Document:

Exhibit 10.39

 

 

AMENDED AND RESTATED SECURITY
AGREEMENT

 

 

LAURUS MASTER FUND, LTD.

 

 

IWT TESORO CORPORATION

 

 

and

 

 

INTERNATIONAL WHOLESALE
TILE INC.

 

 

Dated: July 21, 2006

 

TABLE OF CONTENTS

	
  

  	
   

  	
   

  	
   

  	
  Page

  	
   

  
	
  1.

  	
   

  	
  General Definitions and Terms; Rules of Construction

  	
   

  	
  1

  	
   

  
	
  2.

  	
   

  	
  Loan Facility

  	
   

  	
  2

  	
   

  
	
  3.

  	
   

  	
  Repayment of the Loans

  	
   

  	
  3

  	
   

  
	
  4.

  	
   

  	
  Procedure for Loans

  	
   

  	
  4

  	
   

  
	
  5.

  	
   

  	
  Interest and Payments

  	
   

  	
  4

  	
   

  
	
  6.

  	
   

  	
  Security Interest

  	
   

  	
  5

  	
   

  
	
  7.

  	
   

  	
  Representations, Warranties and Covenants Concerning
  the Collateral

  	
   

  	
  6

  	
   

  
	
  8.

  	
   

  	
  Payment of Accounts

  	
   

  	
  9

  	
   

  
	
  9.

  	
   

  	
  Collection and Maintenance of Collateral

  	
   

  	
  9

  	
   

  
	
  10.

  	
   

  	
  Inspections and Appraisals

  	
   

  	
  10

  	
   

  
	
  11.

  	
   

  	
  Financial Reporting

  	
   

  	
  10

  	
   

  
	
  12.

  	
   

  	
  Additional Representations and Warranties

  	
   

  	
  11

  	
   

  
	
  13.

  	
   

  	
  Covenants

  	
   

  	
  22

  	
   

  
	
  14.

  	
   

  	
  Further Assurances

  	
   

  	
  28

  	
   

  
	
  15.

  	
   

  	
  Representations, Warranties and Covenants of Laurus

  	
   

  	
  29

  	
   

  
	
  16.

  	
   

  	
  Power of Attorney

  	
   

  	
  30

  	
   

  
	
  17.

  	
   

  	
  Term of Agreement

  	
   

  	
  31

  	
   

  
	
  18.

  	
   

  	
  Termination of Lien

  	
   

  	
  31

  	
   

  
	
  19.

  	
   

  	
  Events of Default

  	
   

  	
  32

  	
   

  
	
  20.

  	
   

  	
  Remedies

  	
   

  	
  34

  	
   

  
	
  21.

  	
   

  	
  Waivers

  	
   

  	
  35

  	
   

  
	
  22.

  	
   

  	
  Expenses

  	
   

  	
  35

  	
   

  
	
  23.

  	
   

  	
  Assignment By Laurus

  	
   

  	
  36

  	
   

  

 i
 

 

 

	
  

  	
   

  	
   

  	
   

  	
  Page

  	
   

  
	
  24.

  	
   

  	
  No Waiver; Cumulative Remedies

  	
   

  	
  36

  	
   

  
	
  25.

  	
   

  	
  Application of Payments

  	
   

  	
  36

  	
   

  
	
  26.

  	
   

  	
  Indemnity

  	
   

  	
  36

  	
   

  
	
  27.

  	
   

  	
  Revival

  	
   

  	
  37

  	
   

  
	
  28.

  	
   

  	
  Borrowing Agency Provisions

  	
   

  	
  37

  	
   

  
	
  29.

  	
   

  	
  Notices

  	
   

  	
  38

  	
   

  
	
  30.

  	
   

  	
  Governing Law, Jurisdiction and Waiver of Jury Trial

  	
   

  	
  39

  	
   

  
	
  31.

  	
   

  	
  Limitation of Liability

  	
   

  	
  40

  	
   

  
	
  32.

  	
   

  	
  Entire Understanding; Maximum Interest

  	
   

  	
  40

  	
   

  
	
  33.

  	
   

  	
  Severability

  	
   

  	
  41

  	
   

  
	
  34.

  	
   

  	
  Survival

  	
   

  	
  41

  	
   

  
	
  35.

  	
   

  	
  Captions

  	
   

  	
  41

  	
   

  
	
  36.

  	
   

  	
  Counterparts; Telecopier Signatures

  	
   

  	
  41

  	
   

  
	
  37.

  	
   

  	
  Construction

  	
   

  	
  41

  	
   

  
	
  38.

  	
   

  	
  Publicity

  	
   

  	
  41

  	
   

  
	
  39.

  	
   

  	
  Joinder

  	
   

  	
  41

  	
   

  
	
  40.

  	
   

  	
  Legends

  	
   

  	
  42

  	
   

  

 

 ii

 

AMENDED
AND RESTATED SECURITY AGREEMENT

This Amended and Restated Security Agreement is made
as of July 21, 2006 by and among LAURUS MASTER FUND, LTD., a Cayman Islands
corporation (“Laurus”), IWT TESORO CORPORATION, a Nevada corporation (“the
Parent”), and each party listed on Exhibit A attached hereto (each
an “Eligible Subsidiary” and collectively, the “Eligible Subsidiaries”)
the Parent and each Eligible Subsidiary, each a “Company” and collectively, the
“Companies”).

BACKGROUND

On August 25, 2005, the Companies and Laurus entered
into that certain Security Agreement (as amended, modified or supplemented
through the date hereof, the “Original Security Agreement”), at which time
the  Companies requested that Laurus make
advances available to the Companies; and

The Companies have requested that Laurus make certain
changes to the Original Security Agreement;

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

AGREEMENT

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

1.             General Definitions and Terms; Rules of Construction.

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

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

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

(d)           Rules of Construction.  All Schedules, Addenda, Annexes and Exhibits
hereto or expressly identified to this Agreement are incorporated herein by
reference and taken together with this Agreement constitute but a single
agreement.  The words “herein”, “hereof”
and “hereunder” or other words of similar import refer to this Agreement as a
whole, including the Exhibits, Addenda, Annexes and Schedules thereto, as the
same may be from time to time amended, modified, restated or supplemented, and
not to any particular section, subsection or clause contained in this
Agreement.  Wherever from the context it
appears appropriate, each term 

 

stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. 
The term “or” is not exclusive. 
The term “including” (or any form thereof) shall not be limiting or
exclusive.  All references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations.  All references
in this Agreement or in the Schedules, Addenda, Annexes and Exhibits to this
Agreement to sections, schedules, disclosure schedules, exhibits, and attachments
shall refer to the corresponding sections, schedules, disclosure schedules,
exhibits, and attachments of or to this Agreement.  All references to any instruments or
agreements, including references to any of this Agreement or the Ancillary
Agreements shall include any and all modifications or amendments thereto and
any and all extensions or renewals thereof.

2.             Loan Facility.

(a)           Loans.

(i)         Subject to the terms
and conditions set forth herein and in the Ancillary Agreements, Laurus may
make loans (the “Loans”) to Companies from time to time during the Term
which, in the aggregate at any time outstanding, will not exceed the lesser of
(x) (I) the Capital Availability Amount minus (II) such reserves as Laurus
may reasonably in its good faith judgment deem proper and necessary from time
to time (the “Reserves”) and (y) an amount equal to (I) the Borrowing
Base minus (II) the Reserves.  The amount
derived at any time from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall
be referred to as the “Formula Amount.” 
The Companies shall, jointly and severally, execute and deliver to
Laurus on the Closing Date the Revolving Note evidencing the Loans funded on
the Closing Date.

