  	
   

  
	
   

  	
   

  	
  Name:
  Michael J. Rapisand

  
	
   

  	
   

  	
  Title: Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  XPLORE TECHNOLOGIES CORPORATION OF AMERICA

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael
  J. Rapisand

  	
   

  
	
   

  	
   

  	
  Name:
  Michael J. Rapisand

  
	
   

  	
   

  	
  Title: Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PHOENIX VENTURE FUND LLC

  
	
   

  	
   

  
	
   

  	
  By: SG PHOENIX VENTURES LLC, its

  
	
   

  	
     Managing Member

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Andrea
  Goren

  	
   

  
	
   

  	
   

  	
  Name: Andrea
  Goren

  
	
   

  	
   

  	
  Title:
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE PHILIP S. SASSOWER 1996

  CHARITABLE REMAINDER ANNUITY

  TRUST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Philip
  S. Sassower

  	
   

  
	
   

  	
  Name: Philip
  S. Sassower

  
	
   

  	
  Title:
  Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MAG MULTI CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Andrea
  Goren

  	
   

  
	
   

  	
  Name: Andrea
  Goren

  
	
   

  	
  Title:
  Manager

  
								

 

 

	
   

  	
  PHOENIX ENTERPRISES LLC, solely for purposes
  of Section 9.19 hereof, in its capacity as Agent under (i) the
  Debenture Purchase Agreement, dated November 5, 2002, (ii) the December 2002
  Debenture Purchase Agreement, dated December 6, 2002, (iii) the April 2003
  Debenture Purchase Agreement, dated April 9, 2003, and (iv) the
  Second April 2003 Debenture Purchase Agreement, dated April 28,
  2003

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Philip
  S. Sassower

  	
   

  
	
   

  	
   

  	
  Name: Philip
  S. Sassower

  
	
   

  	
   

  	
  Title: Chief
  Executive OfficerExhibit 10.6

 

XPLORE TECHNOLOGIES CORP.,

 

XPLORE TECHNOLOGIES CORPORATION OF AMERICA,

 

PHOENIX VENTURE FUND LLC

 

AND

 

EACH OF THE LENDERS LISTED

ON SCHEDULE 1 ATTACHED HERETO

 

 

APRIL 2006 DEBENTURE PURCHASE AGREEMENT

 

April 20, 2006

 

 

 

APRIL 2006 DEBENTURE PURCHASE AGREEMENT

 

THIS AGREEMENT is made the 20th day of April, 2006, by and among Xplore Technologies Corp., a corporation
incorporated under the laws of Canada (the “Corporation”),
Xplore Technologies Corporation of America,
a corporation incorporated under the laws of Delaware and a wholly-owned
subsidiary of the Corporation (the “US
Subsidiary”), Phoenix Venture Fund
LLC, a limited liability company organized under the laws of the
State of Delaware (“Phoenix”) and
each of the other lenders listed on Schedule 1 attached to this
Agreement (each such lender, a “Lender”
and collectively, the “Lenders”).

 

WHEREAS the Corporation and the US Subsidiary (each a “Borrower” and together the “Borrowers”) are in the business of
engineering, developing, integrating and marketing ruggedized mobile wireless
pen-based computing systems;

 

WHEREAS on the terms and subject to the conditions hereof, the Lenders
at their discretion shall make available to the Borrowers up to Five Million
United States Dollars ($5,000,000) which may be drawn by the Borrowers in
Five Hundred Thousand United States Dollars ($500,000) increments, each such
drawdown to be represented by a senior secured debenture issued jointly by
Borrowers (the “Debentures” and
each, a “Debenture”) to one or more
of the Lenders;

 

WHEREAS the proceeds to the Borrowers paid by the Lenders for the
Debentures will be used by the Borrowers solely in accordance with the terms of
this Agreement;

 

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
covenants hereinafter contained, the parties hereto agree as follows:

 

ARTICLE 1.

TRANSACTIONS

 

Section 1.1.                                   Issuance
of Debentures to the Lenders.

 

On the terms and subject to the conditions hereof, the Lenders, at the
discretion of Phoenix, shall make available to the Borrowers up to Five Million
United States Dollars ($5,000,000) which may be drawn by the Borrowers in
Five Hundred Thousand United States Dollars ($500,000) increments. In
connection with each such drawdown, the Borrowers shall issue to each Lender a
Debenture in an aggregate principal amount equal to such Lender’s share of the
drawdown, as determined by Phoenix in its sole discretion. The terms and
conditions of the Debentures are as set forth herein and are evidenced by the
Debenture Certificates in the form attached hereto as Exhibit A.

 

(a)                                  Subject
to the terms and conditions of this Agreement, at the Initial Closing (as
hereinafter defined), Phoenix and/or its assignee(s) shall purchase, and the
Borrowers shall sell and issue to Phoenix and/or its assignee(s), Debentures in
an aggregate principal amount of $1,000,000 
(the “Initial Debentures”);
and

 

 

(b)                                 Subject
to the terms and conditions of this Agreement (including Section 1.6), the
Lenders have the right (to be exercised at the sole discretion of Phoenix), but
not the obligation, upon fifteen (15) Business Days prior written notice from
the Borrowers (such notice to specify the aggregate principal amount of
Debentures requested to be subscribed for), to subscribe for and purchase
additional Debentures (the “Additional
Debentures”) in aggregate principal amount increments of $500,000
but in no event shall the Borrowers request the Lenders to subscribe for or
purchase Additional Debentures in an aggregate principal amount of more than
$4,000,000. Phoenix may at any time, without the consent of the Borrowers,
make an assignment of its interests, rights and obligations under this
Agreement, including, without limitation, all or a portion of its Commitment.

 

Section 1.2.                                   Closings

 

(a)                                  The
consummation of the purchase and sale of the Initial Debentures shall occur on
the date when all of the conditions set forth in Sections 7.1 and 7.2 have been
satisfied in full (or waived in writing) or at such later time and place as may be
mutually agreed upon by the Borrowers and Phoenix (the “Initial Closing”).

 

(b)                                 From
time to time after the Initial Closing, but no later than fifteen (15) Business
Days prior to the Maturity Date, the Borrowers may issue and sell to the
Lenders, and the Lenders may purchase, Additional Debentures up to an
aggregate principal amount of $4,000,000 (each an “Additional Closing”), subject to the terms of Sections 1.1(b) and
1.6(b).

 

Section 1.3.                                   Purchase
Price

 

On the terms and subject to the conditions hereof, on each Closing
Date, each Lender shall pay the purchase price (the “Purchase Price”), equal
to the aggregate principal amount of Debentures then being purchased by such
Lender, to the Borrowers by way of certified check, bank draft or wire
transfer, less any unpaid fees and expenses payable by the Borrowers pursuant
to Section 1.4. The Borrowers hereby irrevocably direct each Lender to
withhold such fees and expenses from the payment of its Purchase Price and each
Lender hereby agrees that the withholding of such fees and expenses shall
constitute its acknowledgement and agreement that the Borrowers shall not
thereafter have any further obligation to such Lender under Section 1.4,
except as set forth in Section 7.2(e).

 

Section 1.4.                                   Fees
and Expenses

 

(a)                                  The
Borrowers acknowledge and agree that they will be, jointly and severally,
responsible for and will promptly pay or reimburse each Lender on demand for
all reasonable fees, expenses and other out-of-pocket expenses paid or incurred
by such Lender, its representatives and consultants relating to its
investigation of the Corporation, the Subsidiaries and its respective
businesses, the negotiation, preparation and review of this Agreement and the
other Instruments and related agreements and all other matters pertaining to
the transactions hereby contemplated, including, without limitation, all
reasonable fees, expenses and other out-of-pocket expenses paid or incurred by
such Lender for legal advice and services in connection with such transactions.

 

 

(b)                                 The
Borrowers acknowledge and agree that they will be responsible for and will
promptly pay all such reasonable fees (including, but not limited to, legal
fees), expenses and other out-of-pocket expenses whether or not the
transactions hereunder are completed and even if it is the Lenders who
terminate this Agreement pursuant to Section 7.3.

 

Section 1.5.                                   Use
of Proceeds

 

Each of the Borrowers hereby covenants, agrees, represents and warrants
with and to the Lenders that such Borrower will use the net proceeds from the
issuance and sale of the Debentures to the Lenders solely to finance its
product development and for working capital and general corporate purposes.

 

Section 1.6.                                   Exchange
for Series A Preferred Shares. 

 

(a)                                  The
Corporation intends to consummate an exchange of up to approximately $18.1
million of indebtedness (which includes outstanding principal plus accrued and
unpaid interest) under the Existing Debentures for up to approximately 53.2
million Series A Preferred Shares, whereby each Existing Debenture owned
by an Existing Debenture Holder who is a party to the Exchange Agreement (as
defined below) will be exchanged for Series A Preferred Shares at the rate
of one (1) Series A Preferred Share for each $0.34 of principal plus
accrued but unpaid interest outstanding on such Existing Debenture (the “Recapitalization”). The Recapitalization
shall be effected pursuant to the terms of an exchange agreement to be entered
into by and among the Corporation, the US Subsidiary and the other parties
listed therein (the “Exchange Agreement”).
Immediately following the closing of the exchange of the Existing Debentures
pursuant to the Exchange Agreement, all Debentures owned by a Debenture holder
who is a party to the Exchange Agreement shall be deemed to be purchased by the
Corporation in exchange for Series A Preferred Shares at the rate of one Series A
Preferred Share for each $0.34 of principal plus accrued but unpaid interest
then outstanding on such Debentures (the “Debenture
Exchange”), without any further action (including the prior
agreement of the holder of any Debenture) on behalf of the holder of such
Existing Debenture. The Debenture Exchange shall be effected in accordance with
the terms of the Exchange Agreement as if the holders of Debentures were a party
thereto and, for all such purposes, the Debentures shall constitute Existing
Debentures. Following such exchange of Debentures, such Debentures shall be
cancelled and of no further force and effect other than evidence of entitlement
to receive the Series A Preferred Shares issuable in accordance with the
Exchange Agreement. Upon consummation of the Debenture Exchange and the
transactions contemplated by the Exchange Agreement, each Lender shall be
entitled to all of the rights and benefits of the Lenders under the Exchange
Agreement, and such Lender and the Corporation shall be deemed to have made the
representations and warranties contained therein, as if it were an original
party to the Exchange Agreement. The Recapitalization and the exchange of Debentures
for Series A Preferred Shares pursuant to this Section 1.6 are each
subject to approval by the Toronto Stock Exchange and the Corporation’s
shareholders.

 

(b)                                 In
the event that the Borrowers have not drawn the full $5,000,000 made available
by the Lenders pursuant to the terms of Section 1.1 of this Agreement
prior to consummation of the Recapitalization, pursuant to the Exchange
Agreement, the Corporation may issue to Phoenix, and Phoenix may purchase,
in its sole discretion, Series A Preferred

 

 

Shares (of the
same class and series being issued pursuant to the Recapitalization)
equal to the difference of $5,000,000 and the aggregate principal amount of
debentures issued under this Agreement at the purchase price of $0.34 per Series A
Preferred Share in increments of at least $500,000. Each Lender who purchases Series A
Preferred Shares pursuant to this Section 1.6(b) shall be entitled to
all of the rights and benefits of the Lenders under the Exchange Agreement, and
each Lender and the Corporation shall be deemed to have made the
representations and warranties contained therein, as if it were an original
party to the Exchange Agreement. The Borrowers and Lenders acknowledge and
agree that $0.34 per Series A Preferred Share is the fair market value of
such security.

 

ARTICLE 2.

PAYMENT OBLIGATIONS

 

Section 2.1.                                   Principal
Sum

 

For value received, the Corporation and the US Subsidiary, each having
its principal business office at 14000 Summit Drive, Austin, Texas 78728,
shall, jointly and severally, pay to the order of each of the Lenders the
principal amount of each Debenture held by such Lender, unless such Debenture
has been prepaid in full, plus all accrued and unpaid interest thereon in
lawful money of the United States, or exchanged for Series A Preferred
Shares pursuant to Section 1.6 on the Maturity Date, or such earlier date
as the Obligations shall become due and payable hereunder, at the offices of
the respective Lenders set forth on Schedule 1 or such other place
as the Lenders may designate in writing not less than two Business Days
prior to the Maturity Date.

 

Section 2.2.                                   Interest

 

The principal outstanding on each Debenture from time to time shall
bear interest from and including the applicable Closing Date to the date of
repayment in full at 10% per annum (the “Interest
Rate”) calculated and payable in arrears on the Maturity Date. After
the occurrence of an Event of Default and for so long as it continues, all
Obligations shall bear interest at a rate that is 5% per annum in excess of the
interest rate otherwise payable under this Agreement with respect to the
Debentures (the “Default Interest Rate”).

 

This Agreement and the other Transaction Documents are subject to the
express condition that at no time shall the Borrowers be required to pay interest
on the principal balance of the Debentures at a rate which could subject
Lenders to either civil or criminal liability as a result of being in excess of
the maximum amount permissible under applicable usury or similar laws (the “Maximum Legal Rate”). If by the terms of
this Agreement or the other Transaction Documents, the Borrowers are at any
time required or obligated to pay interest on the principal balance due under
the Debentures at a rate in excess of the Maximum Legal Rate, the Interest Rate,
or the Default Interest Rate, as the case may be, shall be deemed to be
immediately reduced to the Maximum Legal Rate and all previous payments in
excess of the Maximum Legal Rate shall be deemed to have been payments in
reduction of principal and not on account of the interest due hereunder. All
sums paid or agreed to be paid to Lenders for the use, forbearance, or
detention of the sums due under the Debentures, shall, to the extent permitted
by applicable law, be amortized, prorated, allocated and spread throughout the
full stated term of the Debentures

 

 

until payment
in full so that the rate or amount of interest on account of the Debentures
does not exceed the Maximum Legal Rate from time to time in effect and
applicable to the Debentures for so long as the Debentures are outstanding.

 

Section 2.3.                                   Repayments

 

Subject to Section 1.6, each Borrower, jointly and severally,
agrees to pay to each Lender the principal amount, any accrued and unpaid
interest, and any other monies owing in respect of the Debentures in full on
the Maturity Date or on such earlier date as the Obligations shall become due
and payable in full hereunder. Each payment of principal amount of the
Debentures hereunder (whether at maturity, by way of prepayment of otherwise),
and each payment of interest on the Debentures shall be made and applied to the
Lenders pro rata based on the
ratio that each Lender’s Debentures bears to the total number of Debentures
issued to the Lenders hereunder.

 

Section 2.4.                                   Prepayments

 

The Borrowers may, upon at least fifteen (15) days prior notice to the
Lenders, prepay the Debentures (a “Voluntary
Prepayment”), without premium or penalty, in whole or in part at
any time (any such date, the “Prepayment Date”);
provided that upon any such prepayment all accrued and unpaid interest as of
the date immediately preceding the Prepayment Date shall be paid in cash. To
the extent that outstanding Debentures are not all prepaid at the same time,
the Debentures shall be prepaid in chronological order of issuance.

 

Section 2.5.                                   Acceleration
Events/Mandatory Prepayments

 

(a)                                  Subject
to the terms of the Intercreditor Agreement, the SVB Loan Agreement and the
Wistron Intercreditor Agreement, the unpaid principal amount of the Debentures,
together with any accrued and unpaid interest thereon, shall become immediately
due and payable on a first priority basis prior to any repayment of the
Existing Debentures (an “Acceleration Event”),
in whole or in part, to the extent of fifty percent (50%) of the proceeds
received by the Borrowers in any one or more financing transactions (a “Financing”) involving the sale and issuance
by the Borrowers of equity or debt securities (other than as contemplated by
the Recapitalization and proceeds from the exercise of share options, stock purchase
warrants or other convertible securities of the Corporation outstanding at or
prior to the Initial Closing or any Warrant). Subject to the terms of the
Intercreditor Agreement, the SVB Loan Agreement and the Wistron Intercreditor
Agreement, any remaining proceeds of any such Financing allocated to the
repayment of Funded Indebtedness of the Borrowers shall first be applied to
repayment of the Debentures prior to any repayment of the Existing Debentures
or any other Funded Indebtedness of the Borrowers.

 

(b)                                 The
Borrowers shall, subject to the terms of the Intercreditor Agreement, the SVB
Loan Agreement and the Wistron Intercreditor Agreement, promptly upon the
consummation of a sale or disposition of assets in bulk (other than as part of
a bankruptcy or insolvency proceeding or a liquidation of the Corporation or
any Subsidiary) by the Corporation or any Subsidiary in which the Corporation
or Subsidiary, as applicable, shall receive aggregate proceeds in excess of
$5,000,000, prepay the Debentures, on a first priority basis prior to any

 

 

repayment of
the Existing Debentures (a “Mandatory
Prepayment”), to the extent of all such proceeds.

