Document:

EXHIBIT
10.3

    
      

      
        

        

      

    

    Mortgage
and Security Agreement

    with
Assignment of Rents

     

    dated as
of

     

    April 29,
2010,

     

    from

     

    CTI
Industries Corporation,

    an
Illinois corporation

     

    to

     

    Harris
N.A.,

    a
national banking association

     

    
      

      

    

    This
instrument was prepared by and when
recorded return to:

     

    
      	
              Stephanie
      A. Zabela, Esq.

            

    

    
      	
              McGuireWoods
      LLP

            

    

    
      	
              77
      West Wacker Drive

            

    

    
      	
              Suite
      4100

            

    

    
      	
              Chicago,
      Illinois  60601

            

    

     

    
      
        
        

      

      
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    Mortgage
And Security Agreement With

    Assignment
Of Rents

     

    This
Mortgage and Security Agreement with Assignment of Rents (the “Mortgage”) is dated as of
April 29, 2010, from CTI
Industries Corporation, an Illinois corporation with its principal place
of business and mailing address at 22160 North Pepper Road, Barrington, Illinois
60010 (hereinafter referred to as “Mortgagor”) to Harris
N.A., a national banking association with its mailing address at 111 West
Monroe Street, Chicago, Illinois 60603 (hereinafter referred to as “Mortgagee”);

     

    WITNESSETH
THAT:

     

    Whereas,
Mortgagor may from
time to time borrow money or otherwise obtain credit from Mortgagee and, in
connection therewith, Mortgagor may sign and deliver to
Mortgagee such notes, agreements, guaranties, and/or applications evidencing
such obligations or otherwise setting forth the terms and conditions related
thereto, which indebtedness, obligations, and liabilities (together with all
interest and fees thereon, and all costs and expenses related thereto), whether
now existing or hereafter arising, are to be secured by this
Mortgage;

     

    Now,
Therefore, to secure:

     

    (i)         
the payment of all amounts now and from time to time hereafter advanced to or
for the account of Mortgagor under that certain Credit Agreement dated as of
April 29, 2010, between Mortgagor and Mortgagee, as the same may from time to
time be amended, modified or restated (the “Credit Agreement”;
capitalized terms used herein and not otherwise defined shall have the meanings
given such terms in the Credit Agreement), which advances may aggregate up to
$14,416,683.50 in principal at any one time outstanding and are expressed to
mature as set forth in the Credit Agreement, and all promissory
note(s) issued thereunder (if any), including all promissory notes issued, in
whole or in part, in extension or renewal thereof or in substitution or
replacement therefor, as each of the foregoing may from time to time be amended
or modified (the “Notes”), together with all
interest on the outstanding principal balance of such Mortgage Loan and the
payment of all prepayment premiums, fees, costs and expenses from time to time
payable under the terms of or otherwise relating to the Credit Agreement or the
Notes (all such notes, agreements, and/or applications evidencing such
indebtedness, obligations, and liabilities or otherwise setting forth the terms
and conditions related thereto, and all guaranties and security documents
therefor, being hereinafter collectively referred to as the “Loan Documents”),

     

    (ii)         the
payment of all other indebtedness, obligations and liabilities which this
Mortgage secures pursuant to any of its terms, and

     

    (iii)         the
observance and performance of all covenants and agreements contained herein or
in the Loan Documents or in any other instrument or document at any time
evidencing or securing any of the foregoing or setting forth terms and
conditions applicable thereto (all of such indebtedness, obligations and
liabilities described in clauses (i), (ii), and (iii) above being hereinafter
collectively referred to as the “Secured Indebtedness”),

     

    
      
        
        

      

      
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    Mortgagor
does hereby grant, bargain, sell, convey, mortgage, warrant, assign, and pledge
unto Mortgagee, its successors and assigns, and grant to Mortgagee, its
successors and assigns, a continuing security interest in, all and singular the
properties, rights, interests and privileges described in Granting Clauses I,
II, III, IV, V, VI, and VII below, all of the same being collectively referred
to herein as the “Mortgaged
Premises”:

     

    Granting
Clause I

     

    That
certain real estate lying and being in City of Barrington, County of Lake and
State of Illinois more particularly described in Schedule I attached
hereto and made a part hereof.

     

    Granting
Clause II

     

    All
buildings and improvements of every kind and description heretofore or hereafter
erected or placed on the property described in Granting Clause I and all
materials intended for construction, reconstruction, alteration and repairs of
the buildings and improvements now or hereafter erected thereon, all of which
materials shall be deemed to be included within the premises immediately upon
the delivery thereof to the said real estate, and all fixtures, machinery,
apparatus, equipment, fittings and articles of personal property of every kind
and nature whatsoever now or hereafter attached to or contained in or used or
useful in connection with said real estate and the buildings and improvements
now or hereafter located thereon and the operation, maintenance and protection
thereof, including but not limited to all machinery, motors, fittings,
radiators, awnings, shades, screens, all gas, coal, steam, electric, oil and
other heating, cooking, power and lighting apparatus and fixtures, all fire
prevention and extinguishing equipment and apparatus, all cooling and
ventilating apparatus and systems, all plumbing, incinerating, and sprinkler
equipment and fixtures, all elevators and escalators, all communication and
electronic monitoring equipment, all window and structural cleaning rigs and all
other machinery and equipment of every nature and fixtures and appurtenances
thereto and all items of furniture, appliances, draperies, carpets, other
furnishings, equipment and personal property used or useful in the operation,
maintenance and protection of the said real estate and the buildings and
improvements now or hereafter located thereon and all renewals or replacements
thereof or articles in substitution therefor, whether or not the same are or
shall be attached to said real estate, buildings or improvements in any manner,
and all proceeds thereof; it being mutually agreed, intended and declared that
all the aforesaid property shall, so far as permitted by law, be deemed to form
a part and parcel of the real estate and, for the purpose of this Mortgage, to
be real estate and covered by this Mortgage; and as to the balance of the
property aforesaid, this Mortgage is hereby deemed to be as well a security
agreement under the provisions of the Uniform Commercial Code of the State of
Illinois for the purpose of creating hereby a security interest in said
property, which is hereby granted by Mortgagor as debtor to Mortgagee as secured
party, securing the Secured Indebtedness.  The addresses of Mortgagor
(debtor) and Mortgagee (secured party) appear at the beginning
hereof.  Mortgagor’s organizational registration number is
61786341.

     

    
      
        
        

      

      
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    Granting
Clause III

     

    All
right, title and interest of Mortgagor now owned or hereafter acquired in and to
all and singular the estates, tenements, hereditaments, privileges, easements,
licenses, franchises, appurtenances and royalties, mineral, oil, and water
rights belonging or in any wise appertaining to the property described in the
preceding Granting Clause I and the buildings and improvements now or hereafter
located thereon and the reversions, rents, issues, revenues and profits thereof,
including all interest of Mortgagor in all rents, issues and profits of the
aforementioned property and all rents, issues, profits, revenues, royalties,
bonuses, rights and benefits due, payable or accruing (including all deposits of
money as advanced rent or for security) under any and all leases or subleases
and renewals thereof, or under any contracts or options for the sale of all or
any part of, said property (including during any period allowed by law for the
redemption of said property after any foreclosure or other sale), together with
the right, but not the obligation, to collect, receive and receipt for all such
rents and other sums and apply them to the Secured Indebtedness and to demand,
sue for and recover the same when due or payable; provided that the assignments
made hereby shall not impair or diminish the obligations of Mortgagor under the
provisions of such leases or other agreements nor shall such obligations be
imposed upon Mortgagee.  By acceptance of this Mortgage, Mortgagee
agrees, not as a limitation or condition hereof, but as a personal covenant
available only to Mortgagor that until an Event of Default (as hereinafter
defined) shall occur giving Mortgagee the right to foreclose this Mortgage,
Mortgagor may collect, receive (but not more than 30 days in advance) and enjoy
such rents.