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

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

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

(v)        If any Company at any
time fails to perform or observe any of the covenants contained in this
Agreement or any Ancillary Agreement, Laurus may, but need not, perform or
observe such covenant on behalf and in the name, place and stead of such
Company (or, at Laurus’ option, in Laurus’ name) and may, but need not, take
any and all other actions which Laurus may deem necessary to cure or correct
such failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors

 2
 

 

or other
obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments).  The amount of all
monies expended and all costs and expenses (including attorneys’ fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to the Companies’ account as a Loan and added to the
Obligations.  To facilitate Laurus’
performance or observance of such covenants by each Company, each Company
hereby irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as such
Company’s attorney in fact (which appointment is coupled with an interest) with
the right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file in the name and on behalf of such Company any
and all instruments, documents, assignments, security agreements, financing
statements, applications for insurance and other agreements and writings
required to be obtained, executed, delivered or endorsed by such Company.

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

(vii)      During the Term, the
Companies may borrow and prepay Loans in accordance with the terms and
conditions hereof.

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

3.             Repayment of the Loans. 
The Companies (a) may prepay the Obligations from time to time in
accordance with the terms and provisions of the Note (and Section 17 hereof if
such prepayment is due to a termination of this Agreement); (b) shall repay on the
expiration of the Term (i) the then aggregate outstanding principal balance of
the Loans together with accrued and unpaid interest, fees and charges and; (ii)
all other amounts owed Laurus under this Agreement and the Ancillary
Agreements; and (c) subject to Section 2(a)(ii), shall repay on any 

 3
 

 

day
on which the then aggregate outstanding principal balance of the Loans are in
excess of the Formula Amount at such time, Loans in an amount equal to such
excess. Any payments of principal, interest, fees or any other amounts payable
hereunder or under any Ancillary Agreement shall be made prior to 12:00 noon
(New York time) on the due date thereof in immediately available funds.

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

5.             Interest and Payments.

(a)           Interest.

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

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

(iii)       Effective upon the
occurrence of any Event of Default and for so long as any Event of Default
shall be continuing, the Contract Rate shall automatically be increased as set
forth in the Note (such increased rate, the “Default Rate”), and all
outstanding Obligations, including unpaid interest, shall continue to accrue
interest from the date of such Event of Default at the Default Rate applicable
to such Obligations.

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

 4
 

 

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

(b)           Payments; Certain
Closing Conditions.

(i)         Closing/Annual
Payments.  Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and severally
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
three and nine-tenths percent (3.90%) of the Capital Availability Amount.  Such payment shall be deemed fully earned on
the Closing Date and shall not be subject to rebate or proration for any
reason.

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

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

(iv)       Expenses.  The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection
with Laurus’ due diligence review of each Company and its Subsidiaries and all
related matters.  Amounts required to be
paid under this Section 5(b)(v) will be paid on the Closing Date.

6.             Security Interest.

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

(b)           Each Company hereby
(i) authorizes Laurus to file any financing statements, continuation statements
or amendments thereto that (x) indicate the Collateral (1) as 

 5
 

 

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

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

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

(a)           all of the
Collateral (i) is owned by it free and clear of all Liens (including any claims
of infringement) except those in Laurus’ favor and Permitted Liens and (ii)
except for the Working Capital Lender Loan Agreement, is not subject to any
agreement prohibiting the granting of a Lien or requiring notice of or consent
to the granting of a Lien.

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

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

 6
 

 

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

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

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

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

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

(i)            if it retains
possession of any Chattel Paper or Instrument with Laurus’ consent, upon Laurus’
request such Chattel Paper and Instruments shall be marked with the following
legend:  “This writing and obligations
evidenced or secured hereby are subject to the security interest of Laurus
Master Fund, Ltd.” Notwithstanding the foregoing, upon the reasonable request
of Laurus, such Chattel Paper and Instruments shall be delivered to Laurus.

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

 7
 

 

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

(l)            all Eligible
Accounts and Eligible Extended Term Accounts (i) represent complete bona fide transactions
which require no further act under any circumstances on its part to make such
Accounts payable by the Account Debtors, (ii) are not subject to any present,
future contingent offsets or counterclaims, and (iii) do not represent bill and
hold sales, consignment sales, guaranteed sales, sale or return or other
similar understandings or obligations of any Affiliate or Subsidiary of such
Company.  It has not made, nor will it
make, any agreement with any Account Debtor for any extension of time for the
payment of any Account, any compromise or settlement for less than the full
amount thereof, any release of any Account Debtor from liability therefor, or
any deduction therefrom except a discount or allowance for prompt or early
payment allowed by it in the ordinary course of its business consistent with
historical practice and as previously disclosed to Laurus in writing.

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

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

(o)           it shall maintain
and keep the tangible Collateral at the addresses listed in Schedule 12(bb),
provided, that it may change such locations or open a new location, provided
that it provides Laurus at least thirty (30) days prior written notice of such
changes or new location and (ii) prior to such change or opening of a new
location where Collateral having a value of more than $50,000 will be located,
it executes and delivers to Laurus such agreements deemed reasonably necessary
or prudent by Laurus, including landlord agreements, mortgagee agreements and
warehouse agreements, each in form and substance satisfactory to Laurus, to adequately
protect and maintain Laurus’ security interest in such Collateral.

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

 8
 

 

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

8.             Payment of Accounts.

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

(b)           Subject to the terms
of the Intercreditor Agreement, at Laurus’ election, following the occurrence
of an Event of Default which is continuing, Laurus may notify each Company’s
Account Debtors of Laurus’ security interest in the Accounts, collect them
directly and charge the collection costs and expenses thereof to Company’s and
the Eligible Subsidiaries joint and several account.

9.             Collection and Maintenance of Collateral.

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

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

(c)           As Laurus receives
the proceeds of Accounts of any Company, it shall (i) apply such proceeds,
as required, to amounts outstanding under the Note, and (ii) remit all 

 9
 

 

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

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

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

(a)           As soon as
available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, each Company’s audited financial statements with a
report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Laurus (the “Accountants”),
which annual financial statements shall be without qualification and shall include
each of the Parent’s and each of its Subsidiaries’ balance sheet as at the end
of such fiscal year and the related statements of each of the Parent’s and each
of its Subsidiaries’ income, retained earnings and cash flows for the fiscal
year then ended, prepared on a consolidating and consolidated basis to include
the Parent, each Subsidiary of the Parent and each of their respective
affiliates, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by the Accountants; and (ii) a certificate of the Parent’s President,
Chief Executive Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;

(b)           As soon as available
and in any event within forty five (45) days after the end of each fiscal
quarter of the Parent, an unaudited/internal balance sheet and statements of
income, retained earnings and cash flows of each of the Parent’s and each of
its Subsidiaries’ as at the end of and for such quarter and for the year to
date period then ended, prepared on a consolidating and consolidated basis to
include the Parent, each Subsidiary of the Parent and each of their respective
affiliates, in reasonable detail and stating in comparative form the figures
for the corresponding date and periods in the previous year, all prepared in
accordance with 

 10
 

 

GAAP, subject
to year-end adjustments and accompanied by a certificate of the Parent’s
President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, subject
to year-end audit adjustments, and (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto;

(c)           As soon as available
and in any event within fifteen (15) days after the end of each calendar month,
an unaudited/internal balance sheet and statements of income, retained earnings
and cash flows of each of the Parent and its Subsidiaries as at the end of and
for such month and for the year to date period then ended, prepared on a
consolidating and consolidated basis to include the Parent, each Subsidiary of
the Parent and each of their respective affiliates, in reasonable detail and
stating in comparative form the figures for the corresponding date and periods
in the previous year, all prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Parent’s President, Chief
Executive Officer or Chief Financial Officer, stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end
audit adjustments, and (ii) whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;

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

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

(f)            The Parent shall
deliver, or cause the applicable Subsidiary of the Parent to deliver, such
other information as the Purchaser shall reasonably request.

