Document:

Loan Agreement

 

EXHIBIT 10.1

LOAN AGREEMENT

     LOAN AGREEMENT (“Agreement”) dated as of October 23, 2002 (the “Closing
Date”) by and among Manchester Securities Corporation, a New York corporation
(“Manchester”), Alexander Finance, L.P., an Illinois limited partnership
(“Alexander” and together with Manchester, the “Lenders”) and ISCO
International, Inc., a corporation organized and existing under the laws of
Delaware and formerly known as Illinois Superconductor Corporation (the
“Company”).

W I T N E S S E T H:

     Whereas, the Company desires to borrow from the Lenders, and the Lenders
desire to advance to the Company, subject to the terms and provisions of this
Agreement and further subject to their absolute discretion, from time to time
during the period (the “Commitment Period”), from the date hereof until March
31, 2004 (the “Termination Date”), amounts up to the sum of their aggregate
individual Commitments as set forth on Schedule A attached hereto;

     Whereas, the Lenders have agreed to advance one million dollars
($1,000,000) to the Company within twenty-four (24) hours following the
execution of this Agreement pursuant to the terms set forth herein and in the
Notes (as defined below).

     Whereas, the Company and the Lenders desire that the amounts borrowed
hereunder (the “Loans”) be evidenced by secured grid notes, having the rights
and privileges set forth in the notes in the form and substance of Exhibit A
(the “Notes”) hereto and which will be: secured by all of the assets of the
Company and its subsidiaries pursuant to a Security Agreement in the form and
substance of Exhibit B hereto (the “Security Agreement”);

     Whereas, pursuant to Guaranties in favor of the Lenders dated the date
hereof and each in the form and substance of Exhibit C hereto (together, the
“Guaranties”), the Company’s subsidiaries, Spectral Solutions, Inc., a Colorado
corporation and Illinois Superconductor Canada Corporation (the “Guarantors”)
will guaranty the Company’s obligations under this Agreement, the Security
Agreement and the Notes;

     Whereas, the Company and the Lenders desire that concurrently with each
Advance (as defined below), a warrant to purchase shares (“Warrant Shares”) of
the Company Common Stock par value $0.001 per share (“Common Stock”), in the
form of Exhibit I attached hereto (each a “Warrant” and collectively, the
“Warrants”), be issued; and

     Whereas, pursuant to the Registration Rights Agreement, dated as of the
date hereof and in the form and such substance of Exhibit H hereto (the
“Registration Rights

 

 

 Agreement”), the Company shall register for resale under the Securities
Act of 1933, as amended (the “Securities Act”), the Warrant Shares.

     Now, Therefore, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

ARTICLE 1

AMOUNT AND TERMS OF LOANS

     Section 1.1 The Advances; Commitment. Each Lender severally and further
subject to such Lender’s sole and absolute discretion and not jointly with the
other Lender, agrees, on the terms and conditions hereinafter set forth, to
make advances (“Advances”) to the Company from time to time on any Business Day
(as defined below) during the Commitment Period. Any such Advances by a Lender
shall be in an aggregate amount outstanding not to exceed at any time such
Lender’s Commitment; provided, however, that the aggregate amount available to
be borrowed under the “Commitments” shall not exceed $4,000,000. Within the
limits of each Lender’s Commitment in effect from time to time, and subject to
both the Lenders’ discretion (as referred to above) and the terms and
conditions set forth above, the Company may borrow under this Section 1.1. The
Loans shall be evidenced by the Notes, which in turn are guaranteed by the
Guaranties and secured pursuant to the Security Agreement.

               As used herein, “Business Day” shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in New York City are required or
authorized to close.

     Section 1.2 The Initial Loan. Lenders shall, within twenty-four (24)
hours following the execution of this Agreement make a Loan to the Company in
the aggregate amount of one million dollars ($1,000,000) (the “Initial Loan”),
without any prior Borrowing Request (as defined below).

     Section 1.3 Making the Advances.

          (a) Each set of Advances made by the Lenders (a “Borrowing”), other than
the Initial Loan, shall be made on notice (a “Borrowing Request”), given not
later than 11:00 A.M. (New York City time) on the first or fifteenth day of the
month, by the Company to the Lenders, which date shall be five (5) Business
Days prior to the date of the proposed Borrowing. Each Borrowing Request shall
be by telecopier and email, in substantially the form of Exhibit G hereto,
specifying therein the requested (i) date of such Borrowing and (ii) aggregate
amount of such Borrowing. The amount of such Borrowing shall be at least
$250,000. In the event that no Default (as defined below) or Event of Default
(as defined in the Notes) shall have occurred and be continuing and all
conditions to a Borrowing (including those set forth in Article III) shall have
been satisfied and each Lender, in its sole and absolute discretion, shall have
deemed it

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 advisable to make the requested Advance, then the Company shall be
entitled to make Borrowings under the Financing Documents (as defined below).

          (b) Notwithstanding the foregoing, no Loan shall be made unless both
Lenders shall have agreed to fund their respective Advances. If either Lender
does not agree to make its Advance, then the other shall not make its Advance.

          (c) The aggregate indebtedness of the Company hereunder to each Lender
shall be evidenced by a Note.

          (d) Concurrently with each Advance, the Company shall issue to each of the
Lenders a Warrant. Each Warrant shall expire on the Termination Date, and
shall be exercisable at an exercise price of $.20 per Warrant Share (the
“Exercise Price”). The number of Warrant Shares underlying each Warrant shall
be determined by dividing the principal amount of the Advance made by the
Lender receiving the Warrant by the Exercise Price, rounding to the nearest
whole number.

     Section 1.4 Repayment. On the Termination Date, the Company shall repay
to the Lenders the outstanding principal amount of the Advances, together with
all accrued interest (such interest accruing whether or not allowable under any
applicable bankruptcy laws after a bankruptcy filing by the Company) and all
other amounts due hereunder or under the other Financing Documents (as defined
below). Upon any of the Company’s obligations hereunder or under the other
Financing Documents becoming due and payable (by acceleration or otherwise),
the Lenders shall be entitled to immediate payment of such obligations.

     Section 1.5 Termination of the Commitments. On the Termination Date the
Commitments of the Lenders shall be terminated in whole and the Loans shall be
due and payable in their entirety.

     Section 1.6 Prepayments.

          (a) Optional. The Company may, upon 30 days’ prior written notice to the
Lenders, which notice shall state the proposed date and aggregate principal
amount of any proposed prepayment, prepay outstanding amounts under the Loans,
provided that the minimum amount of such prepayment shall be $250,000 and if
such notice is given the Company shall prepay on the proposed repayment date
such proposed prepayment amount, together with accrued interest to the date of
such prepayment on the principal amount prepaid.

          (b) Mandatory. (i) The Company shall, on the date of receipt of cash
proceeds (net of reasonable legal expenses and taxes payable as a result of
such transaction) from (X) the sale, lease, transfer or other disposition of
any assets of the Company, any Guarantor, or any affiliate of the Company or
Guarantor other than in the ordinary course of the Company’s or the Guarantor’s
business, consistent with past practices, (Y) the incurrence or issuance by the
Company, any Guarantor, or any affiliate of the Company or Guarantor of any
debt to parties other than the Lenders, (Z) the sale or issuance by the
Company, any Guarantor, or any affiliate of the Company or any

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Guarantor of any capital stock or any warrants, rights or options to
acquire capital stock, or any other securities other than upon the exercise of
outstanding options and warrants or the issuance of options pursuant to the
Company’s stock option plan, provided that the number of shares of Common Stock
issuable thereunder does not exceed 5% of the outstanding shares of Common
Stock, (AA) the receipt by the Company, any Guarantor or any affiliate of the
Company or any Guarantor, of any judgment, award or settlement, or (BB) a
merger or share exchange pursuant to which 50% of the Company’s voting power is
transferred, prepay an aggregate amount of the Loans equal to the lesser of (a)
the amount of outstanding Loans and (b) the amount of such net cash proceeds.

          (c) Application of Prepayments. Any payments or prepayments by the
Company or any Guarantor permitted or required hereunder shall be applied to
each Lender, pro rata in relation to the total amount then outstanding under
the Financing Documents, in the following order: first, to the payment of any
fees, costs, expenses, or charges of the Lenders arising under the Financing
Documents, second, to the payment of interest accrued on the outstanding
Advances; and third, to the payment of the principal amount of the outstanding
Advances. Any prepayments, whether optional or mandatory, shall permanently
reduce the Lenders’ Commitments, pro rata, to the extent of such prepayments.

     Section 1.7 Interest. Interest shall accrue on the Advances as set forth
in the Notes.

     Section 1.8 Payments and Computations.

          (a) The Company shall make each payment hereunder and under the Notes not
later than 3 P.M. (New York City time) on the day when due, in U.S. dollars, to
the Lenders at accounts designated by the Lenders to the Company.

          (b) All computations of interest, fees, and charges shall be made by the
Lenders on the basis of a year of 360 days, in each case for the actual number
of days (including the first day but excluding the last day) occurring in the
period for which such interest, fees, or charges are payable. Each
determination by the Lenders of an interest rate, fee, or charge hereunder
shall be conclusive and binding for all purposes, absent manifest error.

          (c) Whenever any payment hereunder or under the Notes shall be stated to
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of the payment of interest or fees, as the case may
be.

     Section 1.9 Financing Documents. Concurrently with the execution and
delivery of this Agreement and the Notes, the Company is delivering to the
Lenders the following additional documents, each dated as of the date hereof,
the execution and delivery of which are a condition to the Lenders’ Commitments
set forth in Section 1.1(a) above:

	     	
	 	     (i) the Guaranties;

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	 	     (ii) the Registration Rights Agreement;
	 
	 	     (iii) the Security Agreement;
	 
	 	     (iv) UCC financing statements, naming Lenders as the secured parties
and the Company as the debtor, substantially in the form and substance of
Exhibit D hereto (the “UCC Financing Statements”);
	 
	 	     (v) Patent and Trademark financing statements naming the Lenders as
secured parties and the Company as the debtor, substantially in the form
and substance of Exhibit E hereto (the “Patent and Trademark Financing
Statements”);
	 
	 	     (vi) Legal Opinion of outside counsel to the Company, in the form of
Exhibit F hereto.
	 