     

    Granting
Clause IV

     

    All
plans, specifications, working drawings and like materials prepared in
connection with improvements constituting part of the Mortgaged Premises, all
rights of Mortgagor against vendors or manufacturers in connection with
equipment located upon the Mortgaged Premises, whether arising by virtue of
warranty or otherwise, all rights against contractors, sub-contractors and
materialmen arising in connection with work performed at or on the Mortgaged
Premises or with materials furnished for the construction of improvements at or
on the Mortgaged Premises, and all rights of Mortgagor under contracts to
provide any of the foregoing, in each case whether now owned or existing or
hereafter arising or acquired.

     

    Granting
Clause V

     

    All
judgments, awards of damages, settlements and other compensation heretofore or
hereafter made resulting from condemnation proceedings or the taking of the
property described in Granting Clause I or any part thereof or any building or
other improvement now or at any time hereafter located thereon or any easement
or other appurtenance thereto under the power of eminent domain, or any similar
power or right (including any award from the United States Government at any
time after the allowance of the claim therefor, the ascertainment of the amount
thereof and the issuance of the warrant for the payment thereof), whether
permanent or temporary, or for any damage (whether caused by such taking or
otherwise) to said property or any part thereof or the improvements thereon or
any part thereof, or to any rights appurtenant thereto, including severance and
consequential damage, and any award for change of grade of streets
(collectively, “Condemnation
Awards”); and all right, title, and interest in all insurance policies
maintained in connection with the property described in Granting Clause I or any
part thereof or any building or other improvement now or at any time hereafter
located thereon or any easement or other appurtenance thereto or for any damage
to said property or any part thereof or the improvements thereon or any part
thereof, or to any rights appurtenant thereto.

     

    
      
        
        

      

      
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    Granting
Clause VI

     

    All
property and rights, if any, which are by the express provisions of this
Mortgage required to be subjected to the lien hereof and any additional property
and rights that may from time to time hereafter be subjected to the lien hereof
by Mortgagor or by anyone on Mortgagor’s behalf.

     

    Granting
Clause VII

     

    All
rights in and to common areas and access roads on adjacent properties heretofore
or hereafter granted to Mortgagor and any after-acquired title or reversion in
and to the beds of any ways, roads, streets, avenues and alleys adjoining the
property described in Granting Clause I or any part thereof.

     

    Granting
Clause VIII

     

    All
proceeds of the conversion, voluntary or involuntary, of any of the foregoing
into cash or other liquidated claims, including, without limitation, all
proceeds of insurance.

     

    To
Have And To Hold the Mortgaged Premises and the properties, rights and
privileges hereby granted, bargained, sold, conveyed, mortgaged, warranted,
pledged and assigned, and in which a security interest is granted, or intended
so to be, unto Mortgagee, its successors and assigns, forever; provided, however, that this
Mortgage is upon the express condition that if the Secured Indebtedness shall be
fully paid and performed and all commitments contained in the Loan Documents to
extend credit thereunder shall have terminated, then this Mortgage and the
estate and rights hereby granted shall cease and this Mortgage shall be released
by Mortgagee upon the written request and at the expense of Mortgagor, otherwise
to remain in full force and effect.

     

    This
Mortgage is given to secure, among other things, future advances made or to be
made under a line of credit and/or arising out of draws made or to be made under
letter(s) of credit and shall secure not only presently existing Secured
Indebtedness under the Loan Documents but also future advances, whether such
advances are obligatory or to be made at the option of Mortgagee, or otherwise,
as are made within 20 years from the date hereof, to the same extent as if
such future advances were made on the date of the execution of this Mortgage,
although there may be no advance made at the time of execution of this Mortgage
and although there may be no Secured Indebtedness outstanding at the time any
advance is made.  The lien of this Mortgage shall be valid as to all
Secured Indebtedness, including future advances, from the time of its filing for
record in the recorder’s office in the county in which the Mortgaged Premises
are located.  The total amount of Secured Indebtedness may increase or
decrease from time to time, but the total unpaid balance of Secured Indebtedness
(including disbursements which Mortgagee may make under this Mortgage, the Loan
Documents or any other documents related thereto) at any one time outstanding
shall not exceed a maximum principal amount of Thirty Million and 00/100 Dollars
($30,000,000.00) plus interest thereon, all fees, costs and expenses payable
thereunder, and all disbursements made for payment of taxes, special assessments
or insurance on the Mortgaged Premises and interest on such disbursements (all
such indebtedness being hereinafter referred to as the “maximum amount secured
hereby”).  This Mortgage shall be valid and have priority over
all subsequent liens and encumbrances, including statutory liens, excepting
solely taxes and assessments levied on the Mortgaged Premises, to the extent of
the maximum amount secured hereby. 

     

    
      
        
        

      

      
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    Mortgagor
hereby covenants and agrees with Mortgagee as follows:

     

    1.         
Payment of the Secured
Indebtedness.  The
Secured Indebtedness will be promptly paid as and when the same becomes
due.

     

    2.         
Ownership of Mortgaged
Premises.  Mortgagor covenants and warrants that it is lawfully
seized of and has good and marketable title to the Mortgaged Premises free and
clear of all liens, charges, and encumbrances except those exceptions to title
listed on Schedule
II attached hereto (the “Permitted Exceptions”) and
Mortgagor has good right, full power, and authority to convey, transfer, and
mortgage the same to Mortgagee for the uses and purposes set forth in this
Mortgage; and Mortgagor will warrant and forever defend the title to the
Mortgaged Premises subject to the Permitted Exceptions against all claims and
demands whatsoever.

     

    3.         
Further
Assurances.  Mortgagor will execute and deliver such further
instruments and do such further acts as may be necessary or proper to carry out
more effectively the purpose of this Mortgage and, without limiting the
foregoing, to make subject to the lien hereof any property agreed to be
subjected hereto or covered by the Granting Clauses hereof or intended so to
be.

     

    4.         
Possession.  Provided
no Event of Default has occurred and is continuing hereunder, Mortgagor shall be
suffered and permitted to remain in full possession, enjoyment and control of
the Mortgaged Premises, subject always to the observance and performance of the
terms of this Mortgage.

     

    5.         
Payment of
Taxes.  Mortgagor shall pay before any penalty attaches, all
general taxes and all special taxes, special assessments, water, drainage and
sewer charges and all other charges of any kind whatsoever, ordinary or
extraordinary, which may be levied, assessed, imposed or charged on or against
the Mortgaged Premises or any part thereof and which, if unpaid, might by law
become a lien or charge upon the Mortgaged Premises or any part thereof, and
shall, upon written request, exhibit to Mortgagee official receipts evidencing
such payments, except that, unless and until foreclosure, distraint, sale or
other similar proceedings shall have been commenced, no such charge or claim
need be paid if being contested (except to the extent any full or partial
payment shall be required by law), after notice to Mortgagee, by appropriate
proceedings which shall operate to prevent the collection thereof or the sale or
forfeiture of the Mortgaged Premises or any part thereof to satisfy the same,
conducted in good faith and with due diligence and if Mortgagor shall have
furnished such security, if any, as may be required in the proceedings or
requested by Mortgagee.

     

    6.         
Payment of Taxes on Loan
Documents, Mortgage or Interest of Mortgagee.  Mortgagor agrees
that if any tax, assessment or imposition upon this Mortgage or the Secured
Indebtedness or any Loan Document or the interest of Mortgagee in the Mortgaged
Premises or upon Mortgagee by reason of or as a holder of any of the foregoing
(including, without limitation, corporate privilege, franchise and excise taxes,
but excepting therefrom any income tax on interest payments on the principal
portion of the Secured Indebtedness imposed by the United States or any state)
is levied, assessed or charged, then, unless all such taxes are paid by
Mortgagor to, for or on behalf of Mortgagee as they become due and payable
(which Mortgagor agrees to do upon demand of Mortgagee, to the extent permitted
by law), or Mortgagee is reimbursed for any such sum advanced by Mortgagee, all
sums hereby secured shall become immediately due and payable, at the option of
Mortgagee upon thirty (30) days’ notice to Mortgagor, notwithstanding anything
contained herein or in any law heretofore or hereafter enacted, including any
provision thereof forbidding Mortgagor from making any such
payment.  Mortgagor agrees to exhibit to Mortgagee, upon request,
official receipts showing payment of all taxes and charges which Mortgagor is
required to pay hereunder.