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

(a)           Organization,
Good Standing and Qualification.  It
and each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization.  It and each of its Subsidiaries has the
corporate, limited liability company or partnership, as the   case may be, power and authority to own and
operate its properties and assets and, insofar as it is or shall be a party
thereto, to (i) execute and deliver this Agreement and the Ancillary 

 11
 

 

Agreements,
(ii) to issue the Note, (iii) to issue the Warrants and the shares of Common
Stock issuable upon conversion of the Warrants (the “Warrant Shares”),
and to (iv) carry out the provisions of this Agreement and the Ancillary
Agreements and to carry on its business as presently conducted.  It and each of its Subsidiaries is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation, partnership or limited liability company, as the case may be, in
all jurisdictions in which the nature or location of its activities and of its
properties (both owned and leased) makes such qualification necessary, except
for those jurisdictions in which failure to do so has not had, or could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.

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

(c)           Capitalization;
Voting Rights.

(i)         The authorized capital
stock of the Parent, as of the date hereof consists of 100,000,000shares of
Common Stock, par value $0.001 per share, of which the number of shares set
forth on Schedule 12(c) are issued and outstanding, and 25,000,000 are shares
of preferred stock, par value $0.001 per share of which no shares of  preferred stock are issued and
outstanding.  The authorized, issued and
outstanding capital stock of each Subsidiary of each Company is set forth on Schedule
12(c).

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

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

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

 12
 

 

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

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

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

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

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

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

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

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

 13
 

 

advances for travel expenses; or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than the
sale of its Inventory in the ordinary course of business.

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

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

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

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

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

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

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

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

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

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

 14
 

 

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

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

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

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

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

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

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

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

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

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

 

 15

 

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

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

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

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

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

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

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

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

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

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

(i)            Title to
Properties and Assets; Liens, Etc. 
Except as set forth on Schedule 12(i), it and each of its
Subsidiaries has good and marketable title to their respective properties and
assets, and good title to its leasehold interests, in each case subject to no
Lien, other than Permitted Liens.

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

 16
 

 

(j)            Intellectual
Property.

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

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

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

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

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

 17
 

 

There is no
action, suit, proceeding or investigation by it or any of its Subsidiaries
currently pending or which it or any of its Subsidiaries intends to initiate.

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

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

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

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

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

 18
 

 

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

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

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

(i)         materials which are
listed or otherwise defined as “hazardous” or “toxic” under any applicable
local, state, federal and/or foreign laws and regulations that govern the
existence and/or remedy of contamination on property, the protection of the
environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials; and

(ii)        any petroleum products
or nuclear materials.

(r)            Valid Offering.  Assuming the accuracy of the representations
and warranties of Laurus contained in this Agreement, the offer and issuance of
the Securities will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”), and will have
been registered or qualified (or are exempt from registration and 

 19
 

 

qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.

(s)           Full Disclosure.  It and each of its Subsidiaries has provided
Laurus with all information requested by Laurus in connection with Laurus’
decision to enter into this Agreement, including all information each Company
and its Subsidiaries believe is reasonably necessary to make such investment
decision.  Neither this Agreement, the
Ancillary Agreements nor the exhibits and schedules hereto and thereto nor any
other document delivered by it or any of its Subsidiaries to Laurus or its
attorneys or agents in connection herewith or therewith or with the
transactions contemplated hereby or thereby, contain any untrue statement of a material
fact nor omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading.  Any
financial projections and other estimates provided to Laurus by it or any of
its Subsidiaries were based on its and its Subsidiaries’ experience in the
industry and on assumptions of fact and opinion as to future events which it or
any of its Subsidiaries, at the date of the issuance of such projections or
estimates, believed to be reasonable.

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

(u)           SEC Reports and
Financial Statements.  Except as set
forth on Schedule 12(u), it and each of its Subsidiaries has filed
all proxy statements, reports and other documents required to be filed by it
under the Exchange Act.  The Parent has
furnished Laurus with copies of:  (i) its
Annual Report on Form 10-KSB for its fiscal years ended December 31,  2005; and (ii) its Quarterly Reports on Form
10-QSB for its fiscal quarter ended March 31, 2005, and the Form 8-K filings
which it has made during its fiscal year 2006 to date (collectively, the “SEC
Reports”).  Except as set forth on Schedule
12(u), each SEC Report was, at the time of its filing, in substantial
compliance with the requirements of its respective form and none of the SEC
Reports, nor the financial statements (and the notes thereto) included in the
SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.  Such financial statements have been prepared
in accordance with GAAP applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed) and fairly
present in all material respects the financial condition, the results of
operations and cash flows of the Parent and its Subsidiaries, on a consolidated
basis, as of, and for, the periods presented in each such SEC Report.

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

 20
 

 

(w)          No Integrated
Offering.  Neither it, nor any of its
Subsidiaries nor any of its Affiliates, nor any Person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would cause
the offering of the Securities pursuant to this Agreement or any Ancillary
Agreement to be integrated with prior offerings by it for purposes of the
Securities Act which would prevent it from issuing the Securities pursuant to
Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.

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

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

(z)            Patriot Act.  It certifies that, to the best of its
knowledge, neither it nor any of its Subsidiaries has been designated, nor is
or shall be owned or controlled, by a “suspected terrorist” as defined in
Executive Order 13224.  It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. 
In furtherance of those efforts, it hereby represents, warrants and
covenants that:  (i) none of the cash or
property that it or any of its Subsidiaries will pay or will contribute to
Laurus has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus, to the extent that they are within its
or any such Subsidiary’s control shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001.  It shall promptly notify Laurus if any of
these representations, warranties and covenants ceases to be true and accurate
regarding it or any of its Subsidiaries. 
It shall provide Laurus with any additional information regarding it and
each Subsidiary thereof that Laurus deems necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities.  It understands and agrees
that if at any time it is discovered that any of the foregoing representations,
warranties and covenants are incorrect, or if otherwise required by applicable
law or regulation related to money laundering or similar activities, Laurus may
undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of
Laurus’ investment in it.  It further
understands that Laurus may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the
best interests of Laurus in light of relevant rules and regulations under the
laws set forth in subsection (ii) above.

 21
 

 

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

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

(cc)         Working Capital
Lender Loan Documents.  Laurus has
received a complete and correct copy of each of the Working Capital Lender Loan
Documents (including all exhibits, schedules and disclosure letters referred to
therein or delivered pursuant thereto, if any) and all amendments thereto,
waivers relating thereto and other side letters or agreements affecting the
terms thereof.

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

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

(b)           Listing.  It shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon exercise
of the Warrants on the Principal Market upon which shares of Common Stock are
listed or quoted, as applicable, (subject to official notice of issuance) and
shall maintain such listing or quotation, as applicable, so long as any other
shares of Common Stock shall be so listed or quoted, as applicable.  The Parent shall maintain the listing or
quotation, as applicable, of its Common Stock on the Principal Market, and will
comply in all material respects with the Parent’s reporting, filing and other
obligations 

 22
 

 

under the
bylaws or rules of the National Association of Securities Dealers (“NASD”)
and such exchanges, as applicable.

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

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

(e)           Use of Funds.  It shall use the proceeds of the Loans for
general working capital purposes only.

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

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

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

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

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

(g)           Taxes.  It shall, and shall cause each of its
Subsidiaries to, promptly pay and discharge, or cause to be paid and
discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon it and its Subsidiaries’ income,
profits, property or business, as the case may be; provided, however, that any
such tax, assessment, charge or levy need not be paid currently if (i) the
validity thereof shall currently and diligently be contested in good faith by
appropriate proceedings, (ii) such tax, assessment, charge or levy shall have
no effect on the Lien priority of Laurus in the Collateral, and (iii) if it
and/or such Subsidiary, as applicable, shall have set aside on its and/or such
Subsidiary’s books adequate reserves with respect thereto in accordance with
GAAP; and provided, further, that it shall, and shall cause each of its
Subsidiaries to, pay all such taxes, assessments, charges or 

 23
 

 

levies forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security therefor.