	 	     (vii) Secretary’s Certificate and Incumbency Certificate; and
	 
	 	     (viii) UCC Lien Searches

     Section 1.10 This Agreement, the Registration Rights Agreement, the
Security Agreement, the Notes, the Warrants, the UCC Financing Statements and
the Patent and Trademark Financing Statements are collectively referred to
herein as the “Financing Documents.”

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

     Section 2.1 Representations, Warranties and Agreements of the Company.
The Company hereby makes the following representations and warranties to the
Lenders as of the date hereof:

          (a) Organization and Qualification. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
The Company has no subsidiaries other than the Guarantors. The Company is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not, individually
or in the aggregate, (x) adversely affect the legality, validity or
enforceability of any of the Financing Documents in any material respect, (y)
have a material adverse effect on the results of operations, assets, or
financial condition of the Company or (z) adversely impair in any material
respect the Company’s ability to perform fully on a timely basis its
obligations under the Financing Documents (a “Material Adverse Effect”).

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          (b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by the Financing Documents, and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Financing
Documents by the Company and the consummation by it of the transactions
contemplated thereby, including, the issuance of the Warrants and Warrant
Shares upon exercise of the Warrants, have been duly authorized by all
requisite corporate action on the part of the Company. Each of the Financing
Documents (other than the Warrants) has been duly executed and delivered by the
Company and constitutes, or in the case of the Warrants, will constitute the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.

          (c) Capitalization. The authorized, issued and outstanding capital stock
of the Company is set forth in Schedule 2.1(c). No shares of Common Stock are
entitled to preemptive or similar rights, nor is any holder of the Common Stock
entitled to preemptive or similar rights arising out of any agreement or
understanding with the Company by virtue of any of the Financing Documents.
Except as disclosed in Schedule 2.1(c), there are no outstanding options,
warrants, script rights to subscribe to, calls or commitments of any character
whatsoever relating to, or, except as a result of the issuance of the Warrants
hereunder, securities, rights or obligations convertible into or exchangeable
for, or giving any person any right to subscribe for or acquire any shares of
Common Stock, or contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of
Common Stock.

          (d) Issuance of Warrant Shares. The Warrant Shares are duly authorized
and reserved for issuance and, upon such exercise in accordance with the
Warrants such Warrant Shares, will be validly issued, fully paid and
non-assessable, free and clear of any and all liens, claims and encumbrances,
and subject to the filing and acceptance of an Additional Listing Application
on the American Stock Exchange entitled to be traded on the American Stock
Exchange (or if applicable, upon filing of a corresponding form with the New
York Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market,
collectively with the American Stock Exchange, the “Approved Markets”).

          (e) No Conflicts. The execution, delivery and performance of the
Financing Documents by the Company and the consummation by the Company of the
transactions contemplated thereby, including, the issuance of the Warrants and
of the Warrant Shares, do not and will not (i) conflict with or violate any
provision of its Certificate of Incorporation or By-laws or (ii) conflict with,
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment, injunction, decree or other

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restriction of any court or governmental authority to which the Company is
subject (including Federal and state securities laws and regulations), or by
which any material property or asset of the Company is bound or affected,
except in the case of each of clauses (ii) and (iii), such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect. The business of the Company is not being conducted in violation of any
law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.

          (f) Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, or make any filing or registration
with, any court or other federal, state, local or other governmental authority
or other person in connection with the execution, delivery and performance by
the Company of the Financing Documents other than: (i) the filing of the UCC
and Patent and Trademark Financing Statements; (ii) any filings which may be
required to be made by the Company with the Securities and Exchange Commission,
or state securities administrators subsequent to the date hereof, and (iii) in
all other cases, where the failure to obtain such consent, waiver,
authorization or order, or to give or make such notice or filing, would not
materially impair or delay the ability of the Company to effect the
transactions contemplated by this Agreement free and clear of all liens and
encumbrances of any nature whatsoever or would not otherwise have a Material
Adverse Effect (the approvals referred to in clauses (i) and (ii) are
hereinafter referred to as the “Required Approvals”). The Company has no
reason to believe that it will be unable to obtain the Required Approvals.

          (g) Private Offering. Assuming (without any independent investigation or
verification by or on behalf of the Company) the accuracy of the
representations and warranties of Lenders set forth herein, the offer and sale
of the Notes are, and the offer and sale of the Warrants and Warrant Shares
will be, exempt from registration under Section 5 of the Securities Act of
1933, as amended (the Securities Act). Neither the Company nor any person
acting on its behalf has taken or will take any action which might subject the
offering, issuance or sale of the Notes, Warrants or Warrant Shares to the
registration requirements of Section 5 of the Securities Act.

          (h) SEC Documents. The Company has filed all reports or other filings
required to be filed by it under Securities Act and the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the
date hereof (the foregoing materials being collectively referred to herein as
the SEC Documents), on a timely basis. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder, and none of the SEC
Documents, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the SEC Documents comply in all material respects with applicable
accounting requirements and the published rules and regulations of the
Securities and

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Exchange Commission with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved, except as may be
otherwise indicated in such financial statements or the notes thereto, and
fairly present in all material respects the financial position of the Company
as of and for the dates thereof and the results of operations and cash flows
for the periods then ended, subject, in the case of unaudited statements, to
normal year-end audit adjustments. Since the date of the financial statements
included in the Company’s last filed Annual Report on Form 10-K and except as
disclosed on Schedule 2.1(h), there has been no event, occurrence or
development that has had a Material Adverse Effect which is not specifically
disclosed in any of the SEC Documents.

          (i) Brokers. The Company has taken no action which would give rise to any
claim by any person for brokerage commissions, finder’s fees or similar
payments by the Company or the Lenders relating to the Financing Documents or
the transactions contemplated thereby.

          (j) Compliance with Obligations to the Lenders. The Company is in
compliance with all of its obligations to the Lenders, including without
limitation, pursuant to prior agreements.

     Section 2.2 Representations and Warranties of Lenders. Each Lender
severally hereby makes the following representations and warranties to the
Company as to itself only as of the date hereof:

          (a) Organization; Authority. The Lender is a corporation or partnership
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite legal power and authority
to enter into and to consummate the transactions contemplated hereby, by the
Security Agreement, the Warrants and by the Notes and otherwise to carry out
its obligations hereunder and thereunder. The purchase by the Lender of its
Notes, Warrants and Warrant Shares and the Commitments, if any, under the Loan
Agreement and the making of Loans from time to time hereunder at such Lender’s
discretion, has been duly authorized by all necessary action on the part of the
Lender. This Agreement has been duly executed and delivered by the Lender and
constitutes its valid and legally binding obligation, enforceable against it in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors’ rights generally and to general principles
of equity.

          (b) Investment Intent. Each Lender is acquiring its Notes, Warrants and
Warrant Shares for its own account and without a present intention to
distribute or resell it in violation of applicable securities laws. No Lender
will offer, sell, transfer, assign, pledge or hypothecate any portion of the
Notes, Warrant or Warrant Shares in the absence of a registration under, or
pursuant to an applicable exemption from, federal and applicable state
securities laws.

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          (c) Experience. The Lender has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in its Notes, Warrants and
Warrant Shares and has so evaluated the merits and risks of such investment.

          (d) Ability of Lender to Bear Risk of Investment; Accredited Investor.
The Lender is able to bear the economic risk of an investment in its Notes,
Warrants and Warrant Shares at the present time, is able to afford a complete
loss of such investment. The Lender is an “accredited investor” as such term
is defined in Rule 501 under the Securities Act.

          (e) Access to Information. The Lender acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning the
terms and conditions of its Notes and Warrants and the merits and risks of
investing in its Notes and Warrants; (ii) access to information about the
Company and the Company’s financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information
which the Company possesses or can acquire without unreasonable effort or
expense that is necessary to make an informed investment decision with respect
to the investment.

ARTICLE 3

CONDITIONS TO ADVANCES

     Any making of any Advance by each Lender is subject to the satisfaction at
or before the date of such Advance of each of the conditions set forth below.
These conditions are for the benefit of each Lender and may be waived by such
Lender at any time at its discretion.

          (a) Discretion of Lender. The Lender shall have determined, in its sole
and absolute discretion that the making of such Advance is desirable;

          (b) Absence of Default or Event of Default. There shall be no Event of
Default (as defined in the Notes) or any event which, with the passage of time
and/or the giving of notice, would constitute an Event of Default (“Default”);

          (c) Accuracy of the Company’s Representations Warranties. The
representations and warranties of the Company under this Agreement shall be
true and correct in all material respects as of the date of this Agreement, as
of the date on which the Borrowing Request with respect to such Borrowing was
delivered by the Company to the Lenders, and as of the date of such Borrowing
as though made at that time (except for representations and warranties as of an
earlier date, which shall be true and correct in all material respects as of
such date); provided, that any representations and warranties which are limited
by their terms to materiality shall have been or shall be (as applicable) true
and correct in all respects.

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          (d) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied
by the Company at or prior to the delivery of the Borrowing Request and at or
prior to the Borrowing.

          (e) Legality and Possibility. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by the Financing Documents.

          (f) Security. No changes to the type, validity and sufficiency of the
Lender’s collateral security shall have occurred, in the good faith judgment of
the Lender, to cause the value of such collateral to be impaired.

          (g) Warrants. The Warrants referenced in Section 1.3(d) above shall have
been issued to Lenders.

          (h) Miscellaneous. The Company shall have delivered to the Lenders such
other documents relating to the transactions contemplated by this Agreement and
the other Financing Documents as the Lenders may reasonably request.

ARTICLE 4

COVENANTS

     Section 4.1 Stock Legends. Each Lender agrees to the imprinting, so long
as is required by this Section 4.1, of the following legend on its Warrants and
Warrant Shares:

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

     The Warrant Shares shall not contain the legend set forth above if the
issuance thereof occurs at any time while the registration statement
(“Registration Statement”) filed pursuant to the Registration Rights Agreement
is effective under the Securities Act or in the event that the Warrant Shares
may be sold pursuant to Rule 144(k) under the Securities Act. The Company
agrees that it will provide each Lender, upon request, with a certificate or
certificates representing Warrant Shares free from such legend at such time as
such legend is no longer required hereunder. Each Lender agrees that, in
connection with any transfer of Warrant Shares by it pursuant to an effective
registration

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 statement under the Securities Act, it will comply with the prospectus
delivery requirements of the Securities Act provided copies of a current
prospectus relating to such effective registration statement are or have been
supplied to such Lender.

