Document:

Note Purchase Agreement dated 11/6/01

 

Exhibit 10.35

NOTE PURCHASE AGREEMENT

     NOTE PURCHASE AGREEMENT (“Agreement”) dated as of November 6, 2001 (the
“Closing Date”) by and among Elliott Associates, L.P., a Delaware limited
partnership (“Elliott”), Alexander Finance, L.P., an Illinois limited
partnership (“Alexander” and together with Elliott, the “Purchasers”) and ISCO
International, Inc., a corporation organized and existing under the laws of
Delaware and formerly known as Illinois Superconductor Corporation (the
“Company”).

W I T N E S S E T H:

     Whereas, the Company desires to sell and issue to the Purchasers, and the
Purchasers wish to purchase from the Company, 14% promissory notes (the
“Notes”) in the aggregate principal amount of $9,425,000 for an aggregate
purchase price of $9,425,000, having the rights and privileges set forth in the
Notes in the form and substance of Exhibit A hereto and which will be secured
by all of the assets of the Company and its subsidiaries pursuant to a Security
Agreement in the form and substance of Exhibit B hereto (the “Security
Agreement”); and

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

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

ARTICLE 1

PURCHASE AND SALE OF NOTES

     Section 1.1 Purchase and Sale of Notes.

     (a)     Concurrently with the execution and delivery of this Agreement, each
Purchaser hereby purchases from the Company, and the Company hereby sells to
each Purchaser, a Note in the amount set forth opposite such Purchaser’s name
on Schedule A hereto for the payment of the amount set forth in Schedule A,
provided that the obligations of each Purchaser to purchase a Note is subject
to the condition set forth in Section 1.2 below. All Notes being issued on the
date hereof have an aggregate principal amount of $7,236,112. In addition, as
set forth in Schedule A, on November 8, 2001, Alexander will purchase a further
Note (the “Second Alexander Note”) in the aggregate principal amount of
$2,188,888. Except for the condition set forth in Section 1.2 below,
Alexander’s obligation to purchase the Second Alexander Note is absolute and
unconditional.

 

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

		
	 	     (i)     the Guaranties;

		
	 	     (ii)     the Security Agreement;

		
	 	     (iii)     UCC financing statements, naming Purchasers as the secured
parties and the Company as the debtor, substantially in the form and
substance of Exhibit D hereto (the “UCC Financing Statements”);

		
	 	     (iv)     Patent and Trademark financing statements naming the Purchasers
as secured parties and the Company as the debtor, substantially in the
form and substance of Exhibit E hereto (the “Patent and Trademark
Financing Statements”); and

		
	 	     (v)     Legal Opinion of outside counsel to the Company, in the form of
Exhibit F hereto.

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

     Section 1.2 Settlement Agreement. The Purchasers obligations set forth in
Section 1.1 above are subject to the condition that the Company and Craig M.
Siegler shall have entered into a binding settlement agreement, in form and
substance satisfactory to the Purchasers, (the “Settlement Agreement”),
settling all claims in the Siegler Case (as defined in Section 3.5 below).

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

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

     (a)     Organization and Qualification. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
The Company has no subsidiaries other than the Guarantors. The Company is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not, individually
or in the aggregate, (x) adversely affect the legality, validity or
enforceability

2

 

of any of the Financing Documents in any material respect, (y) have a
material adverse effect on the results of operations, assets, or financial
condition of the Company or (z) adversely impair in any material respect the
Company’s ability to perform fully on a timely basis its obligations under the
Financing Documents (a “Material Adverse Effect”).

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

     (c)     No Conflicts. The execution, delivery and performance of the
Financing Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its Certificate of Incorporation or By-laws or (ii)
conflict with, constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company
is subject (including Federal and state securities laws and regulations), or by
which any material property or asset of the Company is bound or affected,
except in the case of each of clauses (ii) and (iii), such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect. The business of the Company is not being conducted in violation of any
law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.