     

    
      
        
        

      

      
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    7.         
Recordation and Payment of
Taxes and Expenses Incident Thereto.  Mortgagor will cause this
Mortgage, all amendments hereto, all mortgages supplemental hereto, and any
financing statement or other notice of a security interest required by Mortgagee
at all times to be kept, recorded and filed at its own expense in such manner
and in such places as may be required by law for the recording and filing or for
the rerecording and refiling of a mortgage, security interest, assignment or
other lien or charge upon the Mortgaged Premises, or any part thereof, in order
fully to preserve and protect the rights of Mortgagee hereunder and, without
limiting the foregoing, Mortgagor will pay or reimburse Mortgagee for the
payment of any and all taxes, fees or other charges incurred in connection with
any such recordation or rerecordation, including any documentary stamp tax or
tax imposed upon the privilege of having this Mortgage or any instrument issued
pursuant hereto recorded.

     

    8.         
Insurance.  Mortgagor
will, at its expense, keep all buildings, improvements, equipment and other
property now or hereafter constituting part of the Mortgaged Premises insured
against loss or damage by fire, lightning, windstorm, explosion and such other
risks as are usually included under extended coverage policies, or which are
usually insured against by owners of like property, in amount sufficient to
prevent Mortgagor or Mortgagee from becoming a co-insurer of any partial loss
under applicable policies and in any event not less than the then full insurable
value (actual replacement value without deduction for physical depreciation)
thereof, as determined at the request of Mortgagee and at Mortgagor’s expense by
the insurer or insurers or by an expert approved by Mortgagee, all under
insurance policies payable, in case of loss or damage, to Mortgagee, such rights
to be evidenced by the usual standard non-contributory form of mortgage clause
to be attached to each policy.  Mortgagor shall not carry separate
insurance concurrent in kind or form and contributing in the event of loss, with
any insurance required hereby.  Mortgagor shall also obtain and
maintain public liability, property damage and workmen’s compensation insurance
in each case in form and content satisfactory to Mortgagee and in amounts as are
customarily carried by owners of like property and approved by
Mortgagee.  Mortgagor shall also obtain and maintain such other
insurance with respect to the Mortgaged Premises in such amounts and against
such insurable hazards as Mortgagee from time to time may require, including,
without limitation, boiler and machinery insurance, insurance against flood
risks, host liquor liability, war risk insurance when and to the extent
obtainable from the United States Government or any agency thereof, and
insurance against loss of rent due to fire and risks now or hereafter embraced
by so-called “extended
coverage”.  All insurance required hereby shall be maintained
with good and responsible insurance companies satisfactory to Mortgagee and
shall not provide for any deductible amount in excess of $10,000 not approved in
writing by Mortgagee, shall provide that any losses shall be payable
notwithstanding any act or negligence of Mortgagor, shall provide that no
cancellation thereof shall be effective until at least thirty (30) days
after receipt by Mortgagor and Mortgagee of written notice thereof
(ten (10) days in the case of non-payment of premiums), and shall be
satisfactory to Mortgagee in all other respects.  Upon the execution
of this Mortgage and thereafter not less than fifteen (l5) days prior to
the expiration date of any policy delivered pursuant to this Mortgage, Mortgagor
will deliver to Mortgagee certificates of insurance evidencing Mortgagor’s
compliance with the foregoing (and, at Mortgagee’s request, the originals of any
policy or renewal policy, as the case may be, required by this Mortgage, bearing
notations evidencing the payment of all premiums).  In the event of
foreclosure, Mortgagor authorizes and empowers Mortgagee to effect insurance
upon the Mortgaged Premises in amounts aforesaid for a period covering the time
of redemption from foreclosure sale provided by law, and if necessary therefor
to cancel any or all existing insurance policies.

     

    
      
        
        

      

      
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    Unless
Mortgagor provides Mortgagee with evidence of the insurance coverage required by
this Mortgage, Mortgagee may purchase insurance at Mortgagor’s expense to
protect Mortgagee’s interests in the Mortgaged Premises.  This
insurance may, but need not, protect Mortgagor’s interests in the Mortgaged
Premises.  The coverage purchased by Mortgagee may not pay any claims
that Mortgagor makes or any claim that is made against Mortgagor in connection
with the Mortgaged Premises.  Mortgagor may later cancel any such
insurance purchased by Mortgagee, but only after providing Mortgagee with
evidence that Mortgagor has obtained insurance as required by this
Mortgage.  If Mortgagee purchases insurance for the Mortgaged
Premises, Mortgagor will be responsible for the costs of that insurance,
including interest and any other charges that Mortgagee may impose in connection
with the placement of the insurance, until the effective date of the
cancellation or expiration of the insurance.  The costs of the
insurance may be added to the Secured Indebtedness.  The costs of the
insurance may be more than the cost of insurance Mortgagor may be able to obtain
on its own.

     

    9.         
Damage to or Destruction of
Mortgaged Premises.

     

    (a)         
Notice.  In
case of any material damage to or destruction of the Mortgaged Premises or any
part thereof, Mortgagor shall promptly give written notice thereof to Mortgagee,
generally describing the nature and extent of such damage or
destruction.

     

    (b)         
Restoration.  In
case of any damage to or destruction of the Mortgaged Premises or any part
thereof, Mortgagor, whether or not the insurance proceeds, if any, received on
account of such damage or destruction shall be sufficient for the purpose, at
Mortgagor’s expense, will promptly commence and complete (subject to unavoidable
delays occasioned by strikes, lockouts, acts of God, inability to obtain labor
or materials, governmental restrictions and similar causes beyond the reasonable
control of Mortgagor) the restoration, replacement or rebuilding of the
Mortgaged Premises as nearly as possible to its value, condition and character
immediately prior to such damage or destruction.

     

    (c)         
Adjustment of
Loss.  Mortgagor hereby authorizes Mortgagee, at Mortgagee’s
option, to adjust and compromise any losses under any insurance afforded, but
unless Mortgagee elects to adjust the losses as aforesaid, said adjustment
and/or compromise shall be made by Mortgagor, subject to final approval of
Mortgagee in the case of losses exceeding $10,000.

     

    (d)         
Application of Insurance
Proceeds.  Net insurance proceeds received by Mortgagee under
the provisions of this Mortgage or any instruments supplemental hereto or
thereto or under any policy or policies of insurance covering the Mortgaged
Premises or any part thereof may be applied toward the payment of the amount
owing on the Secured Indebtedness in such order of application as Mortgagee may
elect whether or not the same may then be due or be otherwise adequately secured
and any amounts not so applied shall be held as collateral security therefor;
provided, however, that
Mortgagee shall have the right, but not the duty, to release the proceeds
thereof for use in restoring the Mortgaged Premises or any part thereof for or
on behalf of Mortgagor in lieu of applying said proceeds to the Secured
Indebtedness and for such purpose may do all acts necessary to complete such
restoration, including advancing additional funds, and any additional funds so
advanced shall constitute part of the Secured Indebtedness and shall be payable
on demand with interest at the Reimbursement Rate.  

     

    
      
        
        

      

      
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    10.        Eminent
Domain.  Mortgagor acknowledges that Condemnation Awards have
been assigned to Mortgagee, which awards Mortgagee is hereby irrevocably
authorized to collect and receive, and to give appropriate receipts and
acquittances therefor, and at Mortgagee’s option, to apply the same toward the
payment of the amount owing on account of the Secured Indebtedness in such order
of application as Mortgagee may elect and whether or not the same may then be
due and payable or otherwise adequately secured and any amounts not so applied
may held as collateral security therefor.  Mortgagor covenants and
agrees that Mortgagor will give Mortgagee immediate notice of the actual or
threatened commencement of any proceedings under condemnation or eminent domain
affecting all or any part of the Mortgaged Premises including any easement
therein or appurtenance thereof or severance and consequential damage and change
in grade of streets, and will deliver to Mortgagee copies of any and all papers
served in connection with any such proceedings.  Mortgagor further
covenants and agrees to make, execute and deliver to Mortgagee, at any time or
times upon request, free, clear and discharged of any encumbrances of any kind
whatsoever, any and all further assignments and/or instruments deemed necessary
by Mortgagee for the purpose of validly and sufficiently assigning all awards
and other compensation heretofore and hereafter to be made to Mortgagor for any
taking, either permanent or temporary, under any such proceeding. 