     Section 4.2 Affirmative Covenants. The Company covenants that from the
date hereof and for so long as any portion of the Loans or other obligation
under the Financing Documents shall remain outstanding, it will observe or
perform each of the following unless such observance or performance is
expressly waived by the Lenders in writing:

          (a) Corporate Existence. It will maintain its corporate existence in good
standing and remain qualified to do business as a foreign corporation in each
jurisdiction in which the nature of its activities or the character of the
properties it owns or leases makes such qualification necessary.

          (b) Continuation of Business. Except as set forth on Schedule 4.1(b), it
will continue to conduct its business, in all material aspects, as conducted on
the day hereof in compliance in all material respects with all applicable rules
and regulations of applicable governmental authorities.

     Section 4.3 Dividends; Stock Repurchases. So long as any Notes remain
outstanding, the Company will not declare any dividends on any shares of any
class of its capital stock (other than dividends consisting solely of Common
Stock or rights to purchase Common Stock of the Company), or apply any of its
property or assets to the purchase, redemption or other retirement of, or set
apart any sum for the payment of any dividends on, or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of capital or otherwise in respect of, any shares of any class of its capital
stock.

     Section 4.4 Incurrence of Debt; Liens; Transfer of Assets to Subsidiaries.
For so long as any Commitments or portion of the Loans (or any other
obligation under the Financing Documents) remain outstanding, neither the
Company nor any subsidiary of the Company shall:

          (a) Directly or indirectly create, incur, assume, guarantee, or otherwise
become or remain directly or indirectly liable with respect to, any
indebtedness of any kind, other than (i) indebtedness under the Notes; (ii)
other indebtedness to the Lenders which indebtedness is expressly subordinated
in writing to the indebtedness under the Financing Documents; or (iii)
indebtedness to trade creditors in the ordinary course of business consistent
with past practice.

          (b) Directly or indirectly create, incur, assume or permit to exist any
lien, pledge, charge or encumbrance on or with respect to any of its property
or assets (including any document or instrument in respect of goods or accounts
receivable) whether now owned or held or hereafter acquired, or any income or
profits therefrom, except for Permitted Liens.

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          (c) Directly or indirectly transfer any of its assets to any subsidiary of
the Company.

As used herein, "Permitted Liens” means (i) liens granted under the Security
Agreement; (ii) liens imposed by mandatory provisions of law such as
materialmen’s, mechanic’s or warehousemen’s; (iii) liens for taxes, assessments
and governmental charges or levies imposed upon the Company or any subsidiaries
or their income, profits or property, if the same are not yet due and payable
or if the same are contested in good faith and as to which adequate reserves
have been provided; (iv) pledges or deposits made to secure payment of worker’s
compensation insurance, unemployment insurance, pensions or social security
programs or to secure the performance of letters of credits, bids, tenders,
public or statutory obligations, surety, performance bonds and other similar
obligations; (v) encumbrances consisting of zoning restrictions, easements, or
other restrictions on the use of real property, provided that such do not
impair the use of such property for the uses intended and none of which is
violated by existing or proposed structures or land use and (vi) the liens and
encumbrances disclosed on Schedule A of the Security Agreement.

     Section 4.5 Amex Rule. Notwithstanding any other provision of this
Agreement, the Notes, the Warrants and the Registration Rights Agreement, the
Lenders shall, in the aggregate, be entitled to exercise for Warrant Shares
resulting in a total of no more than 29,574,000 shares of Common Stock (19.99%
of the Common Stock issued and outstanding on the date hereof, which number
shall be subject to readjustment for any stock split, stock dividend or
reclassification of the Common Stock) (the “20% Cap”). Once a Lender has
received its total pro rata share of Warrant Shares, it may request that the
Company redeem its remaining Warrants at the applicable Premium Redemption
Price as defined in the Registration Rights Agreement. The restrictions and
redemption obligations set forth in this Section 4.5 shall cease to apply if
(a) the Company obtains written shareholder approval to issue Warrant Shares in
excess of the 20% Cap pursuant to Amex Rule 713 or (b) the Company provides the
Lenders with irrevocable written notice, based upon the advice of its counsel,
that any such issuance of Common Shares is not subject to the 20% Cap pursuant
to Amex Rule. If the number of Warrant Shares exceeds 75% of the 20% Cap, the
Company will use its best efforts promptly to obtain either the shareholder
approval or the irrevocable notice described in the preceding sentence and to
provide the Lenders with a copy of same. Without limiting the foregoing, the
Company shall solicit the aforementioned shareholder approval at the next
shareholders meeting (for whatever purpose it may be called) which, if
requested by holders of 75% of the Commitments, shall not be later than 75 days
after the occurrence of the number of Warrant Shares exceeding 75% of the 20%
Cap.

ARTICLE 5

MISCELLANEOUS

     Section 5.1 Fees and Expenses. The Company shall pay, concurrently with
the execution and delivery of this Agreement, the reasonable fees and expenses
of legal counsel for the Lenders incident to the negotiation, preparation,
execution, delivery and performance of the Financing Documents incurred to date
and, thereafter, upon request of

12

 

 a Lender, the Company, shall pay any additional fees and expenses incurred
by the Lenders and incident to the filing, negotiation, preparation,
performance or amendment of the Financing Documents.

     Section 5.2 Entire Agreement. This Agreement, together with the Notes,
the Security Agreement, the Guaranties and the other Financing Documents,
contains the entire understanding of the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings, oral or
written, with respect to such matters.

     Section 5.3 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been delivered (i) upon receipt, when delivered personally; (ii) when sent by
facsimile, upon receipt if received on a business day prior to 5:00 p.m.
(Central Time), or the first business day following such receipt if received on
a business day after 5:00 p.m. (Central Time); or (iii) upon receipt, when
deposited with a nationally recognized overnight express courier service, fully
prepaid, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:

	 	 	 
	If to the Company:
	 	
ISCO International, Inc.

451 Kingston Court

Mt. Prospect, Illinois 60056

Attn: Frank Cesario

Fax: (847) 391-5015
	
With copies to:	 	
 
	 	 	
Pepper Hamilton LLP

400 Berwyn Park

899 Cassatt Road

Berwyn, Pennsylvania 19312

Attn: Michael P. Gallagher

Fax: (610) 640-7835
	 
	If to Manchester:
	 	
712 Fifth Avenue, 36th Floor

New York, New York 10019

Attn: Dan Gropper

Fax: (212) 974-2092
	
With copies to:	 	
 
	 	 	
Kleinberg, Kaplan, Wolff & Cohen, P.C.

551 Fifth Avenue

New York, NY 10176

Attn: Lawrence D. Hui

Fax: (212) 986-8866

13

 

	 	 	 
	If to Alexander:	 	
Alexander Finance, LP

1560 Sherman Avenue, Suite 900

Evanston, Illinois 60201

Attn: Bradford T. Whitmore

Fax: (847) 733-0339
	With copies to:	 	 
	 	 	
Sachnoff & Weaver

30 S. Wacker Drive

Chicago, Illinois 60606

Attn: Evelyn C. Arkebauer, Esq.

Fax: (312) 207-6400

or such other address or facsimile number as may be designated in writing
hereafter, in the same manner, by such person.

     Section 5.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and by Lenders holding at least 75% of the
Commitments; or, in the case of a waiver, by the party against whom enforcement
of any such waiver is sought. No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.

     Section 5.5 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.

     Section 5.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. Neither the Company nor any Lender may assign this Agreement or any
rights or obligations hereunder (other than an assignment from a Lender to an
affiliate of such Lender) without the prior written consent of the other. Any
transfer made in violation of this provision shall be null and void. The
assignment by a party of this Agreement or any rights hereunder shall not
affect the obligations of such party under this Agreement.

     Section 5.7 No Third-Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

     Section 5.8 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof.

14

 

     Section 5.9 Survival. The agreements, representations and warranties and
covenants contained in this Agreement shall survive the delivery of the Notes
pursuant to this Agreement and any Advances made thereunder.

     Section 5.10 Counterpart and Facsimile Signatures. This Agreement may be
executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party,
it being understood that both parties need not sign the same counterpart. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the executing party
with the same force and effect as if such facsimile signature page were an
original thereof.

     Section 5.11 Publicity. The Company and the Lenders shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and neither the Company
nor any Lender shall issue any such press release or otherwise make any such
public statement without the prior consent of the other, which consent shall
not be unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement.

     Section 5.12 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement
shall not in any way be affected or impaired thereby and the parties will
attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

     Section 5.13 Payment of Expenses. The Company agrees to pay all costs and
expenses, including reasonable attorneys’ fees and expenses, which may be
incurred by any Lender in successfully enforcing any Financing Document,
including without limitation in enforcing Section 5.14 below.

     Section 5.14 Indemnification. The Company hereby agrees to indemnify,
defend and hold harmless each Lender and its respective partners, shareholders,
officers, affiliates, employees or agents (“Indemnified Parties”), from and
against any and all losses, claims, damages, liabilities and costs, including
reasonable legal fees (collectively “Losses”) (i) incurred as a result of the
breach by the Company or any subsidiary of any representation, covenant or
other provision in any Financing Document; (ii) incurred as a result of
entering into this Agreement; (iii) incurred in enforcing this Section 5.14 or
(iv) incurred involving a third-party claim and arising out of the acquisition,
holding and/or enforcement by such Lender of any of the Financing Documents.

15

 

     Section 5.15
Like Treatment of Lenders. Neither the Company nor any of its affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee, payment for the redemptions or exchange of the
Notes, or any Advance thereunder or otherwise, to any holder of Notes, for or
as an inducement to, or in connection with the solicitation of, any consent,
waiver or amendment of any terms or provisions of the Financing Documents,
unless such consideration is required to be paid to all holders of Notes bound
by such consent, waiver or amendment whether or not such holders so consent,
waive or agree to amend and whether or not such holders tender their Notes for
redemption or exchange. The Company shall not, directly or indirectly, redeem
to prepay any Advances unless such offer of redemption is made pro rata to all
holders on identical terms.

16

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized persons as of the date first
indicated above.

	 	 	 	 
	 	ISCO INTERNATIONAL, INC.
	 
 
	 	By: 	/s/  Amr Abdelmonem
	 	

	 	
Name:  	Amr Abdelmonem, Ph.D.