     (d)     Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, or make any filing or registration
with, any court or other federal, state, local or other governmental authority
or other person in connection with the execution, delivery and performance by
the Company of the Financing Documents other than: (i) the lifting of the
Citation (as defined below); (ii) the

3

 

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

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

     (f)     SEC Documents. The Company has filed all reports or other filings
required to be filed by it under Securities Act and the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), including pursuant to Section 13(a)
or 15(d) thereof, for the three years preceding the date hereof (the foregoing
materials being collectively referred to herein as the “SEC Documents”), on a
timely basis. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act and the Exchange
Act, and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, and none of the SEC Documents, when filed, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents comply in all material respects with applicable accounting
requirements and the published rules and regulations of the Securities and
Exchange Commission with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved, except as may be otherwise
indicated in such financial statements or the notes thereto, and fairly present
in all material respects the financial position of the Company as of and for
the dates thereof and the results of operations and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal year-end
audit adjustments. Since the date of the financial statements included in the
Company’s last filed Annual Report on Form 10-K and except as disclosed on
Schedule 2.1(f), there has been no event, occurrence or development that has
had a Material Adverse Effect which is not specifically disclosed in any of the
SEC Documents.

     (g)     Brokers. The Company has taken no action which would give rise to any
claim by any person for brokerage commissions, finder’s fees or similar
payments

4

 

by the Company or the Purchasers relating to the Financing Documents or
the transactions contemplated thereby.

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

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

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

     (b)     Investment Intent. The Purchaser is acquiring its Notes, for its own
account and without a present intention to distribute or resell it in violation
of applicable securities laws.

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

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

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

5

 

ARTICLE 3

COVENANTS

     Section 3.1 Affirmative Covenants. The Company covenants that from the
date hereof and for so long as any portion of the Notes (or any amendment
thereto or instrument issued in exchange therefor) shall remain outstanding, it
will observe or perform each of the following unless such observance or
performance is expressly waived by the Purchasers in writing:

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

     (b)     Continuation of Business. Except as set forth on Schedule 3.1(b), it
will continue to conduct its business, in all material aspects, as conducted on
the day hereof in compliance in all material respects with all applicable rules
and regulations of applicable governmental authorities.

     Section 3.2 Dividends; Stock Repurchases. So long as any Notes remain
outstanding, the Company will not declare any dividends on any shares of any
class of its capital stock (other than dividends consisting solely of Common
Stock or rights to purchase Common Stock of the Company), or apply any of its
property or assets to the purchase, redemption or other retirement of, or set
apart any sum for the payment of any dividends on, or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of capital or otherwise in respect of, any shares of any class of its capital
stock.

     Section 3.3 Incurrence of Debt; Liens; Transfer of Assets to Subsidiaries.
For so long as any Notes remain outstanding, neither the Company nor any
subsidiary of the Company shall:

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

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

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

6

 

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

     Section 3.4 Future Secured Debt with Purchasers. The Purchasers and the
Company hereby agree that in the event that the Company and one or more
Purchasers enter into a secured financing transaction (a “Participating Secured
Transaction”), then each other Purchaser shall be offered the opportunity to
participate in such secured financing on the same terms, and in an amount
sufficient to maintain the relative collateral coverage of their Notes
(relative to the other Purchasers and their affiliates) by the lien on the
assets of the Company created by the Security Agreement. The Purchasers hereby
agree that, in the event a Participating Secured Transaction which complies
with this Section 3.4 is effected, the Purchasers consent to the lien on the
Company’s assets securing the debt in such transaction being pari passu with
the lien created by the Security Agreement.

     Section 3.5 Lifting of Citation.

     (a)     As soon as practicable, but by no later than the close of business on
the date of this Agreement, the Company shall have had issued, from the court
having jurisdiction over the case of Craig M. Siegler vs. Illinois
Superconductor Corporation (No. 96 Ch. 5824 Circuit Court of Cook County,
Illinois, County Department, Chancery Division) (the “Siegler Case”), an order
lifting the restraining provisions of the Citation to Discover Assets issued on
October 19, 2001 (the “Citation”) and dismissing the Siegler Case with
prejudice.

     Section 3.6 Application of Proceeds. The Company and the Purchasers
hereby agree that $4.925 million (the “Settlement Amount”) of the purchase
price of the Notes shall be immediately applied to fund the settlement
contemplated by the Settlement Agreement. To effectuate the foregoing, the
Purchasers shall directly wire the Settlement Amount to the account of Craig M.
Siegler in accordance with the terms of the Settlement Agreement, and upon
receipt thereof the Settlement Amount shall be deemed delivered as part of the
purchase price for the Notes.

7

 

ARTICLE 4

MISCELLANEOUS

     Section 4.1 Fees and Expenses. The Company shall pay upon request, the
reasonable fees and expenses of legal counsel for the Purchasers incident to
the negotiation, preparation, execution, delivery and performance of the
Financing Documents.