 

Section 2.6.                                   Payment
in US Dollars.

 

All payments made in cash by the Borrowers shall be made in U.S.
Dollars in immediately available funds.

 

Section 2.7.                                   Taxes

 

Any and all payments or reimbursements made under the Debentures shall
be made free and clear of, and without deduction for, any and all taxes,
levies, deductions, charges or withholdings, and all liabilities with respect
thereto (all such taxes, deductions, charges or withholdings and all
liabilities with respect thereto, excluding such taxes imposed on net income, “Tax Liabilities”), excluding, however, (i) any
taxes imposed on income or any franchise tax imposed in lieu of a net income
tax; (ii) any taxes imposed on any Lender (or any Person or entity with an
interest in Lender), and (iii) any taxes for which any Lender (or any
Person or entity with an interest in such Lender) would be entitled to claim a
credit against its income tax liability in the country in which the Lender is
organized or otherwise subject to taxation. If the Borrowers shall be required
by law to deduct any such amounts from or in respect of any sum payable
hereunder to a Lender then, the Borrowers shall pay such amounts to the
appropriate Governmental Body and provide such Lender with satisfactory
documentary evidence of such payment within ten (10) days after such
payment and the sum payable hereunder shall be increased as may be necessary
so that, after making all required deductions, such Lender receives an amount
equal to the sum it would have received had no such deductions been made.

 

ARTICLE 3.

INTERPRETATION

 

Section 3.1.                                   Defined
Terms

 

As used herein the following expressions shall have the following
meanings:

 

“Accounts Receivable”
means all of the Person’s accounts, contract rights, chattel paper,
instruments, general intangibles and rights to payment of every kind, now or at
any time hereafter arising.

 

“Affiliate” means,
in respect of any corporation, any Person which, directly or indirectly,
controls or is controlled by or is under common control with the Corporation;
and for the purpose of this definition, “control” (including, with correlative
meanings, the terms “controlled by” and “under common control with”) means the
power to direct, or cause to be directed, the management and policies of such
Person whether through the ownership of Voting Shares or by contract or
otherwise.

 

“Applicable Law”
means, in respect of any Person, property, transaction or event, all applicable
laws, statutes, rules, by-laws and regulations, and all applicable official
directives, orders, judgments and decrees of Governmental Bodies.

 

 

“Business Day” means
any day other than Saturday, Sunday or a day on which chartered banks are
closed for business in New York, New York.

 

“Capital Lease Obligations”
means, as to any Person, the obligation of such Person to pay rent or other
liquidated amounts under a lease of (or other agreement conveying the right to
use) real or personal property, which obligations are required to be classified
and accounted for as a capital lease on a balance sheet of such Person under
generally accepted accounting principles and, for purposes of this Agreement,
the amount of such obligations shall in each case be the capitalized amount
thereof, determined in accordance with generally accepted accounting
principles.

 

“Cash Equivalents” means: (i) marketable
direct obligations issued or unconditionally guaranteed by the United States or
Canadian Government or issued by any agency thereof and backed by the full
faith and credit of the United States or Canada, in each case maturing within
one (1) year from the date of acquisition thereof; (ii) commercial
paper maturing no more than one (1) year from the date issued and, at the
time of acquisition, having a rating of at least A-1 from Standard &
Poor’s Rating Service or at least P-1 from Moody’s Investors Service, Inc.;
(iii) certificates of deposit or bankers’ acceptances maturing within one (1) year
from the date of issuance thereof issued by, or overnight reverse repurchase
agreements from, any commercial bank organized under the laws of Canada or the
United States of America or any state thereof or the District of Columbia having
combined capital and surplus of not less than $500,000,000; and (iv) time
deposits maturing no more than thirty (30) days from the date of creation
thereof with commercial banks having membership in the Federal Deposit
Insurance Corporation or the Canadian Deposit Insurance Corporation in amounts
at any one such institution not exceeding the lesser of $100,000 or the maximum
amount of insurance applicable to the aggregate amount of the Corporation’s
deposits at such institution.

 

“Change of Control” means
any of:

 

(i)                                     a
merger, consolidation, amalgamation or reorganization involving the
Corporation, unless such merger, consolidation, amalgamation or reorganization
is one in which the shareholders of the Corporation, immediately before such
merger, consolidation, amalgamation or reorganization, own, directly or
indirectly immediately following such merger, consolidation, amalgamation or
reorganization, at least fifty-one percent (51%) of the combined voting power
of the outstanding voting securities of the corporation resulting from such
merger or consolidation, amalgamation or reorganization in substantially the
same proportion as their ownership of the voting securities immediately before
such merger, consolidation, amalgamation or reorganization,

 

(ii)                                  the
individuals who, as of the date hereof, are members of the Board (the “Incumbent Board”), cease for any reason to
constitute at least two-thirds of the members of the Board; provided, however,
that (i) if the election, or nomination for election by the Corporation’s
common shareholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board or (ii) if any new director has been
designated by the December 2004 Lenders pursuant to the December 2004
Debenture Agreement, such new director shall, for purposes hereof, be
considered as a member of the Incumbent Board; provided
further, however, that no individual (other than an
individual designated pursuant to the rights of

 

 

the December 2004
Debenture Holders) shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened election contest or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Incumbent Board
(a “Proxy Contest”) including by
reason of any agreement intended to avoid or settle any election contest or
Proxy Contest;

 

(iii)                               the
Corporation shall cease to own and control all of the economic and voting
rights associated with ownership of at least 100% of the outstanding shares of
all classes of the Subsidiaries on a fully diluted basis, other than pursuant
to the dissolution or winding-up of a Subsidiary pursuant to which all of the
assets of such Subsidiary are transferred or conveyed to the Corporation or a
Subsidiary; and

 

(iv)                              with
respect to any of the Corporation or Subsidiaries, the time when the
Corporation or such Subsidiary has sold, transferred, conveyed assigned or
otherwise disposed of all or substantially all of its assets, other than
pursuant to a transaction in which such assets are sold, transferred, conveyed,
assigned or disposed of to the Corporation or a Subsidiary.

 

“Closing” means the
Initial Closing together with each Additional Closing, if any.

 

“Closing Date” means
the date on which a Closing is consummated.

 

“Commitment” shall mean
the maximum amount of money such Lender may, in its sole discretion, make
available to the Borrowers, as set forth opposite its name on Schedule 1.

 

“Common Shares” means
the common shares, no par value, of the Corporation.

 

“Contingent Liabilities”
means, as applied to any Person, any direct or indirect contingent liability of
that Person: (i) with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto; or (ii) with respect to any letter of
credit issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings. Contingent Liabilities shall
also include (A) the direct or indirect guaranty, endorsement (other than
for collection or deposit in the ordinary course of business), co-making,
discounting with recourse or sale with recourse by such Person of the
obligation of another, (B) the obligation to make take-or-pay or similar
payments if required regardless of nonperformance by any other party or parties
to an agreement, other than pursuant to routine agreements entered into in the
ordinary course of business, and (C) any liability of such Person for the
obligations of another through any agreement to purchase, repurchase or
otherwise acquire such obligation or any property constituting security
therefore, to provide funds for the payment or discharge of such obligation or
to maintain the solvency, financial condition or any balance sheet item or
level of income of another. The amount of any Contingent Liabilities shall be
equal to the amount of the obligation so guaranteed or otherwise supported or,
if not a fixed and determined amount, the maximum amount so guaranteed.

 

 

“Default” means any
event which, but for the lapse of time, giving of notice or both, would
constitute an Event of Default.

 

“December 2004 Debenture Holders”
means those Persons in their capacity as lenders under the December 2004
Agreement.

 

“Encumbrance” means
any mortgage, lien, pledge, assignment, charge, security interest, title
retention agreement, hypothec, levy, execution, seizure, attachment,
garnishment, right of distress or other claim in respect of property of any
nature or kind whatsoever howsoever arising (whether consensual, statutory or
arising by operation of law or otherwise) and includes arrangements known as
sale and lease-back, sale and buy-back and sale with option to buy-back.

 

“Environmental Laws”
means all applicable federal, provincial, state, municipal or local laws,
statutes, regulations or ordinances relating to the environment, occupational
safety, health, product liability and transportation.

 

“Environmental Order”
means any prosecution, order, decision, notice, direction, report,
recommendation or request issued, rendered or made by any Governmental Body in
connection with Environmental Laws.

 

“Event of Default”
has the meaning ascribed to such term in Section 8.1.

 

“Existing Debentures”
means those debentures of the Corporation issued pursuant to (i) that
certain Debenture Purchase Agreement, dated November 5, 2002, by and among
Xplore Technologies Corp (as Borrower), Phoenix Enterprises LLC and the lenders
listed on Schedule 1 thereto, as amended (the “November 2002 Debenture Agreement”), (ii) that
certain December 2002 Debenture Purchase Agreement, dated December 6,
2002, by and among Xplore Technologies Corp (as Borrower), Phoenix Enterprises
LLC and the lenders listed on Schedule 1 thereto, as amended (the “December 2002 Debenture Agreement”), (iii) that
certain April 2003 Debenture Purchase Agreement, dated April 9, 2003,
by and among Xplore Technologies Corp (as Borrower), Phoenix Enterprises LLC
and the lenders listed on Schedule 1 thereto, as amended (the “April 2003 Debenture Agreement”), (iv) that
certain Second April 2003 Debenture Purchase Agreement, dated April 28,
2003, by and among Xplore Technologies Corp (as Borrower), Phoenix Enterprises
LLC and the lenders listed on Schedule 1 thereto, as amended (the “Second April 2003 Debenture Agreement”),
(v) that certain December 2004 Debenture Purchase Agreement, dated December 17,
2004, by and among Xplore Technologies Corp. (as Borrower), Phoenix Venture
Fund LLC and the lenders listed on Schedule 1 thereto, as amended ( the “December 2004 Debenture Agreement”),
and (vi) that certain September 2005 Debenture Purchase Agreement,
dated September 15, 2005, by and among Xplore Technologies Corp., Xplore
Technologies Corporation of America (as Borrowers), Phoenix Venture Fund LLC
and the lenders listed on Schedule 1 thereto ( the “September 2005 Debenture Agreement”).

 

“Existing Debenture Agreements”
means (i) the November 2002 Debenture Agreement, (ii) the December 2002
Debenture Agreement, (iii) the April 2003 Debenture Agreement, (iv) the
Second April 2003 Debenture Agreement, (v) the December 2004
Debenture Agreement, and (vi) the September 2005 Debenture Agreement.

 

 

“Existing Debenture Holders”
means those Persons in their capacity as lenders under (i) the November 2002
Debenture Agreement, (ii) the December 2002 Debenture Agreement, (iii) the
April 2003 Debenture Agreement, (iv) the Second April 2003
Debenture Agreement, (v) the December 2004 Debenture Agreement, and (vi) the
September 2005 Debenture Agreement.

 

“Funded Indebtedness”
means, with respect to any Person at any particular time, any of the following
amounts determined in accordance with generally accepted accounting principles
on a consolidated basis at such time:

 

(i)                                     indebtedness
for money borrowed and indebtedness represented by notes payable and drafts
accepted representing extensions of credit (including, as regards any note or
draft issued at a discount, the face amount of such note or draft) and
including the face amount of bankers’ acceptances and letters of credit;

 

(ii)                                  all
obligations (whether or not with respect to the borrowing of money) which are
evidenced by bonds, debentures, notes or other similar instruments or not so
evidenced but which would be considered to be indebtedness for borrowed money
in accordance with generally accepted accounting principles;

 

(iii)                               all
indebtedness for borrowed money secured by an Encumbrance on any property of
such Person;

 

(iv)                              all
indebtedness upon which interest charges are customarily paid;

 

(v)                                 Capital
Lease Obligations and all other indebtedness issued or assumed as full or
partial payment for property or services or by way of capital contribution; and

 

(vi)                              any
of the foregoing amounts in respect of any Subsidiary of the Person whose
accounts are not required under generally accepted accounting principles to be
consolidated with the accounts of such Person, including (without limitation)
the aggregate outstanding amount of the Obligations at such time.

 

Notwithstanding
the foregoing, trade payables, expenses, costs and charges accrued in the
ordinary course of business in accordance with customary trade terms and not
overdue for more than 90 days (or which, if overdue for more than 90 days, are
being and continue to be actively and diligently contested in good faith or in
respect of which no legal proceedings for payment of any such amount have been
commenced and are continuing), customer advance payments and deposits received
in the ordinary course of business shall not constitute Funded Indebtedness.

 

“Governmental Body”
means any government, parliament, legislature, or any regulatory authority,
agency, commission or board of any government, parliament or legislature
(including, without limitation, the Ontario Securities Commission), or any
court or (without limitation to the foregoing) any other law, regulation or
rule-making entity (including, without limitation, any central bank, fiscal or
monetary authority or authority regulating banks), having or purporting to have
jurisdiction in the relevant circumstances, or any Person acting or purporting
to act under the authority of any of the foregoing (including, without
limitation, any arbitrator).

 

 

“Hazardous Substance”
means any substance or combination of substances which is or may become
hazardous, toxic, injurious or dangerous to persons, property, air, land,
water, flora, fauna or wildlife, and includes but is not limited to any
contaminants, pollutants, dangerous substances, liquid wastes, industrial
wastes, hauled liquid wastes, toxic substances, hazardous wastes, hazardous
materials or hazardous substances as defined in or pursuant to any
Environmental Laws or Environmental Orders pursuant thereto.

 

“Instrument” means
this Agreement, the Debenture Certificates and any other agreement or
instrument (whether now existing, presently arising or created in future)
delivered by or on behalf of the Borrowers to the Lenders.

 

“Intellectual Property”
means all right, title, interest and benefit of the Corporation and its
Subsidiaries in and to any registered or unregistered world wide trade marks,
trade or brand names, service marks, copyrights, copyright applications,
designs, inventions, patents, patent applications, patent rights, licenses,
sub-licenses, franchises, formulas, processes, know-how, technology, computer
rights and other intellectual or industrial property of the Corporation or any
of its Subsidiaries or pertaining to the Corporation’s business.

 

“Intercreditor Agreement”
means that Third Amended and Restated Consent, Amendment and Intercreditor
Agreement, dated as of the date hereof, by and among the Corporation, the U.S.
Subsidiary, Phoenix Enterprises LLC, Phoenix Venture Fund LLC and each of those
persons and entities listed on Schedule A attached thereto.

 

“Inventory” means any and
all goods, merchandise and other personal property located in the United
States, including, without limitation, goods representing returns upon any
accounts, and whether now owned or hereafter acquired by the Borrowers that is
free and clear of all Encumbrances and is not unsellable, damaged, obsolete or
otherwise not readily saleable at market value in the ordinary course of
business, consistent with past practice.

 

“Material Adverse Effect” means
any change or effect that is materially adverse to (i) the business,
financial condition, or results of operations of such Person and its
Subsidiaries, taken as a whole, other than any change or effect relating to
general political, financial or economic conditions or the state of financial
markets in general or (ii) the rights, remedies and benefits available to,
or conferred upon, the Lenders under the Transaction Documents.

 

“Material Authorization”
means, with respect to any Person, any approval, permit, license or similar
authorization (including any trademark, trade name or patent) from, and any
filing or registration with, any Governmental Body or other Person required by
such Person to own its property and assets or to carry on its business as
presently carried on by it or as contemplated hereunder to be carried on by it
in each jurisdiction in which it does so or is contemplated to do so or where
the failure to have such approval, permit, license, authorization, filing or
registration would have a Material Adverse Effect upon such Person or upon its
ability to perform its obligations under any of the Instruments.

 

“Maturity Date”
shall mean June 30, 2006.

 

“Obligations” means
all monies now or at any time and from time to time hereafter owing or payable
by the Borrowers to the Lenders and all obligations (whether now existing,

 

 

presently
arising or created in the future) of the Borrowers in favor of the Lenders, and
whether direct or indirect, absolute or contingent, matured or not, each in
connection with or relating to the Debentures, this Agreement or any of the
other Transaction Documents, but excluding amounts owing by the Corporation
pursuant to any Series A Preferred Shares.

 

“Operating Expenses”
means, as of any date, the sum of the line items entitled “Sales, marketing and
support”, “Research, development and engineering”, and “General and
administrative” on the Corporation’s consolidated statement of loss included in
the Corporation’s Financial Statements, and each such line item shall have the
value that such line item has on such statement of loss as of that date.