     

    11.        Construction, Repair, Waste,
Etc.  Mortgagor agrees (i) that no building or other
improvement on the Mortgaged Premises and constituting a part thereof shall be
altered, removed or demolished nor shall any fixtures or appliances on, in or
about said buildings or improvements be severed, removed, sold or mortgaged,
without the consent of Mortgagee and in the event of the demolition or
destruction in whole or in part of any of the fixtures, chattels or articles of
personal property covered hereby, Mortgagor covenants that the same will be
replaced promptly by similar fixtures, chattels and articles of personal
property at least equal in quality and condition to those replaced, free from
any security interest in or encumbrance thereon or reservation of title thereto;
(ii) to permit, commit or suffer no waste, impairment or deterioration of
the Mortgaged Premises or any part thereof; (iii) to keep and maintain said
Mortgaged Premises and every part thereof in good and first class repair and
condition; (iv) to effect such repairs as Mortgagee may reasonably require
and from time to time to make all needful and proper replacements and additions
so that said buildings, fixtures, machinery and appurtenances will, at all
times, be in good and first class condition, fit and proper for the respective
purposes for which they were originally erected or installed; (v) to comply
with all statutes, orders, requirements or decrees relating to the Mortgaged
Premises by any federal, state or municipal authority; (vi) to observe and
comply with all conditions and requirements necessary to preserve and extend any
and all rights, licenses, permits (including, but not limited to, zoning
variances, special exceptions and non-conforming uses), privileges, franchises
and concessions which are applicable to the Mortgaged Premises or which have
been granted to or contracted for by Mortgagor in connection with any existing
or presently contemplated use of the Mortgaged Premises or any part thereof and
not to initiate or acquiesce in any changes to or terminations of any of the
foregoing or of zoning classifications affecting the use to which the Mortgaged
Premises or any part thereof may be put without the prior written consent of
Mortgagee; and (vii) to make no material alterations in or improvements or
additions to the Mortgaged Premises except as required by governmental authority
or as permitted by Mortgagee.

     

    
      
        
        

      

      
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    12.        Liens and
Encumbrances.  Mortgagor will not, without the prior written
consent of Mortgagee, directly or indirectly, create or suffer to be created or
to remain and will discharge or promptly cause to be discharged any mortgage,
lien, encumbrance or charge on, pledge of, or conditional sale or other title
retention agreement with respect to, the Mortgaged Premises or any part thereof,
whether superior or subordinate to the lien hereof, except for this Mortgage and
the Permitted Exceptions.

     

    13.        Right of Mortgagee to Perform
Mortgagor’s Covenants, Etc.  If Mortgagor shall fail to make
any payment or perform any act required to be made or performed hereunder,
Mortgagee, without waiving or releasing any obligation or default, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of Mortgagor, and may enter
upon the Mortgaged Premises or any part thereof for such purpose and take all
such action thereon as, in the opinion of Mortgagee, may be necessary or
appropriate therefor.  All sums so paid by Mortgagee and all costs and
expenses (including, without limitation, attorneys’ fees and expenses) so
incurred, together with interest thereon from the date of payment or incurrence
at the Reimbursement Rate, shall constitute so much additional Secured
Indebtedness and shall be paid by Mortgagor to Mortgagee on
demand.  Mortgagee in making any payment authorized under this Section
relating to taxes or assessments may do so according to any bill, statement or
estimate procured from the appropriate public office without inquiry into the
accuracy of such bill, statement or estimate or into the validity of any tax
assessment, sale, forfeiture, tax lien or title or claim
thereof.  Mortgagee, in performing any act hereunder, shall be the
sole judge of whether Mortgagor is required to perform the same under the terms
of this Mortgage.

     

    14.        After-Acquired
Property.  Any and all property hereafter acquired which is of
the kind or nature herein provided, or intended to be and become subject to the
lien hereof, shall ipso facto, and without any further conveyance, assignment or
act on the part of Mortgagor, become and be subject to the lien of this Mortgage
as fully and completely as though specifically described herein; but
nevertheless Mortgagor shall from time to time, if requested by Mortgagee,
execute and deliver any and all such further assurances, conveyances and
assignments as Mortgagee may reasonably require for the purpose of expressly and
specifically subjecting to the lien of this Mortgage all such
property.

     

    15.        Inspection by
Mortgagee.  Mortgagee and any participant in the Secured
Indebtedness shall have the right to inspect the Mortgaged Premises at all
reasonable times, and access thereto shall be permitted for that
purpose.

     

    16.        Financial
Reports.  Mortgagor will furnish to Mortgagee such information
and data with respect to the financial condition, business affairs and
operations of Mortgagor and the Mortgaged Premises as may be reasonably
requested (all such information and data to be prepared in accordance with
generally accepted accounting principles consistently applied), such information
and data to be prepared and certified by independent public accountants
satisfactory to Mortgagee if so requested by Mortgagee not more often than
annually.

     

    17.        Subrogation.  Mortgagor
acknowledges and agrees that Mortgagee shall be subrogated to any lien
discharged out of the proceeds of any credit extended under the Loan Documents
or out of any advance by Mortgagee hereunder, irrespective of whether or not any
such lien may have been released of record.

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    18.        Events of Default. Any one or
more of the following shall constitute an “Event of Default”
hereunder:

     

    (a)        default
in the payment when due (whether by demand, lapse of time, acceleration, or
otherwise) of the principal of or interest on any Secured Indebtedness;
or

     

    (b)        default
in the observance or performance of any provision hereof requiring the
maintenance of insurance on the Mortgaged Premises or dealing with the use or
remittance of proceeds of the Mortgaged Premises or any part thereof;
or

     

    (c)        default
for more than fifteen (l5) days in the observance or compliance with any terms
or provisions of this Mortgage or any other Loan Document (including, without
limitation, the Credit Agreement) or of any separate assignment of leases and/or
rents or any other instrument or document securing the Secured Indebtedness or
any part thereof or relating thereto; or

     

    (d)        any
representation or warranty made by Mortgagor herein or in any separate
assignment of leases and/or rents or any other instrument or document securing
the Secured Indebtedness or any part thereof or relating thereto or in any
statement or certificate furnished by it pursuant hereto or thereto proves to be
untrue in any material respect as of the date of issuance or making thereof;
or

     

    (e)        any
indebtedness, obligation or liability of the Mortgagor at any time owing to
Harris N.A. or any of its affiliates shall not be paid when due (whether by
demand, lapse of time, acceleration, or otherwise) provided that the foregoing
shall constitute an event of default only if and so long as Harris N.A. is the
holder of the Secured Indebtedness or any part thereof; or

     

    (f)        the
Mortgaged Premises or any part thereof shall be sold, transferred, or conveyed,
whether voluntarily or involuntarily, by operation of law or otherwise, except
for sales of obsolete, worn out or unusable fixtures or personal property which
are concurrently replaced with similar fixtures or personal property at least
equal in quality and condition to those sold and owned by Mortgagor free of any
lien, charge or encumbrance other than the lien hereof; or

     

    (g)        any
indebtedness secured by a lien or charge on the Mortgaged Premises or any part
thereof is not paid when due or proceedings are commenced to foreclose or
otherwise realize upon any such lien or charge or to have a receiver appointed
for the property subject thereto or to place the holder of such indebtedness or
its representative in possession thereof; or

     

    (h)        Mortgagor
or any person, firm or corporation at any time guaranteeing all or any part of
the Secured Indebtedness (a “Guarantor”) shall (i) have
entered involuntarily against it an order for relief under the United States
Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to
pay, its debts generally as they become due, (iii) make an assignment for the
benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the
appointment of a receiver, custodian, trustee, examiner, liquidator or similar
official for it or any substantial part of its property, (v) institute any
proceeding seeking to have entered against it an order for relief under the
United States Bankruptcy Code, as amended, to adjudicate it insolvent, or
seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or fail to file an
answer or other pleading denying the material allegations of any such proceeding
filed against it, (vi) take any action in furtherance of any matter described in
parts (i) through (v) above, or (vii) fail to contest in good faith any
appointment or proceeding described in Section 18(i) hereof;
or

     

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    (i)        a
custodian, receiver, trustee, examiner, liquidator or similar official shall be
appointed for Mortgagor or any Guarantor or any substantial part of any of their
property, or a proceeding described in Section 18(h)(v) shall be instituted
against Mortgagor or any Guarantor, and such appointment continues undischarged
or such proceeding continues undismissed or unstayed for a period of sixty (60)
days; or

     

    (j)        any
event occurs or condition exists which is specified as an event of default in
any Loan Document or any separate assignment of leases and/or rents or of any
other instrument or document securing the Secured Indebtedness or any part
thereof or relating thereto; or

     

    (k)        dissolution
or termination of existence of Mortgagor or of any Guarantor; or

     

    (l)        any
Guarantor dies or any financial or other information submitted by any Guarantor
to Mortgagee proves untrue in any material respect; or

     

    (m)      the
Mortgaged Premises is abandoned.