     Section 4.2 Entire Agreement. This Agreement, together with the Notes,
the Security Agreement, the Guaranties and the other Financing Documents,
contains the entire understanding of the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings, oral or
written, with respect to such matters.

     Section 4.3 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been delivered (i) upon receipt, when delivered personally; (ii) when sent by
facsimile, upon receipt if received on a business day prior to 5:00 p.m.
(Central Time), or the first business day following such receipt if received on
a business day after 5:00 p.m. (Central Time); or (iii) upon receipt, when
deposited with a nationally recognized overnight express courier service, fully
prepaid, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:

	 	 	 	 	 	 	 
	If to the Company:
	 	ISCO International, Inc.
	
	
	
	

	 
	 	451 Kingston Court
	
	
	
	

	 
	 	Mt. Prospect, Illinois  60056
	
	
	
	

	 
	 	Attn:  Charles F. Willes
	
	
	
	

	 
	 	Fax:  (847) 391-5015
	
	
	
	

	 	With copies to:
	 	 	 	 
	
	
	
	

	 
	 	Pepper Hamilton LLP
	
	
	
	

	 
	 	Suite 400
	
	
	
	

	 
	 	1235 Westlakes Drive
	
	
	
	

	 
	 	Berwyn, Pennsylvania  19312
	
	
	
	

	 
	 	Attn:  Michael P. Gallagher
	
	
	
	

	 
	 	Fax:  (610) 640-7835
	 
	
	
	
	

	
	
	
	

	If to Elliott:
	 	712 Fifth Avenue, 36th Floor
	
	
	
	

	 
	 	New York, New York  10019
	
	
	
	

	 
	 	Attn:  Mark Brodsky
	
	
	
	

	 
	 	Fax:  (212) 974-2092
	
	
	
	

	 	With copies to:
	 	 	 	 
	
	
	
	

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

	 
	 	551 Fifth Avenue
	
	
	
	

	 
	 	New York, NY  10176

8

 

	 	 	 	 	 	 	 
	
	
	
	

	 
	 	Attn:  Stephen M. Schultz
	 
	 	Fax:  (212) 986-8866
	 
	
	
	
	

	If to Alexander:
	 	Alexander Finance, LP
	
	
	
	

	 
	 	1560 Sherman Avenue, Suite 900
	
	
	
	

	 
	 	Evanston, Illinois  60201
	
	
	
	

	 
	 	Attn:  Brian D. Brookover
	
	
	
	

	 
	 	Fax:  (847) 733-0339
	
	
	
	

	 	With copies to:
	 	 	 	 
	
	
	
	

	 
	 	Sachnoff & Weaver
	
	
	
	

	 
	 	30 S. Wacker Drive
	
	
	
	

	 
	 	Chicago, Illinois  60606
	
	
	
	

	 
	 	Attn:  Evelyn C. Arkebauer, Esq.
	
	
	
	

	 
	 	Fax:  (312) 207-6400

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

     Section 4.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and by Purchasers holding at least a 75% of the
outstanding principal amount of the Notes; or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any other provision, condition or requirement hereof, nor shall any delay or
omission of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter.

     Section 4.5 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.

     Section 4.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. Neither the Company nor any Purchaser may assign this Agreement or
any rights or obligations hereunder without the prior written consent of the
other, except that, in connection with a transfer, in whole or in part, of its
Note as provided therein, a Purchaser may assign its rights hereunder to any
such transferee of its Note. The assignment by a party of this Agreement or
any rights hereunder shall not affect the obligations of such party under this
Agreement.

9

 

     Section 4.7 No Third-Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

     Section 4.8 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof.

     Section 4.9 Survival. The agreements, representations and warranties and
covenants contained in this Agreement shall survive the delivery of the Notes
pursuant to this Agreement.

     Section 4.10 Counterpart and Facsimile Signatures. This Agreement may be
executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party,
it being understood that both parties need not sign the same counterpart. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the executing party
with the same force and effect as if such facsimile signature page were an
original thereof.

     Section 4.11 Publicity. The Company and the Purchasers shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and neither the Company
nor any Purchaser shall issue any such press release or otherwise make any such
public statement without the prior consent of the other, which consent shall
not be unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement.

     Section 4.12 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement
shall not in any way be affected or impaired thereby and the parties will
attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

     Section 4.13 Payment of Expenses. The Company agrees to pay all costs and
expenses, including reasonable attorneys’ fees and expenses, which may be
incurred by any Purchaser in successfully enforcing any Financing Document,
including without limitation in enforcing Section 4.14 below.