(h)           Insurance.  It shall bear the full risk of loss from any
loss of any nature whatsoever with respect to the Collateral.  It and each of its Subsidiaries shall keep
its assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as it and its Subsidiaries; and it and its Subsidiaries shall maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which it and/or such Subsidiary thereof reasonably believes is customary for
companies in similar business similarly situated as it and its Subsidiaries and
to the extent available on commercially reasonable terms.  It and each of its Subsidiaries will jointly
and severally bear the full risk of loss from any loss of any nature whatsoever
with respect to the assets pledged to Laurus as security for its obligations
hereunder and under the Ancillary Agreements. 
At its own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, it and each of its Subsidiaries shall (i) keep all their
insurable properties and properties in which they have an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to it or the
respective Subsidiary’s including business interruption insurance; (ii)
maintain a bond in such amounts as is customary in the case of companies
engaged in businesses similar to it and its Subsidiaries’ insuring against
larceny, embezzlement or other criminal misappropriation of insured’s officers
and employees who may either singly or jointly with others at any time have
access to its or any of its Subsidiaries assets or funds either directly or
through governmental authority to draw upon such funds or to direct generally
the disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker’s compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which it or any
of its Subsidiaries is engaged in business; and (v) furnish Laurus with
(x) copies of all policies and evidence of the maintenance of such
policies at least thirty (30) days before any expiration date, (y) excepting
its and its Subsidiaries’ workers’ compensation policy, endorsements to such
policies naming Laurus as “co-insured” or “additional insured” and appropriate
loss payable endorsements in form and substance satisfactory to Laurus, naming
Laurus as lenders loss payee, and (z) evidence that as to Laurus the insurance
coverage shall not be impaired or invalidated by any act or neglect of any
Company or any of its Subsidiaries and the insurer will provide Laurus with at
least thirty (30) days notice prior to cancellation.  It shall instruct the insurance carriers that
in the event of any loss thereunder, the carriers shall make payment for such
loss to Laurus and not to any Company or any of its Subsidiaries and Laurus jointly.  If any insurance losses are paid by check,
draft or other instrument payable to any Company and/or any of its Subsidiaries
and Laurus jointly, Laurus may endorse, as applicable, such Company’s and/or
any of its Subsidiaries’ name thereon and do such other things as Laurus may
deem advisable to reduce the same to cash. 
Laurus is hereby authorized to adjust and compromise claims.  All loss recoveries received by Laurus upon
any such insurance may be applied to the Obligations, in such order as Laurus
in its sole discretion shall determine or shall otherwise be delivered to
Company Agent for the benefit of the applicable Company and/or its
Subsidiaries.  Any surplus shall be paid
by Laurus to Company Agent for the benefit of the applicable Company and/or its
Subsidiaries, or applied as may be otherwise required by law.  

 24
 

 

Any deficiency
thereon shall be paid, as applicable, by Companies and their Subsidiaries to
Laurus, on demand.

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

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

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

(l)            Required
Approvals.  It shall not, and shall
not permit any of its Subsidiaries to, without the prior written consent of
Laurus, (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt) whether secured or unsecured other than each Company’s
indebtedness to Laurus and as set forth on Schedule 13(l)(i)
attached hereto and made a part hereof; (ii) cancel any debt owing to it in
excess of $50,000 in the aggregate during any 12 month period; (iii) assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except the endorsement of
negotiable instruments by it or its Subsidiaries for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or
indirectly declare, pay or make any dividend or distribution on any class of
its Stock or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any of its or its Subsidiaries’ Stock
outstanding on the date hereof, or issue any preferred stock; (v) purchase or
hold beneficially any Stock or other securities or evidences of indebtedness
of, make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any partnership
or joint venture, except (x) travel advances, (y) loans to its and its
Subsidiaries’ officers and employees not exceeding at any one time an aggregate
of $10,000, and (z) loans to its existing Subsidiaries so long as such
Subsidiaries are designated as either a co-borrower hereunder or has entered
into such guaranty and security documentation required by Laurus, including,
without limitation, to grant to Laurus a first priority perfected security
interest in substantially all of such Subsidiary’s assets to secure 

 25
 

 

the
Obligations; (vi) create or permit to exist any Subsidiary, other than any
Subsidiary in existence on the date hereof and listed in Schedule 12(b)
unless such new Subsidiary is a wholly-owned Subsidiary and is designated by
Laurus as either a co-borrower or guarantor hereunder and such Subsidiary shall
have entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of such Subsidiary’s assets to secure the Obligations; (vii)
directly or indirectly, prepay any indebtedness (other than to Laurus and in
the ordinary course of business), or repurchase, redeem, retire or otherwise
acquire any indebtedness (other than to Laurus and in the ordinary course of
business) except to make scheduled payments of principal and interest thereof;
(viii) enter into any merger, consolidation or other reorganization with or
into any other Person or acquire all or a portion of the assets or Stock of any
Person or permit any other Person to consolidate with or merge with it, unless
(1) such Company is the surviving entity of such merger or consolidation,
(2) no Event of Default shall exist immediately prior to and after giving
effect to such merger or consolidation, (3) such Company shall have
provided Laurus copies of all documentation relating to such merger or
consolidation and (4) such Company shall have provided Laurus with at least
thirty (30) days’ prior written notice of such merger or consolidation; (ix)
materially change the nature of the business in which it is presently engaged;
(x) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under
any circumstances) restrict its or any of its Subsidiaries’ right to perform
the provisions of this Agreement or any of the Ancillary Agreements; (xi)
change its fiscal year or make any changes in accounting treatment and
reporting practices without prior written notice to Laurus except as required
by GAAP or in the tax reporting treatment or except as required by law; (xii)
enter into any transaction with any employee, director or Affiliate, except in
the ordinary course on arms-length terms; (xiii) bill Accounts under any name
except the present name of such Company; or (xiv) sell, lease, transfer or
otherwise dispose of any of its properties or assets, or any of the properties
or assets of its Subsidiaries, except for (1) the sale of Inventory in the
ordinary course of business and (2) the disposition or transfer in the ordinary
course of business during any fiscal year of obsolete and worn-out Equipment
and only to the extent that (x) the proceeds of any such disposition are used
to acquire replacement Equipment which is subject to Laurus’ first priority
security interest or are used to repay Loans or to pay general corporate
expenses, or (y) following the occurrence of an Event of Default which
continues to exist, the proceeds of which are remitted to Laurus to be held as
cash collateral for the Obligations.

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

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

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

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

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

 26
 

 

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

(p)           Compliance with Laws.  The operation of each of its and each of its
Subsidiaries’ business is and shall continue to be in compliance in all
material respects with all applicable federal, state and local laws, rules and
ordinances, including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health and safety and environmental matters.

(q)           Notices.  It and each of its Subsidiaries shall
promptly inform Laurus in writing of: 
(i) the commencement of all proceedings and investigations by or before
and/or the receipt of any notices from, any governmental or nongovernmental
body and all actions and proceedings in any court or before any arbitrator
against or in any way concerning any event which could reasonably be expected
to have singly or in the aggregate, a Material Adverse Effect; (ii) any change
which has had, or could reasonably be expected to have, a Material Adverse
Effect; (iii) any Event of Default or Default; and (iv) any default or any
event which with the passage of time or giving of notice or both would
constitute a default under any agreement for the payment of money to which it
or any of its Subsidiaries is a party or by which it or any of its Subsidiaries
or any of its or any such Subsidiary’s properties may be bound the breach of
which would have a Material Adverse Effect.

(r)            Margin Stock.  It shall not permit any of the proceeds of
the Loans made hereunder to be used directly or indirectly to “purchase” or “carry”
“margin stock” or to repay indebtedness incurred to “purchase” or “carry” “margin
stock” within the respective meanings of each of the quoted terms under Regulation
U of the Board of Governors of the Federal Reserve System as now and from time
to time hereafter in effect.

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

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

(u)           Financing Right of First Refusal.