 

“Overhead Costs” means
Operating Expenses less (i) sales commissions and (ii) non-cash
charges as determined in accordance with GAAP.

 

“Order” means any
order, notice, direction, report, recommendation or decision rendered by any
Governmental Body or other regulatory agency.

 

“Permitted Encumbrances”
means:

 

(i)                                     Encumbrances
for taxes, assessments or governmental charges incurred in the ordinary course
of business that are not yet due and payable or the validity of which is being
actively and diligently contested in good faith by the Corporation or any
Subsidiary, as applicable, provided reserves reasonably deemed adequate
therefor by the Corporation or Subsidiary, as applicable, with respect thereto
are maintained on the books of the Corporation or the Subsidiary, as
applicable, in accordance with generally accepted accounting principles;

 

(ii)                                  construction,
mechanics’, carriers’, warehousemen’s and materialmen’s liens and liens in
respect of vacation pay, workers’ compensation, employment insurance or similar
statutory obligations, provided the obligations secured by such liens are not
yet due and payable and, in the case of construction liens, which have not yet
been filed or for which the applicable has not received written notice of an
Encumbrance;

 

(iii)                               Encumbrances
arising from court or arbitral proceedings, provided that the claims secured
thereby are being contested in good faith by the Corporation or any Subsidiary,
provided reserves reasonably deemed adequate by the Corporation or Subsidiary,
as applicable, with respect thereto are maintained on the books of the
Corporation or Subsidiary in accordance with generally accepted accounting
principles, execution thereon has been stayed and continues to be stayed and
such Encumbrances do not result in an Event of Default;

 

(iv)                              good
faith deposits made in the ordinary course of business to secure the
performance of bids, tenders, contracts (other than for the repayment of
borrowed money), leases, surety, customs, performance bonds and other similar
obligations;

 

(v)                                 deposits
to secure statutory obligations or in connection with any matter giving rise to
an Encumbrance described in (ii) above;

 

 

(vi)                              deposits
of cash or securities in connection with any appeal, review or contestation of
any Encumbrance or any matter giving rise to an Encumbrance described in (i) or
(iii) above;

 

(vii)                           zoning
restrictions, easements, rights of way, leases or other similar encumbrances or
privileges in respect of real property which in the aggregate do not materially
affect the value of such property and any related Security Document nor impair
the use of such property by the Corporation or any Subsidiary, in the operation
of its business, and which are not violated in any material respect by existing
or proposed structures or land use;

 

(viii)                        Encumbrances
in favor of (i) each Lender pursuant to this Agreement and (ii) the
Existing Debenture Holders pursuant to the Existing Debenture Agreements;

 

(ix)                                Encumbrances
pursuant to Purchase Money Security Interests;

 

(x)                                   security
given by the Corporation or any Subsidiary to a public utility or any
Governmental Body, when required by such utility or Governmental Body in
connection with the operations of the Corporation or such Subsidiary, in the
ordinary course of its business, which singly or in the aggregate do not
materially detract from the value of the asset concerned or materially impair
its use in the operation of the business of the Corporation or such Subsidiary;

 

(xi)                                Encumbrances
granted to Wistron under the Wistron Intercreditor Agreement;

 

(xii)                             Encumbrances
granted to SVB under the SVB Loan Agreement;

 

(xiii)                          any
other Encumbrance which Phoenix approves in writing as a Permitted Encumbrance
subsequent to the date hereof; and

 

(xiv)                         the
Encumbrances listed under the heading “Permitted Encumbrances” in Schedule 3.1.

 

“Person” means a
natural person, partnership, corporation, joint stock company, trust,
unincorporated association, joint venture or other entity or governmental
entity, and pronouns have a similarly extended meaning.

 

“Premises” means any
premises owned or occupied by the Corporation or its Subsidiaries from time to
time.

 

“Purchase Money Security Interest”
means an Encumbrance on any asset, other than accounts receivable or inventory,
of a Person which is assumed, created, guaranteed or reserved to secure the
unpaid purchase price of such asset, provided that any such Encumbrance is
limited to the asset so acquired and does not secure in excess of the purchase
price thereof, such purchase price not to exceed the fair market value of the
purchased asset.

 

 

“Receiver” means one
or more of a receiver, receiver-manager or receiver and manager of all or a
portion of the undertaking, property and assets of the Corporation appointed by
Phoenix pursuant to this Agreement, any of the Security Documents or by or
under any judgment or order of a court.

 

“Release” includes
abandon, add, deposit, discharge, disperse, dispose, dump, emit, empty, escape,
leach, leak, migrate, pour, pump, release or spill.

 

“Reserve Pool” means
those 10 million Common Shares issuable to key management and employees of the
Corporation as performance awards pursuant to the Corporation’s 1995 Share
Option Plan.

 

“Secured Property”
has the meaning assigned to such term in the Security Agreement.

 

“Security Agreement” means
that Security Agreement, dated the date hereof, between the Borrowers and
Phoenix, as agent for the benefit of the Lenders.

 

“Security Documents”
means, collectively, this Agreement and all other agreements and other
instruments (whether now existing or presently arising) for the purpose of
establishing, perfecting, preserving or protecting any security for the benefit
of any Lender in respect of any Obligations, including, but not limited to, the
Security Agreement.

 

“Series A Preferred Shares” means
Series A Preferred Shares of the Corporation proposed to be created and
issued in connection with the Recapitalization, subject to obtaining all necessary
regulatory and shareholder approvals.

 

“Shareholders’ Equity”
of the Corporation at any particular time means the difference between (i) the
aggregate of Total Assets of the Corporation and (ii) the Total
Liabilities of the Corporation at such time.

 

“Subsidiary” means a
corporation controlled by the Corporation, as the term “control” is defined in
the Business Corporations Act
(Ontario) as in effect at the date hereof and without reference to any
amendments thereto after the date hereof and includes the corporations set out
in Schedule 5.1(q) hereto.

 

“SVB Loan Agreement”
means that Loan and Security Agreement, dated as of September 15, 2005, as
amended, between Silicon Valley Bank (“SVB”)
and the US Subsidiary.

 

“Taxes” means all
taxes of any kind or nature whatsoever including, without limitation, income
taxes, sales or value-added taxes, levies, stamp taxes, royalties, duties, and
all fees, deductions, compulsory loans and withholdings imposed, levied,
collected, withheld or assessed as of the date hereof or at any time in the
future, by any Governmental Body of or within Canada or any other jurisdiction
whatsoever having power to tax, together with penalties, fines, additions to
tax and interest thereon.

 

“Total Assets” of
any Person means the aggregate book value amount of all assets of the Person
which would, on a consolidated basis in accordance with generally accepted
accounting principles, be reflected on a balance sheet of the Person.

 

 

“Total Liabilities”
of any Person means the aggregate amount of all indebtedness and liabilities
determined on a consolidated basis, which would, in accordance with generally
accepted accounting principles, be reflected on a balance sheet of the Person
including, for greater certainty, deferred taxes, together with, without
duplication:

 

(i)                                     the
amount of all Funded Indebtedness and all Contingent Liabilities of the Person,
whether or not reflected on a balance sheet;

 

(ii)                                  the
amount for which any shares in the capital of the Person (if it is a
corporation) may be redeemed if the holders of such shares are entitled at
any time to require the Person to redeem such shares or if the Person has
called such shares for redemption; and

 

(iii)                               the
amount of all Capital Lease Obligations of the Person, provided that if the
rights and remedies of the lessor under such Capital Lease Obligations in the
event of default are limited to repossession or sale of property, such amount
shall be deemed to be equal to the lesser of (A) the amount of the Capital
Lease Obligations and (B) the book value of such property.

 

“Transaction Documents” means
this Agreement, the Share Purchase Warrant Certificates, the Debenture
Certificates, the Security Agreement and any other documents, instruments or
agreements entered into by the Corporation or the U.S. Subsidiary in connection
with any of the foregoing.

 

“Voting Shares”
means capital stock of any class of a corporation which carries voting
rights under any circumstances, provided that shares which carry the right to
vote conditionally upon the happening of an event shall not be considered
Voting Shares until the occurrence of such event and then only during the
continuance of such event.

 

“Wistron  Intercreditor  Agreement” means that Intercreditor, Trade Credit
Restructuring and Security Agreement, dated as of November 24, 2004 by and
among the Corporation, the U.S. Subsidiary, Phoenix Enterprises LLC, Phoenix,
the Philip S. Sassower 1996 Charitable Remainder Annuity Trust and Wistron
Corporation (“Wistron”).

 

Section 3.2.                                   Interpretation

 

(a)                                  “This Agreement”,  “hereto”, “hereby”,
“hereunder”, “herein”, and similar expressions refer to
the whole of this Agreement and not to any particular Article, Section,
paragraph, clause, subdivision or other portion hereof.

 

(b)                                 The
expression “Arm’s Length” has the
meaning ascribed to such term in the Income
Tax Act (Canada).

 

(c)                                  All
references herein to the Income Tax Act (Canada) shall refer to such act and
the regulations thereunder as the same may be amended or replaced from
time to time.

 

(d)                                 Words
importing the singular number only include the plural and vice versa and words importing gender
shall include all genders.

 

 

(e)                                  All
financial or accounting determinations, reports and statements provided for in
this Agreement shall be made or prepared in accordance with generally accepted
accounting principles applied in a consistent manner and shall be made and
prepared on a consolidated basis.

 

(f)                                    The
division of this Agreement into Articles and Sections and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement.

 

(g)                                 The
schedules and exhibits annexed hereto shall, for all purposes, form an
integral part of this Agreement.

 

(h)                                 References
to sums of money herein are to US dollars, unless otherwise specified.

 

(i)                                     Time
is of the essence hereof.

 

(j)                                     Where
the word “including” or “includes” is used in this Agreement, it means “including
(or includes) without limitation”.

 

(k)                                  Wherever
in this Agreement reference is made to generally accepted accounting principles
or GAAP, such reference shall be deemed to mean the generally accepted
accounting principles from time to time approved by the Canadian Institute of
Chartered Accountants, or any successor institute, applicable as at the date on
which a given calculation is made or required to be made in accordance with
generally accepted accounting principles.

 

Section 3.3.                                   Invalidity
of Provisions

 

Each of the provisions contained in this Agreement is distinct and
severable and a declaration of invalidity, illegality or unenforceability of
any such provision or part thereof by a court of competent jurisdiction
shall not affect the validity or enforceability of any other provision hereof
or thereof. Without limiting the generality of the foregoing, if any amounts on
account of fees or otherwise payable by the Borrowers to the Lenders hereunder
or under the Debenture Certificates exceed the maximum amount recoverable under
applicable law, the amounts so payable hereunder shall be reduced to the
maximum amount recoverable under applicable law.

 

Section 3.4.                                   Day
Not A Business Day

 

In the event that any day on or before which any action is required to
be taken hereunder is not a Business Day, then such action shall be required to
be taken at or before the requisite time on the next succeeding day that is a
Business Day.

 

Section 3.5.                                   Governing
Law

 

This Agreement shall be governed by and interpreted and enforced in
accordance with the laws of the Province of Ontario and the federal laws of Canada
applicable therein. Each of the parties hereby agrees to the non-exclusive
jurisdiction of the courts of the Province of

 

 

Ontario. For
the purpose of all legal proceedings, this Agreement will be deemed to have
been performed in the Province of Ontario and the courts of the Province of
Ontario will have non-exclusive jurisdiction to entertain any action arising
under this Agreement.

 

ARTICLE 4.

SECURITY

 

Section 4.1.                                   Charge

 

(a)                                  In
consideration of the sum of Ten Dollars ($10.00) now paid to it by each Lender
(receipt of which is hereby acknowledged), and to secure the due payment of the
Obligations hereunder, the Corporation hereby grants to each Lender a security
interest in, and charges with payment to each Lender of, all sums payable
hereunder as and by way of a fixed and a floating charge, the whole of the
undertaking of the Corporation and all of its property and assets, real and
personal, movable and immovable, tangible and intangible, of every nature and
kind whatsoever, whosesoever situate, both present and future.

 

(b)                                 The
Corporation and each Lender hereby acknowledge that (i) value has been
given to the Corporation by such Lender, (ii) the Corporation has rights
in the property and assets of the Corporation subject to the security interest
granted under Section 4.1 (other than after-acquired property), and (iii) they
have not agreed to postpone the time of attachment of the security granted
hereunder.

 

Section 4.2.                                   Habendum

 

The Lenders shall have and hold the property and assets of the Corporation
subject to the security interest granted under Section 4.1 and all of the
rights hereby conferred unto the Lenders, their successors and assigns forever,
but subject nevertheless to the provisions and with the powers herein set
forth.

 

Section 4.3.                                   Charge
Valid Irrespective of Advance of Money

 

The charges and security interests hereby created shall have effect and
be deemed to be effective whether or not the monies or obligations hereby
secured or any part thereof shall be advanced or owing or in existence
before or after or upon the date of this Agreement and neither the giving of
charges and security interests hereunder nor any advance of funds shall oblige
each Lender to advance any funds or any additional funds.

 

Section 4.4.                                   Supplemental
Indentures

 

The Corporation shall from time to time on demand by each Lender and at
the expense of the Corporation execute and deliver such further deeds or
indentures supplemental hereto, which shall thereafter form part hereof,
for the purpose of charging, or securing in favor of each Lender any property
now owned or hereafter acquired by the Corporation, for correcting or
amplifying the description of any property hereby charged or secured or
intended so to be, or for any other purpose not inconsistent with the terms of
this Agreement.

 

 

Section 4.5.                                   Continuing
Security

 

Any and all payments made at any time in respect of the Obligations and
the proceeds realized from any securities held therefor (including moneys
realized from the enforcement of this Agreement) shall be applied in accordance
with the Intercreditor Agreement. Each Lender may hold as additional
security hereunder any increase or profits or other proceeds realized from the
property and assets of the Corporation subject to the security interest granted
under Section 4.1 (including money) for such period of time as each Lender
sees fit. The Corporation shall be accountable for any deficiency.

 

Section 4.6.                                   Defeasance

 

If the Corporation, its successors or assigns or any of them, make or
cause to be made due payment or performance of all Obligations, without any
reduction or abatement, and all taxes, rates, levies, charges or assessments
payable by the Corporation upon the Secured Property or in respect thereof no
matter by whom or by what authority imposed which each Lender shall have paid
or shall have been rendered liable to pay, then, subject to Article 8 and
Sections 9.6 and 9.16 hereof, everything in this Agreement shall be absolutely
null and void and each Lender shall on request therefor by the Corporation, and
at the expense of the Corporation, at that time surrender the Debenture to the
Corporation, but until that time it shall remain in full force and effect
despite the repayment or satisfaction from time to time of the whole or any part of
the Obligations.

 

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES

 

Section 5.1.                                   General
Representations and Warranties of the Borrowers

 

The Corporation and the US Subsidiary, jointly and severally, represent
and warrant to each Lender as follows and shall continue to represent and
warrant to each Lender as follows for so long as the Obligations are
outstanding:

 

(a)                                  Incorporation and Status. Each of the
Corporation and the US Subsidiary is duly incorporated and validly existing
under the laws of its jurisdiction of incorporation and has the corporate power
and capacity to own its properties and assets and to carry on its businesses as
presently carried on by it or as contemplated hereunder to be carried on by it
and holds all Material Authorizations.

 

(b)                                 Power and Capacity. Each of the Corporation
and the US Subsidiary has the corporate power and capacity to enter into this
Agreement and each Instrument to which it is a party and to do all acts and
things as are required or contemplated hereunder or thereunder to be done,
observed and performed by it.

 

(c)                                  Due Authorization. Each of the Corporation
and the US Subsidiary has taken all necessary corporate action to authorize the
execution, delivery and performance of each of this Agreement and each
Instrument to which it is a party.

 

 

(d)                                 No Contravention. The execution and
delivery of this Agreement and the other Instruments to which the Corporation
or the US Subsidiary is a party and the performance by each of the Corporation
or the US Subsidiary of their respective obligations hereunder or thereunder (i) does
not and will not contravene, breach or result in any default under (A) the
articles, memorandum of association, by-laws, or other organizational documents
of the Corporation or the US Subsidiary, or (B) any mortgage, lease,
agreement or other legally binding instrument, license, permit or Applicable
Law to which the Corporation or the US Subsidiary is a party or by which any of
the Corporation or the US Subsidiary or any of its properties or assets may be
bound, (ii) will not oblige the Corporation or the US Subsidiary to grant
any Encumbrance to any Person other than each Lender, and (iii) will not
result in or permit the acceleration of the maturity of any indebtedness,
liability or obligation of the Corporation or the US Subsidiary under any
mortgage, lease, agreement or other legally binding instrument of or affecting
the Corporation or the US Subsidiary.