     Section 4.14 Indemnification. The Company hereby agrees to indemnify,
defend and hold harmless each Purchaser and its respective partners, officers,
employees or agents (“Indemnified Parties”), from and against any and all
losses, claims, damages, liabilities and costs, including reasonable legal fees
(collectively “Losses”) (i) incurred as a result of the breach by the Company
or any subsidiary of any representation, covenant

10

 

or other provision in any Financing Document; (ii) incurred as a result of
entering into this Agreement; (iii) incurred in enforcing this Section 4.14 or
(iv) incurred involving a third-party claim and arising out of the acquisition,
holding and/or enforcement by such Purchaser of any of the Financing Documents.

     Section 4.15 Like Treatment of Purchasers. Neither the Company nor any of
its affiliates shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee, payment for the redemptions or
exchange of the Notes, or otherwise, to any holder of Notes, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver
or amendment of any terms or provisions of the Financing Documents, unless such
consideration is required to be paid to all holders of Notes bound by such
consent, waiver or amendment whether or not such holders so consent, waive or
agree to amend and whether or not such holders tender their Notes for
redemption or exchange. The Company shall not, directly or indirectly, redeem
to prepay any Notes unless such offer of redemption is made pro rata to all
holders on identical terms. The foregoing sentence shall not apply to
prepayments effected pursuant to Section 2(b) of the Notes.

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

	 	 	 	 
		ISCO INTERNATIONAL, INC
	 
		By:		/s/ Charles F. Willes
				

				    Charles F. Willes

    Executive Vice President

    and Chief Financial Officer
	 
	 
		ELLIOTT ASSOCIATES, L.P.
	 
		By:		/s/ Paul E. Singer
				

				Name:  Paul E. Singer

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

				Name:  Bradford T. Whitmore

Title: President
          BUN Partners, Inc.
          its General Partner

11

 

SCHEDULES

	 	 	 	 	 
	Schedule A
	 	Schedule of Purchasers
	
	
	
	

	Company Schedules
	 	 	 	 

EXHIBITS

	 	 	 	 	 
	Exhibit A
	 	14% Promissory Note
	
	
	
	

	Exhibit B
	 	Security Agreement
	
	
	
	

	Exhibit C
	 	Guaranties
	
	
	
	

	Exhibit D
	 	UCC Financing Statements
	
	
	
	

	Exhibit E
	 	Patent and Trademark Financing Filings
	
	
	
	

	Exhibit F
	 	Legal opinion of counsel to the Company

12

 

SCHEDULE A

	 	 	 	 	 	 	 	 	 
	 	 	Principal Amount	 	 	 	 
	 	 	of Notes to be	 	Purchase Price
	Purchaser	Purchased on 11/6/01	to be paid 11/6/01
	
	 	
	 	

	Elliott Associates, L.P.
	 	$	5,236,112	 	 	$	5,236,112	 
	
	
	
	

	Alexander Finance, L.P.
	 	$	2,000,000	 	 	$	2,000,000	 
	
	
	
	

	Total
	 	$	7,236,112	 	 	$	7,236,112	 

	 	 	 	 	 	 	 	 	 
	 	 	Principal Amount	 	 	 	 
	 	 	of Notes to be	 	Purchase Price
	Purchaser	Purchased on 11/8/01	to be paid 11/8/01
	
	 	
	 	

	Alexander Finance, L.P.
	 	$	2,188,888	 	 	$	2,188,888Security Agreement dated 11/6/01

 

Exhibit 10.36

SECURITY AGREEMENT

     Security Agreement, dated as of November 6, 2001 made by and among ISCO
International, Inc., a Delaware Corporation with offices at 451 Kingston Court,
Mt. Prospect, Illinois 60056 and formerly known as Illinois Superconductor
Corporation (the “Company”), each of the Company’s undersigned subsidiaries
(the “Subsidiaries,” the Company and Subsidiaries are hereafter collectively
referred to as the “Debtors” or individually as a “Debtor”), Elliott
Associates, L.P., a Delaware limited partnership with offices at 712 Fifth
Avenue, 36th Floor, New York, New York 10019 (“Elliott”), Alexander Finance,
LP, an Illinois limited partnership with offices at 1560 Sherman Avenue,
Evanston, IL 60201 (“Alexander”; Elliott and Alexander are sometimes
individually referred to as a “Secured Party” or collectively referred to as
“Secured Parties”) and Elliott Associates, L.P. as collateral agent (the
“Collateral Agent”).