(i)         It hereby grants to Laurus a right of
first refusal to provide any Additional Financing (as defined below) to be
issued by any Company and/or any of its 

 27
 

 

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

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

(v)           Prohibition of Amendments to
Working Capital Loan Documents.  It
will not, without the prior written consent of Laurus, (i) amend, modify or in
any way alter the terms of the Working Capital Loan Documents, except to the
extent permitted by the terms of the Intercreditor Agreement or (ii) permit, at
any time, the amount of Working Capital Lender Loans to exceed the Working
Capital Lender Borrowing Base.

(w)          Prohibition of Amendments to
Subordinated Debt Documentation.  It
shall not, without the prior written consent of Laurus, amend, modify or in any
way alter the terms of any of the Subordinated Debt Documentation.

(x)            Prohibition of Grant of
Collateral for Subordinated Debt Documentation.  It shall not, without the prior written
consent of Laurus, grant or permit any of its Subsidiaries to grant to any
Person any Collateral of such Company or any collateral of any of its
Subsidiaries as security for any obligation arising under the Subordinated Debt
Documentation.

(y)           Prohibitions of Payment Under
Subordinated Debt Documentation. 
Neither it nor any of its Subsidiaries shall, without the prior written
consent of Laurus, make any payments in respect of the indebtedness evidenced
by the Subordinated Debt Documentation, other than as expressly permitted by
the terms of the Subordination Agreement.

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

 28
 

 

Agreement or any Ancillary Agreement,
and/or (c) to enable Laurus to exercise all or any of the rights and powers
herein granted or any Ancillary Agreement.

15.           Representations,
Warranties and Covenants of Laurus.  Laurus hereby
represents, warrants and covenants to each Company as follows:

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

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

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

(d)           Investment for Own Account.  The Securities are being issued to Laurus for
its own account for investment only, and not as a nominee or agent and not with
a view towards or for resale in connection with their distribution.

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

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

 

 29

 

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

(h)           Patriot
Act.  Laurus certifies that, to the
best of Laurus’ knowledge, Laurus has not been designated, and is not owned or
controlled, by a “suspected terrorist” as defined in Executive Order
13224.  Laurus seeks to comply with all
applicable laws concerning money laundering and related activities.  In furtherance of those efforts, Laurus
hereby represents, warrants and covenants that: 
(i) none of the cash or property that Laurus will use to make the Loans
has been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no disbursement by Laurus to any
Company to the extent within Laurus’ control, shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001.  Laurus shall promptly notify the
Company Agent if any of these representations ceases to be true and accurate
regarding Laurus.  Laurus agrees to
provide the Company any additional information regarding Laurus that the
Company deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities.  Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus’ investment in the Parent.  Laurus further understands that the Parent
may release information about Laurus and, if applicable, any underlying
beneficial owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of relevant
rules and regulations under the laws set forth in subsection (ii) above.

(i)            Limitation
on Acquisition of Common Stock. 
Notwithstanding anything to the contrary contained in this Agreement,
any Ancillary Agreement, or any document, instrument or agreement entered into
in connection with any other transaction entered into by and between Laurus and
any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
not acquire stock in the Parent (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Parent, or otherwise, and such options, warrants, conversion or other
rights shall not be exercisable) to the extent such stock acquisition would
cause any interest (including any original issue discount) payable by any
Company to Laurus not to qualify as portfolio interest, within the meaning of
Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”)
by reason of Section 881(c)(3) of the Code, taking into account the
constructive ownership rules under Section 871(h)(3)(C) of the Code (the “Stock
Acquisition Limitation”).  The Stock
Acquisition Limitation shall automatically become null and void without any
notice to any Company upon the Parent’s delivery to Laurus of a Notice of
Redemption (as defined in the Note) .

16.           Power of Attorney.  Each Company hereby appoints Laurus, or any
other Person whom Laurus may designate as such Company’s attorney, with power
to:  (i) endorse such Company’s name on
any checks, notes, acceptances, money orders, drafts or other forms of 

 30
 

 

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

17.           Term of Agreement.  Laurus’ agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term.  At
Laurus’ election following the occurrence of an Event of Default, Laurus may
terminate this Agreement.  The
termination of the Agreement shall not affect any of Laurus’ rights hereunder
or any Ancillary Agreement and the provisions hereof and thereof shall continue
to be fully operative until all transactions entered into, rights or interests
created and the Obligations have been irrevocably disposed of, concluded or
liquidated.  Notwithstanding the
foregoing, Laurus shall release its security interests at any time after thirty
(30) days notice upon irrevocable payment to it of all Obligations if each
Company shall have (i) provided Laurus with an executed release of any and all
claims which such Company may have or thereafter have under this Agreement and
all Ancillary Agreements and (ii) paid to Laurus an early payment fee in an
amount equal to (1) five percent (5%) of the Capital Availability Amount if
such payment occurs prior to the first anniversary of the Closing Date,
(2) four percent (4%) of the Capital Availability Amount if such payment
occurs on or after the first anniversary of the Closing Date and prior to the
second anniversary of the Closing Date and (3) three percent (3%) of the
Capital Availability Amount if such termination occurs thereafter during the
Term; such fee being intended to compensate Laurus for its costs and expenses
incurred in initially approving this Agreement or extending same. Such early
payment fee shall be due and payable jointly and severally by the Companies to
Laurus upon termination by acceleration of this Agreement by Laurus due to the
occurrence and continuance of an Event of Default.

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

 31
 

 

19.           Events of Default.  The occurrence of any of the following shall
constitute an “Event of Default”:

(a)           failure
to make payment of any of the Obligations when required hereunder, and, in any
such case, such failure shall continue for a period of three (3) days following
the date upon which any such payment was due;

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

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

(d)           any
representation, warranty or statement made by any Company or any of its
Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
or document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should prove to be false or
misleading in any material respect on the date as of which made or deemed made;

(e)           the
occurrence of any default (or similar term) in the observance or performance of
any other agreement or condition relating to any indebtedness or contingent
obligation of any Company or any of its Subsidiaries (including, without
limitation, the indebtedness evidenced by the Working Capital Lender Loan
Documents or the Subordinated Debt Documentation) beyond the period of grace
(if any), the effect of which default is to cause, or permit the holder or
holders of such indebtedness or beneficiary or beneficiaries of such contingent
obligation to cause, such indebtedness to become due prior to its stated
maturity or such contingent obligation to become payable;

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

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

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

(i)            any
Company or any of its Subsidiaries shall (i) apply for, consent to or
suffer to exist the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking 

 32
 

 

to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to without challenge within ten (10) days of
the filing thereof, or failure to have dismissed within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws,
or (vii) take any action for the purpose of effecting any of the foregoing;

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

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

(l)            any
“Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act, as in effect on the date hereof) is or becomes the “beneficial
owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act),
directly or indirectly, of 35% or more on a fully diluted basis of the then
outstanding voting equity interest of any Company (other than a “Person” or “group”
that beneficially owns 35% or more of such outstanding voting equity interests
of the respective Company on the date hereof) or (ii) the Board of Directors of
the Parent shall cease to consist of a majority of the Parent’s board of
directors on the date hereof (or directors appointed by a majority of the board
of directors in effect immediately prior to such appointment);

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

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

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

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

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

 33
 

 

thirty (30) days of the notice thereof or list the
Common Stock on another Principal Market within sixty (60) days of such notice;

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

(s)           any
Company, or any of its Subsidiaries shall take or participate in any action
which would be prohibited under the provisions of any of the Subordinated Debt
Documentation or Working Capital Lender Loan Documents or make any payment on
the indebtedness evidenced by the Subordinated Debt Documentation to a Person
that was not entitled to receive such payments under the subordination
provisions of applicable Subordinated Debt Documentation.