	 	
Title:	 Chief Executive Officer

	 	 	 	 
	 	MANCHESTER SECURITIES CORPORATION
	 
 
	 	By: 	/s/ Elliott Greenberg
	 	

	 	
Name:  	Elliot Greenberg

	 	
Title:  	 Vice President

	 
	 	ALEXANDER FINANCE, L.P.
	 
 
	 	By: 	/s/  Bradford T. Whitmore
	 	

	 	
Name:  	Bradford T. Whitmore

	 	
Title:	 President, Bun Partners, Inc.

17

 

SCHEDULES

	 	 	 
	Schedule A	 	
Schedule of Lenders
	 
	Company Schedules	 	 

EXHIBITS

	 	 	 
	Exhibit A	 	
Secured Grid Note
	 
	Exhibit B	 	
Security Agreement
	 
	Exhibit C	 	
Guaranties
	 
	Exhibit D	 	
UCC Financing Statements
	 
	Exhibit E	 	
Patent and Trademark Financing Filings
	 
	Exhibit F	 	
Legal opinion of counsel to the Company
	 
	Exhibit G	 	
Form of Notice of Borrowing
	 
	Exhibit H	 	
Registration Rights Agreement

 

 

SCHEDULE A

	 	 	 	 	 
	Lender	 	Commitment
	
	 	

	Manchester Securities Corporation
	 	$	2,247,600	 
	Alexander Finance, L.P.
	 	$	1,752,400	 
	Total
	 	$	4,000,000Security Agreement

 

Exhibit 10.2

SECURITY AGREEMENT

     Security Agreement, dated as of October 23, 2002 made by and among ISCO
International, Inc., a Delaware Corporation with offices at 451 Kingston Court,
Mt. Prospect, Illinois 60056 and formerly known as Illinois Superconductor
Corporation (the “Company”), each of the Company’s undersigned subsidiaries
(the “Subsidiaries,” the Company and Subsidiaries are hereafter collectively
referred to as the “Debtors” or individually as a “Debtor”), Manchester
Securities Corporation, a New York corporation with offices at 712 Fifth
Avenue, 36th Floor, New York, New York 10019 (“Manchester”), Alexander Finance,
LP, an Illinois limited partnership with offices at 1560 Sherman Avenue,
Evanston, IL 60201 (“Alexander”; Manchester and Alexander are sometimes
individually referred to as a “Secured Party” or together referred to as
“Secured Parties”), and Manchester Securities Corporation as collateral agent
(the “Collateral Agent”).

     NOW THEREFORE, in consideration of the foregoing, each Debtor hereby
agrees with the Secured Parties and Collateral Agent as follows:

	     	
	 	     SECTION 1. Grant of Security Interest.

     (a)  As collateral security for all of the Obligations (as defined in
Section 2 hereof), the Debtors hereby jointly and severally pledge and
collaterally assign to the Collateral Agent and the Secured Parties, and grant
to the Collateral Agent and the Secured Parties a continuing first priority
security interest (subject to Permitted Liens (as defined in the Loan Agreement
dated the date hereof by and among the Company and the Secured Parties (the
“Loan Agreement”)) in the following (the “Collateral”):

“Collateral” means all assets of the Debtors (whether currently owned or
hereafter acquired by a Debtor), including without limitation all presently
existing and hereafter arising (i) accounts, contract rights, and all other
forms of obligations owing to the Debtors from any source, including, without
limitation, to affiliates and insiders of the Debtors (“Accounts”); (ii) all of
the Debtors’ books and records, including ledgers, records indicating,
summarizing, or evidencing the Debtors’ assets or liabilities, or the
Collateral, all information relating to the Debtors’ business operations or
financial condition, all computer programs, disc or tape files, printouts, runs
or other computer prepared information, and any equipment containing such
information (the Debtors’ “Books”); (iii) all of the Debtors’ present and
hereafter acquired equipment, wherever located, and all attachments,
accessories, accessions, replacements, substitutions, additions and
improvements to any of the foregoing, wherever located (“Equipment”); (iv) all
of the Debtors’ present and hereafter acquired general intangibles and other
personal property (including, but not limited to, contract rights, rights
arising under common law, statutes or regulations, choses or things in action,
goodwill, patents and patentable inventions, whether described and claimed
therein or otherwise, and all reissues, divisions, continuations,
continuations-in-part, substitutes, renewals, and extensions thereof, and all
improvements thereon and all other rights of any kind whatsoever accruing
thereunder or pertaining thereto, trade names, trademarks, patent and trademark
applications, service marks, copyrights, copyright

 

 

applications, blueprints, drawings, purchase orders, customer lists, monies due
under any royalty or licensing agreements, infringements, claims, computer
programs, discs or tapes, deposit accounts, insurance premium rebates, tax
refunds, and tax refund claims, as well as all cash collateral that is
hypothecated to secure letters of credit or bonding obligations and the right
to sue or otherwise recover for any and all past, present and future
infringements and misappropriations thereof, and all income, royalties, damages
and other payments now and hereafter due and/or payable with respect thereto)
(“General Intangibles”); (v) all present and future inventory in which a Debtor
has any interest, and all of the Debtors’ present and future raw materials,
work in process, finished goods, and packing and shipping material, wherever
located, any documents of title representing any of the above (“Inventory”);
(vi) all of the Debtors’ negotiable collateral, including all of the Debtors’
present and future letters of credit, notes, drafts, instruments, certificated
securities (including but not limited to, the “Pledged Securities” as defined
below), documents, personal property leases (where a Debtor is the lessor),
chattel paper and the Debtors’ books and records relating to any of the
foregoing (“Negotiable Collateral”); and (vii) any money or other assets of the
Debtors which hereafter come into the possession, custody or control of the
Debtors, and the proceeds and products, whether tangible or intangible, of any
of the foregoing including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Equipment, General Intangibles,
Inventory, Negotiable Collateral, money, deposit accounts or other tangible or
intangible, real or personal, property resulting from the sale, exchange,
collection or other disposition of the Collateral, or any portion thereof or
interest therein, and the proceeds and products thereof;

in each case howsoever a Debtor’s interest therein may arise or appear (whether
by ownership, security interest, claim or otherwise). For purposes of this
Security Agreement, the term “Pledged Securities” means (i) all capital stock
and all other securities issued or issuable by all current and future
subsidiaries, whether currently issued or issued in the future, including,
without limitation, the promissory note issued by Illinois Superconductor
Canada Corporation to the Company (“Subsidiary Securities”); (ii) any capital
stock or other securities currently owned or received by the Debtors in the
future (“Further Securities”); (iii) all other securities which may be issued
or issuable in exchange for or in respect of the Further Securities and
Subsidiary Securities pursuant to the terms hereof; (iv) all dividends, cash,
instruments, securities and other property from time to time received,
receivable or otherwise distributed, in respect of, in, for, or upon the
exchange or conversion of the securities referred to in clauses (i), (ii) and
(iii) above; and (v) all rights and privileges of the Debtors with respect to
the Pledged Securities and other properties referred to in clauses (i), (ii),
(iii) and (iv).

     (b) Concurrently with the execution of this Security Agreement, the
Company is delivering to the Collateral Agent, certificates representing all of
the outstanding Pledged Securities, together with all stock powers duly
executed in blank and corporate resolutions authorizing the transfer of title
to the Collateral Agent, the Secured Parties or their respective designee or
designees upon an Event of Default pursuant to the terms of this Security
Agreement. Upon the issuance of any additional Pledged Securities, the Company
shall immediately deliver such Securities to the Collateral Agent, together
with stock powers duly executed in blank and corporate resolutions authorizing
the transfer of title of such stock to the Collateral Agent, the Secured
Parties or their respective designee or designees upon an Event of Default
pursuant to the terms of this Security Agreement.

2

 

     (c)  Upon the future receipt of any certificated securities by any Debtor,
such Debtor shall immediately deliver the certificates representing such
securities, together with stock powers duly executed in blank to the Collateral
Agent and corporate resolutions of the type described in Section 1(b) above.

     (d)  A reasonably detailed list of the Collateral existing as of the date
hereof is set forth on Schedule A attached hereto. For each item of
Collateral, Schedule A provides the location, description and ownership and,
for items of Collateral which have a certificate of title, the jurisdiction of
such certificates, and for those items of Collateral which are mobile goods
(goods that are mobile and generally used in more than one jurisdiction such as
motor vehicles, trailers and similar items) the present location of such goods.
Schedule A also identifies any liens and encumbrances with respect to any
items of Collateral and sets forth the jurisdiction of incorporation of each
Debtor. Schedule A further lists all patents and trademarks and patent and
trademark applications owned by the Debtors.

          SECTION 2. Security for Obligations. The security interest created hereby
in the Collateral constitutes continuing collateral security for the (a) prompt
payment by the Debtors, as and when due and payable, of all amounts from time
to time owing by them to the Secured Parties under (i) the Loan Agreement, (ii)
the Company’s 9 1/2% secured grid notes due March 31, 2004 (the “Notes”)
issued pursuant to the Loan Agreement, and (iii) the Guaranties dated the date
hereof issued by each of the Subsidiaries to the Secured Parties (the
“Subsidiary Guaranties”) (the Loan Agreement, the Notes, the Subsidiary
Guaranties and this Security Agreement hereinafter collectively referred to as
the “Transaction Documents”), with the obligations under this clause (a) being
referred to as “Indebtedness” and (b) prompt performance by the Debtors of each
of their respective covenants and duties under the Transaction Documents (the
covenants and obligations referred to in clauses (a) and (b) above hereafter
collectively referred to as the “Obligations”). The Debtors further jointly
and severally agree that the Collateral Agent and the Secured Parties shall
have the rights stated in this Security Agreement with respect to the
Collateral in addition to all other rights which the Secured Parties may have
by law.