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

     SECTION 1. Grant of Security Interest.

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

“Collateral” means all assets of the Debtors (whether currently owned or
hereafter acquired by a Debtor), including without limitation all presently
existing and hereafter arising (i) accounts, contract rights, and all other
forms of obligations owing to the Debtors from any source (“Accounts”); (ii)
all of the Debtors’ books and records, including ledgers, records indicating,
summarizing, or evidencing the Debtors’ assets or liabilities, or the
Collateral, all information relating to the Debtors’ business operations or
financial condition, all computer programs, disc or tape files, printouts, runs
or other computer prepared information, and any equipment containing such
information (the Debtors’ “Books”); (iii) all of the Debtors’ present and
hereafter acquired equipment, wherever located, and all attachments,
accessories, accessions, replacements, substitutions, additions and
improvements to any of the foregoing, wherever located (“Equipment”); (iv) all
of the Debtors’ present and hereafter acquired general intangibles and other
personal property (including, but not limited to, contract rights, rights
arising under common law, statutes or regulations, choses or things in action,
goodwill, patents and patentable inventions, whether described and claimed
therein or otherwise, and all reissues, divisions, continuations,
continuations-in-part, substitutes, renewals, and extensions thereof, and all
improvements thereon and all other rights of any kind whatsoever accruing
thereunder or pertaining thereto, trade names, trademarks, patent and trademark
applications, service marks, copyrights, copyright applications, blueprints,
drawings, purchase orders, customer lists, monies due under any royalty or
licensing agreements, infringements, claims, computer programs, discs or tapes,
deposit accounts, insurance premium rebates, tax refunds, and tax refund
claims, as well as all cash collateral that is hypothecated to secure letters
of credit or bonding obligations and the

 

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

in each case howsoever a Debtor’s interest therein may arise or appear (whether
by ownership, security interest, claim or otherwise). For purposes of this
Security Agreement, the term “Pledged Securities” means (i) all capital stock
and all other securities issued or issuable by all current and future
subsidiaries, whether currently issued or issued in the future (“Subsidiary
Securities”); (ii) any capital stock or other securities currently owned or
received by the Debtors in the future (“Further Securities”); (iii) all other
securities which may be issued or issuable in exchange for or in respect of the
Further Securities and Subsidiary Securities pursuant to the terms hereof; (iv)
all dividends, cash, instruments, securities and other property from time to
time received, receivable or otherwise distributed, in respect of, in, for, or
upon the exchange or conversion of the securities referred to in clauses (i),
(ii) and (iii) above; and (v) all rights and privileges of the Debtors with
respect to the Pledged Securities and other properties referred to in clauses
(i), (ii), (iii) and (iv).

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

     (c)     Upon the future receipt of any certificated securities by any Debtor,
such Debtor shall immediately deliver the certificates representing such
securities, together with stock powers duly executed in blank to the Collateral
Agent and corporate resolutions of the type described in Section 2.1(b) above.

2

 

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

     SECTION 2. Security for Obligations. The security interest created hereby
in the Collateral constitutes continuing collateral security for the (a) prompt
payment by the Debtors, as and when due and payable, of all amounts from time
to time owing by them to the Secured Parties under (i) the Note Purchase
Agreement (the “Note Purchase Agreement”) dated the date hereof by and among
the Company and the Secured Parties, (ii) the Company’s 14% Notes due March 31,
2003 (the “Notes”) issued pursuant to the Note Purchase Agreement, and (iii)
the Guarantees dated the date hereof issued by each of the Subsidiaries to the
Secured Parties (the “Subsidiary Guarantees”) (the Note Purchase Agreement, the
Notes, the Subsidiary Guarantees and this Security Agreement hereinafter
collectively referred to as the “Transaction Documents”), with the obligations
under this clause (a) being referred to as “Indebtedness” and (b) prompt
performance by the Debtors of each of their respective covenants and duties
under the Transaction Documents (the covenants and obligations referred to in
clauses (a) and (b) above hereafter collectively referred to as the
“Obligations”). The Debtors further jointly and severally agree that the
Collateral Agent and the Secured Parties shall have the rights stated in this
Security Agreement with respect to the Collateral in addition to all other
rights which the Secured Parties may have by law.