     

    19.        Remedies.  When any
Event of Default has happened and is continuing (regardless of the pendency of
any proceeding which has or might have the effect of preventing Mortgagor from
complying with the terms of this instrument and of the adequacy of the security
for the Secured Indebtedness) and in addition to such other rights as may be
available under the Loan Documents or applicable law, but subject at all times
to any mandatory legal requirements:

     

    (a)        Acceleration.  Mortgagee
may, by written notice to Mortgagor, declare the Secured Indebtedness, including
all principal and interest then accrued thereon, to be forthwith due and
payable, whereupon the same shall become and be forthwith due and payable,
without other notice or demand of any kind.

     

    (b)        Uniform Commercial
Code.  Mortgagee shall, with respect to any part of the
Mortgaged Premises constituting property of the type in respect of which
realization on a lien or security interest granted therein is governed by the
Uniform Commercial Code, have all the rights, options and remedies of a secured
party under the Uniform Commercial Code of Illinois, including without
limitation, the right to the possession of any such property, or any part
thereof, and the right to enter without legal process any premises where any
such property may be found.  Any requirement of said Uniform
Commercial Code for reasonable notification shall be met by mailing written
notice to Mortgagor at its address above set forth at least ten (l0) days prior
to the sale or other event for which such notice is required.  The
costs and expenses of retaking, selling, and otherwise disposing of said
property, including attorneys’ fees and legal expenses incurred in connection
therewith, shall constitute so much additional Secured Indebtedness and shall be
payable upon demand with interest at the Reimbursement Rate.

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

    (c)        Foreclosure.  Mortgagee
may proceed to protect and enforce the rights of Mortgagee hereunder (i) by any
action at law, suit in equity or other appropriate proceedings, whether for the
specific performance of any agreement contained herein, or for an injunction
against the violation of any of the terms hereof, or in aid of the exercise of
any power granted hereby or by law, or (ii) by the foreclosure of this
Mortgage.

     

    (d)        Appointment of
Receiver.  Mortgagee shall, as a matter of right, without
notice and without giving bond to Mortgagor or anyone claiming by, under or
through it, and without regard to the solvency or insolvency of Mortgagor or the
then value of the Mortgaged Premises, be entitled to have a receiver appointed
of all or any part of the Mortgaged Premises and the rents, issues and profits
thereof, with such power as the court making such appointment shall confer, and
Mortgagor hereby consents to the appointment of such receiver and shall not
oppose any such appointment.  Any such receiver may, to the extent
permitted under applicable law, without notice, enter upon and take possession
of the Mortgaged Premises or any part thereof by force, summary proceedings,
ejectment or otherwise, and may remove Mortgagor or other persons and any and
all property therefrom, and may hold, operate and manage the same and receive
all earnings, income, rents, issues and proceeds accruing with respect thereto
or any part thereof, whether during the pendency of any foreclosure or until any
right of redemption shall expire or otherwise.

     

    (e)        Taking Possession, Collecting Rents,
Etc.  Mortgagee may enter and take possession of the Mortgaged
Premises or any part thereof and manage, operate, insure, repair and improve the
same and take any action that, in Mortgagee’s judgment, is necessary or proper
to conserve the value of the Mortgaged Premises.  Mortgagee may also
take possession of, and for these purposes use, any and all personal property
contained in the Mortgaged Premises and used in the operation, rental or leasing
thereof or any part thereof.  Mortgagee shall be entitled to collect
and receive all earnings, revenues, rents, issues and profits of the Mortgaged
Premises or any part thereof (and for such purpose Mortgagor does hereby
irrevocably constitute and appoint Mortgagee its true and lawful
attorney-in-fact for it and in its name, place and stead to receive, collect and
receipt for all of the foregoing, Mortgagor irrevocably acknowledging that any
payment made to Mortgagee hereunder shall be a good receipt and acquittance
against Mortgagor to the extent so made) and to apply same to the reduction of
the Secured Indebtedness.  The right to enter and take possession of
the Mortgaged Premises and use any personal property therein, to manage, operate
and conserve the same, and to collect the rents, issues and profits thereof,
shall be in addition to all other rights or remedies of Mortgagee hereunder or
afforded by law, and may be exercised concurrently therewith or independently
thereof.  The expenses (including any receiver’s fees, counsels’ fees,
costs and agent’s compensation) incurred pursuant to the powers herein contained
shall be so much additional Secured Indebtedness, which Mortgagor promises to
pay upon demand together with interest at the Reimbursement
Rate.  Mortgagee shall not be liable to account to Mortgagor for any
action taken pursuant hereto other than to account for any rents actually
received by Mortgagee.  Without taking possession of the Mortgaged
Premises, Mortgagee may, in the event the Mortgaged Premises becomes vacant or
is abandoned, take such steps as it deems appropriate to protect and secure the
Mortgaged Premises (including hiring watchmen therefor) and all costs incurred
in so doing shall constitute so much additional Secured Indebtedness payable
upon demand with interest thereon at the Reimbursement Rate.

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

     

    20.        Waiver of Right to Redeem From Sale
- Waiver of Appraisement, Valuation, Etc. Mortgagor shall not and will
not apply for or avail itself of any appraisement, valuation, stay, extension or
exemption laws, or any so-called “Moratorium Laws”, now
existing or hereafter enacted in order to prevent or hinder the enforcement or
foreclosure of this Mortgage, but hereby waives the benefit of such
laws.  Mortgagor for itself and all who may claim through or under it
waives any and all right to have the property and estates comprising the
Mortgaged Premises marshalled upon any foreclosure of the lien hereof and agrees
that any court having jurisdiction to foreclose such lien may order the
Mortgaged Premises sold as an entirety.  In the event of any sale made
under or by virtue of this Mortgage, the whole of the Mortgaged Premises may be
sold in one parcel as an entirety or in separate lots or parcels at the same or
different times, all as Mortgagee may determine.  Mortgagee shall have
the right to become the purchaser at any sale made under or by virtue of this
Mortgage and Mortgagee so purchasing at any such sale shall have the right to be
credited upon the amount of the bid made therefor by Mortgagee with the amount
payable to Mortgagee out of the net proceeds of such sale.  In the
event of any such sale, the Secured Indebtedness, if not previously due, shall
be and become immediately due and payable without demand or notice of any
kind.  Mortgagor hereby waives any and all rights of redemption prior
to or from sale under any order or decree of foreclosure pursuant to rights
herein granted, on behalf of Mortgagor, and each and every person acquiring any
interest in, or title to the Mortgaged Premises described herein subsequent to
the date of this Mortgage, and on behalf of all other persons to the extent
permitted by applicable law.

     

    21.        Costs and Expenses of
Foreclosure.  In any suit to foreclose the lien hereof there
shall be allowed and included as additional indebtedness in the decree for sale
all expenditures and expenses which may be paid or incurred by or on behalf of
Mortgagee for attorneys’ fees, appraisers’ fees, environmental auditors’ fees,
outlays for documentary and expert evidence, stenographic charges, publication
costs and costs (which may be estimated as the items to be expended after the
entry of the decree) of procuring all such abstracts of title, title searches
and examination, guarantee policies, and similar data and assurances with
respect to title as Mortgagee may deem to be reasonably necessary either to
prosecute any foreclosure action or to evidence to the bidder at any sale
pursuant thereto the true condition of the title to or the value of the
Mortgaged Premises, all of which expenditures shall become so much additional
Secured Indebtedness which Mortgagor agrees to pay and all of such shall be
immediately due and payable with interest thereon from the date of expenditure
until paid at the Reimbursement Rate.