          SECTION 3. Representations and Obligations of the Debtors. Each of the
Debtors jointly and severally represents, warrants and covenants to the
Collateral Agent and the Secured Parties as follows:

     (a)  Perfection of Security Interest. Each of the Debtors agrees to
execute at any time and from time to time such financing statements and to take
whatever other actions are requested by the Collateral Agent to perfect and
continue the Collateral Agent and the Secured Parties’ security interest in the
Collateral including, without limitation, any filings in the United States
Patent and Trademark Office or foreign recordal offices. Upon request of the
Collateral Agent, each Debtor will deliver to the Collateral Agent any and all
documents evidencing or constituting the Collateral, possession of which is
required in order for the Collateral Agent and the Secured Parties’ to perfect
their security interest therein. Upon request of the Collateral Agent, the
Debtors will note Collateral Agent’s and Secured Parties’ interest, as the case
may be, upon any and all Accounts if not delivered to Collateral Agent for
possession by the Collateral Agent. The Collateral Agent may at any time and
from time to time, and without further authorization from the Debtors, file a
carbon, photographic or other reproduction of any financing statement or of

3

 

this Security Agreement for use as a financing statement to the extent
permitted by applicable law. The Debtors will reimburse the Collateral Agent
for all reasonable expenses for the perfection and the continuation of the
perfection of Secured Parties’ security interest in the Collateral. Each
Debtor will promptly notify the Collateral Agent of any change in its name
including any change to the assumed business names of such Debtor. This is a
continuing Security Agreement and will continue in effect until all
Indebtedness is paid in full and any other Obligations are satisfied and the
Secured Parties shall release their interest in the Collateral upon the full
and final payment and satisfaction of the Indebtedness and other Obligations.
If payment is made by a Debtor, whether voluntarily or otherwise, or by any
third party, on the Indebtedness and thereafter a Secured Party is forced to
remit the amount of that payment to such Debtor’s trustee in bankruptcy or to
any similar person under any federal, state or foreign bankruptcy law or other
law for the relief of debtors, the Indebtedness shall be considered unpaid for
the purpose of enforcement of this Security Agreement. If permitted or
required under applicable law, the Collateral Agent may file any financing
statements with respect to the Collateral without the signatures of the
Debtors. Any financing statements must state that the Collateral Agent and the
Secured Parties have a lien on all of the Debtors’ assets.

     (b)  Power of Attorney. Each Debtor hereby irrevocably makes, constitutes,
and appoints the Collateral Agent (and all of such Collateral Agent’s officers,
employees or agents designated by such Collateral Agent) as its true and lawful
attorney, with power to: (i) sign such Debtor’s name on any of the documents
described hereunder or on any other similar documents to be executed, recorded,
or filed in order to perfect or continue perfected the Collateral Agent’s and
Secured Parties’ security interest in the Collateral; (ii) at any time that an
Event of Default has occurred and is continuing, execute, sign and endorse such
Debtor’s name on any invoice or bill of lading relating to any Account, drafts
against Account Debtors, schedules and assignments of Accounts, verifications
of Accounts, and notices to Account Debtors; (iii) send requests for
verification of Accounts; (iv) at any time that an Event of Default has
occurred and is continuing, execute, sign and endorse such Debtor’s name on any
checks, notices, instruments, acceptances, money orders, drafts, warrants or
other item of payment or security that may come into the Collateral Agent’s
possession; (v) at any time that an Event of Default has occurred and is
continuing, demand, collect, receive, receipt for, sue and recover all sums of
money or other property which may now or hereafter become due, owing or payable
from the Collateral; (vi) file any claim or claims or, following an Event of
Default, take any action or institute or take part in any proceedings, either
in its own name or in the name of such Debtor, or otherwise, which in the
discretion of the Collateral Agent may seem to be necessary or advisable; (vii)
at any time that an Event of Default has occurred and following acceleration of
the Indebtedness, direct the Account Debtors and other persons sending mail to
the Debtors to send all mail relating to the Collateral to the Collateral
Agent; (viii) at any time that an Event of Default has occurred and is
continuing, make, settle, and adjust all claims under the Debtors’ policies of
insurance and make all determinations and decisions with respect to such
policies of insurance; and (ix) at any time that an Event of Default has
occurred and is continuing, settle and adjust disputes and claims respecting
the Accounts directly with Account Debtors, for amounts and upon terms which
the Collateral Agent determines to be reasonable, and the Collateral Agent may
cause to be executed and delivered any documents and releases which the
Collateral Agent determines to be necessary. The appointment of the Collateral
Agent as such Debtor’s attorney, and each and every one of the Collateral
Agent’s and Secured Parties’ rights and powers, being coupled with an interest,
is irrevocable and shall remain in full force and effect until all of the
Indebtedness

4

 

has been fully repaid and the other Obligations satisfied and the
Collateral Agent renounces such appointment.

     (c)  No Violation. The execution and delivery of this Security Agreement
does not violate any law or agreement governing any Debtor or to which any
Debtor is a party, and the Debtors’ certificates or articles of incorporation
and bylaws or other organizational documents do not prohibit any term or
condition of this Security Agreement. The execution and delivery hereof is in
the interest of each of the Debtors.

     (d)  Enforceability of Collateral. With respect to the Accounts, and
General Intangibles, the Collateral is enforceable in accordance with its
terms, is genuine, and complies in all material respects with applicable laws
concerning form, content and manner of preparation and execution, and, to the
best of the knowledge of the Debtors, all persons appearing to be obligated on
the Collateral have authority and capacity to contract and are in fact
obligated as they appear to be on the Collateral, except as such enforcement
may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or
other laws applicable to creditors’ rights generally and by generally
applicable equitable principles, whether considered in an action at law or in
equity.

     (e)  Accounts. All Accounts existing as of the date hereof are good and
valid Accounts representing an undisputed, bona fide indebtedness incurred by
the Account Debtors, and there exists no set-offs or counterclaims against any
such Accounts and no agreements under which any deductions or discounts may be
claimed with any Account Debtor except as disclosed to the Collateral Agent and
the Secured Parties in writing.

     (f)  Removal of Collateral; Transactions Involving Collateral. To the
extent the Collateral consists of Accounts, General Intangibles, Negotiable
Collateral or Debtors’ Books the records and other documents pertaining to the
Collateral shall be kept at the principal office of the Debtor that owns such
collateral, or at such other locations as are reasonably acceptable to the
Collateral Agent. Except as provided below, the Debtors shall keep the
non-mobile tangible Collateral at the location(s) at which they are kept
specified on Schedule A and shall maintain any certificate of title of any
tangible Collateral in the same jurisdiction as indicated on Schedule A.
Except for transactions in the ordinary course of business in accordance with
past practice or for sales or dispositions on arm’s length terms and for fair
equivalent value, the Debtors shall not sell, offer to sell, or otherwise
transfer, dispose of or encumber any tangible Collateral. Without the prior
written consent of the Secured Parties, Debtors shall not sell, offer to sell,
or otherwise transfer, dispose of or encumber any intangible Collateral other
than pursuant to license agreements made in the ordinary course of Debtor’s
business and consistent with past business practice. Without the prior written
consent of the Secured Parties, no Collateral that is located in the United
States shall be moved outside of the United States.

     (g)  Title. As of the date hereof, the Debtors hold good and marketable
title to all the Collateral, free and clear of all liens and encumbrances
except for the lien of this Security Agreement and Permitted Liens (as defined
in the Loan Agreement). No financing statement or other evidence of a lien or
transfer covering any of the Collateral is on file in any public office in any
jurisdiction other than those which reflect the security interest created by
this Security

5

 

Agreement or Permitted Liens. The Debtors shall defend the Collateral
Agent’s and Secured Parties’ rights in the Collateral against any and all
claims and demands.

     (h)  Prepayments. None of the Collateral has been prepaid by any Account
Debtor for any Accounts.

     (i)  Collateral Schedules and Locations. On a monthly basis, the Debtors
shall deliver to the Collateral Agent schedules of the Collateral, including
such information as the Collateral Agent may require, including without
limitation names and addresses of Account Debtors, the location of mobile goods
or changes in any certificates of title and descriptions of any after-acquired
general intangibles. The Debtors represent and warrant to the Collateral Agent
and the Secured Parties that Schedule A is true, accurate and complete in all
material respects and shall be updated monthly by the Debtors to reflect any
changes thereto.

     (j)  Application of Payments Received With Respect to Collateral. Unless
an Event of Default (as defined in Section 4 below) has occurred and is
continuing, any amounts received by or on behalf of any Debtor with respect to
any Account pledged as Collateral hereunder may be used by such Debtor in the
ordinary course of its business. Following the occurrence and during the
continuance of an Event of Default, any amounts received by or on behalf of any
Debtor with respect to any Account shall be applied in the following order:
(i) costs and expenses of the Collateral Agent and the Secured Parties
reasonably incurred in connection with collecting the Indebtedness and
enforcing this Agreement and the Transaction Documents; (ii) accrued and unpaid
interest due and owing on the Indebtedness as of such date; (iii) unpaid
principal due and owing with respect to the Indebtedness as of such date; and
(iv) any excess to the Debtors or other party or parties in accordance with
applicable law or court order.

     (k)  Possession and Collection of Accounts. Following an Event of Default
and during the continuance thereof or following acceleration of any
Indebtedness, the records and documents evidencing the Accounts pledged as
Collateral hereunder shall, upon the Collateral Agent’s request, be delivered
to the Collateral Agent or its agent and held in accordance with the terms of
this Security Agreement.

     (l)  Maintenance and Inspection of Collateral. The Debtors shall maintain
or cause to be maintained all tangible Collateral in good condition and repair
except for ordinary wear and tear. The Debtors will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral. The
Collateral Agent and its designated representatives and agents shall have the
right at all reasonable times, upon reasonable advance notice, to examine,
inspect, and audit the Collateral wherever located and the books, records or
any property which is otherwise used in connection with the Collateral. The
Debtors shall immediately notify the Collateral Agent of all material cases
involving the return, rejection, repossession, loss or damage of or to any
Collateral; of any request for credit or adjustment or of any other dispute
arising with respect to the Collateral; and generally of all happenings and
events materially adversely affecting the Collateral or the value or the amount
of the Collateral.

     (m)  Taxes, Assessments and Liens. The Debtors will pay when due all
taxes, assessments and liens upon the Collateral, its use or operation and upon
the Transaction Documents. A Debtor may withhold any such payment or may elect
to contest any lien if such

6

 

Debtor is in good faith conducting an appropriate proceeding to contest
the obligation to pay and so long as the Collateral Agent’s and Secured
Parties’ interest in the Collateral is not jeopardized in the Collateral
Agent’s sole reasonable opinion. If any of the Collateral is subjected to a
lien which is not discharged or bonded, or the enforcement thereof stayed (in
either case without granting any security interests in any of the assets of any
Debtor) within fifteen (15) days or such longer period as is provided by
applicable law, but not to exceed thirty (30) days, the Debtors shall deposit
with the Collateral Agent cash, a sufficient corporate surety bond or other
security satisfactory to the Collateral Agent (in its discretion) in an amount
adequate to provide for the discharge of the lien plus any interest, reasonable
costs, attorneys’ fees or other charges that could accrue as a result of
foreclosure or sale of the Collateral. In any contest the Debtor or Debtors
shall defend itself or themselves, the Secured Parties and the Collateral Agent
and shall satisfy any final adverse judgment before enforcement against the
Collateral. The Debtors shall name the Collateral Agent as an additional
obligee under any surety bond furnished in such contest proceedings.