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

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

3

 

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

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

     (c)     No Violation. The execution and delivery of this Security Agreement
does not

4

 

violate any law or agreement governing any Debtor or to which any Debtor
is a party, and the Debtors’ certificate or articles of incorporation and
bylaws or other organizational documents do not prohibit any term or condition
of this Security Agreement. The execution and delivery hereof is in the
interest of each of the Debtors.

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

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

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

     (g)     Title. As of the date hereof, the Debtors hold good and marketable
title to all the Collateral, free and clear of all liens and encumbrances
except for the lien of this Security Agreement and Permitted Liens (as defined
in the Note Purchase Agreement). No financing statement or other evidence of a
lien or transfer covering any of the Collateral is on file in any public office
in any jurisdiction other than those which reflect the security interest
created by this Security Agreement or Permitted Liens. The Debtors shall
defend the Collateral Agent’s and Secured Parties’ rights in the Collateral
against any and all claims and demands.

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

5

 

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

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

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

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

     (m)    Taxes, Assessments and Liens. The Debtors will pay when due all
taxes, assessments and liens upon the Collateral, its use or operation and upon
the Transaction Documents. A Debtor may withhold any such payment or may elect
to contest any lien if such Debtor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as the Collateral
Agent’s and Secured Parties’ interest in the Collateral is not jeopardized in
the Collateral Agent’s sole reasonable opinion. If any of the Collateral is
subjected to a lien which is not discharged or bonded, or the enforcement
thereof stayed (in either case without granting any security interests in any
of the assets of any Debtor) within fifteen (15) days or such longer period as
is provided by applicable law, but not to exceed thirty (30) days, the Debtors

6

 

shall deposit with the Collateral Agent cash, a sufficient corporate
surety bond or other security satisfactory to the Collateral Agent (in its
discretion) in an amount adequate to provide for the discharge of the lien plus
any interest, reasonable costs, attorneys’ fees or other charges that could
accrue as a result of foreclosure or sale of the Collateral. In any contest
the Debtor or Debtors shall defend itself or themselves, the Secured Parties
and the Collateral Agent and shall satisfy any final adverse judgment before
enforcement against the Collateral. The Debtors shall name the Collateral
Agent as an additional obligee under any surety bond furnished in such contest
proceedings.

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

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

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

     (q)     The Debtors’ Right to Possession and to Collect Accounts. Except as
otherwise provided herein, until the occurrence of an Event of Default or
acceleration of Indebtedness, the Debtors may have possession of the tangible
personal property and beneficial use of all the Collateral and may use it in
any lawful manner not inconsistent with this Security Agreement or the other
Transaction Documents, provided that the Debtors’ right to possession and
beneficial use shall not apply to any Collateral where possession of the
Collateral by the Collateral Agent is required by law to perfect the Collateral
Agent’s and Secured Parties’ security interest in such Collateral. At any time
an Event of Default exists or following acceleration of Indebtedness, the
Collateral Agent may exercise its right to directly collect the Accounts and to
notify Account Debtors to make payments directly to the Collateral Agent for
application to the Indebtedness, and the Debtors authorize and direct the
Account Debtors, if the Collateral Agent exercises such right, to make payments
on the Accounts to the Collateral Agent. If the Collateral Agent at any time
has possession of any Collateral, whether before or after an Event of Default,
the Collateral Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral if the Collateral Agent takes such
action for that purpose as the Debtors shall reasonably request or as the
Collateral Agent, in the Collateral Agent’s sole reasonable discretion, shall
deem appropriate under the circumstances, but failure to honor any request by
the Debtors shall not of itself be deemed to be a failure to exercise
reasonable care. The Collateral Agent shall not be required to take any steps
necessary to preserve any rights in the Collateral against prior parties, nor
to protect, preserve or maintain any security interest given to secure the
Collateral. The Collateral Agent shall have the right to direct who shall
collect and service the Accounts.

7

 

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

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

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

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

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

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

8

 

Default has occurred under this Security Agreement.

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

     SECTION 4. Events of Default; Remedies

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

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

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

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

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

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

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

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

     (b)     Assemble Collateral. The Collateral Agent may require the Debtors to
deliver to the Collateral Agent all or any portion of the Collateral and other
documents relating to the Collateral. The Collateral Agent may require the
Debtors to assemble the Collateral and make it available to the Collateral
Agent at a place to be designated by the Collateral Agent. The Collateral
Agent also shall have full power to enter upon the property of the Debtors to
take possession of and remove the Collateral. If the Collateral contains other
goods not covered by

9

 

this Security Agreement at the time of repossession, the Debtors agree
that the Collateral Agent may take such other goods, provided that the
Collateral Agent makes reasonable efforts to return them to the Debtors after
repossession.