20.           Remedies.  Following the occurrence of an Event of
Default, Laurus shall have the right to demand repayment in full of all
Obligations, whether or not otherwise due. 
Until all Obligations have been fully and indefeasibly satisfied, Laurus
shall retain its Lien in all Collateral. 
Laurus shall have, in addition to all other rights provided herein and
in each Ancillary Agreement, the rights and remedies of a secured party under
the UCC, and under other applicable law, all other legal and equitable rights
to which Laurus may be entitled, including the right to take immediate
possession of the Collateral, to require each Company to assemble the
Collateral, at Companies’ joint and several expense, and to make it available
to Laurus at a place designated by Laurus which is reasonably convenient to
both parties and to enter any of the premises of any Company or wherever the
Collateral shall be located, with or without force or process of law, and to
keep and store the same on said premises until sold (and if said premises be
the property of any Company, such Company agrees not to charge Laurus for
storage thereof), and the right to apply for the appointment of a receiver for
such Company’s property.  Further, Laurus
may, at any time or times after the occurrence of an Event of Default, sell and
deliver all Collateral held by or for Laurus at public or private sale for
cash, upon credit or otherwise, at such prices and upon such terms as Laurus,
in Laurus’ sole discretion, deems advisable or Laurus may otherwise recover
upon the Collateral in any commercially reasonable manner as Laurus, in its
sole discretion, deems advisable.  The
requirement of reasonable notice shall be met if such notice is mailed postage
prepaid to Company Agent at Company Agent’s address as shown in Laurus’
records, at least ten (10) days before the time of the event of which notice is
being given.  Laurus may be the purchaser
at any sale, if it is public.  In
connection with the exercise of the foregoing remedies, Laurus is granted
permission to use all of each Company’s Intellectual Property.  The proceeds of sale shall be applied first
to all costs and expenses of sale, including attorneys’ fees, and second to the
payment (in whatever order Laurus elects) of all Obligations.  After the indefeasible payment and
satisfaction in full of all of the Obligations, and after the payment by Laurus
of any other amount required by any provision of law, including Section 9-608(a)(1)
of the UCC (but only after Laurus has received what Laurus considers reasonable
proof of a subordinate party’s security interest), the surplus, if any, shall
be paid to Company Agent (for the benefit of the applicable Companies) or its
representatives or to whosoever may be lawfully entitled to receive the same,
or as a court of competent jurisdiction may direct.  The Companies shall remain jointly and
severally liable to Laurus for any 

 34
 

 

deficiency.  In addition, the Companies shall jointly and
severally pay Laurus a liquidation fee (“Liquidation Fee”) in the amount
of five percent (5%) of the actual amount collected in respect of each Account
outstanding at any time during a Liquidation Period”.  For purposes hereof, “Liquidation Period”
means a period:  (i) beginning on the
earliest date of (x) an event referred to in Section 19(i) or 19(j), or
(y) the cessation of any Company’s business; and (ii) ending on the date on
which Laurus has actually received all Obligations due and owing it under this
Agreement and the Ancillary Agreements. 
The Liquidation Fee shall be paid on the date on which Laurus collects
the applicable Account by deduction from the proceeds thereof.  Each Company and Laurus acknowledge that the
actual damages that would be incurred by Laurus after the occurrence of an
Event of Default would be difficult to quantify and that such Company and
Laurus have agreed that the fees and obligations set forth in this Section and
in this Agreement would constitute fair and appropriate liquidated damages in
the event of any such termination.

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

22.           Expenses.  The Companies shall jointly and severally pay
all of Laurus’ out-of-pocket costs and expenses, including reasonable fees and
disbursements of in-house or outside counsel and appraisers, in connection with
the preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary
Agreement.  The Companies shall also
jointly and severally pay all of Laurus’ reasonable fees, charges,
out-of-pocket costs and expenses, including fees and disbursements of counsel
and appraisers, in connection with (a) the preparation, execution and delivery
of any waiver, any amendment thereto or consent proposed or executed in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements, (b) Laurus’ obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not limited
to, the enforcement or defense of Laurus’ security interests, assignments of
rights and Liens hereunder as valid perfected security interests, (c) any
attempt to inspect, verify, protect, collect, sell, liquidate or otherwise
dispose of any Collateral, (d) any appraisals or re-appraisals of any
property (real or personal) pledged to Laurus by any Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the
Obligations hereunder and (e) any consultations in connection with any of the
foregoing.  The Companies shall also
jointly and severally pay Laurus’ customary bank charges for all bank services
(including wire transfers) performed or caused to be performed by Laurus 

 35
 

 

for
any Company or any of its Subsidiaries at any Company’s or such Subsidiary’s
request or in connection with any Company’s loan account with Laurus.  All such costs and expenses together with all
filing, recording and search fees, taxes and interest payable by the Companies
to Laurus shall be payable on demand and shall be secured by the
Collateral.  If any tax by any
Governmental Authority is or may be imposed on or as a result of any
transaction between any Company and/or any Subsidiary thereof, on the one hand,
and Laurus on the other hand, which Laurus is or may be required to withhold or
pay, the Companies hereby jointly and severally indemnifies and holds Laurus
harmless in respect of such taxes, and the Companies will repay to Laurus the
amount of any such taxes which shall be charged to the Companies’ account; and
until the Companies shall furnish Laurus with indemnity therefor (or supply
Laurus with evidence satisfactory to it that due provision for the payment thereof
has been made), Laurus may hold without interest any balance standing to each
Company’s credit and Laurus shall retain its Liens in any and all Collateral.

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

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

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

26.           Indemnity.  Each Company hereby jointly and severally
indemnify and hold Laurus, and its respective affiliates, employees, attorneys
and agents (each, an “Indemnified Person”), harmless from and against
any and all suits, actions, proceedings, claims, damages, losses, liabilities
and expenses of any kind or nature whatsoever (including attorneys’ fees and 

 36
 

 

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

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

28.           Borrowing Agency Provisions.

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

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

(c)           All
Obligations shall be joint and several, and the Companies shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation 

 37
 

 

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

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

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

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

Notices shall be provided
as follows:

	
  If to Laurus:

  	
  Laurus Master Fund, Ltd.

  
	
   

  	
  c/o Laurus Capital Management, LLC

  
	
   

  	
  825 Third Avenue, 14th Fl.

  
	
   

  	
  New York, New York 10022

  
	
   

  	
  Attention:

  	
  John E. Tucker, Esq.

  
	
   

  	
  Telephone:

  	
  (212) 541-4434

  
	
   

  	
  Telecopier:

  	
  (212) 541-5800

  

 

 38
 

 

 

	
  With a copy to:

  	
  Loeb & Loeb & Loeb LLP

  
	
   

  	
  345 Park Avenue

  
	
   

  	
  New York, New York 10154

  
	
   

  	
  Attention:

  	
  Scott J. Giordano, Esq.

  
	
   

  	
  Telephone:

  	
  (212) 407-4000

  
	
   

  	
  Facsimile:

  	
  (212) 407-4990

  

 

	
  If to any Company,

  	
   

  	
   

  
	
  or Company
  Agent:

  	
  IWT Tesoro Corporation

  
	
   

  	
  191 Post Road West

  
	
   

  	
  Westport, Connecticut 06880

  
	
   

  	
  Attention:

  	
  Henry J. Boucher, Jr., President

  
	
   

  	
  Telephone:

  	
  (203)221-2770

  
	
   

  	
  Facsimile:

  	
  (203) 221-2797

  	
   

  

 

	
  With a copy to:

  	
  Rader and Coleman, P.L.

  
	
   

  	
  2101 N.W. Boca Raton Blvd., Suite 1

  
	
   

  	
  Boca Raton, FL 33431

  
	
   

  	
  Attention:

  	
  Gayle Coleman, Esq.

  	
   

  
	
   

  	
  Telephone:

  	
  (561) 368-0545

  	
   

  
	
   

  	
  Facsimile:

  	
  (561) 367-1725

  	
   

  
					

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

30.           Governing
Law, Jurisdiction and Waiver of Jury Trial.

(a)           THIS AGREEMENT AND
THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

(b)           EACH COMPANY HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF
NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE
ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND LAURUS, ON THE
OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR
TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANY ACKNOWLEDGE
THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED
OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER  PROVIDED,
THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR
THE 

 39
 

 

OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF LAURUS.  EACH COMPANY
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION
WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY
AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE
DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

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

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

32.           Entire Understanding; Maximum
Interest.  This Agreement and the Ancillary Agreements
contain the entire understanding among each Company and Laurus as to the
subject matter hereof and thereof and any promises, representations, warranties
or guarantees not herein contained shall have no force and effect unless in
writing, signed by each Company’s and Laurus’ respective officers.  Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. 
Nothing contained in this Agreement, any Ancillary Agreement or in any
document referred to herein or delivered in connection herewith shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum rate permitted by applicable law.  In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Companies to Laurus and thus refunded to
the Companies.