 

(e)                                  No Senior or Pari Passu Indebtedness. Other
than the Corporation’s indebtedness to SVB under the SVB Loan Agreement
(including all accrued and unpaid interest thereon, but excluding any
refinancing or other modification which increases the amount of such
indebtedness) and Wistron, the Borrowers do not have, and shall not have, any
indebtedness for borrowed money which ranks senior to or pari passu with the Debentures. Except for
the Intercreditor Agreement, the SVB Loan Agreement and the Wistron
Intercreditor Agreement, nothing herein, including pursuant to Section 6.4(a),
shall operate to subordinate the security interest provided for in the Security
Documents to or in favor of any Encumbrance or Permitted Encumbrance, or to
postpone any of the Obligations to any of the obligations, indebtedness or
liabilities owed by the Corporation or its Subsidiaries to the holder of any
Permitted Encumbrances or Encumbrance.

 

(f)                                    No Consents Required. No authorization,
consent or approval of, or filing with or notice to, any Person (including any
Governmental Body) is required in connection with the execution, delivery or
performance of this Agreement by the Corporation or the US Subsidiary or any
other Instrument by the Corporation or the US Subsidiary, as applicable, other
than (i) the consent of the
Existing Debenture Holders, (ii) the approval of the Toronto Stock
Exchange and the satisfaction of any conditions to such approval, (iii) the
filings required by applicable securities laws, and (iv) the registration
of a financing statement under the UCC, (the consents and approvals in clauses (i) through
(iv) collectively, the “Required
Consents”).

 

(g)                                 Enforceability. Each of this Agreement and
the other Instruments to which it is a party constitutes, or upon execution and
delivery will constitute, a valid and binding obligation of the Corporation and
the US Subsidiary, as the case may be, enforceable against it in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting the rights of creditors generally and except as limited by the
application of equitable principles.

 

(h)                                 No Work Orders. As at each Closing Date, no
work orders, directions or notices have been issued and remain outstanding
pursuant to any Applicable Law relating to the business of the Corporation or
any Subsidiary or any part of the Secured Property or any environmental
matters affecting the foregoing, except such orders, directions and notices
that would not have a Material Adverse Effect. As at each Closing Date, neither
the Corporation or

 

 

any Subsidiary
have received any notification from any Governmental Body, that has not been
satisfied, that any work, repairs, construction or capital expenditures are
required to be made in respect of the Secured Property or any part thereof
as a condition of continued compliance with any Applicable Law or any Material
Authorization issued thereunder.

 

(i)                                     Permits and Compliance with Laws. The
Corporation and each Subsidiary has all licenses, permits, approvals and
franchises that it requires, or is required to have, to own its properties and
assets and to carry on its business as presently conducted, except where the
failure to have such license, permit approval or franchise would not have a
Material Adverse Effect. All such licenses, permits, approvals and franchises
are in good standing and no actions, proceedings, investigations or other steps
of any kind are in process, pending, or to the knowledge of the Corporation,
threatened, or would result in any such license, permit, approval or franchise
being terminated, revoked, withdrawn, suspended or otherwise made unavailable
to the Corporation or any Subsidiary for any period of time, except where such
termination, revocation, withdrawal, suspension or unavailability would not
have a Material Adverse Effect. The Corporation and each Subsidiary is
conducting its business in material compliance with all applicable laws,
regulations, by-laws and ordinances of each jurisdiction in which its business
is carried on.

 

(j)                                     Financial Statements. Phoenix, on behalf of
the Lenders, has been furnished with a copy of:

 

(i)                                     the
audited consolidated financial statements of the Corporation and its
Subsidiaries for its financial year ended March 31, 2005; and

 

(ii)                                  the
unaudited consolidated financial statements of the Corporation and its
Subsidiaries for the fiscal quarter ended December 31, 2005.

 

Such financial
statements, including the notes thereto (the “Financial
Statements”) have been prepared in accordance with generally
accepted accounting principles and fairly, completely and accurately present
the financial condition of the Corporation (including each Subsidiary) and the
financial information presented therein in all material respects for the
periods and as at the dates thereof. As at each Closing Date, the Corporation
and each of the Subsidiaries has no outstanding liabilities (including Funded
Indebtedness, Contingent Liabilities or otherwise) other than those disclosed
in the Financial Statements and other than the indebtedness owed by the
Corporation to the Existing Debenture Holders, to Wistron, to SVB and trade or
business obligations subsequently incurred in the ordinary course of business,
which such trade and business obligations are currently in good standing in
accordance with their respective terms. Since March 31, 2005, there has
been no development which has had or would reasonably be expected to have a
Material Adverse Effect upon the ability of the Corporation or any Subsidiary
to perform its obligations under this Agreement or any other Transaction
Document to which it is a party.

 

(k)                                  Non-Arm’s Length Transactions. During the
period from March 31, 2005 through each Closing Date, none of the
Corporation or Subsidiaries has entered into any transaction or agreement with
any Affiliate other than on commercially reasonable terms and within the
limitations of the other provisions hereof, except as disclosed in the
Financial

 

 

Statements or
in any document filed by the Corporation with the Ontario Securities Commission
that is publicly available.

 

(l)                                     No Litigation. As at each Closing Date,
there is no court, administrative, regulatory or similar proceeding (whether
civil, quasi-criminal, or criminal), arbitration or other dispute settlement
procedure, investigation or enquiry by any Governmental Body, or any similar
matter or proceeding (collectively “proceedings”)
against or involving any of the Corporation or any Subsidiary (whether in
progress or threatened) which, if determined adversely to the Corporation or
Subsidiary would have or would reasonably be expected to have a Material
Adverse Effect or have a material adverse effect upon its ability to perform any
of the provisions of this Agreement or any other Transaction Document to which
it is a party or which purports to affect the legality, validity and
enforceability of this Agreement or any other Transaction Document. As at each
Closing Date, no event has occurred which would reasonably be expected to give
rise to any proceedings and there is no judgment decree, injunction, rule,
award or order of any Governmental Body outstanding against the Corporation or
any Subsidiary which has or would reasonably be likely to have a Material
Adverse Effect.

 

(m)                               No Default. As at each Closing Date,
neither the Corporation nor any of the Subsidiaries are in default or breach
(other than any breach for which the Corporation has received a written waiver
from either Phoenix Venture Fund LLC or Phoenix Enterprises LLC) under any
material commitment or obligation (including, without limitation, obligations
in relation to Funded Indebtedness) or under the terms and conditions relating
to any Material Authorizations, and, to the best knowledge of the Borrowers, as
at each Closing Date, there exists no state of facts which, after notice or the
passage of time or both, would constitute such a default or breach; and as at
each Closing Date, there are no proceedings in progress, pending or, to the
knowledge of the Borrowers, threatened which would result in the revocation,
cancellation suspension or any adverse modification of any Material
Authorization.

 

(n)                                 Hazardous Substances. Neither the
Corporation nor any of the Subsidiaries are aware of any Hazardous Substances
located at, on or under the Secured Property or the Premises, and the Secured
Property, the Premises and the operations conducted thereat are not and have
not been in breach of any Environmental Law which has resulted or could result
in the Secured Property being materially adversely affected. Neither the
Corporation nor any Subsidiary has caused or permitted, nor does the
Corporation or any Subsidiary have any knowledge of the Release of any
Hazardous Substance on, from, under or to the Secured Property or the Premises
or of any Release from a facility owned or operated by third parties, including
previous owners, for which the Corporation or any Subsidiary may have
liability and which has resulted or could result in the Secured Property or the
Premises being adversely affected. Neither the Corporation nor any of the
Subsidiaries has been charged with or convicted of an offence for
non-compliance with any Environmental Law or has been fined or otherwise
sentenced or have settled any prosecution short of conviction; and neither the
Corporation nor any Subsidiary has received any notice of judgment or
commencement of proceedings of any nature or experienced any search and seizure
or are under investigation related to a breach or alleged breach of any
Environmental Law.

 

(o)                                 All Material Information Supplied. The
Borrowers have provided to Phoenix all information which the Borrowers, acting
reasonably, determined was material

 

 

relating to
the financial condition, business, assets and results of operations (including
forecasts and budgets) of the Corporation and the Subsidiaries, taken as a
whole, and all such information (including all publicly available documents
filed by the Corporation with the Ontario Securities Commission), taken as a
whole (other than forecasts and budgets) is true, accurate and complete in all
material respects and omits no material fact necessary to make such information
not misleading in light of the circumstances in which such information was made
and there has been no change in such information, taken as a whole, that would
have or would reasonably be likely to have a Material Adverse Effect. The
forecasts and budgets provided to Phoenix, at the time presented, were prepared
prudently and upon reasonable assumptions (which assumptions remain reasonable
at each Closing Date), the forecasts and budgets are, as at each Closing Date,
reasonable and attainable as at the date hereof, such forecasts and budgets
have not, as of the date hereof, changed or been amended or updated, and it
would, as of the date hereof, be reasonable for Phoenix to rely upon these
forecasts and budgets.

 

(p)                                 Taxes and Claims. The Borrowers have:

 

(i)                                     delivered
or caused to be delivered all required income tax returns, sales, property,
franchise and value-added tax returns and other tax returns to the appropriate
Governmental Body; and

 

(ii)                                  withheld
and collected all Taxes required to be withheld and collected by them and
remitted such Taxes when due to the appropriate Governmental Body,

 

and no
material assessment, appeal or claim is, as far as the Borrowers are aware,
being asserted or processed with respect to such claim, Taxes or obligations,
except as previously disclosed to Phoenix in writing.

 

(q)                                 Authorized and Issued Capital. Schedule 5.1(q)
accurately describes the authorized and issued share capital of the Corporation
and each of the Subsidiaries, as at each Closing Date. As at each Closing Date,
the Corporation has no Subsidiaries except as set forth in Schedule 5.1(q).
Except as set out in Schedule 5.1(q), as at each Closing Date,
there are no agreements, options, warrants, rights of conversion or other
rights pursuant to which the Corporation or any of the Subsidiaries is or may become
obligated to issue any shares or any securities convertible into, or
exchangeable for, shares.

 

(r)                                    Insurance. The Corporation and each of the
Subsidiaries insures with reputable insurance companies all of its property and
other assets of an insurable nature against fire and other casualties in the
same manner and to the same extent as such insurance is carried by prudent
corporations carrying on a similar business and owning similar property and
maintains with reputable insurance corporations adequate insurance against
business interruption with respect to any rental properties or properties under
construction and liability on account of damage to persons or property, and
under all applicable worker’s compensation laws, in the same manner and to the
same extent as such insurance is carried by prudent corporations carrying on a
similar business and owning similar property.

 

 

(s)                                  Funded Indebtedness.
Schedule 5.1(s) sets forth a complete and
accurate list of all Funded Indebtedness of each of the Corporation and the
Subsidiaries at each Closing Date and accurately describes the security
therefor and the dollar amount thereof.

 

(t)                                    Directors and Officers Insurance. The Corporation has a directors’
and officers’ insurance policy in place to the same extent as such insurance is
carried by prudent public corporations and the premiums on such insurance
policy are paid to date.

 

(u)                                 Solvency. None of the Corporation or any of
the Subsidiaries has committed an act of bankruptcy, proposed a compromise or
arrangement to its creditors generally, had any petition for a receiving order
in bankruptcy filed against it, taken any proceeding to have itself declared
bankrupt or wound-up or taken any proceeding to have a Receiver appointed over
it or any part of its assets.

 

(v)                                 Articles, Memorandum, By-Laws, Etc. True
and complete copies of the articles of incorporation (including all amendments
thereto), memorandum of association and by-laws and all other organizational
documents of each of the Borrowers in effect on each Closing Date have been
delivered to Phoenix on behalf of the Lenders. On each Closing Date, there are
outstanding no applications or filings which would alter in any way the
organizational documents or corporate status of any of the said corporations. As
in effect on each Closing Date, the respective minute books of the Borrowers
contain all by-laws and resolutions of the respective directors and
shareholders of the Borrowers currently in effect and the corporate and other
records of the Borrowers have been maintained in all material respects in
accordance with all Applicable Law.

 

(w)                               Location of Business and Assets. As of each
Closing Date, the only locations at which the Corporation and the Subsidiaries
have any place of business or material assets are as set forth in Schedule 5.1(w).

 

(x)                                   Title. Subject only to the Permitted
Encumbrances, the Corporation and each Subsidiary has good and marketable title
to all of its undertaking, property and assets, free and clear of any
Encumbrances and no person has any agreement or right to acquire its interest
in any of such properties out of the ordinary course of business.

 

(y)                                 Employment Matters. As of each Closing
Date, except as is disclosed in Schedule 5.1(y) neither the
Corporation nor any Subsidiary is a party to or is bound by any:

 

(i)                                     written
or oral contract or commitment for the employment of any senior management
employee or officer;

 

(ii)                                  written
contract or commitment for the employment of any employee or officer providing
for an annual salary (including benefits) of in excess of $100,000 or a payment
on termination of in excess of six months salary and benefits;

 

(iii)                               oral
contract or commitment for the employment of any employee or officer, except
for contracts of indefinite hire terminable by the Corporation without cause on
reasonable notice;

 

 

(iv)                              contract
with or commitment to any trade union, council of trade unions, employee
bargaining agent or affiliated bargaining agent (collectively called “labor representatives”) and the Borrowers
have not conducted negotiations with respect to any such future contracts or
commitments; no labor representatives hold bargaining rights with respect to
any employees of the Corporation or any Subsidiary; no labor representatives
have applied to have the Corporation or any Subsidiary declared a related
employer pursuant to the applicable labor legislation; and, to the knowledge of
either of the Borrowers, there are no current or threatened attempts to
organize or establish any trade union or employee association with respect to
the Corporation or any Subsidiary; or

 

(v)                                 except
as is disclosed in Schedule 5.1(y), there is no bonus, pension,
multi-employer, profit sharing, deferred compensation, retirement, disability,
health insurance or similar benefit plan, with respect to any of its employees
or others (including without limitation any agreements in respect of employee
share ownership plans), other than Canada Pension Plan, the Ontario Health Insurance
Plan and other similar health plans established and administered by any other
governmental authority or workers’ compensation insurance provided pursuant to
statute.

 

As of each
Closing Date, the Corporation and each of the Subsidiaries has paid all sums
due to its employees and its independent contractors and has observed in all
material respects the provisions of (i) all agreements binding upon it or (ii) any
pension, bonus, profit sharing, compensation, retirement, deferred
compensation, illness or other plan, agreement, trust, fund or arrangement for
the benefit of or with its employees, directors, officers or shareholders and (iii) all
applicable laws and regulations respecting employment, including, but not
limited to, labor standards legislation and regulations and legislation and
regulations prohibiting discrimination; and there is no complaint, civil action
or other proceeding in process alleging a violation of any such agreement,
plan, trust, fund, arrangement, law or regulation.

 

As of each Closing
Date, none of the Corporation nor any Subsidiary has received any remedial
order or notice of offence under any applicable laws and regulations respecting
employment, and each of the Corporation and the Subsidiaries has performed all
of its financial or monetary obligations under such laws and regulations
towards its employees and independent contractors, and there are no facts which
may give rise to a claim for which the Corporation or any Subsidiary might
be held liable under the provisions of the said laws or regulations.

 

(z)                                   Intellectual Property. The Corporation and
each Subsidiary owns all right title and interest in or to, or have valid and
enforceable rights to use all of the Intellectual Property including the trade
marks, trade or brand names, corporate names and service marks set out in Schedule 5.1(z),
free and clear of all Encumbrances except Permitted Encumbrances. As of each
Closing Date, neither the Corporation nor any Subsidiary uses or owns any trade
marks, trade or brand names, corporate names or service marks except as set out
in Schedule 5.1(z). The conduct of the business of, and the use of
the Intellectual Property by, the Corporation and the Subsidiaries does not,
nor to the Borrowers’ knowledge, will the proposed conduct of the business and
the proposed use of the Intellectual Property, infringe (and neither the
Corporation nor any Subsidiary, except as previously disclosed to Phoenix in
writing, has received any notice, complaint, threat or claim alleging
infringement of) any patent, trade mark, trade name, copyright, industrial
design, trade secret or other propriety right of any other Person. The

 

 

Intellectual
Property which is not owned by the Corporation or the Subsidiaries is being
used with the consent of, and in accordance with, the consent or license from,
the rightful owner thereof. The Corporation and each of the Subsidiaries has
taken all commercially reasonable steps to establish, preserve and protect its
rights in the Intellectual Property which is material to the Corporation or
such Subsidiary.