     

    22.        Application of
Proceeds.  The proceeds of any foreclosure sale of the
Mortgaged Premises or of any sale of property pursuant to Section l9(b)
hereof shall be distributed in the following order of
priority:  First, on account of all costs and expenses incident to the
foreclosure or other proceedings including all such items as are mentioned in
Sections l9(b) and 21 hereof; Second, to the Secured Indebtedness in such
order and manner as Mortgagee shall determine, with any overplus to whomsoever
Mortgagee shall reasonably determine to be lawfully entitled to the
same.

     

    23.        Deficiency
Decree.  If at any foreclosure proceeding the Mortgaged
Premises shall be sold for a sum less than the total amount of indebtedness for
which judgment is therein given, the judgment creditor shall be entitled to the
entry of a deficiency decree against Mortgagor and against the property of
Mortgagor for the amount of such deficiency; and Mortgagor does hereby
irrevocably consent to the appointment of a receiver for the Mortgaged Premises
and the property of Mortgagor and until such deficiency decree is satisfied in
full.

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

     

    24.        Mortgagee’s Remedies Cumulative - No
Waiver.  No remedy or right of Mortgagee shall be exclusive of
but shall be cumulative and in addition to every other remedy or right now or
hereafter existing at law or in equity or by statute or otherwise.  No
delay in the exercise or omission to exercise any remedy or right accruing on
any default shall impair any such remedy or right or be construed to be a waiver
of any such default or acquiescence therein, nor shall it affect any subsequent
default of the same or a different nature.  Every such remedy or right
may be exercised concurrently or independently, and when and as often as may be
deemed expedient by Mortgagee.

     

    25.        Mortgagee Party to
Suits.  If Mortgagee shall be made a party to or shall
intervene in any action or proceeding affecting the Mortgaged Premises or the
title thereto or the interest of Mortgagee under this Mortgage (including
probate and bankruptcy proceedings), or if Mortgagee employs an attorney to
collect any or all of the Secured Indebtedness or to enforce any of the terms
hereof or realize hereupon or to protect the lien hereof, or if Mortgagee shall
incur any costs or expenses in preparation for the commencement of any
foreclosure proceedings or for the defense of any threatened suit or proceeding
which might affect the Mortgaged Premises or the security hereof, whether or not
any such foreclosure or other suit or proceeding shall be actually commenced,
then in any such case, Mortgagor agrees to pay to Mortgagee, immediately and
without demand, all reasonable costs, charges, expenses and attorney’s fees
incurred by Mortgagee in any such case, and the same shall constitute so much
additional Secured Indebtedness payable upon demand with interest at the
Reimbursement Rate.

     

    26.        Modifications Not to Affect Lien.
Mortgagee, without notice to anyone, and without regard to the
consideration, if any, paid therefor, or the presence of other liens on the
Mortgaged Premises, may in its discretion release any part of the Mortgaged
Premises or any person liable for any of the Secured Indebtedness, may extend
the time of payment of any of the Secured Indebtedness and may grant waivers or
other indulgences with respect hereto and thereto, and may agree with Mortgagor
to modifications to the terms and conditions contained herein or otherwise
applicable to any of the Secured Indebtedness (including modifications in the
rates of interest applicable thereto), without in any way affecting or impairing
the liability of any party liable upon any of the Secured Indebtedness or the
priority of the lien of this Mortgage upon all of the Mortgaged Premises not
expressly released, and any party acquiring any direct or indirect interest in
the Mortgaged Premises shall take same subject to all of the provisions
hereof.

     

    27.        Notices.  All
communications provided for herein shall be in writing and shall be deemed to
have been given when delivered personally or mailed by first class mail, postage
prepaid, addressed to the parties hereto at their addresses as shown at the
beginning of this Mortgage or to such other and different address as Mortgagor
or Mortgagee may designate pursuant to a written notice sent in accordance with
the provisions of this Section.

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

     

    28.        Other Security
Documents.  Mortgagor acknowledges that this Mortgage is one of
several mortgages and/or other security documents (the aforesaid being together
called the “Other Security
Documents”) that secure the Secured Indebtedness or portions
thereof.  Mortgagor agrees that the lien of this Mortgage shall be
absolute and unconditional and shall not in any manner be affected or impaired
by any acts or omissions whatsoever of Mortgagee or any other holder of any of
the Secured Indebtedness, and without limiting the generality of the foregoing,
the lien and security hereof shall not be impaired by any acceptance by
Mortgagee or any other holder of any of the Secured Indebtedness of any security
for or guarantors upon any of the Secured Indebtedness or by any failure,
neglect or omission on the part of Mortgagee or any other holder of any of the
Secured Indebtedness to realize upon or protect any of the Secured Indebtedness
or any collateral or security therefor including the Other Security
Documents.  The lien and security interest hereof shall not in any
manner be impaired or affected by any release (except as to the property
released), sale, pledge, surrender, compromise, settlement, renewal, extension,
indulgence, alteration, substitution, exchange, change in, modification or
disposition of any of the Secured Indebtedness, or of any of the collateral or
security therefor, including, without limitation, the Other Security Documents
or of any guaranty thereof, or of any instrument or agreement setting forth the
terms and conditions pertaining to any of the foregoing.  Mortgagee
may at its discretion foreclose, exercise any power of sale, or exercise any
other remedy available to it under any or all of the Other Security Documents
without first exercising or enforcing any of its right and remedies
hereunder.  Such exercise of Mortgagee’s rights and remedies under any
or all of the Other Security Documents shall not in any manner impair the
Secured Indebtedness, except to the extent of payment, or the lien of this
Mortgage and any exercise of the rights or remedies of Mortgagee hereunder shall
not impair the lien of any of the Other Security Documents or any of Mortgagee’s
rights and remedies thereunder.  Mortgagor specifically consents and
agrees that Mortgagee may exercise its rights and remedies hereunder and under
the Other Security Documents separately or concurrently and in any order that it
may deem appropriate. 

     

    29.        Reimbursement
Rate.  For purposes of this Mortgage, the term “Reimbursement Rate”
means (a) the rate per annum equal to the per annum interest rate applicable to Base Rate
Portions under the Credit Agreement from time to time and (b) at all
times on and after the occurrence of an Event of Default hereunder, the rate per
annum determined by adding two percent (2%) to the rate determined under
subsection (a) above (in each case, computed on the basis of a year of 360
days for the actual number of days elapsed). 

     

    32.        Governing Law.  The
creation of this Mortgage, the perfection of the lien and security interest in
the Mortgaged Premises, and the rights and remedies of Mortgagee with respect to
the Mortgaged Premises, as provided herein and by the laws of the state in which
the Mortgaged Premises is located, shall be governed by and construed in
accordance with the internal laws of the state in which the Mortgaged Premises
are located without regard to principles of conflicts of
law.  Otherwise, the Loan Documents and all other obligations of
Mortgagor (including, but not limited to, the liability of Mortgagor for any
deficiency following a foreclosure of all or any part of the Mortgaged Premises)
shall be governed by and construed in accordance with the internal laws of the
State of Illinois without regard to principles of conflicts of laws, such state
being the state where such documents were executed and delivered.

     

    33.        Partial
Invalidity.  All rights, powers and remedies provided herein
are intended to be limited to the extent necessary so that they will not render
this Mortgage invalid, unenforceable or not entitled to be recorded, registered
or filed under any applicable law.  If any term of this Mortgage shall
be held to be invalid, illegal or unenforceable, the validity and enforceability
of the other terms of this Mortgage shall in no way be affected
thereby.

     

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

     

    34.        Successors and
Assigns.  Whenever any of the parties hereto is referred to,
such reference shall be deemed to include the successors and assigns of such
party; and all the covenants, promises and agreements in this Mortgage contained
by or on behalf of Mortgagor, or by or on behalf of Mortgagee, shall bind and
inure to the benefit of the respective successors and assigns of such parties,
whether so expressed or not.  If more than one party signs this
instrument as Mortgagor, then the term “Mortgagor” as used herein
shall mean all of such parties, jointly and severally.