 40
 

 

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

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

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

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

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

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

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

 41
 

 

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

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

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES
LAWS.  THIS NOTE MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IWT TESORO CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.”

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

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

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

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

 42
 

 

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

 43
 

 

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

	
  

  	
  IWT TESORO CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INTERNATIONAL WHOLESALE TILE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

 44

Annex A - Definitions

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

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

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

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

“Ancillary Agreements” means the Note, the
Warrants, the Registration Rights Agreements, each Guaranty, each Security
Document and all other agreements, instruments, documents, mortgages, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, trust agreements and guarantees whether heretofore, concurrently,
or hereafter executed by or on behalf of any Company, any of its Subsidiaries
or any other Person or delivered to Laurus, relating to this Agreement or to
the transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may
be amended, supplemented, restated or otherwise modified from time to time.

“Average Loan Amount” has the meaning given to
such term in Section 5(b)(ii).

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

 

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

“Borrowing Base” means at the date of
determination thereof, the difference, if any, between (a) an amount equal to
the sum of (i) 90% of the net amount of Eligible Accounts outstanding at such
date; plus (ii) 95% of the insured net amount of Eligible Extended Term
Accounts at such date; plus (iii) the sum of (1) 70% of the value of Eligible
Inventory consisting of floor tile, wall tile, marble and decorative tile; plus
(2) 55% of the value of Eligible Inventory consisting of trim; plus (3) 45% of
Listello; plus (4) 15% of Intransit Inventory at such date, each calculated on
the basis of the lower of cost or market with the cost of raw materials and
finished goods calculated on a first-in, first-out basis; provided, however,
such sum shall not exceed 70% of the value of the Borrowing Base and (b) the
amount of Working Capital Lender Loans outstanding on such date.

“Borrowing Base Certificate” has the meaning
given to such term in the Working Capital Lender Loan Agreement as in effect on
the Closing Date.

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

“Capital Availability Amount” means $5,000,000.

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

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

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

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

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

(a)           all Inventory;

(b)           all Equipment;

 2
 

 

(c)           all Fixtures;

(d)           all General Intangibles;

(e)           all Accounts;

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

(g)           all Investment Property;

(h)           all Stock;

(i)            all Chattel Paper;

(j)            all Letter-of-Credit Rights;

(k)           all Instruments;

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

(m)          all Books and Records;

(n)           all Intellectual Property;

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

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

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

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

“Company Agent” means Parent

“Contract Rate” has the meaning given such term
in the respective Note.

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

 3
 

 

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

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

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

“Eligible Account” has the meaning given to
such term in the Working Capital Lender Loan Agreement as in effect on the
Closing Date.

“Eligible Inventory” has the meaning given to
such term in the Working Capital Lender Loan Agreement as in effect on the
Closing Date.

“Eligible Extended Term Account” has the
meaning given to such term in the Working Capital Lender Loan Agreement as in
effect on the Closing Date.

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

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

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

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

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

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

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

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

“Formula Amount” has the meaning given such
term in Section 2(a)(i).

 4
 

 

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

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

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

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

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

“Guarantor” means each Person that executes a
guaranty or a support, put or other similar agreement in favor of Laurus in
connection with the transactions contemplated by this Agreement.

“Guaranty” means any agreement to perform all
or any portion of the Obligations on behalf of any Company for the benefit of
Laurus, together with all amendments, modifications and supplements thereto.

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

 5
 

 

“Intellectual Property” means any and all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
Licenses, information and other proprietary rights and processes.

“Intercreditor Agreement” means the Senior
Subordination Agreement among Laurus, Working Capital Lender, Company and each
Guarantor.

“Intransit Inventory” has the meaning given to
such term in the Working Capital Lender Loan Agreement as in effect on the
Closing Date.

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

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

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

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

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

“Loans” has the meaning given such term in
Section 2(a)(i) and shall include all other extensions of credit hereunder and
under any Ancillary Agreement.

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

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

 6
 

 

any of its Subsidiary’s
ability to pay or perform the Obligations in accordance with the terms hereof
or any Ancillary Agreement, (c) the value of the Collateral, the Liens on the
Collateral or the priority of any such Lien or (d) the practical realization of
the benefits of Laurus’ rights and remedies under this Agreement and the
Ancillary Agreements.

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

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

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

“Original Security
Agreement” shall have the meaning set forth in the preamble hereto.

“Overadvance” has the meaning given to such
term in Section 5(b)(iii).

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

“Permitted Liens” means (a) Liens of carriers,
warehousemen, artisans, bailees, mechanics and materialmen incurred in the
ordinary course of business securing sums not overdue; (b) Liens incurred in
the ordinary course of business in connection with worker’s compensation,
unemployment insurance or other forms of governmental insurance or benefits,
relating to employees, securing sums (i) not overdue or (ii) being diligently
contested in good faith provided that adequate reserves with respect thereto
are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; (c) Liens in favor of 

 7
 

 

Laurus; (d) Liens for
taxes (i) not yet due or (ii) being diligently contested in good faith by
appropriate proceedings, provided that adequate reserves with respect thereto
are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; and which have no effect on the priority
of Liens in favor of Laurus or the value of the assets in which Laurus has a
Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the
extent permitted in this Agreement ; (f) Liens in favor of the Working Capital
Lender; and (g) Liens specified on Schedule 2 hereto.

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

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

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

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

“Purchase Money Lien” means any Lien upon any
fixed assets that secures the Purchase Money Indebtedness related thereto but
only if such Lien shall at all times be confined 

 8
 

 

solely to the asset the
purchase price of which was financed or refinanced through the incurrence of
the Purchase Money Indebtedness secured by such Lien and only if such Lien
secures only such Purchase Money Indebtedness.

“Registration Rights Agreements” means that
certain Minimum Borrowing Note Registration Rights Agreement dated as of the
July __, 2005 by and between the Parent and Laurus and each other registration
rights agreement by and between the Parent and Laurus, as each of the same may
be amended, modified and supplemented from time to time.

“Revolving Note” means that certain Amended and
Restated Secured Revolving Note dated as of the Closing Date made by the
Companies in favor of Laurus in the original principal amount of $5,000,000, as
the same may be amended, supplemented, restated and/or otherwise modified from
time to time.

“SEC” means the Securities and Exchange
Commission.

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

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

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

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

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

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

“Subordinated Debt Documentation” means any and
all agreements, instruments or documents which now or at any time hereafter are
executed and/or delivered by any Company or its Subsidiaries with or in favor
of any subordinated lender which evidences the principal, interest and other
amounts owed by any of its Subsidiaries to such subordinated lender.

“Subsidiary” means, with respect to any Person,
(i) any other Person whose shares of stock or other ownership interests having
ordinary voting power (other than stock or other ownership interests having
such power only by reason of the happening of a contingency) to elect a
majority of the directors or other governing body of such other Person, are
owned, 

 9
 

 

directly or indirectly,
by such Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.

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

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

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

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

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

“Working Capital Lender” means Fleet Capital
Corporation, and, if at any time, the Working Capital Lender shall assign or
syndicate all or any of the Working Capital Lender Loans, such term shall
include such assignee or other such members of the syndicate.

“Working Capital Lender Borrowing Base” has the
meaning given to the terms “Borrowing Base” in the Working Capital Lender Loan
Agreement as in effect on the Closing Date.

“Working Capital Lender Loan Agreement” means
the Amended and Restated Loan and Security Agreement dated as of December 31,
2004 among Working Capital Lender, Parent and Eligible Subsidiary.