     (n)  Incorporation by Reference. The Debtors hereby restate and affirm all
representations, warranties and agreements contained in the other Transaction
Documents (as of each date and time such representations and warranties are
made under each of the other Transaction Documents), the terms and conditions
of which are hereby incorporated herein by reference.

     (o)  Compliance With Governmental Requirements. The Debtors shall comply
promptly with all laws, ordinances and regulations of all governmental
authorities applicable to the production, disposition, or use of the
Collateral. The Debtors may contest in good faith any such law, ordinance or
regulation and withhold compliance during any proceeding, including appropriate
appeals, so long as the Collateral Agent’s interest in the Collateral, in the
Collateral Agent’s sole reasonable opinion, is not jeopardized.

     (p)  Insurance. The Debtors shall maintain insurance with respect to their
assets and businesses that is customary for other similarly situated companies.

     (q)  The Debtors’ Right to Possession and to Collect Accounts. Except as
otherwise provided herein, until the occurrence of an Event of Default or
acceleration of Indebtedness, the Debtors may have possession of the tangible
personal property and beneficial use of all the Collateral and may use it in
any lawful manner not inconsistent with this Security Agreement or the other
Transaction Documents, provided that the Debtors’ right to possession and
beneficial use shall not apply to any Collateral where possession of the
Collateral by the Collateral Agent is required by law to perfect the Collateral
Agent’s and Secured Parties’ security interest in such Collateral. At any time
an Event of Default exists or following acceleration of Indebtedness, the
Collateral Agent may exercise its right to directly collect the Accounts and to
notify Account Debtors to make payments directly to the Collateral Agent for
application to the Indebtedness, and the Debtors authorize and direct the
Account Debtors, if the Collateral Agent exercises such right, to make payments
on the Accounts to the Collateral Agent. If the Collateral Agent at any time
has possession of any Collateral, whether before or after an Event of Default,
the Collateral Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral if the Collateral Agent takes such
action for that purpose as the Debtors shall reasonably request or as the
Collateral Agent, in the Collateral Agent’s sole reasonable

7

 

discretion, shall deem appropriate under the circumstances, but failure to
honor any request by the Debtors shall not of itself be deemed to be a failure
to exercise reasonable care. The Collateral Agent shall not be required to
take any steps necessary to preserve any rights in the Collateral against prior
parties, nor to protect, preserve or maintain any security interest given to
secure the Collateral. The Collateral Agent shall have the right to direct who
shall collect and service the Accounts in accordance with reasonable commercial
practices.

     (r)  Transactions with Others. After the occurrence and during the
continuation of any Event of Default, the Collateral Agent may (i) extend the
time for payment or other performance, (ii) grant a renewal or change in terms
or conditions, or (iii) compromise, compound or release any obligation with an
Account Obligor as the Collateral Agent deems advisable, without obtaining the
prior written consent of the Debtors, and no such act or failure to act shall
affect the Collateral Agent’s or Secured Parties’ rights against the Debtors or
the Collateral.

     (s)  Expenditures by the Collateral Agent. If not discharged or paid when
due, and provided that such items have not been contested as permitted herein,
the Collateral Agent may (but shall not be obligated to) discharge or pay any
amounts required to be discharged or paid by the Debtors under this Security
Agreement, including without limitation all taxes, liens, security interests,
encumbrances, and other claims, at any time levied or placed on the Collateral.
The Collateral Agent also may (but shall not be obligated to) pay all
reasonable costs for insuring, maintaining and preserving the Collateral. All
such expenditures incurred or paid by the Collateral Agent for such purposes
will then bear interest at the then rate charged under the Notes from the date
incurred or paid by the Collateral Agent to the date of repayment by the
Debtors. All such expenses shall become a part of the Indebtedness and, at the
Collateral Agent’s option, will (i) be payable on demand or (ii) upon notice to
Debtors be added to the balance of the Notes becoming a part of the outstanding
principal amount due and payable on the maturity date of the Notes. This
Security Agreement also will secure payment of these amounts. Such right under
this subsection shall be in addition to all other rights and remedies to which
the Collateral Agent and the Secured Parties may be entitled upon the
occurrence of an Event of Default.

     (t)  Sale or Factoring of Accounts; Release of Accounts. Except with
respect to Permitted Liens (as defined in the Loan Agreement), or as otherwise
expressly permitted herein, the Debtors shall not sell or otherwise transfer or
encumber any of the Accounts, or other Collateral without the Collateral
Agent’s written consent. It is expressly agreed that the Collateral Agent is
under no obligation to grant such a consent and will do so only in its sole and
absolute discretion on terms and conditions they deem acceptable in their sole
and absolute discretion.

     (u)  In the event that in the future, any Collateral is held by
subsidiaries, affiliates or joint ventures of the Debtors who are not a party
to this Agreement, then the Debtors shall cause such entities to grant the
Collateral Agent an exclusive first priority lien in such Accounts and
Inventory, to cause such entities to enter into security agreements reasonably
satisfactory to the Collateral Agent and the Secured Parties, and to take all
actions necessary to perfect such security interests.

8

 

     (v)  Debt. The Company has no Debt other than Debt created under the
Transaction Documents or as disclosed on Schedule 3(v) hereto. None of the
Subsidiaries have any Debt other than that disclosed on Schedule 3(v) hereto.

     (w)  Monthly Compliance Certificate. On the last business day of each
calendar month, the Company shall deliver to the Collateral Agent a certificate
executed by the Chief Financial Officer of the Company stating that each of the
representations made by the Debtors in this Security Agreement are true as of
the date of such certificate and no default or Event of Default has occurred
under this Security Agreement.

     (x)  Additional Guarantors. The Company shall cause each of its
subsidiaries formed or acquired on or subsequent to the date hereof to deliver
a guarantee to the Secured Parties substantially in the form of the Subsidiary
Guarantees being delivered on the date hereof.

          SECTION 4. Events of Default; Remedies.

     Events of Default. Each of the following shall constitute an Event of
Default under this Security Agreement:

     (a)  Event of Default under the Notes. An Event of Default shall have
occurred under Notes.

     (b)  Other Defaults. Failure of any Debtor to comply with or to perform
when due or required (after the expiration of any applicable stated cure
periods) any term, obligation, covenant or condition contained in this Security
Agreement.

     (c)  False Statements. Any warranty, representation or statement made or
furnished to the Collateral Agent or the Secured Parties by or on behalf of the
Debtors under this Security Agreement or any certificate or schedule required
thereby is false or misleading in any material respect, either now or at the
time made or furnished.

     (d)  Defective Collateralization. This Security Agreement ceases to be in
full force and effect at any time and for any reason (other than by reasons
caused solely by actions of the Collateral Agent); or the security interest
intended to be created by this Security Agreement is not created and perfected,
or such security interest ceases to be valid and perfected at any time and for
any reason.

     (e)  Material Adverse Change. The Secured Parties shall have determined in
good faith (which determination shall be conclusive) that a material adverse
change has occurred in the condition, value or operation of a material portion
of the Collateral.

          SECTION 5. Rights and Remedies on Default. If an Event of Default occurs
and is continuing under this Security Agreement, at any time thereafter, the
Collateral Agent and the Secured Parties shall have all the rights of a secured
party under the New York Uniform Commercial Code. In addition and without
limitation, the Collateral Agent and the Secured Parties may exercise any one
or more of the following rights and remedies:

9

 

     (a)  Accelerate Indebtedness. The Collateral Agent may declare the entire
Indebtedness immediately due and payable, without notice.

     (b)  Assemble Collateral. The Collateral Agent may require the Debtors to
deliver to the Collateral Agent all or any portion of the Collateral and other
documents relating to the Collateral. The Collateral Agent may require the
Debtors to assemble the Collateral and make it available to the Collateral
Agent at a place to be designated by the Collateral Agent. The Collateral
Agent also shall have full power to enter upon the property of the Debtors to
take possession of and remove the Collateral. If the Collateral contains other
goods not covered by this Security Agreement at the time of repossession, the
Debtors agree that the Collateral Agent may take such other goods, provided
that the Collateral Agent makes reasonable efforts to return them to the
Debtors after repossession.

     (c)  Sell the Collateral. The Collateral Agent shall have full power to
sell, lease, transfer, or otherwise deal with the Collateral or proceeds
thereof in its own name or that of the Debtors. The Collateral Agent may sell
the Collateral at public auction or private sale. Unless the Collateral
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Collateral Agent will give the Debtors reasonable notice
of the time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice shall be
met if such notice is given at least ten (10) days before the time of the sale
or disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part of the
Indebtedness secured by this Security Agreement and shall be payable on demand,
with interest at the lower of twenty percent (20%) per annum or the highest
rate permitted by law from date of expenditure until repaid.

     (d)  Foreclosure. Maintain a judicial suit for foreclosure and sale of the
Collateral.

     (e)  Appoint Receiver. To the extent permitted by applicable law, the
Collateral Agent shall have the following rights and remedies regarding the
appointment of a receiver: (i) the Collateral Agent may have a receiver
appointed as a matter of right, (ii) the receiver may be an employee of the
Collateral Agent and may serve without bond, and (iii) all fees of the receiver
and the receiver’s attorney shall become part of the Indebtedness secured by
this Security Agreement and shall be payable on demand, with interest at the
lower of twenty percent (20%) per annum or the highest rate permitted by law
from date of expenditure until repaid.

     (f)  Transfer Title. Effect transfer of title upon sale of all or part of
the Collateral. For this purpose, the Debtors irrevocably appoint the
Collateral Agent, acting singly, as its attorneys-in-fact to execute
endorsements, assignments and instruments in the name of the Debtors as shall
be necessary or reasonable. With respect to any such transfer of trademarks,
the applicable Debtor hereby transfers all goodwill associated therewith.