 

(aa)                            Disclosure Restricted. Each of the
statements contained in Section 5.1 is true and correct except as set
forth in the specific disclosure schedule qualifying such statement or in
any document filed by the Corporation with the Ontario Securities Commission
and that is publicly available. The disclosure in any disclosure schedule shall
qualify only the corresponding statement.

 

Section 5.2.                                   Representations
and Warranties of Lenders

 

Each of the Lenders, severally and not jointly, represents and warrants
to the Borrowers as follows:

 

(a)                                  Authorization. Such Lender is an
individual, corporation, limited partnership or limited liability company duly
organized, validly existing and in good standing under the laws of its jurisdiction
of formation, and each Lender has full power and authority to enter into this
Agreement and the other Transaction Documents to which it is a party, and has
duly authorized, executed and delivered the same. This Agreement, when executed
and delivered by a Lender, will constitute valid and legally binding
obligations of such Lender, enforceable in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and any other laws of general application affecting
enforcement of creditors’ rights generally, or (ii) as limited by laws
relating to the availability of a specific performance, injunctive relief, or
other equitable remedies.

 

(b)                                 Disclosure of Information. Each Lender has
had an opportunity to discuss the Borrowers’ business, management, financial
affairs and the terms and conditions of the offering of the Debentures with the
Borrowers’ management and has had an opportunity to review the Borrowers’
facilities. Each Lender understands that such discussions, as well as any other
written information delivered by the Borrowers to such Lender, were intended to
describe the aspects of the Borrowers’ business which it believes to be
material. Each Lender has had all of its questions related to the Borrowers and
the purchase of Debentures answered by the Borrowers.

 

(c)                                  Experience; Speculative Nature of Investment. Each
Lender has substantial experience in evaluating and investing in private
placement transactions of securities in companies similar to the Borrowers so
that it is capable of evaluating the merits and risks of its investment in the
Borrowers and has the capacity to protect its own interests. Each Lender
acknowledges that its investment in the Borrowers is highly speculative and
entails a substantial degree of risk and such Lender is in a position to lose
the entire amount of such investment.

 

(d)                                 Investment. The Lenders are acquiring the
Debentures and Warrants (if and when issued) for investment for their own
account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof. By executing this Agreement,

 

 

each Lender
further represents that it does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
the Debentures, Warrants or Common Shares.

 

(e)                                  Restricted Securities. The Lenders
understand that the Debentures, Warrants (if and when issued) and Common Shares
issuable upon exercise of the Warrants as contemplated hereby have not been
registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or qualified for
distribution in any province or territory of Canada and are issued pursuant to
a specific exemption from the registration provisions of the Securities Act and
the registration and prospectus requirements of the Securities Act (Ontario),
the availability of which depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of the Lenders’
representations as expressed herein. Each Lender is an “accredited investor”
within the meaning of Section 1.1 of National Instrument 45-106 and each
Lender, which is resident in the United States, is also an “accredited investor”
within the meaning of Regulation D, Rule 501(a), promulgated by the U.S.
Securities and Exchange Commission. If any Lender is resident in or otherwise
subject to the securities laws of a jurisdiction other than the Province of
Ontario or the United States, the issuance by the Corporation, and the
acquisition by such Lender, of the Debentures, Warrants (if and when acquired)
and Common Shares issuable upon exercise of the Warrants as contemplated by
this Agreement is in full compliance with all applicable securities laws,
statutes, regulations, policy statements and orders in such jurisdiction and no
authorization, consent of, or filing with or notice to, any person is required
in connection therewith.

 

(f)                                    Legends. The Lenders understand that the
Debentures, Warrants (if and when issued) and Common Shares issuable upon
exercise of the Warrants (each, for purposes of this paragraph, a security) may bear
the following legend and any other legends that may be required by
applicable securities law and stock exchange rules:

 

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION
WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL (WHICH COUNSEL SHALL BE BROWN RAYSMAN MILLSTEIN FELDER &
STEINER LLP OR OTHER COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION) IN A FORM REASONABLY
SATISFACTORY TO THE CORPORATION, OR OTHER EVIDENCE REASONABLY SATISFACTORY TO
THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933.

 

(g)                                 No Public Market. The Lenders understand
that no public market now exists for any of the Debentures or Warrants issued
by the Borrowers and that the Borrowers have made no assurances that a public
market will ever exist for the Corporation’s securities.

 

 

 

Section 5.3.                                   Survival
of Representations and Warranties

 

The statements made in any certificate hereafter delivered by the
Corporation or any of the Subsidiaries to the Lenders shall be deemed to
constitute representations and warranties made by the party delivering the
same. The Borrowers covenant that the representations and warranties made by
them in this Article 5 shall be true and correct on each day that any of
the Obligations remain outstanding, with the same effect as if such
representations and warranties had been made and given on and as of such day,
notwithstanding any investigation made at any time by or on behalf of each
Lender or its counsel and notwithstanding any foreclosure or enforcement
pursuant to any Security Documents; except that if any such representation and
warranty is specifically given as of the date hereof or in respect of a
particular date or particular period of time and relates only to such date or
period of time, then such representation and warranty shall continue to be given
as at such date or for such period of time.

 

ARTICLE 6.

COVENANTS OF THE CORPORATION

 

Section 6.1.                                   General
Covenants

 

So long as the Obligations remain outstanding, the Borrowers covenant
and agree as follows:

 

(a)                                  Securities Compliance. Subject to the representations
and warranties of the Lenders in Section 5.2(e) being true and
correct on the date of issuance of the Debentures and Warrants (if and when
issued), the Borrowers shall take all necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation for the
legal and valid issuance of the Debentures and the Warrants (if and to the
extent issued) to be acquired by the Lenders, hereunder and the issuance of the
Common Shares upon exercise of the Warrants.

 

(b)                                 Books and Reserves. From the date hereof
until the payment in full of all Obligations (the “Termination Date”), the Corporation shall (i) maintain,
and cause its Subsidiaries to maintain, at all times, true and complete books,
records and accounts in which true and correct entries shall be made of its
transactions in accordance with GAAP consistently applied and consistent with
those applied in the preparation of the Financial Statements (to the extent
same are consistent with GAAP), and (ii) by means of appropriate quarterly
entries, reflect in its accounts and in all financial statements, proper
liabilities and reserves for all taxes and proper reserves for depreciation,
renewals and replacements, obsolescence and amortization of its properties and
bad debts, all in accordance with GAAP consistently applied, as above
described, and all subject to normal year end adjustments.

 

(c)                                  Ordinary Course of Business. The Borrowers
shall operate their respective businesses only in the ordinary course and will
use commercially reasonable efforts to preserve their respective business,
organization, goodwill and relationships with Persons having business dealings
with them.

 

(d)                                 To Use Proceeds. The Borrowers shall use
the net proceeds from the sale of the Debentures in accordance with Section 1.5.

 

 

(e)                                  To Pay Costs. The Borrowers shall pay all
reasonable costs, charges and expenses of or incurred by any Lender in
inspecting the Secured Property or in or about taking, recovering or keeping
possession of any of the Secured Property or in any other proceedings taken in
enforcing the remedies provided herein or otherwise in relation to this
Agreement or the Secured Property, or by reason of non-payment of the moneys
hereby secured, costs of any sale proceedings hereunder, whether such sale
proceedings prove abortive or not, and costs of any Receiver with respect to,
and all expenditures made by any Lender or any Receiver in the course of, doing
anything hereby permitted to be done by any Lender or such Receiver. All such
costs and expenses and other monies payable hereunder, together with interest
at the Maximum Legal Rate applicable to such Obligations, shall be payable on
demand and shall constitute a charge on the Secured Property. Without limiting
the generality of the foregoing, such reasonable costs shall extend to and
include any legal costs incurred by or on behalf of each Lender or the Receiver
as between attorney and his own client.

 

(f)                                    To Pay Certain Debts. The Corporation shall
and shall cause each of the Subsidiaries to punctually pay and discharge every
obligation, the failure to pay or discharge of which would reasonably be likely
to result in any Encumbrance or right of distress, forfeiture, termination or
sale or any other remedy being enforced against the Secured Property and
provide to Phoenix, on behalf of the Lenders, when required by Phoenix, on
behalf of the Lenders, acting reasonably, satisfactory evidence of such payment
and discharge, but the Borrowers may, on giving the Lenders such security (if
any) as Phoenix, on behalf of the Lenders, may require, refrain from
paying or discharging any obligation the liability for which is being contested
in good faith.

 

(g)                                 To Comply with Obligations and Maintain Corporate
Existence and Security. The Corporation shall and shall cause each
Subsidiary to:

 

(i)                                     pay
or cause to be paid all Obligations falling due hereunder on the dates and in
the manner specified herein and comply with its obligations hereunder, under
the Security Documents and the other Instruments;

 

(ii)                                  create
an annual business plan, approved by the Board of Directors of the Corporation,
for each year in which the Debentures remain outstanding (the “Annual Business Plan”), and immediately notify Phoenix, on behalf
of the Lenders of any material deviation from the Annual Business Plan;

 

(iii)                               maintain
its corporate existence;

 

(iv)                              use
commercially reasonable efforts to preserve all its rights, licenses, powers,
privileges, franchises and goodwill;

 

(v)                                 observe
and perform all of its obligations and comply with all conditions under
leases, licenses and other agreements to which it is a party or upon or under
which any of the Secured Property is held;

 

(vi)                              carry
on and conduct its business in a proper and efficient manner so as to preserve
and protect the Secured Property and income therefrom;

 

 

(vii)                           observe
and conform to all Applicable Laws and of any Governmental Body having
jurisdiction over the Corporation or any Subsidiary;

 

(viii)                        repair
and keep in repair and good order and condition all property, including the
Secured Property, the use of which is necessary or advantageous in connection
with its business;

 

(ix)                                immediately
notify Phoenix, on behalf of the Lenders, in writing of any proposed change of
name of the Corporation or any Subsidiary or of chief place of business of any
of the foregoing;

 

(x)                                   keep
Phoenix, on behalf of the Lenders, regularly informed in writing as to the
location of the Secured Property and the books of account and other records of
each of the Corporation and the Subsidiaries to the extent that the Secured
Property or such books of account are not located at 14000 Summit Drive, Suite 900,
Austin, Texas 78728;

 

(xi)                                pay
all Taxes levied, assessed or imposed upon it or its property as and when the
same become due and payable save and except where it contests in good faith the
validity thereof;

 

(xii)                             forthwith
notify Phoenix, on behalf of the Lenders, of any default (or event, condition
or occurrence which with the giving of notice and/or the lapse of time would
constitute a default) in connection with any indebtedness, Funded Indebtedness
or Contingent Liability in an amount exceeding $300,000;

 

(xiii)                          advise
Phoenix, on behalf of the Lenders, forthwith upon becoming aware of any Default
or Event of Default hereunder with detailed particulars thereof and deliver to
Phoenix, on behalf of the Lenders, upon request a certificate in form and
substance satisfactory to Phoenix, on behalf of the Lenders, signed by a senior
officer of the Corporation certifying that no Default or Event of Default has
occurred or, if such is not the case, specifying all Default or Events of
Default and their nature and status;

 

(xiv)                         use
commercially reasonable efforts to collect all accounts receivable in the
ordinary course of business;

 

(xv)                            promptly
cure or cause to be cured any defects in the execution or delivery of any
Instrument and any defects in the validity or enforceability of any security
hereunder and at its expense duly execute and deliver or cause to be duly
executed and delivered all documents as the Lenders may consider necessary
or desirable for such purposes;

 

(xvi)                         retain
auditors approved by the Audit Committee of the Board of Directors of the
Corporation;

 

(xvii)                      at
its cost and expense, upon the request of Phoenix, on behalf of the Lenders,
duly execute and deliver, or cause to be duly executed and delivered, to
Phoenix, on behalf of the Lenders, such documents and do or cause to be done
such acts as may be necessary or desirable in the reasonable opinion of
Phoenix, on behalf of the Lenders, to carry out the purposes of this Agreement;
and

 

 

(xviii)                   effect
such registrations as may be required by Phoenix, on behalf of the
Lenders, from time to time to protect the security granted under the
Transaction Documents.

 

(h)                                 To Insure. The Borrowers shall keep the
Secured Property insured in such amounts as is carried by prudent corporations
carrying on a similar business and owning similar property, and against loss or
damage by fire and such other risks as Phoenix, on behalf of the Lenders, may from
time to time specify, acting reasonably, with reputable insurers. The Borrowers
shall, whenever from time to time requested by Phoenix, on behalf of the
Lenders, provide Phoenix, on behalf of the Lenders, satisfactory evidence of
such insurance and any renewal thereof which shall at all times be subject to
charging clauses in a form approved by Phoenix, on behalf of the Lenders,
and shall cause the Lenders to be shown as loss payees under the policy or
policies. Evidence satisfactory to Phoenix, on behalf of the Lenders, of the
renewal of every policy of insurance shall be left with Phoenix, on behalf of
the Lenders, at least seven (7) days before the termination thereof. Each
policy of insurance shall be in form and substance acceptable to Phoenix,
on behalf of the Lenders, acting reasonably, and shall not be subject to any
co-insurance clause.

 

(i)                                     Notice of Litigation and Damage. The
Borrowers will promptly give written notice to Phoenix, on behalf of the
Lenders, of (i) all claims or proceedings pending or threatened against
any of the Corporation or Subsidiaries which may give rise to uninsured
liability in excess of $300,000 or which may have a Material Adverse
Effect; and (ii) all damage to or loss or destruction of any property
comprising part of the Secured Property which may give rise to an
insurance claim in excess of $300,000; and will supply Phoenix, on behalf of
the Lenders, with all information reasonably requested in respect of any such
claim.

 

(j)                                     To Furnish Proofs. The Borrowers shall
forthwith on the happening of any loss or damage furnish or cause to be
furnished at their expense all necessary proofs and do all necessary acts to
enable each Lender to obtain payment of the insurance monies, which, in the
sole discretion of the Lenders, may be applied in reinstating the insured
property or be paid to the Corporation or any Subsidiary or be applied in
payment of the monies owing hereunder, whether due or not then due, or paid
partly in one way and partly in another.

 

(k)                                  Financial Statement Presentation. In any
press release, or public disclosure document required by securities regulatory
authorities, that contains the Corporation’s quarterly or annual financial
statements, subject to compliance with applicable securities law and other
regulatory requirements, such financial statements shall be prepared in
accordance with Canadian GAAP and, if requested by Phoenix, contain a note
reconciliation to U.S. generally accepted accounting principles (“US GAAP”).

 

Section 6.2.                                   Specific
Covenants

 

So long as the Obligations remain outstanding, the Corporation
covenants and agrees as follows:

 

 

(a)                                  Cost Maintenance Program. The Corporation
shall continue its previously implemented cost-cutting program (the “Cost Maintenance Program”) in a manner
satisfactory, in its sole discretion, to Phoenix.

 

Section 6.3.                                   Financial
Covenants.

 

So long as any of the Obligations remain outstanding, the Corporation
covenants and agrees as follows:

 

(a)                                  Budget. The Corporation shall not, and
shall cause its Subsidiaries not to, expend any funds nor incur any expenses
except as provided for in the budget delivered to Phoenix, on behalf of the
Lenders (the “Budget”), which
shall also included a detailed income statement, balance sheet and statement of
cash flows. The Borrowers and Phoenix, on behalf of the Lenders, hereby agree
that aggregate expenditures, if any, exceeding the total budgeted amount by 5%
or less shall be deemed to be within the Budget.

 

(b)                                 Financial Statements and Other Reports. The
Corporation will maintain, and cause each of its Subsidiaries to maintain, a
system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements in conformity
with GAAP (it being understood that quarterly financial statements are not
required to have footnote disclosures). The Corporation will deliver or cause
to be delivered each of the financial statements and other reports described
below to Phoenix, on behalf of the Lenders and, if requested by a Lender or
Phoenix, to each Lender directly, in addition to copies of any other financial
statements prepared by the Corporation for filing with securities commissions
and other regulatory authorities.