     

    35.        Headings. The headings in
this Mortgage are for convenience of reference only and shall not limit or
otherwise affect the meaning of any provision hereof.

     

    36.        Changes, Etc.  This
Mortgage and the provisions hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is
sought.

     

    [Signature
Page to Follow]

    

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

     

    In
Witness Whereof, Mortgagor has caused these presents to be signed and
sealed the day and year first above written.

     

    
      
      

      
        
          	 
      	 
      	
                  CTI
      Industries Corporation

                
	 
      	 
      	 
      
	 
      	
                  By: 

                	
                  /s/ Stephen M. Merrick

                
	 
      	 
      	
                  Executive
      Vice-President and Chief Financial

                  Officer

                

        

      

    

     

    
      
        
        

      

      
         

        
          

        

      

      
        
        

      

    

     

    Acknowledgment

     

    
      
        
          
            	
                    State
      of Illinois

                  	
                    )

                  
	 
      	
                    )  SS

                  
	
                    County
      of _____________

                  	
                    )

                  

          

        

      

    

     

    The
undersigned, a Notary Public in and for said County in the State aforesaid, does
hereby certify that _____________________, the _____________ of CTI Industries
Corporation, an Illinois corporation, personally known to me to be the same
person whose name is subscribed to the foregoing instrument, appeared before me
this day in person and acknowledged that she/he signed and delivered the said
instrument as her/his own free and voluntary act, and as the free and voluntary
act of said corporation for the purposes therein set forth.

     

    Given
under my hand and notarial seal this _____ day of _______________,
2010.

     

    
      
        
          
            	
                    (Notary
      Seal)

                  	 
      
	 
      	
                    Notary
      Public

                  
	 
      	 
      
	 
      	 
      
	 
      	
                    (Type
      or Print Name)

                  
	 
      	 
      
	 
      	
                    My
      commission
expires: ____________________

                  

          

        

      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Schedule
I

     

    Legal
Description

    

    THAT
PART OF THE SOUTH 1/2 OF SECTION 21, TOWNSHIP 43 NORTH, RANGE 9, EAST OF THE
THIRD PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT A POINT IN THE
EAST LINE OF THE WEST 1/2 OF THE SOUTH EAST 1/4 OF SAID SECTION 21, 691.81 FEET
NORTH OF THE SOUTHEAST CORNER THEREOF; THENCE WEST PARALLEL WITH THE SOUTH LINE
OF SAID SOUTH EAST 1/4 746.66 FEET; THENCE NORTH PARALLEL WITH THE EAST LINE OF
THE SAID WEST 1/2 OF THE SOUTH EAST 1/4 291.81 FEET; THENCE EAST PARALLEL WITH
THE SOUTH LINE OF SAID SOUTH EAST 1/4 746.66 FEET TO THE EAST LINE OF THE WEST
1/2 OF THE SOUTH EAST 1/4; THENCE SOUTH 291.81 FEET TO THE POINT OF BEGINNING,
IN LAKE COUNTY, ILLINOIS.

    

    PROPERTY
ADDRESS:

    

    22160
North Pepper Road

    Barrington,
Illinois  60010

    

    PERMANENT TAX
NUMBER:

    

    13-21-400-014

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    Schedule II

     

    Permitted
Exceptions

    

    General
real estate taxes for the year 2009, due and payable in 2010, and each year
thereafter.  The 2008 real estate taxes are paid.

    

    The
exceptions contained on Schedule B – Part I of Chicago Title Insurance Company
loan policy No. 1409-000754046 dated as of April 29, 2010.EXHIBIT
10.4

      
         

        Security
Agreement

         

        This
Security Agreement (the “Agreement”) is dated as of
April 29, 2010, between CTI
Industries Corporation, an Illinois corporation (the “Debtor”), with its mailing
address as set forth in Section 12(b) hereof, and Harris
N.A., a national banking association (the “Secured Party”), with its
mailing address as set forth in Section 12(b) hereof.

         

        Preliminary
Statement

         

        A.    The
Debtor has requested that the Secured Party from time to time extend credit or
otherwise make financial accommodations available to or for the account of the
Debtor, including, without limitation, pursuant to the terms of that certain
Credit Agreement dated as of April 29, 2010, between Debtor and Secured Party,
as the same may from time to time be amended, modified or restated (the “Credit Agreement”;
capitalized terms used herein and not otherwise defined shall have the meanings
given such terms in the Credit Agreement).

         

        B.    As
a condition to extending credit or otherwise making financial accommodations
available to or for the account of the Debtor, the Secured Party requires, among
other things, that the Debtor grant the Secured Party a security interest in the
Debtor’s personal property described herein subject to the terms and conditions
hereof.

         

        Now,
Therefore, in consideration of the benefits accruing to the Debtor, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

         

        Section 1.    Grant of Security
Interest.  The Debtor hereby grants to the Secured Party a lien
on and security interest in, and acknowledges and agrees that the Secured Party
has and shall continue to have a continuing lien on and security interest in,
all right, title, and interest of the Debtor, whether now owned or existing or
hereafter created, acquired, or arising, in and to all of the
following:

         

        (a)      Accounts
(including Health-Care-Insurance Receivables, if any);

         

        (b)      Chattel
Paper;

         

        (c)      Instruments
(including Promissory Notes);

         

        (d)     
Documents;

         

        (e)     
General Intangibles (including Payment Intangibles and Software, patents,
trademarks, tradestyles, copyrights, and all other intellectual property rights,
including all applications, registration, and licenses therefor, and all
goodwill of the business connected therewith or represented
thereby);

         

        
          
             

          

          
            -1-

            
              

            

          

          
             

          

        

         

        (f)      
Letter-of-Credit Rights;

         

        (g)     
Supporting Obligations;

         

        (h)      Deposit
Accounts;

         

        (i)     
Investment Property (including certificated and uncertificated Securities,
Securities Accounts, Security Entitlements, Commodity Accounts, and Commodity
Contracts);

         

        (j)      
Inventory;

         

        (k)     
Equipment (including all software, whether or not the same constitutes embedded
software, used in the operation thereof);

         

        (l)    
  Fixtures;

         

        (m)   
 Commercial Tort Claims (as described on Schedule G hereto or on one
or more supplements to this Agreement);

         

        (n)    
 Rights to merchandise and other Goods (including rights to returned or
repossessed Goods and rights of stoppage in transit) which is represented by,
arises from, or relates to any of the foregoing;

         

        (o)  
  Monies, personal property, and interests in personal property of the
Debtor of any kind or description now held by the Secured Party or at any time
hereafter transferred or delivered to, or coming into the possession, custody,
or control of, the Secured Party, or any agent or affiliate of the Secured
Party, whether expressly as collateral security or for any other purpose
(whether for safekeeping, custody, collection or otherwise), and all dividends
and distributions on or other rights in connection with any such
property;

         

        (p)    
Supporting evidence and documents relating to any of the above-described
property, including, without limitation, computer programs, disks, tapes and
related electronic data processing media, and all rights of the Debtor to
retrieve the same from third parties, written applications, credit information,
account cards, payment records, correspondence, delivery and installation
certificates, invoice copies, delivery receipts, notes, and other evidences of
indebtedness, insurance certificates and the like, together with all books of
account, ledgers, and cabinets in which the same are reflected or
maintained;

         

        (q)   
 Accessions and additions to, and substitutions and replacements of, any
and all of the foregoing; and

         

        (r)   
  Proceeds and products of the foregoing, and all insurance of the
foregoing and proceeds thereof;

         

        
          
             

          

          
            -2-

            
              

            

          

          
             

          

        

         

        all of
the foregoing being herein sometimes referred to as the “Collateral”.   All
terms which are used in this Agreement which are defined in the Uniform
Commercial Code of the State of Illinois as in effect from time to time (“UCC”) shall have the same
meanings herein as such terms are defined in the UCC, unless this Agreement
shall otherwise specifically provide.  For purposes of this Agreement,
the term "Receivables"
means all rights to the payment of a monetary  obligation, whether or
not earned by performance, and whether evidenced by an Account, Chattel Paper,
Instrument, General Intangible, or otherwise.