     (g)  Collect Revenues, Apply Accounts. The Collateral Agent, either itself
or through a receiver, may collect the payments, rents, income, and revenues
from the Collateral. The Collateral Agent may at any time in its discretion
transfer any Collateral into its own names or that of its nominees and receive
the payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order

10

 

of preference as the Collateral Agent may determine. The Collateral Agent
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as the Collateral Agent may determine,
whether or not the Indebtedness is then due. For these purposes, the
Collateral Agent may, on behalf of and in the name of the Debtors, open and
dispose of mail addressed to any Debtor; change any address to which mail and
payments are to be sent; and endorse notes, checks, drafts, money orders,
documents of title, instruments and items pertaining to payment, shipment or
storage of any Collateral. To facilitate collection, the Collateral Agent may,
notify Account Debtors and obligors on any Collateral to make payments directly
to the Collateral Agent.

     (h)  Obtain Deficiency. If the Collateral Agent chooses to sell any or all
of the Collateral and/or pursue any other remedy available hereunder, under any
other agreement, at law or in equity, the Collateral Agent may obtain a
judgment against the Debtors for any deficiency remaining on the Indebtedness
due to the Secured Parties after application of all amounts received from the
exercise of the rights provided in this Security Agreement. The Debtors shall
be liable for a deficiency even if the transaction described in this Subsection
is a sale of accounts or chattel paper.

     (i)  Application of Proceeds. The proceeds of any foreclosure or
realization upon the Collateral shall be applied:

          (i) First, to the costs and expenses of collection;

          (ii) Second, to overdue interest;

          (iii) Third, to the outstanding principal amount of the Indebtedness; and

          (iv) Fourth, any excess to the Debtors or other party or parties in
accordance with applicable law or court order.

     (j)  Other Rights and Remedies. The Collateral Agent and the Secured
Parties shall have all the rights and remedies of a secured creditor under the
provisions of the New York Uniform Commercial Code, as may be amended from time
to time. In addition, the Collateral Agent and the Secured Parties shall have
and may exercise any or all rights and remedies they may have available at law,
in equity, or otherwise.

          SECTION 6. Cumulative Remedies. All of the Collateral Agent’s and the
Secured Parties’ rights and remedies, whether evidenced by this Security
Agreement, or the other Transaction Documents or by any other writing, shall be
cumulative and may be exercised singularly or concurrently. Election by the
Collateral Agent or the Secured Parties to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to take
action to perform an obligation of a Debtor under this Security Agreement,
after such Debtor’s failure to perform, shall not affect the Collateral Agent’s
and Secured Parties’ right to declare a default and to exercise their remedies.

          SECTION 7. Pledged Securities.

     (a)  So long as no Event of Default shall have occurred and be continuing:

11

 

          (i) The Debtors shall be entitled to exercise any and all voting and other
consensual rights pertaining to the Pledged Securities or any part thereof for
any purpose not inconsistent with the terms of this Security Agreement or the
Transaction Documents; provided, however, that the Debtors shall not exercise
or refrain from exercising any such right if such action would have a material
adverse effect on the value of the Pledged Securities or any part thereof; and
provided further that the Debtors shall give the Collateral Agent at least five
days’ prior written notice of the manner in which it intends to exercise, or
the reasons for refraining from exercising, any such right.

          (ii) The Debtors shall be entitled to receive and retain any and all
dividends and interest paid in respect of the Pledged Securities; provided,
however, that any and all

	          	
	 	     (A) (I) dividends and other distributions paid or payable in
cash in respect of any Pledged Securities in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus, (II) cash
paid, payable or otherwise distributed in respect of principal of,
or in redemption of, or in exchange for, any Pledged Securities or
(III), cash dividends resulting from transactions outside the
ordinary course of business, shall be used to prepay the Notes (on
a pro rata basis based on the Principal Amount (as defined in the
Notes) outstanding on each Note), or

	          	
	 	     (B) dividends and interest paid or payable other than in cash
in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange
for, any Pledged Securities shall be, and shall be forthwith
delivered to the Collateral Agent to hold as, Collateral and shall,
if received by the Debtors, be received in trust for the benefit of
the Secured Parties, be segregated from the other property or funds
of the Debtors and be forthwith delivered to the Collateral Agent
as Collateral in the same form as so received (with any necessary
endorsement).

     The Debtors, promptly upon the request of the Collateral Agent, shall
execute such documents and do such acts as may be necessary or desirable in the
reasonable judgment of the Collateral Agent to give effect to this Section
7(a)(ii).

          (iii) The Debtors shall deliver to the Collateral Agent any distribution
consisting of Subsidiary Securities or Further Securities immediately upon
receipt, together with executed stock powers and corporate resolutions
authorizing the transfer of title of such shares after an Event of Default
pursuant to the terms of this Security Agreement.

          (iv) The Collateral Agent shall execute and deliver (or cause to be
executed and delivered) to the Debtors all such proxies and other instruments
as Debtors may reasonably request for the purpose of enabling the Debtors to
exercise the voting and other rights that it is entitled to exercise pursuant
to clause (i) above and to receive the dividends or interest payments that it
is authorized to receive and retain pursuant to clause (ii) above.

     (b)  Upon the occurrence and during the continuance of an Event of Default:

          (i) All rights of Debtors (x) to exercise or refrain from exercising the
voting

12

 

and other consensual rights that it would otherwise be entitled to
exercise pursuant to Section 7(a)(i) shall, upon notice to Debtors by the
Secured Parties, cease and (y) to receive the dividends and interest payments
that it would otherwise be authorized to receive and retain pursuant to Section
7(a)(ii) shall automatically cease, and all such rights shall thereupon become
vested in the Collateral Agent, which shall thereupon have the sole right to
exercise or refrain from exercising such voting and other consensual rights and
to receive and hold as Pledged Securities such dividends, interest payments and
other distributions. For the avoidance of doubt, the Collateral Agent is
hereby granted an irrevocable proxy coupled with an interest to exercise all
voting power with respect to the Subsidiary Securities and/or the Further
Securities, effective upon the occurrence of an Event of Default.

          (ii) All dividends, interest payments and other distributions that are
received by the Debtors contrary to the provisions of clause (i) of this
Section 7(b) shall be received in trust for the benefit of the Secured Parties,
shall be segregated from other funds of Debtors and shall be forthwith paid
over to the Collateral Agent as Collateral in the same form as so received
(with any necessary endorsement).

          SECTION 8. The Collateral Agent’s Duties.

     (a)  Other than as specified in this Security Agreement and any amendment
hereto, the Collateral Agent shall not be required to take or refrain from
taking any actions, to exercise or refrain from exercising any rights, or to
make or refrain from making any requests unless it shall first receive proper
instructions from Secured Parties holding at least 75% of the outstanding
principal amount of the Obligations (or their respective successors or
assigns).

     (b)  The Collateral Agent shall hold all Collateral received by it, and
shall make disposition thereof, only in accordance with this Security Agreement
or any amendment thereto. Except for the safe custody of any Collateral in its
possession and the accounting for moneys actually received by it hereunder, the
Collateral Agent shall have no duty as to any Collateral, as to ascertaining or
taking action with respect to calls, conversions, exchanges, maturities,
tenders or other matters relative to any Pledged Securities, whether or not the
Collateral Agent or any of the Secured Parties has or is deemed to have
knowledge of such matters, or as to the taking of any necessary steps to
preserve rights against any parties or any other rights pertaining to any
Collateral.

     (c)  The Collateral Agent shall not be under any duty or obligation to
inspect, review or examine any document, instrument, certificate, agreement or
other papers to determine that they are enforceable or that they are other than
what they purport to be on their face. The Collateral Agent shall hold any
Collateral delivered to the Collateral Agent as the agent of the and for the
benefit of each Secured Party, without preference as to any Secured Party.

     (d)  The duties and obligations of the Collateral Agent shall be determined
solely by the express provisions of this Security Agreement or any amendment
hereto or any instructions permitted hereby. The Collateral Agent shall have
no obligation with respect to any other matters covered in any other document
other than as expressly provided herein, or any amendment hereto. The
Collateral Agent shall not be liable except for the performance of such duties
and obligations as are specifically set forth in this Security Agreement or as
set forth in a

13

 

written amendment to this Security Agreement executed by the parties
hereto or their successors or assigns. No representations, warranties,
covenants or obligations of the Collateral Agent or any Secured Party shall be
implied with respect to this Agreement or the Collateral Agent’s services
hereunder. Without limiting the generality of the foregoing, the Collateral
Agent:

          (i) shall use the same degree of care and skill as a reasonably prudent
person would use in similar circumstances (without limiting the generality of
the foregoing, the Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of any Collateral in its
possession if such Collateral is accorded treatment substantially equal to that
which the Collateral Agent accords its own property of like tenor);

          (ii) shall not be obligated to take any legal action hereunder that might
in its reasonable judgment involve any expense or liability unless it has been
furnished with reasonable indemnity from the Secured Parties;

          (iii) may rely on and shall be protected in acting in good faith upon any
certificate, instrument, opinion, notice, letter, telegram or other document,
or any security, delivered to it and in good faith believed by it to be genuine
and to have been signed by the proper party or parties;

          (iv) may rely on and shall be protected in acting in good faith upon the
written instructions of Secured Parties holding at least 75% of the outstanding
principal amount of the Obligations;

          (v) may consult its own independent counsel satisfactory to it and the
opinion of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered, or omitted by it hereunder in good
faith and in furtherance of its duties hereunder, in accordance with the
opinion of such counsel;

          (vi) may execute any of the powers hereunder or perform any duties
hereunder either directly or through agents or attorneys; and

          (vii) will be regarded as making no representation and having no
responsibilities (except as expressly set forth herein) as to the validity,
sufficiency, value, genuineness, ownership or transferability of any portion of
the Collateral, and will not be required to and will not make any
representations as to the validity, value or genuineness of any portion of the
Collateral.

     (e)  Neither the Collateral Agent nor any of its partners, agents or
employees, shall be liable for any error in judgment, for any mistake of fact
or for any action taken or omitted to be taken by it or them hereunder or in
connection herewith in good faith and believed by it or them to be within the
purview of this Security Agreement, except for its or their own gross
negligence, lack of good faith or willful misconduct. In no event shall the
Collateral Agent or its partners, officers, agents and employees be held liable
for any special, indirect or consequential damages resulting from any action
taken or omitted to be taken by it or them hereunder in connection herewith
even if advised of the possibility of such damages.