 

(i)                                     Monthly Financials. As soon as available
and in any event within forty-five (45) days after the end of each month, the
Corporation will deliver or cause to be delivered its consolidated balance
sheet, as at the end of such month, and the related consolidated statements of
loss and deficit and cash flows for such month, and for the period from the
beginning of the then current fiscal year of the Corporation to the end of such
month.

 

(ii)                                  Quarterly Financials; Other Quarterly Reports. As
soon as available and in any event within forty-five (45) days after the end of
each fiscal quarter, the Corporation will deliver or cause to be delivered (A) its
consolidated balance sheet, as at the end of such fiscal quarter, and the
related consolidated statements of income, shareholders’ equity, loss and
deficit (or income) and cash flows for such fiscal quarter and for the period
from the beginning of the then current fiscal year of the Corporation to the
end of such quarter, along with a comparison to the operating budget for such
quarter, (B) a copy of its consolidating financial statements for such
fiscal quarter, but only if material to an understanding of the Corporation’s
operations and financial condition, and (C) a schedule of investments
made by the Corporation or any of its Subsidiaries since the date such information
was last provided to Lenders.

 

(iii)                               Year-End Financials. As soon as available
and in any event within ninety (90) days after the end of each fiscal year of
the Corporation, the Corporation will deliver or cause to be delivered (A) its
consolidated balance sheet, as at the end of such year, and the related
consolidated statements of loss and deficit (or income), cash flows, and
shareholders’

 

 

equity for
such fiscal year, (B) a copy of its consolidating financial statements for
such fiscal year, but only if material to an understanding of the Corporation’s
operations and financial condition, and (C) a report with respect to the
financial statements received pursuant to this Subsection from certified
public accountants nationally recognized in the United States or Canada,
selected by the Corporation.

 

(iv)                              Other Weekly/Monthly Reports. As soon as
available, and in any event within four (4) Business Days after the end of
each week, the Corporation will deliver or cause to be delivered a report of
sales booked by the Corporation during such week and any such other
weekly/monthly reports as Phoenix may reasonably request.

 

(c)                                  Compliance Certificates. Together with each
delivery of financial statements of the Corporation or its Subsidiaries (other
than those financial statements delivered pursuant to Section 6.3(c)(iv)),
the Corporation or the Subsidiary, as the case may be, will deliver or
cause to be delivered to Phoenix, on behalf of the Lenders and, if requested by
a Lender or Phoenix, to each Lender directly a fully and properly completed
compliance certificate substantially in the form attached hereto as Exhibit C
(each, a “Compliance Certificate”)
signed by the chief executive officer, chief operating officer or chief
financial officer of the Corporation or such Subsidiary.

 

Section 6.4.                                   Negative
Covenants

 

At all times, the Borrowers hereby covenant and agree that for so long
as any portion of the Obligations remains unpaid, unfulfilled and/or
unsatisfied, the Borrowers shall not, nor shall the Corporation permit any
Subsidiary to:

 

(a)                                  Encumbrances. Create, grant, assume or
suffer to exist any Encumbrance upon any of their properties or assets other
than Permitted Encumbrances or enter into or assume any agreement (other than
the other Transaction Documents) prohibiting the creation or assumption of any
Encumbrance upon its or their respective properties or assets, whether now
owned or hereafter acquired.

 

(b)                                 Capital Expenditures. Incur or commit or
agree to incur capital expenditures in any fiscal year, including Capital Lease
Obligations and Purchase Money Security Interests, involving aggregate payments
in any twelve (12) month period in excess of 5% over the amount of capital
expenditures provided for in the Budget.

 

(c)                                  Sell. Remove, destroy, lease, transfer,
assign, sell or otherwise dispose of any of the Secured Property, except for
sales in the ordinary course of business.

 

(d)                                 Funded Indebtedness. Incur or become liable
for any Funded Indebtedness, other than the Obligations hereunder and those
obligations existing on the date hereof; provided such obligations do not
exceed the amount outstanding as of the date hereof.

 

(e)                                  Indebtedness. Incur or repay any debts,
liabilities or obligations (including Funded Indebtedness and Contingent
Liabilities) whether direct or indirect, actual or contingent, material or not,
other than those specifically permitted hereunder (including indebtedness to
the Existing Debenture Holders, Wistron and SVB in the aggregate amounts

 

 

existing as of
the date hereof) or under the Security Documents, except for normal trade
debts, liabilities or obligations to Persons dealing at Arm’s Length with the
Borrowers arising in the ordinary course of business and with customary payment
terms; provided, however, that in the event any
indebtedness consists of trade payables, expenses, costs and charges accrued in
the ordinary course of business in accordance with customary trade terms which
are overdue for more than 180 days (the “Qualified
Indebtedness”), the aggregate amount of such Qualified Indebtedness
shall not exceed $1,500,000.

 

(f)                                    Executive Officers. Appoint, hire, remove
or change any executive officer without the prior written consent of Phoenix,
which consent will not be unreasonably withheld or delayed.

 

(g)                                 Make Certain Changes.

 

(i)                                     change
their financial year end;

 

(ii)                                  purchase,
establish or acquire in any manner any new business entity;

 

(iii)                               change
the nature of their business as presently carried on;

 

(iv)                              amalgamate,
consolidate or merge or enter into a partnership, joint venture (other than
joint business arrangements with the third parties for the sale of goods and
services in the ordinary course of business) or syndicate with any other
Person, except an amalgamation, consolidation or merger involving only the
Corporation and the US Subsidiary, unless otherwise consented to by Phoenix;

 

(v)                                 sell,
transfer, convey, assign or otherwise dispose of all or substantially all of
its assets;

 

(vi)                              dissolve
or wind-up the Corporation or any Subsidiary, other than pursuant to the
dissolution or winding-up of a Subsidiary (other than the US Subsidiary)
pursuant to which all of the assets of such Subsidiary are transferred or
conveyed to the Corporation or the US Subsidiary;

 

(vii)                           except
for the Recapitalization, enter into any transaction outside the ordinary
course of business;

 

(viii)                        acquire
or invest in any securities or investments, other than Cash Equivalents;

 

(ix)                                make
any loans in any other Person other than the giving of trade credit or
consistent with the Business Plan;

 

(x)                                   except
for the Recapitalization, engage in any commercial transactions with Persons
not dealing at Arm’s Length with the Corporation or any Subsidiary, other than
transactions relating to the compensation of any employee or director of the
Corporation or a Subsidiary in the ordinary course of business, including the
grant of stock under

 

 

the Reserve
Pool or the grant of options pursuant to the Corporation’s stock option plan,
as in effect on the date hereof, approved by a majority of the Board of
Directors (including a majority of the non-participating directors);

 

(xi)                                engage
in any sale-leaseback or similar transactions;

 

(xii)                             remove
any of the Secured Property or any of the books of account or other records of
the Corporation or any Subsidiary from the jurisdiction where same are
presently located, except for inventory sold in the ordinary course of
business;

 

(xiii)                          make
or commit to any form of distribution or reduction of the profits of the
Corporation or any Subsidiary or of its capital including any (i) declaration
or payment of any dividend (including stock dividends) on any present or future
shares; (ii) except for the Recapitalization, payment to purchase, redeem,
retire or acquire any of its shares, or any option, warrant or other right to
acquire any such shares, or apply or set apart any of its assets therefor;
(iii) bonuses to shareholders; (iv) payment on account of loans made
to shareholders of the Corporation or any of its Subsidiaries; or (v) payment
of any bonuses or management fees (other than bonuses paid to employees in the
ordinary course of business);

 

(xiv)                         other
than pursuant to any agreement, option, right, instrument or privilege set
forth on Schedule 5.1(q) or otherwise in connection with the
Recapitalization, create, allot or issue any shares in its capital, or enter
into any agreement, or grant any option, right or privilege, whether
pre-emptive, contractual or otherwise for the purchase of shares or securities
convertible into shares of the Corporation or any Subsidiary, amend the
articles, memorandum or association or by-laws, change the capital structure,
enter into any agreement, or make any offer, to do so; or

 

(xv)                            amend,
modify or change, or consent or agree to any amendment, modification or change
to, any of the terms of any material contracts, except to the extent such
change, amendment, modification or consent is not materially adverse to Lenders
and would not otherwise have a Material Adverse Effect, or except to the extent
that any Existing Debenture Agreement is amended, modified or changed solely in
connection with the Recapitalization or the Debenture Exchange.

 

Section 6.5.                                   Warrants.

 

In the event that any Debenture has not been paid in full or exchanged
for Series A Preferred Shares prior to the Maturity Date pursuant to Section 1.6,
including all outstanding principal and interest accrued thereon and all fees
related thereto, on or before the Maturity Date (each a “Past Due Debenture”), the Corporation shall
promptly (but in no event more than ten (10) days thereafter) issue share
purchase warrants (each a “Warrant”),
substantially in the form attached hereto as Exhibit B, to
each holder of a Past Due Debenture entitling the holder thereof to purchase
that number of Common Shares equal to the number of dollars representing the
aggregate Obligations due on such Past Due Debenture (including accrued
interest and expenses related thereto). Prior to, and as a condition of, the
issuance of such Warrants, the Corporation shall be entitled to receive a certificate
from such applicable Lender for a Past Due Debenture confirming that the
representations and warranties in Section 5.2(e) hereof are true and
correct

 

 

on such date. The
exercise price of the Warrants shall be the volume weighted average trading
price of the Common Shares, as reported on the Toronto Stock Exchange, for the
5 trading days immediately prior to the Maturity Date.

 

ARTICLE 7.

CONDITIONS TO CLOSING

 

Section 7.1.                                   Conditions
to Initial Closing

 

The obligation of the Lenders (and in the case of Section 7.1(a),
the Borrowers) to effect the Initial Closing are subject to the satisfaction or
waiver in writing in whole or in part by Phoenix, on behalf of the Lenders
(and in the case of Section 7.1(a), the Borrowers) of each of the
following conditions:

 

(a)                                  Receipt of Consent of Existing Debenture Holders.
Phoenix, on behalf of the Lenders, shall have obtained and delivered to the
Borrowers the consent of the Existing Debenture Holders, to the issuance of the
Debentures and security granted in respect thereof and waiver of certain rights
under the Existing Debentures.

 

(b)                                 Regulatory Approval. The Borrowers shall
have obtained and delivered to Phoenix, on behalf of the Lenders, the approval
of the Toronto Stock Exchange and all other applicable regulatory authorities
with respect to the transactions contemplated hereby, each in form and
substance satisfactory to Phoenix.

 

(c)                                  Consent of the Board. The Borrowers shall
have obtained and delivered to Phoenix, on behalf of the Lenders, board resolutions
or unanimous written consents of their respective Boards of Directors
authorizing and approving the Corporation’s issuance of the Debentures, the
Warrants and the Warrant Shares.

 

(d)                                 Security Agreement. Phoenix, on behalf of
the Lenders, shall have received originally executed copies of the Security
Agreement duly executed by the Borrowers.

 

(e)                                  Legal Opinion. The Lenders shall have
received a legal opinion of McCarthy Tétrault LLP substantially in the form attached
hereto as Exhibit D regarding the validity and enforceability of
this Agreement and the Transaction Documents (other than those relating to the
US Subsidiary) and such other matters as Phoenix may reasonably require.

 

(f)                                    September 2005 Debenture Agreement. The
warrants required to be issued pursuant to Section 6.5 of the September 2005
Debenture Agreement shall have been issued and the maturity date of the
Debentures issued pursuant to the September 2005 Debenture Agreement shall
have been extended to June 30, 2006.

 

(g)                                 Intercreditor Agreement. The Lenders, the
Existing Debenture Holders and the Borrowers shall have entered into the
Intercreditor Agreement.

 

 

Section 7.2.                                   Conditions
to each Closing

 

Notwithstanding anything herein contained, the obligation of each
Lender to consummate the purchase of the Debentures at the Initial Closing and
each Additional Closing, if any, and to pay the Purchase Price will be subject
to the fulfillment of the following conditions at or prior to each Closing
Date, and the Borrowers covenant to use their respective commercially
reasonable efforts to ensure that such conditions are fulfilled.

 

(a)                                  Accuracy of Representations and Warranties and
Performance of Covenants. The representations and warranties of the
Borrowers contained herein or in any other Security Document shall be true and
accurate at each Closing Date. In addition, the Borrowers shall have complied
with all covenants and agreements herein agreed to be performed or caused to be
performed by it at or prior to each Closing Date. At each Closing Date, the
Borrowers shall have delivered to Phoenix, on behalf of the Lenders, a
certificate, substantially in the form attached hereto as Exhibit F,
confirming the facts with respect to each of the representations and
warranties, confirming that all such covenants and agreements have been
performed and confirming that all conditions set forth in this Sections 7.1 and
7.2 have been satisfied or waived.

 

(b)                                 Cost Maintenance Program. The Corporation
shall have provided to Phoenix, on behalf of the Lenders, evidence satisfactory
to Phoenix, acting reasonably, that the Cost Maintenance Program is continuing.

 

(c)                                  Default or Event of Default. No Default or
Event of Default shall have occurred and be continuing nor shall there be any
Default or Event of Default which will or will likely occur as a result of the
transactions contemplated by this Agreement, the Debenture Certificates or the
Instruments.

 

(d)                                 Consents. All consents, permits,
agreements, confirmations and acknowledgements, determined by the Phoenix on
behalf of Lenders, as required or necessary to be obtained in order to
effectively complete the transactions contemplated herein, including without
limitation, the Required Consents, shall have been obtained.

 

(e)                                  Payment of Fees. The Borrowers shall have
paid, by way of a deduction from the Purchase Price in accordance with Section 1.3,
all fees and expenses referred to in Section 1.4, and shall have
unconditionally waived and released, in form and content satisfactory to
Phoenix, on behalf of the Lenders, any right to contest the reasonableness of
such agreement, fees and expenses or otherwise challenge the entitlement of the
Lenders thereto. Notwithstanding such payment, the Borrowers will remain liable
for any other fees and expenses referred to in Section 1.4 hereof which
relate to the transactions hereunder.

 

(f)                                    Perfection of Security. All steps necessary
or desirable (including without limitation, the registration of the security
interests created by the Security Documents in all public registries where such
registration is necessary or desirable to perfect the security interest granted
in favor of the Lenders) shall have been taken to constitute the Encumbrances
under the Security Documents as valid, enforceable and prior ranking to all
other Encumbrances, claims and interests in the Secured Property, subject only
to Permitted Encumbrances.

 

 

(g)                                 Receipt of Closing Documentation. All
documentation relating to the due authorization and completion of the issuance
of the Debentures provided for herein and the due execution and delivery of all
the Security Documents and other Instruments, and all actions and proceedings
taken on or prior to each Closing Date in connection with the performance by
the Borrowers of their respective obligations hereunder shall be satisfactory
to Phoenix, on behalf of the Lenders, and Phoenix, on behalf of the Lenders,
shall have received copies of all such documentation or other evidence as it may reasonably
request in order to establish the consummation of the transactions contemplated
hereby and the taking of all corporate proceedings in connection therewith in
compliance with these conditions, in form and substance satisfactory to
Phoenix, on behalf of the Lenders.

 

(h)                                 Deliveries.

 

(i)                                     The
Borrowers shall have executed and delivered to the Lenders, such other
undertakings as they may reasonably request regarding the taking of
actions and delivery of documents following each Closing Date necessary or
desirable to give effect to the terms and conditions of this Agreement and the
other Transaction Documents; and

 

(ii)                                  The
Borrowers shall have executed and delivered to the Lenders the Debenture
Certificates.

 

(i)                                     No Material Adverse Change. There shall
have been no material adverse change with respect to the Corporation and the
Subsidiaries taken as a whole.

 

Section 7.3.                                   Waiver
or Termination by the Lenders

 

Each of the conditions contained in Sections 7.1 and 7.2 hereof are
inserted for the benefit of the Lenders and may be waived in whole or in part by
Phoenix, on behalf of the Lenders, at any time. The Borrowers acknowledge that
the waiver by Phoenix, on behalf of the Lenders, of any condition or any part of
any condition shall constitute a waiver only of such condition or such part of
such condition, as the case may be, and shall not constitute a waiver of
any covenant, agreement, representation or warranty made by the Borrowers
herein that corresponds or is related to such condition or such part of
such condition, as the case may be. If any of the conditions contained in
Sections 7.1 and 7.2 hereof are not fulfilled or complied with as herein
provided, the Lenders may, at or prior to any Closing Date at their option, be
released from any and all of their respective obligations, covenants,
agreements and liabilities pursuant to this Agreement by notice in writing to
the Borrowers and in such event each Lender shall be released from all of its
obligations, covenants, agreements and liabilities hereunder.