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

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

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

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

     (g)     Collect Revenues, Apply Accounts. The Collateral Agent, either itself
or through a receiver, may collect the payments, rents, income, and revenues
from the Collateral. The Collateral Agent may at any time in its discretion
transfer any Collateral into its own names or that of its nominees and receive
the payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as the Collateral Agent may determine. The Collateral
Agent may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as the Collateral Agent may determine,
whether or not the Indebtedness is then due. For these purposes, the
Collateral Agent may, on behalf of and in the name of the Debtors, open and
dispose of mail addressed to any Debtor; change any address to which mail and
payments are to be sent; and endorse notes, checks, drafts, money orders,
documents of title, instruments and items pertaining to payment, shipment or
storage of any Collateral. To facilitate collection, the Collateral Agent may,
notify Account Debtors and obligors on any Collateral to make payments directly
to the Collateral Agent.

10

 

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

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

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

		
	 	     (ii)     Second, to overdue interest;

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

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

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

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

     SECTION 7. Pledged Securities.

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

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

11

 

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

		
	 	     (A)    dividends and interest paid or payable other than in cash
in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange
for, any Pledged Securities,

		
	 	     (B)    dividends and other distributions paid or payable in cash
in respect of any Pledged Securities in connection with a partial
or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus, and
	 
	 	     (C)    cash paid, payable or otherwise distributed in respect of
principal of, or in redemption of, or in exchange for, any Pledged
Securities

shall be, and shall be forthwith delivered to the Collateral Agent to hold as,
Collateral and shall, if received by the Debtors, be received in trust for the
benefit of the Secured Parties, be segregated from the other property or funds
of the Debtors and be forthwith delivered to the Collateral Agent as Collateral
in the same form as so received (with any necessary endorsement) and such cash
received by the Collateral Agent will be deposited in an account held by the
Collateral Agent. The Debtors, promptly upon the request of the Collateral
Agent, shall execute such documents and do such acts as may be necessary or
desirable in the reasonable judgment of the Collateral Agent to give effect to
this Section 7(a)(ii).

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

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

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

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

12

 

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

     SECTION 8. The Collateral Agent’s Duties.

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

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

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

     (d)     The duties and obligations of the Collateral Agent shall be determined
solely by the express provisions of this Security Agreement or any amendment
hereto or any instructions permitted hereby. The Collateral Agent shall have
no obligation with respect to any other matters covered in any other document
other than as expressly provided herein, or any amendment hereto. The
Collateral Agent shall not be liable except for the performance of such duties
and obligations as are specifically set forth in this Security Agreement or as
set forth in a written amendment to this Security Agreement executed by the
parties hereto or their successors or assigns. No representations, warranties,
covenants or obligations of the Collateral Agent or any Secured Party shall be
implied with respect to this Agreement or the Collateral Agent’s services
hereunder. Without limiting the generality of the foregoing, the Collateral
Agent:

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

13

 

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

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

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

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

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

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

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

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

     SECTION 9. Miscellaneous Provisions.

     (a)     Entire Agreement; Amendments. This Security Agreement, together with
the other Transaction Documents, constitute the entire understanding and
agreement of the parties as

14

 

to the matters set forth in this Security Agreement. No alteration of or
amendment to this Security Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by the
alteration or amendment.

     (b)     CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS
SECURITY AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE
RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. THE
PARTIES IRREVOCABLY AND UNCONDITIONALLY AGREE (1) THAT ALL ACTIONS OR
PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF NEW
YORK, NEW YORK COUNTY AND THAT THE PARTIES SHALL BE SUBJECT TO THE JURISDICTION
OF SUCH COURTS, AND (2) THAT SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, SHALL CONSTITUTE PERSONAL SERVICE. EACH DEBTOR, THE
COLLATERAL AGENT AND THE SECURED PARTIES WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 9(b). EACH DEBTOR, THE COLLATERAL AGENT AND THE
SECURED PARTIES HEREBY WAIVES THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS SECURITY AGREEMENT
OR ANY OF THE ACTIONS CONTEMPLATED HEREIN, INCLUDING WITHOUT LIMITATION
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
OR STATUTORY CLAIMS. EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES
REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS
A WRITTEN CONSENT TO A TRIAL BY THE COURT.