14

 

     (f)  Whenever, in the administration of this Security Agreement, the
Collateral Agent reasonably shall deem it necessary that a matter be proved or
established prior to taking, suffering or omitting any action under this
Security Agreement, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate of the Secured Parties, and such certificate shall
be full warranty to the Collateral Agent for any action taken, suffered or
omitted under the provisions of this Agreement, upon the faith thereof.

          SECTION 9. Miscellaneous Provisions.

     (a)  Entire Agreement; Amendments. This Security Agreement, together with
the other Transaction Documents, constitute the entire understanding and
agreement of the parties as to the matters set forth in this Security
Agreement. No alteration of or amendment to this Security Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.

     (b)  CHOICE OF LAW AND VENUE; MUTUAL JURY TRIAL WAIVER. THE VALIDITY OF
THIS SECURITY AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND
THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. THE
PARTIES MUTUALLY IRREVOCABLY AND UNCONDITIONALLY AGREE (I) THAT ALL ACTIONS OR
PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF NEW
YORK, NEW YORK COUNTY AND THAT THE PARTIES SHALL BE SUBJECT TO THE JURISDICTION
OF SUCH COURTS, AND (II) THAT SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, SHALL CONSTITUTE PERSONAL SERVICE. EACH DEBTOR, THE
COLLATERAL AGENT AND THE SECURED PARTIES WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 9(b). EACH DEBTOR, THE COLLATERAL AGENT AND THE
SECURED PARTIES HEREBY WAIVES THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS SECURITY AGREEMENT
OR ANY OF THE ACTIONS CONTEMPLATED HEREIN, INCLUDING WITHOUT LIMITATION
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
OR STATUTORY CLAIMS. EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES
REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS
A WRITTEN CONSENT TO A TRIAL BY THE COURT.

     (c)  Attorneys’ Fees; Expenses. The Debtors agrees to pay, jointly and
severally upon demand, all of the Collateral Agent’s and Secured Parties’ costs
and expenses, including without limitation reasonable attorneys’ fees and legal
expenses, incurred in connection with the

15

 

enforcement of this Security Agreement. The Collateral Agent or any
Secured Party may pay someone else to help enforce this Security Agreement, and
the Debtors shall pay the costs and expenses of such enforcement. Costs and
expenses include without limitation the Collateral Agent’s and Secured Parties’
reasonable attorneys’ fees and legal expenses whether or not there is a
lawsuit, reasonable attorneys’ fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
The Debtors also shall pay all court costs and such additional fees as may be
directed by the court.

     (d)  Caption Headings. Caption headings in this Security Agreement are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Security Agreement.

     (e)  Notices. All notices required to be given under this Security
Agreement shall be given in writing and shall be effective when actually
delivered or two (2) days after being deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the notice is to
be given or, if via facsimile, when sent via facsimile transmission to the
party to whom the notice is to be given and confirmation of such transmission
has been received, at the address and/or facsimile number shown below:

	 	If to Elliott or the Collateral Agent:

	 	Manchester Securities Corporation

712 Fifth Avenue, 36th Floor

New York, New York 10019

Telephone: (212) 974-6000

Facsimile: (212) 974-2092

Attention: Dan Gropper

	 	With a copy to:

	 	Kleinberg, Kaplan, Wolff & Cohen, P.C.

551 Fifth Avenue, 18th Floor

New York, New York 10176

Telephone: (212) 986-6000

Facsimile: (212) 986-8866

Attention: Lawrence D. Hui, Esq.

	 	If to Alexander:

	 	Alexander Finance, LP

1560 Sherman Avenue

Evanston, Illinois

Telephone: (847) 733-0232

Facsimile: (847) 733-0339

Attention: Bradford T. Whitmore

	 	With a copy to:

	 	Sachnoff & Weaver

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	 	30 S. Wacker Drive

Chicago, Illinois 60606

Telephone: (312) 207-3879

Facsimile: (312) 207-6400

Attention: Evelyn C. Arkebauer, Esq.

	 	If to the Company or a Subsidiary:

	 	ISCO International, Inc.

451 Kingston Court

Mount Prospect, Illinois 60056

Telephone: (847) 391-9400

Facsimile: (847) 391-5015

Attention:: Frank Cesario

	 	With a copy to:

	 	Pepper Hamilton LLP

400 Berwyn Park

899 Cassatt Road

1235 Westlakes Drive

Berwyn, Pennsylvania 19312

Telephone: (610) 640-7800

Facsimile: (610) 640-7835

Attention: Michael P. Gallagher, Esq.

     Any party may change its address for notices under this Security Agreement
by giving formal written notice to the other parties, specifying that the
purpose of the notice is to change the party’s address. For notice purposes,
the Debtors agrees to keep the Collateral Agent informed at all times of the
Debtors’ current addresses.

     (f)  Severability. The parties acknowledge and agree that the Collateral
Agent and the Secured Parties are not agents or partners of each other, that
all representations, warranties, covenants and agreements of the Collateral
Agent and the Secured Parties hereunder are several and not joint, that the
Collateral Agent and the Secured Parties shall not have any responsibility or
liability for the representations, warranties, agreements, acts or omissions of
the other and that any rights granted to the Collateral Agent and the Secured
Parties hereunder shall be enforceable by each of the Collateral Agent and the
Secured Parties hereunder. If a court of competent jurisdiction finds any
provision of this Security Agreement to be invalid or unenforceable as to any
person or circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken, and all other provisions of this Security
Agreement in all other respects shall remain valid and enforceable and such
offending provision shall not be affected in any other jurisdiction.

     (g)  Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Security Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns to the extent
permitted by Section 5.6 of the Loan Agreement. The

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Debtors shall not, however, have the right to assign this Security
Agreement without the prior written consent of the Secured Parties which may be
withheld for any reason in the Secured Parties’ sole discretion.

     (h)  Waiver. The Collateral Agent and the Secured Parties shall not be
deemed to have waived any rights under this Security Agreement unless such
waiver is given in writing and signed by the Collateral Agent and the Secured
Parties. No delay or omission on the part of the Collateral Agent or Secured
Parties in exercising any right shall operate as a waiver of such right or any
other right. A waiver by the Collateral Agent or Secured Parties of a
provision of this Security Agreement shall not prejudice or constitute a waiver
of the Collateral Agent’s or the Secured Parties’ right otherwise to demand
strict compliance with that provision or any other provision of this Security
Agreement. No prior waiver by the Collateral Agent or Secured Parties, nor any
course of dealing between the Secured Parties and the Debtors, shall constitute
a waiver of any of the Collateral Agent’s or the Secured Parties’ rights or of
any of the Debtors’ obligations as to any future transactions. Whenever the
consent of the Collateral Agent and/or the Secured Parties is required under
this Security Agreement, the granting of such consent in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the sole
discretion of the Collateral Agent and/or the Secured Parties.

     (i)  Indemnity. The Debtors agree, jointly and severally, to indemnify,
pay and hold the Collateral Agent, each Secured Party and the officers,
partners, directors, employees, agents and affiliates thereof (collectively,
the “indemnitees”) harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, expenses and disbursements of any kind or nature whatsoever (including,
without limitation, the reasonable fees and disbursements of counsel) that may
be imposed on, incurred by, or asserted against any indemnitee, in any manner
relating to or arising out of this Security Agreement and any action undertaken
or contemplated hereby. This indemnification shall survive the satisfaction
and payment of the Indebtedness and termination of this Security Agreement.

     (j)  Subsidiary Liability. Notwithstanding anything in this Security
Agreement to the contrary, each Subsidiary’s obligations hereunder shall not
exceed the maximum amount that would not be subject to avoidance under
fraudulent conveyance, fraudulent transfer, and other similar laws.

     (k)  No Subrogation. Notwithstanding any payment made by any Debtor
hereunder or any set-off or application of funds of any Debtor by the Secured
Parties, no Debtor shall be entitled to be subrogated to any of the rights of
the Secured Parties against a Debtor or any collateral security or guarantee or
right of offset held by the Secured Parties for the payment of the
Indebtedness, nor shall any Debtor seek or be entitled to seek any contribution
or reimbursement from another Debtor in respect of payments made by such Debtor
hereunder, until all amounts owing to the Secured Parties by the Debtors under
any Transaction Documents are paid in full. If any amount shall be paid to any
Debtor on account of such subrogation rights at any time when any such amounts
shall not have been paid in full, such amount shall be held by such Debtor in
trust for the Secured Parties, segregated from other funds of such Debtor, and
shall, forthwith upon receipt by such Debtor, be turned over to the Secured
Parties in the exact form received by such Debtor (duly indorsed by such Debtor
to Secured Parties, if required), to

18

 

be applied against the Indebtedness of the Debtors under the Transaction
Documents, whether matured or unmatured, in such order as the Secured Parties
may determine.

     (l)  The actions of the holders of 75% of the outstanding principal amount
of the Obligations shall be deemed the actions of Secured Parties for purposes
of giving any notice or enforcing any rights or remedies.

19

 

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

	 	 	 	 	 	 	 
	 	 	 	 	ISCO INTERNATIONAL, INC.
	 
	 	 	 	 	By:
	 	/s/ Amr
Abdelmonem

     Name: Amr Abdelmonem, Ph.D.

     Title: Chief Executive Officer
	 
	 	 	 	 	SPECTRAL SOLUTIONS, INC.
	 
	 	 	 	 	By:
	 	/s/ Amr Abdelmonem

     Name: Amr Abdelmonem

     Title: Chief Executive Officer
	 
	 	 	 	 	ILLINOIS SUPERCONDUCTOR CANADA CORPORATION
	 
	 	 	 	 	By:
	 	
/s/ Amr Abdelmonem

     Name: Amr Abdelmonem

     Title: Authorized Officer
	 
	 	 	 	 	MANCHESTER SECURITIES CORPORATION
	 
	 	 	 	 	By:
	 	/s/ Elliot
Greenberg

     Name: Elliot Greenberg

     Title: Vice President
	 
	 	 	 	 	ALEXANDER FINANCE, L.P.
	 
	 	 	 	 	By:
	 	/s/ Bradford T.
Whitmore

     Name: Bradford T. Whitmore

     Title: President, Bun Partners, Inc.
	 
	  	 	
COLLATERAL AGENT:	 	 	 	 
	 
	 	 	 	 	MANCHESTER SECURITIES CORPORATION
	 
	 	 	 	 	By:
	 	 /s/ Elliot
Greenberg

     Name: Elliot Greenberg

     Title: Vice President

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SCHEDULE A

Identification, Ownership and Location of Collateral and Liens

21

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