 

ARTICLE 8.

EVENTS OF DEFAULT AND REMEDIES

 

Section 8.1.                                   Events
of Default

 

The occurrence of any of the following events shall constitute an Event
of Default under this Agreement:

 

 

(a)                                  If
default occurs in payment when due of any principal payable under this
Agreement.

 

(b)                                 If
default occurs in payment when due of any interest, fees or other amounts
payable under this Agreement and remains unremedied for a period of 10 days
after the receipt by the Borrowers of notice of such default.

 

(c)                                  If
default occurs in payment or performance of any other Obligation (whether
arising herein or otherwise) and such default remains unremedied for a period
of 10 days after receipt by the Borrowers of notice of such default.

 

(d)                                 If
default occurs in performance by any of the Borrowers of any covenant in favor
of any of the Lenders under this Agreement (excluding any of the covenants set
forth in Section 6.4) and remains unremedied for a period of 15 days after
the receipt by the Borrowers of notice of such default.

 

(e)                                  If
default occurs in performance by any of the Borrowers of any covenant in favor
of the Lenders set forth in Section 6.4 of this Agreement.

 

(f)                                    If
an event of default occurs in payment or performance of any obligation in favor
of any Existing Debenture Holder or any person from whom the Corporation or any
Subsidiary has borrowed money aggregating in excess of $300,000 which would
entitle the holder to accelerate repayment of the borrowed money, and such
default is not waived in writing within 10 days of the occurrence of such
default.

 

(g)                                 Either
the Corporation or the US Subsidiary institutes proceedings to be adjudicated
as bankrupt or insolvent, or the consent by it to the institution of bankruptcy
or insolvency proceedings against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under any applicable
federal, provincial or state law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or the consent by it to the filing of any
such petition or to the appointment under any such law of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of such
Borrower or of substantially all of its property, or the making by it of a
general assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due.

 

(h)                                 If
there is the entry of a decree or order by a court having jurisdiction in the
premises adjudging either the Corporation or the US Subsidiary as bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement or adjustment of or in respect of such Borrowers under any
applicable law relating to bankruptcy, insolvency, reorganization or relief of
debtors, or appointing under any such law a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of such Borrower or of
substantially all of its property, or ordering pursuant to any such law the
winding-up or liquidation of its affairs, and the continuance of any such
decree, petition, appointment or order unstayed and in effect for a period of
45 consecutive days.

 

(i)                                     If
any act, matter or thing is done to, or any action or proceeding is launched or
taken to, terminate the corporate existence of the Corporation or any
Subsidiary, whether by winding-up, surrender of charter or otherwise.

 

 

(j)                                     If
the Corporation or any Subsidiary ceases to carry on its business or makes or
proposes to make any sale of its assets in bulk or any sale of its assets out
of the usual course of its business.

 

(k)                                  If
any receiver, administrator or manager of the property, assets or undertaking
of the Corporation or any Subsidiary or a substantial part thereof is
appointed pursuant to the terms of any trust deed, trust indenture, debenture
or similar instrument or by or under any judgment or order of any court.

 

(l)                                     If
any balance sheet or other financial statement provided by the Corporation to
the Lenders after the date hereof pursuant to the provisions hereof is false or
misleading in any material respect.

 

(m)                               If
any proceedings are taken to enforce any Encumbrance affecting any of the
Secured Property or if a distress or any similar process is levied or enforced
against any of the Secured Property.

 

(n)                                 If
any judgment or order for the payment of money in excess of $200,000 shall be
rendered against the Corporation or any Subsidiary and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order, or (ii) there shall be any period of 10 consecutive days during
which a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect.

 

(o)                                 If
any action is taken or power or right be exercised by any Governmental Body
which has a Material Adverse Effect on the Corporation or any Subsidiary.

 

(p)                                 If
any representation or warranty made by any Borrower herein or in any other
Instrument or in any certificate, statement or report furnished in connection
herewith is found to be false or incorrect in any way so as to make it
materially misleading when made or when deemed to have been made.

 

(q)                                 If
any event occurs with respect to any Subsidiary which, if a like event had
occurred with respect to the Corporation, would have constituted an Event of
Default.

 

(r)                                    If
a Change of Control (other than in connection with the Recapitalization) occurs
with respect to the Corporation or any Subsidiary.

 

(s)                                  If
there shall occur or arise any change (or any condition, event or development
involving a prospective change) in the business, operations, affairs, assets,
liabilities (including any contingent liabilities that may arise through
outstanding pending or threatened litigation or otherwise), capitalization,
financial condition, licenses, permits, rights or privileges, whether
contractual or otherwise, or prospects of the Corporation or any Subsidiary
which, in the judgment of Phoenix, on behalf of the Lenders, acting reasonably,
has or may have a Material Adverse Effect on any Borrower or on its
ability to perform its obligations hereunder or under the Security
Documents.

 

 

(t)                                    The
termination of employment of the then current Chief Operating Officer or Chief
Financial Officer by the Corporation (other than a termination by the
Corporation for “cause”), without the prior consent of Phoenix, on behalf of
the Lenders.

 

(u)                                 If
either Borrower commits an event of default pursuant to any other Transaction
Document and such default continues beyond any cure period provided for in such
Transaction Document.

 

Section 8.2.                                   Consequences
of an Event of Default

 

Upon the occurrence of any Event of Default, at the option of Phoenix
on behalf of the Lenders, all Obligations and all monies secured hereby shall
become forthwith due and payable, all of the rights and remedies hereby
conferred in respect of the Secured Property shall become immediately
enforceable and any and all additional and collateral security for payment of
this Agreement shall become immediately enforceable.

 

Section 8.3.                                   Enforcement

 

(a)                                  Upon
the happening of any Event of Default, Phoenix on behalf of the Lenders, may by
instrument in writing declare that the security hereof has become enforceable
and the Lenders shall have the following rights and powers:

 

(i)                                     to
enter into possession of all or any part of the Secured Property;

 

(ii)                                  to
preserve and maintain the Secured Property and make such replacements thereof
and additions thereto as it deems advisable;

 

(iii)                               to
collect any proceeds arising in respect of the Secured Property;

 

(iv)                              to
collect, realize upon or sell or otherwise deal with accounts;

 

(v)                                 to
institute proceedings in any court of competent jurisdiction for the
appointment of a Receiver of the Secured Property;

 

(vi)                              to
institute proceedings in any court of competent jurisdiction for the sale or
foreclosure of the Secured Property;

 

(vii)                           to
file proofs of claim and other documents to establish claims in any proceeding
relating to the Corporation or any Subsidiary;

 

(viii)                        to
undertake any other remedy or proceeding authorized or permitted by law or
equity;

 

(ix)                                to
pay or otherwise satisfy in whole or in part any Encumbrances which, in
the opinion of Phoenix, may rank in priority to the security hereof;

 

(x)                                   after
entry by its officers or agents or without entry, to sell, lease or otherwise
dispose in any way whatsoever of all or any part of the Secured Property
either en bloc

 

 

or separately
at public auction or by tender or by private agreement and at such time or
times and on such terms and conditions as the Lenders in their absolute
discretion may determine and without any notice to or concurrence of the
Borrowers except as may be required by applicable law; and

 

(xi)                                by
instrument in writing, to appoint any person or persons (whether an officer or
officers of the Lenders or not) as a Receiver (as defined herein to include a
receiver and manager) of the Secured Property and to remove any Receiver so
appointed and appoint another or others in its stead.

 

(b)                                 The
security of this Agreement may be realized and the rights enforced by any
remedy or in any manner permitted by this Agreement or by law or equity and no
remedy for the realization of the security hereof shall be exclusive of or
dependent upon any other remedy and all or any remedies may from time to
time be exercised independently or in any combination.

 

(c)                                  In
addition to the remedies of the Lenders set forth above, Phoenix on behalf of
the Lenders, may, whenever an Event of Default has occurred:

 

(i)                                     require
the Borrowers, at their expense, to assemble the Secured Property at a place or
places designated by notice in writing given by the Lenders to the Borrowers;

 

(ii)                                  require
the Borrowers, by notice in writing given by Phoenix on behalf of the Lenders
to the Borrowers, to disclose to the Lenders the location or locations of the
Secured Property;

 

(iii)                               repair,
process, modify, complete or otherwise deal with the Secured Property and
prepare for the disposition of the Secured Property, whether on the premises of
the Borrowers or otherwise;

 

(iv)                              carry
on all or any part of the business or businesses of the Borrowers and, to
the exclusion of all others including the Borrowers, enter upon, occupy and use
all or any of the premises, buildings, plant, undertaking and other property of
or used by the Borrowers for such time as the Lenders see fit, free of charge,
and the Lenders shall not be liable to the Borrowers for any act, omission or
negligence in so doing or for any rent, charges, depreciation or damages
incurred in connection therewith or resulting therefrom;

 

(v)                                 borrow
for the purpose of carrying on the business of the Borrowers or for the maintenance,
preservation or protection of the Secured Property and mortgage, charge, pledge
or grant a security interest in the Secured Property, whether or not in
priority to the Security Documents, to secure repayment;

 

(vi)                              advance
the Lenders’ own money to the Borrowers, in any case upon such terms as the
Lenders may deem reasonable and upon the security hereof; and

 

(vii)                           demand,
commence, continue or defend any judicial or administrative proceedings for the
purpose of protecting, seizing, collecting, realizing or

 

 

obtaining
possession or payment of the Secured Property, and give valid and effectual
receipts and discharges therefor and compromise or give time for the payment or
performance of all or any part of the accounts or any other obligation of
any third party to either of the Borrowers.

 

Section 8.4.                                   Disposition

 

(a)                                  Without
limiting the generality of the foregoing in connection with the exercise of
remedies under this Article 8, it shall be lawful for the Lenders:

 

(i)                                     to
make any sale, lease or other disposition of the Secured Property either for
cash or upon credit or partly for one and partly for the other upon such
conditions as to terms of payment as it in its absolute discretion may deem
proper;

 

(ii)                                  to
rescind or vary any contract for sale, lease or other disposition that the
Lenders may have entered into pursuant hereto and resell, release or
redispose of the Secured Property with or under any of the powers conferred
herein; and

 

(iii)                               to
stop, suspend or adjourn any sale, lease or other disposition from time to time
and to hold the same adjourned without further notice.

 

(b)                                 Upon
any such sale, lease or other disposition the Lenders shall be accountable only
for money actually received by them. The Borrowers shall be accountable for any
deficiency and the Lenders shall be accountable for any surplus. The Lenders may deliver
to the purchaser or purchasers of the Secured Property or any part thereof
good and sufficient conveyances or deeds for the same free and clear of any
claim by the Borrowers. The purchaser or lessee receiving any disposition of
the Secured Property or any part thereof need not inquire whether default
under this Agreement has actually occurred but may as to this and all
other matters rely upon a statutory declaration of an officer of Phoenix on
behalf of the Lenders, which declaration shall be conclusive evidence as
between the Borrowers and any such purchaser or lessee, and the purchaser or
lessee need not look to the application of the purchase money, rent or other
consideration given upon such sale, lease or other disposition, which shall not
be affected by any irregularity of any nature or kind relating to the
crystallizing or enforcing of the security hereof or the taking of possession
of the Secured Property or the sale, lease or other disposition thereof.

 

Section 8.5.                                   Powers
of Receiver

 

(a)                                  Any
Receiver appointed pursuant to Section 8.3(a)(xi) shall have the power
without legal process:

 

(i)                                     to
take possession of the Secured Property or any part thereof wherever the
same may be found;

 

(ii)                                  to
carry on the business of the Borrowers or any part thereof in the name of
the Borrowers or of the Receiver; and

 

(iii)                               to
exercise on behalf of each Lender all of the rights and remedies herein granted
to the Lenders,

 

 

and without in
any way limiting the foregoing, the Receiver shall have all the powers of a
receiver appointed by a court of competent jurisdiction. Any Receiver appointed
by Phoenix shall act as agent for the Lenders for the purposes of taking
possession of the Secured Property, but otherwise and for all other purposes
(except as provided below), as agent for the Borrowers.

 

(b)                                 The
Receiver may sell, lease, or otherwise dispose of Secured Property as
agent for the Borrowers or as agent for the Lenders, as Phoenix may determine
in its discretion. The Borrowers agree to ratify and confirm all actions of the
Receiver acting as agent for the Borrowers, and to release and indemnify the
Receiver in respect of all such actions. The Lenders, in appointing or
refraining from appointing any Receiver, shall not incur liability to the
Receiver, the Borrowers or otherwise and shall not be responsible for any
misconduct or negligence of such Receiver or for any loss resulting therefrom.

 

Section 8.6.                                   Application
of Moneys

 

All moneys and non-cash proceeds actually received by the Lenders or by
the Receiver in enforcing the security of this Agreement shall be initially
held in trust by such person and promptly thereafter shall be applied, subject
to the proper claims of any other person:

 

(a)                                  first,
to pay or reimburse each Lender and any Receiver the costs, charges, expenses
and advances payable by the Borrowers in accordance herewith;

 

(b)                                 second,
in or toward the payment to each Lender of all Obligations or amounts secured
hereby which payment shall be made and applied to the Lenders pro rata based on
the ratio that such Lender’s Debentures bears to the total number of Debentures
issued to the Lenders hereunder; and

 

(c)                                  third,
any surplus shall be paid to the Borrowers or their assigns or as a court of
competent jurisdiction may direct.

 

Section 8.7.                                   Care
and Custody of Secured Property

 

No Lender shall be bound to collect, dispose of, realize, protect or
enforce any of a Borrower’s right, title and interest in and to the Secured Property
or to institute proceedings for the purpose thereof and, without limiting the
generality of the foregoing, no Lender shall be required to take any steps
necessary to preserve rights against prior parties in respect of any negotiable
Secured Property. No Lender shall have any obligation to keep Secured Property
in its possession identifiable. Phoenix on behalf of the Lenders may, after an
Event of Default: (i) notify any person obligated on an account or on
chattel paper or any obligor on an instrument to make payment thereunder to
such Lender whether or not the Borrowers were theretofore making collections
thereon; and (ii) assume control of any proceeds arising from the Secured
Property.

 

Section 8.8.                                   Dealing
with the Secured Property

 

No Lender shall be obliged to exhaust its recourse against the
Borrowers or any other person or persons or against any other security it may hold
in respect of the Obligations before realizing upon or otherwise dealing with
the Secured Property in such manner as such Lender may consider desirable.
Phoenix on behalf of the Lenders may grant extensions or other

 

 

indulgences,
take and give up securities, accept compositions, grant releases and discharges
and otherwise deal with the Borrowers and with other parties, sureties or
securities as Phoenix may see fit without prejudice to the Obligations or
the rights of any Lender in respect of the Secured Property. No Lender shall be
(i) liable or accountable for any failure to collect, realize or obtain
payment in respect of the Secured Property; (ii) bound to institute
proceedings for the purpose of collecting, enforcing, realizing or obtaining
payment of the Secured Property or for the purpose of preserving any rights of
such Lender, the Borrowers or any other parties in respect thereof; (iii) responsible
for any loss occasioned by any sale or other dealing with the Secured Property
or by the retention of or failure to sell or otherwise deal therewith; or (iv) bound
to protect the Secured Property from depreciating in value or becoming
worthless.

 

Section 8.9.                                   Standards
of Sale

 

Without prejudice to the ability of the Lenders to dispose of the
Secured Property in any manner which is commercially reasonable, the Borrower’s
acknowledge that, subject to the terms of any Permitted Encumbrance, the rights
of Wistron and the rights of SVB, a disposition of Secured Property by the
Lenders which takes place substantially in accordance with the following
provisions shall be deemed to be commercially reasonable:

 

(a)                                  Secured
Property may be disposed of in whole or in part;

 

(b)                                 Secured
Property may be disposed of by public auction, public tender or private
contract, with or without advertising and without any other formality;

 

(c)                                  Any
purchaser or lessee of such Secured Property may be a customer of the
Lenders;

 

(d)                                 A
disposition of Secured Property may be on such terms and conditions as to
credit or otherwise as Phoenix on behalf of the Lenders, in its sole
discretion, may deem advantageous;

 

(e)                                  Any
Lender or any other Person may be the purchaser of all or any portion of
the Secured Property and thereafter hold the same absolutely, free from any
claim or right of whatever kind; and

 

(f)                                    Any
Lender may establish an upset or reserve bid or price in respect of
Secured Property.

 

ARTICLE 9.