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

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

15

 

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

		
	 	If to Elliott or the Collateral Agent:
	 
	 	Elliott Associates, L.P.

712 Fifth Avenue, 36th Floor

New York, New York 10019

Telephone: (212) 974-6000

Facsimile: (212) 974-2091

Attention: Mark Brodsky
	 
	 	With a copy to:
	 
	 	Kleinberg, Kaplan, Wolff & Cohen, P.C.

551 Fifth Avenue, 18th Floor

New York, New York 10176

Telephone: (212) 986-6000

Facsimile: (212) 986-8866

Attention: Stephen M. Schultz, Esq.
	 
	 	If to Alexander:
	 
	 	Alexander Finance, LP

1560 Sherman Avenue

Evanston, Illinois

Telephone: (847) 733-0232

Facsimile: (847) 733-0339

Attention: Brian D. Brookover
	 
	 	With a copy to:
	 
	 	Sachnoff & Weaver

30 S. Wacker Drive

Chicago, Illinois 60606

Telephone: (312) 207-3879

Facsimile: (312) 207-6400

Attention: Evelyn C. Arkebauer, Esq.
	 
	 	If to the Company or a Subsidiary:
	 
	 	ISCO International, Inc.

451 Kingston Court

Mount Prospect, Illinois 60056

Telephone: (847) 391-9400

Facsimile: (847) 391-5015

Attention:: Charles F. Willes

16

 

		
	 	With a copy to:
	 
	 	Pepper Hamilton LLP

Suite 400

1235 Westlakes Drive

Berwyn, Pennsylvania 19312

Telephone: (610) 640-7800

Facsimile: (610) 640-7835

Attention: Michael P. Gallagher, Esq.

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

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

     (g)     Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Security Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns. The Debtors
shall not, however, have the right to assign this Security Agreement without
the prior written consent of the Secured Parties which may be withheld for any
reason in the Secured Parties’ sole discretion.

     (h)     Waiver. The Collateral Agent and the Secured Parties shall not be
deemed to have waived any rights under this Security Agreement unless such
waiver is given in writing and signed by the Collateral Agent and the Secured
Parties. No delay or omission on the part of the Collateral Agent or Secured
Parties in exercising any right shall operate as a waiver of such right or any
other right. A waiver by the Collateral Agent or Secured Parties of a
provision of this Security Agreement shall not prejudice or constitute a waiver
of the Collateral Agent’s or the Secured Parties’ right otherwise to demand
strict compliance with that provision or any other

17

 

provision of this Security Agreement. No prior waiver by the Collateral
Agent or Secured Parties, nor any course of dealing between the Secured Parties
and the Debtors, shall constitute a waiver of any of the Collateral Agent’s or
the Secured Parties’ rights or of any of the Debtors’ obligations as to any
future transactions. Whenever the consent of the Collateral Agent and/or the
Secured Parties is required under this Security Agreement, the granting of such
consent in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of the Collateral Agent and/or the
Secured Parties.

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

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

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

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

[SIGNATURE PAGE FOLLOWS]

18

 

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

	 	 	 
	 	 	
ILLINOIS SUPERCONDUCTOR CORPORATION
	 
	 	By:	
/s/ Charles F. Willes
	 	 	

	 	 	
Charles F. Willes

Executive Vice President

and Chief Financial Officer
	 
	 	 	
SPECTRAL SOLUTIONS, INC.
	 
	 	By:	
/s/ Charles F. Willes
	 	 	

	 	 	
Name: Charles F. Willes

Title:
	 
	 	 	
ILLINOIS SUPERCONDUCTOR CANADA CORPORATION
	 
	 	By:	
/s/ Charles F. Willes
	 	 	

	 	 	
Name: Charles F. Willes

Title:
	 
	 	 	
COLLATERAL AGENT

ELLIOTT ASSOCIATES, L.P.
	 
	 	By:	
/s/ Paul E. Singer
	 	 	

	 	 	
Name: Paul E. Singer

Title: General Partner
	 
	 	 	
ELLIOTT ASSOCIATES, L.P.
	 
	 	By:	
/s/ Paul E. Singer
	 	 	

	 	 	
Name: Paul E. Singer

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

	 	 	Name: Bradford T. Whitmore

Title: President
          BUN Partners, Inc.
          its General Partner

 

SCHEDULE A

Identification, Ownership and Location of Collateral and Liens

20

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