“Working Capital Lender Loans” has the meaning
given to the terms Loans (as such term is defined in the Working Capital Lender
Loan Agreement).

“Working Capital Lender Loan Documents” means
collectively, the Working Capital Lender Loan Agreement and all agreements,
instruments, documents,  mortgages,
pledges, powers of attorney, consents, assignments, contracts, notice, security
agreements, trust 

 10
 

 

agreements and guarantees
executed in connection with the Working Capital Lender Loan Agreement.

 

 11

 

Exhibit A

Eligible Subsidiaries

International Wholesale Tile, Inc.

 

Exhibit B

Borrowing Base
Certificate

[To be inserted]Exhibit 10.40

THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS.  THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

AMENDED AND RESTATED SECURED REVOLVING NOTE

FOR VALUE
RECEIVED, each of IWT TESORO CORPORATION, a Nevada corporation (the “Parent”), and the other companies listed on Exhibit A
attached hereto (such other companies together with the Parent, each a “Company” and collectively, the “Companies”),
jointly and severally, promises to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or its registered assigns or successors in
interest, the sum of Five Million Dollars ($5,000,000), , or, if different, the
aggregate principal amount of all Loans (as defined in the Security Agreement
referred to below), together with any accrued and unpaid interest hereon, on
August 25, 2008 (the “Maturity Date”)
if not sooner  indefeasibly paid in full.

Capitalized terms
used herein without definition shall have the meanings ascribed to such terms
in the Security Agreement among the Companies and the Holder dated as of the
date hereof (as amended, modified and/or supplemented from time to time, the “Security Agreement”).

This Amended and
Restated Secured Revolving Note (the “Note”) replaces in its entirety that
certain Secured Revolving Note issued by the Companies to the Holder on August
24, 2005  (such note, the “Original Note”).

The following terms shall apply to this Amended and Restated Secured
Revolving Note (this “Note”):

ARTICLE I

CONTRACT RATE AND MINIMUM BORROWING NOTE

1.1           Contract
Rate.  Subject to Sections 3.2 and
4.10, interest payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate
per annum equal to the “prime rate” published in The Wall Street Journal
from time to time (the “Prime Rate”),
plus one and one-half percent (1.5 percent) from the date of the Original Note
through July 21, 2006 and thereafter eight and one-half percent (8.5%) (the “Contract Rate”).  The Contract Rate shall be increased or
decreased as the case may be for each increase or decrease in the Prime Rate in
an amount equal to such increase or decrease in the Prime Rate; each change to
be effective as of the day of the change in the Prime Rate.  Subject to Section 1.2, the Contract Rate
shall not at any time be less than seven and one-half percent (7.5%).  Interest shall be (i) calculated on the basis
of a 360 day year, and (ii) payable monthly, in arrears, 

 	   :
 	  
 	  
  
 

  
 

 

commencing on September 1, 2006 on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date,
and on the Maturity Date, whether by acceleration or otherwise.

1.2           Contract
Rate Adjustments and Payments.  The
Contract Rate shall be calculated on the last business day of each calendar
month hereafter (other than for increases or decreases in the Prime Rate which
shall be calculated and become effective in accordance with the terms of
Section 1.1) until the Maturity Date (each a “Determination
Date”) and shall be subject to adjustment as set forth herein.

ARTICLE II

EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS

2.1           Events
of Default.  The occurrence of an
Event of Default under the Security Agreement shall constitute an event of
default (“Event of Default”)
hereunder.

2.2           Default
Interest.  Following the occurrence
and during the continuance of an Event of Default, the Companies shall, jointly
and severally, pay additional interest on the outstanding principal balance of
this Note in an amount equal to two percent (2%) per month, and all outstanding
Obligations, including unpaid interest, shall continue to accrue interest at
such  additional interest rate from the
date of such Event of Default until the date such Event of Default is cured or
waived.

2.3           Default
Payment.  Following the occurrence
and during the continuance of an Event of Default, the Holder, at its option,
may elect, in addition to all rights and remedies of the Holder under the
Security Agreement and the other Ancillary Agreements and all obligations  and liabilities of each Company under the
Security Agreement and the other Ancillary Agreements, to require the
Companies, jointly and severally, to make a Default Payment (“Default Payment”).  The Default Payment shall be 130% of the
outstanding principal amount of the Note, plus accrued but unpaid interest, all
other fees then remaining unpaid, and all other amounts payable hereunder.  The Default Payment shall be applied first to
any fees due and payable to the Holder pursuant to the Notes , the Security
Agreement and/or the Ancillary Agreements, then to accrued and unpaid interest
due on the Notes and then to the outstanding principal balance of the
Notes.  The Default Payment shall be due
and payable immediately on the date that the Holder has exercised its rights
pursuant to this Section 3.3.

ARTICLE III

MISCELLANEOUS

3.1           Cumulative
Remedies.  The remedies under this
Note shall be cumulative.

3.2           Failure
or Indulgence Not Waiver.  No failure
or delay on the part of the Holder hereof in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude 

 2
 

 

other or further exercise thereof or of any other right, power or
privilege.  All rights and remedies
existing hereunder are cumulative to, and not exclusive of, any rights or
remedies otherwise available.

3.3           Notices.  Any notice herein required or permitted to be
given shall be in writing and shall be deemed effective given (a) upon personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile
if sent during normal business hours of the recipient, if not, then on the next
business day, (c) five days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. 
All communications shall be sent to the respective Company at the
address provided for such Company in the Security Agreement executed in
connection herewith, and to the Holder at the address provided in the Security
Agreement for the Holder, with a copy to John E. Tucker, Esq., 825 Third
Avenue, 14th Floor, New York, New York 10022, facsimile
number (212) 541-4434, or at such other address as the respective Company or
the Holder may designate by ten days advance written notice to the other
parties hereto.

3.4           Amendment
Provision.  The term “Note” and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.

3.5           Assignability.  This Note shall be binding upon each Company
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Security Agreement.  No Company may not assign any of its
obligations under this Note without the prior written consent of the Holder,
any such purported assignment without such consent being null and void.

3.6           Cost
of Collection.  In case of any Event
of Default under this Note, the Companies shall, jointly and severally, pay the
Holder the Holder’s reasonable costs of collection, including reasonable
attorneys’ fees.

3.7           Governing
Law, Jurisdiction and Waiver of Jury Trial.

(a)           THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

(b)           EACH COMPANY HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF
NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND THE
HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY AGREEMENT OR
ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY
AGREEMENTSPROVIDED, THAT 

 3
 

 

EACH COMPANY
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO
PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY
OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR
ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF THE HOLDER.  EACH
COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS. 
EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT
AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN THE
SECURITY AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF THE COMPANY’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT
IN THE U.S. MAILS, PROPER POSTAGE PREPAID

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

3.8           Severability.  In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or enforceability
of any other provision of this Note.

3.9           Maximum
Payments.  Nothing contained herein
shall be deemed to establish or require the payment of a rate of interest or
other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.

 4
 

 

 

3.10         Security
Interest and Guarantee.  The Holder
has been granted a security interest (i) in certain assets of the Companies as
more fully described in the Security Agreement and (ii) pursuant to the Stock
Pledge Agreement dated as of the date hereof. 
The obligations of the Companies under this Note are guaranteed by
certain Subsidiaries of the Companies pursuant to the Subsidiary Guaranty dated
as of the date hereof.

3.11         Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.

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

 5
 

 

 

IN
WITNESS WHEREOF, each Company has caused this Amended and
Restated Secured Revolving Note to be signed in its name effective as of this
___ day of July, 2006.

	
   

  	
  IWT TESORO CORPORATION

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
  WITNESS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  THE
  TILE CLUB, INC.

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
  WITNESS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
				

 

 6

 

EXHIBIT
A

OTHER
COMPANIES

International Wholesale Tile, Inc., a Florida
corporation

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