GENERAL

 

Section 9.1.                                   Waiver

 

No act or omission by any Lender in any manner whatsoever shall extend
to or be taken to affect any provision hereof or any subsequent breach or
default or the rights resulting therefrom save only an express waiver in
writing. A waiver of default shall not extend to, or be taken in any manner
whatsoever to affect the rights of any Lender with respect to, any

 

 

subsequent
default, whether similar or not. The Borrowers waive every defense based upon
any or all indulgences that may be granted by the Lenders.

 

Section 9.2.                                   Other
Security

 

The rights of each Lender hereunder shall not be prejudiced nor shall
the liabilities of the Borrowers or of any other Person be reduced in any way
by the taking of any other security of any nature or kind whatsoever either at
the time of execution of this Agreement or at any time hereafter.

 

Section 9.3.                                   No
Merger or Novation

 

Neither the taking of any judgment nor the exercise of any power of
seizure or sale shall operate to extinguish the liability of the Corporation to
pay the moneys hereby secured nor shall the same operate as a merger of any
covenant herein contained or of any other Obligation, nor shall the acceptance
of any payment or other security constitute or create any novation.

 

Section 9.4.                                   Power
of Attorney

 

Each of the Borrowers, for valuable consideration for and after the
occurrence of an Event of Default, irrevocably appoints Phoenix, on behalf of
the Lenders, and its officers from time to time or any of them to be the
attorneys of such Borrower in the name of and on behalf of such Borrower to
execute such deeds, transfers, conveyances, assignments, assurances and things
which such Borrower ought to execute and do under the covenants and provisions
herein contained and generally to use the name of such Borrower in the exercise
of all or any of the powers hereby conferred on the Lenders.

 

Section 9.5.                                   License

 

Each Borrower hereby grants to Phoenix, on behalf of the Lenders, and
its employees and agents an irrevocable and non-exclusive license, subject to
the rights of tenants, to enter any of the Premises, during regular business
hours and acting in a reasonable manner, to conduct audits, testing and
monitoring with respect to Hazardous Substances and to remove and analyze any
Hazardous Substance at the cost and expense of the Borrowers (which cost and
expense shall be secured hereby).

 

Section 9.6.                                   Environmental
Indemnity

 

The Borrowers shall jointly and severally indemnify each Lender and
hold each Lender harmless against and from all losses, costs, damages and
expenses which each Lender may sustain, incur or be or become liable at
any time whatsoever for by reason of or arising from the past, present or
future existence, clean-up, removal or disposal of any Hazardous Substance referred
to in this Agreement or compliance with Environmental Laws or Environmental
Orders relating thereto, including any clean-up, decommissioning, restoration
or remediation of the Premises and other affected lands or property (and this
indemnification shall survive the satisfaction, release or extinguishment of
the indebtedness secured hereby).

 

 

Section 9.7.                                   Amalgamation

 

(a)                                  The
Corporation acknowledges that if it amalgamates with any other corporation or
corporations (i) the Secured Property and the lien created hereby shall
extend to and include all the property and assets of each of the amalgamating
corporations and the amalgamated corporation and to any property or assets of
the amalgamated corporation thereafter owned or acquired, (ii) the term, “Corporation”, where used herein shall
extend to and include each of the amalgamating corporations and the amalgamated
corporation, and (iii) the term, “Obligations”,
where used herein shall extend to and include the Obligations of each of the
amalgamating corporations and the amalgamated corporation. Nothing is this Section 9.7(a) shall
permit or authorize an amalgamation that is otherwise prohibited by the
provisions of this Agreement. For purposes solely of this Section 9.7(a),
the Corporate Migration shall be deemed to constitute an amalgamation.

 

(b)                                 The
US Subsidiary acknowledges that if it merges with any other corporation or
corporations (i) the Secured Property and the lien created hereby shall
extend to and include all the property and assets of each of the merging
corporations and the surviving corporation and to any property or assets of the
surviving corporation thereafter owned or acquired, (ii) the term, “US Subsidiary”, where used herein shall
extend to and include each of the merging corporations and the surviving
corporation, and (iii) the term, “Obligations”,
where used herein shall extend to and include the Obligations of each of the
merging corporations and the surviving corporation. Nothing is this Section 9.7(b) shall
permit or authorize a merger that is otherwise prohibited by the provisions of
this Agreement. For purposes solely of this Section 9.7(b), the Corporate
Migration shall be deemed to constitute a merger.

 

Section 9.8.                                   Holder
May Remedy Default

 

If the Borrowers fail to do anything hereby required to be done by it
each Lender may, but shall not be obliged to, do such thing and all reasonable
sums thereby expended by such Lender shall be payable forthwith by the
Borrowers, shall be secured hereby and shall have the benefit of the Encumbrances
hereby created, but no such performance by such Lender shall be deemed to
relieve the Borrowers from any default hereunder.

 

Section 9.9.                                   Notices

 

Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., (Austin, Texas
time), on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice later than 5:00 p.m.,
(Austin, Texas time), on any date and earlier than 11:59 p.m., (Austin,
Texas time), on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service or (iv) actual
receipt by the party to whom such notice is required to be given. The addresses
for such communications shall be addressed:

 

 

(a)                                  to
the Lenders at:

 

c/o Phoenix Venture Fund LLC

110 East 59th Street, Suite 1901

New York, NY 10022

Attention: Philip S. Sassower

Facsimile: (212) 319-4970

 

with a copy to:

Brown Raysman Millstein Felder & Steiner LLP

900 Third Avenue

New York, NY 10022

Attention:  Jonathan J. Russo, Esq.

Facsimile: (212) 895-2900

 

(b)                                 to
the Borrowers at:

 

Xplore Technologies Corp.

14000 Summit Drive, Suite 900

Austin, Texas 78728

Attention: Mr. Michael J. Rapisand

Facsimile: (512) 336-7791

 

Xplore Technologies Corporation of America

14000 Summit Drive, Suite 900

Austin, Texas 78728

Attention: Mr. Michael J. Rapisand

Facsimile: (512) 336-7791

 

with a copy to:

McCarthy Tétrault LLP

Suite 4700

Toronto Dominion Bank Tower

Toronto, ON M5K 1E6

Attention: Jonathan Grant, Esq.

Fax: (416) 868-0673

 

Section 9.10.                             Further
Assurances

 

Each of the Borrowers and the Lenders hereby covenant and agree that at
any time and from time to time after any Closing Date it will, upon the request
of the other, do, execute, acknowledge and deliver or cause to be done,
executed, acknowledged and delivered all such further acts, deeds, assignments,
transfers, conveyances and assurances as may be required for the better
carrying out and performance of all the terms of this Agreement including,
without limitation, such further and other security interests as the Lenders may reasonably
request.

 

 

Section 9.11.                             Remedies
Cumulative

 

The rights and remedies of the parties under this Agreement are
cumulative and in addition to and not in substitution for any rights or
remedies provided by law. Any single or partial exercise by any party hereto of
any right or remedy for default or breach of any term, covenant or condition of
this Agreement does not waive, alter, affect or prejudice any other right or
remedy to which such party may be lawfully entitled for the same default
or breach.

 

Section 9.12.                             Announcements

 

No announcement with respect to this Agreement, including any
disclosure of the identity of the Lender, will be made by any party hereto
without the prior approval of the other party. The foregoing will not apply to
any announcement by any party required in order to comply with laws pertaining
to timely disclosure, provided that such party consults with the other parties
before making any such announcement.

 

Section 9.13.                             Time
of the Essence

 

Time shall be of the essence of this Agreement.

 

Section 9.14.                             Entire
Agreement

 

This Agreement, the schedules referred to herein, and the other
documents referenced herein constitute the entire agreement between the parties
hereto pertaining to the matters therein set forth and supersede all prior
agreements, representations, warranties, statements, promises, information,
arrangements and understandings, whether oral or written, express or implied,
with respect to the subject matter thereof. Neither party hereto shall be bound
or charged with any oral or written agreements, representations, warranties,
statements, promises, information, arrangements or understandings not
specifically set forth in this Agreement or the schedules or such other
documents. The parties hereto further acknowledge and agree that, in entering
into this Agreement and in delivering the schedules and such other documents, they
have not in any way relied, and will not in any way rely, upon any oral or
written agreements, representations, warranties, statements, promises,
information, arrangements or understandings, express or implied, not
specifically referenced or set forth in this Agreement or in such schedules or
such other documents.

 

Section 9.15.                             Invalidity
of any Provisions

 

Any provision of this Agreement or any provisions of the security
contemplated hereunder which is prohibited by the laws of any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition without invalidating the remaining terms and provisions hereof or
thereof and no such invalidity shall affect the obligation of the Borrowers to
repay the Obligations.

 

Section 9.16.                             Indemnification

 

The Borrowers agree to jointly and severally indemnify each Lender from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs,

 

 

expenses or
disbursements of any kind or nature whatsoever (except by reason of the gross
negligence or willful misconduct or breach of applicable laws of such Lender or
any of its employees) which may be imposed on, incurred by, or asserted
against such Lender and arising by reason of any action (including any action
referred to herein) or inaction or omission to do any act legally required of
the Borrowers.

 

Section 9.17.                             Successors,
Assigns and Participation, etc.

 

(a)                                  The
Corporation shall not assign or transfer all or any part of its rights or
obligations hereunder or under any other Instrument, or permit or cause any
Subsidiary to assign or transfer all or any part of its rights or
obligations under any Instrument without the prior written consent of Phoenix
on behalf of the Lenders.

 

(b)                                 Each
Lender may assign or grant participations in its Debentures or in all or part of
its rights in respect of this Agreement, the Obligations and the Instruments
and have its corresponding obligations hereunder assumed by any other Person
without the consent of the Borrowers, on a private sale basis to other “accredited
investors” within the meaning of Regulation D, Rule 501(a), promulgated by
the U.S. Securities and Exchange Commission and within the meaning of Section 1.1
of National Instrument 45-106. An assignment under this Section 9.17 shall
become effective when the Borrowers have been notified thereof by the
applicable Lender and has received from the assignee an undertaking to be bound
by this Agreement and the other Security Documents and to perform the obligations,
if any, assumed by it. Any such assignee shall be treated as a party to this
Agreement for all purposes of this Agreement and the other Security Documents
and shall be entitled to the full benefit hereof and thereof and shall be
subject to the obligations of the applicable Lender to the same extent as if it
were an original party in respect of the rights assigned to it and obligations
assumed by it and such Lender shall be released and discharged accordingly. Any
Person to whom a Lender grants participations in all or part of its rights
and obligations under this Agreement and the Instruments shall not have any
rights under this Agreement and the Instruments in respect of its participation
interest, and shall only have, as against such Lender, as grantor, those rights
and obligations in respect of such participation interest as are set forth in
the agreement or agreements made between such Lender and such participant.

 

Section 9.18.                             Amendments

 

This Agreement may only be amended by a written agreement signed
by the Borrowers and Phoenix, on behalf of the Lenders. Notwithstanding
anything to the contrary contained herein, any action to impose additional
obligations on the Lenders, or to amend Section 8.6 hereof or any other
provision hereof or in any of the Security Documents which would affect the pro
rata repayment, as among the Lenders, of the Obligations or the pro rata
disbursement, as among the Lenders, of moneys or other proceeds received in the
enforcement of the security interests created hereby, shall require the consent
of each Lender whose interests are adversely affected by such action.

 

 

Section 9.19.                             Consent
of Phoenix Enterprises LLC and Phoenix as Agent for the Existing Debenture
Holders; 

 

(a)                                  Phoenix
Enterprises LLC, for itself and as agent for the Existing Debenture Holders
(other than the December 2004 and September 2005 Debenture Holders)
under (i) Section 9.20 of the November 2002 Debenture Agreement,
(ii) Section 9.21 of the December 2002 Debenture Agreement, (iii) Section 9.21
of the April 2003 Debenture Agreement, and (iv) Section 9.21 of
the Second April 2003 Debenture Agreement, hereby acknowledges, agrees and
gives its consent to the Borrowers’ entering into and performing their
obligations under this Agreement under the terms and conditions contained
herein and the execution, delivery and performance of the Security Documents
and, if applicable, the issue and sale of the Warrants to the Lenders.

 

(b)                                 Phoenix
for itself and as agent for the December 2004 and September 2005 Debenture
Holders under Section 9.21 of the December 2004 Debenture Agreement
and Section 9.20 of the September 2005 Debenture Agreement, hereby
acknowledges, agrees and gives its consent to the Borrowers’ entering into and
performing their obligations under this Agreement under the terms and
conditions contained herein and the execution, delivery and performance of the
Security Documents and, if applicable, the issue and sale of the Warrants to
the Lenders.

 

Section 9.20.                             Appointment
and Authorization of Phoenix as Agent

 

(a)                                  Each
Lender hereby irrevocably appoints and authorizes Phoenix to (A) hold the
Secured Property for its own benefit and the pro rata benefit of the Lenders,
and (B) be its attorney in its name and on its behalf to exercise such
rights or powers granted to Phoenix or the Lenders under this Agreement and the
other Transaction Documents to the extent and on the terms specifically
provided herein and therein, together with such powers as are reasonably
incidental thereto. As to any matters not expressly provided for by this
Agreement, Phoenix shall not be required to exercise any discretion or take any
action, but shall be required 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 Debentures
outstanding (the “Requisite Lenders”),
and such instructions shall be binding upon all Lenders; provided, however,
that Phoenix shall not be required to take any action which exposes Phoenix to
liability in such capacity, which could result in Phoenix incurring any costs
and expenses or which is contrary to this Agreement or applicable law. For the
avoidance of doubt, Phoenix and its members, officers, agents, and employees shall
in no event be liable to the Lenders or to any of them for any action taken or
omitted to be taken by Phoenix pursuant to instructions received by it from the
Requisite Lenders or in reliance upon the advice of counsel. Notwithstanding
anything to the contrary contained herein, any action to impose additional
obligations on the Lenders, or to amend Section 8.6 hereof or any other
provision hereof or in any of the Security Documents which would affect the pro
rata repayment, as among the Lenders, of the Obligations or the pro rata
disbursement, as among the Lenders, of moneys or other proceeds received in the
enforcement of the security interests created hereby, shall require the consent
of each Lender whose interests are adversely affected by such action.

 

 

(b)                                 The
Borrowers shall be entitled to rely upon any certificate, notice or other
document or other advice, statement or instruction provided to it by Phoenix
pursuant to this Agreement, and the Borrowers shall generally be entitled to
deal with Phoenix with respect to matters under this Agreement which Phoenix is
authorized to deal with without any obligation whatsoever to satisfy itself as
to the authority of Phoenix to act on behalf of the Lenders and without any
liability whatsoever to the Lenders for relying upon any certificate, notice or
other document or other advice, statement or instruction provided to it by
Phoenix, notwithstanding any lack of authority of Phoenix to provide the same.

 

Section 9.21.                             Counterparts

 

This Agreement may be executed in separate counterparts (including
by facsimile), each of which when so executed and delivered shall be deemed to
be an original and all of such counterparts shall together constitute one and
the same instrument. Any party may execute this Agreement by facsimile
signature.

 

 

IN WITNESS WHEREOF
the parties have executed this Agreement.

 

 

	
   

  	
  XPLORE TECHNOLOGIES CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael
  J. Rapisand

  	
   

  
	
   

  	
   

  	
  Name:
  Michael J. Rapisand

  
	
   

  	
   

  	
  Title: Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  XPLORE TECHNOLOGIES CORPORATION OF AMERICA

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael
  J. Rapisand

  	
   

  
	
   

  	
   

  	
  Name:
  Michael J. Rapisand

  
	
   

  	
   

  	
  Title: Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PHOENIX VENTURE FUND LLC

  
	
   

  	
   

  
	
   

  	
  By:  SG
  PHOENIX VENTURES LLC, its

  
	
   

  	
  Managing Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Andrea
  Goren

  	
   

  
	
   

  	
   

  	
  Name: Andrea
  Goren

  
	
   

  	
   

  	
  Title:
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PHOENIX ENTERPRISES LLC, solely for purposes
  of Section 9.19 hereof, in its capacity as Agent under (i) the
  Debenture Purchase Agreement, dated November 5, 2002, (ii) the December 2002
  Debenture Purchase Agreement, dated December 6, 2002, (iii) the April 2003
  Debenture Purchase Agreement, dated April 9, 2003, and (iv) the
  Second April 2003 Debenture Purchase Agreement, dated April 28,
  2003

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Philip
  S. Sassower

  	
   

  
	
   

  	
   

  	
  Name: Philip
  S. Sassower

  
	
   

  	
   

  	
  Title: Chief
  Executive Officer

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