         

        Section 2.    Obligations Hereby
Secured.  The lien and security interest herein granted and
provided for is made and given to secure, and shall secure, the payment and
performance of (a) any and all indebtedness, obligations and liabilities of
whatsoever kind and nature of the Debtor to the Secured Party (whether arising
before or after the filing of a petition in bankruptcy), whether direct or
indirect, absolute or contingent, due or to become due, and whether now existing
or hereafter arising and howsoever held, evidenced or acquired, and whether
several, joint or joint and several and (b) any and all expenses and
charges, legal or otherwise, suffered or incurred by the Secured Party in
collecting or enforcing any of such indebtedness, obligations or liabilities or
in realizing on or protecting or preserving any security therefor, including,
without limitation, the lien and security interest granted hereby (all of the
foregoing being hereinafter referred to as the “Obligations”).

         

        Section 3.    Covenants, Agreements,
Representations and Warranties.  The Debtor hereby covenants
and agrees with, and represents and warrants to, the Secured Party
that:

         

        (a)    The
Debtor is a corporation duly organized and validly existing in good standing under
the laws of the jurisdiction of its organization. The Debtor shall not change
its jurisdiction of organization without the Secured Party’s prior written
consent.  The Debtor is the sole and lawful owner of the Collateral,
and has full right, power and authority to enter into this Security Agreement
and to perform each and all of the matters and things herein provided
for.  The execution and delivery of this Security Agreement, and the
observance and performance of each of the matters and things herein set forth,
will not (i) contravene or constitute a default under any provision of law
or any judgment, injunction, order or decree binding upon the Debtor or any
provision of the Debtor’s organizational documents (e.g., charter, articles or
certificate of incorporation and by-laws, articles or certificate of formation
and limited liability company operating agreement, partnership agreement, or
similar organizational documents) or any covenant, indenture or agreement of or
affecting the Debtor or any of its property or (ii) result in the creation
or imposition of any lien or encumbrance on any property of the Debtor except
for the lien and security interest granted to the Secured Party
hereunder.  The Debtor’s organizational registration number (if any)
is 61786341.

         

        (b)    The
Debtor’s chief executive office and principal place of business is at, and the
Debtor keeps and shall keep all of its books and records relating to Receivables
only at, 22160 North Pepper Road, Barrington, Illinois; and the Debtor has no
other executive offices or places of business other than those listed under
Item 1 on Schedule A.  The Collateral is and shall remain in
the Debtor’s possession or control at the locations listed under Item 2 on
Schedule A attached hereto (collectively, the “Permitted Collateral
Locations”), except for (i) Collateral which in the ordinary course
of the Debtor’s business is in transit between Permitted Collateral Locations
and (ii) Collateral aggregating less than $50,000 in fair market value
outstanding at any one time.   If for any reason any
Collateral is at any time kept or located at a location other than a Permitted
Collateral Location, the Secured Party shall nevertheless have and retain a lien
on and security interest therein.  The Debtor owns and
shall at all times own all Permitted Collateral Locations, except to the extent
otherwise disclosed under Item 2 on Schedule A.  The Debtor
shall not move its chief executive office or maintain a place of business at a
location other than those specified under Item 1 on Schedule A or
permit the Collateral to be located at a location other than those specified
under Item 2 on Schedule A, in each case without first providing the
Secured Party 30 days’ prior written notice of the Debtor’s intent to do
so; provided that the
Debtor shall at all times maintain its chief executive office and, unless
otherwise specifically agreed to in writing by the Secured Party, Permitted
Collateral Locations in the United States of America and, with respect to any
new chief executive office or place of business or location of Collateral, the
Debtor shall have taken all action requested by the Secured Party to maintain
the lien and security interest of the Secured Party in the Collateral at all
times fully perfected and in full force and effect.

         

        
          
             

          

          
            -3-

            
              

            

          

          
             

          

        

         

        (c)    The
Debtor’s legal name and jurisdiction of organization is correctly set forth in
the first paragraph of this Agreement.  The Debtor has not transacted
business at any time during the immediately preceding five-year period, and does
not currently transact business, under any other legal names or trade names
other than the prior legal names and trade names (if any) set forth on
Schedule B attached hereto.  The Debtor shall not change its
legal name or transact business under any other trade name without first giving
30 days’ prior written notice of its intent to do so to the Secured
Party.

         

        (d)    The
Collateral and every part thereof is and shall be free and clear of all security
interests, liens (including, without limitation, mechanics’, laborers’ and
statutory liens), attachments, levies, and encumbrances of every kind, nature
and description, whether voluntary or involuntary, except for the lien and
security interest of the Secured Party therein and as otherwise provided on
Schedule C attached hereto.  The Debtor shall warrant and defend
the Collateral against any claims and demands of all persons at any time
claiming the same or any interest in the Collateral adverse to the Secured
Party.

         

        (e)    The
Debtor shall promptly pay when due all taxes, assessments and governmental
charges and levies upon or against the Debtor or any of the Collateral, in each
case before the same become delinquent and before penalties accrue thereon,
unless and to the extent that the same are being contested in good faith by
appropriate proceedings which prevent foreclosure or other realization upon any
of the Collateral and preclude interference with the operation of the Debtor’s
business in the ordinary course, and the Debtor shall have established adequate
reserves therefor.

         

        (f)    The
Debtor shall not use, manufacture, sell, or distribute any Collateral in
violation of any statute, ordinance, or other governmental
requirement.  The Debtor shall not waste or destroy the Collateral or
any part thereof or be negligent in the care or use of any
Collateral.  The Debtor shall perform its obligations under any
contract or other agreement constituting part of the Collateral, it being
understood and agreed that the Secured Party has no responsibility to perform
such obligations.

         

        (g)    Subject
to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor shall not, without the
Secured Party’s prior written consent, sell, assign, mortgage, lease or
otherwise dispose of the Collateral or any interest therein.

         

        
          
             

          

          
            -4-

            
              

            

          

          
             

          

        

         

        (h)    The
Debtor shall at all times insure the Collateral consisting of tangible personal
property against such risks and hazards as other persons similarly situated
insure against, and including in any event loss or damage by fire, theft,
burglary, pilferage, loss in transit and such other hazards as the Secured Party
may specify.  All insurance required hereby shall be maintained in
amounts and under policies and with insurers reasonably acceptable to
the Secured Party, and all such policies shall contain loss payable clauses
naming the Secured Party as loss payee as its interest may appear (and, if the
Secured Party requests, naming the Secured Party as an additional insured
therein) in a form reasonably acceptable to the Secured Party.  All
premiums on such insurance shall be paid by the Debtor.  Certificates
of insurance evidencing compliance with the foregoing and, at the Secured
Party’s request, the policies of such insurance shall be delivered by the Debtor
to the Secured Party.  All insurance required hereby shall provide
that any loss shall be payable to the Secured Party notwithstanding any act or
negligence of the Debtor, shall provide that no cancellation thereof shall be
effective until at least 30 days after receipt by the Debtor and the
Secured Party of written notice thereof, and shall be reasonably satisfactory to the
Secured Party in all other respects.  In case of any material loss,
damage to, or destruction of the Collateral or any part thereof, the Debtor
shall promptly give written notice thereof to the Secured Party generally
describing the nature and extent of such damage or destruction.  In
case of any loss, damage to or destruction of the Collateral or any part
thereof, the Debtor, whether or not the insurance proceeds, if any, received on
account of such damage or destruction shall be sufficient for that purpose, at
the Debtor’s cost and expense, shall promptly repair or replace the Collateral
so lost, damaged, or destroyed, except to the extent such Collateral, prior to
its loss, damage, or destruction, had become uneconomical, obsolete or worn out
and is not necessary for or of importance to the proper conduct of the Debtor’s
business in the ordinary course.  In the event the Debtor shall
receive any proceeds of such insurance, the Debtor shall immediately pay over
such proceeds to the Secured Party.  The Debtor hereby authorizes the
Secured Party, at the Secured Party’s option, to adjust, compromise and settle
any losses under any insurance afforded at any time during the existence of any
Event of Default or any other event or condition which with the lapse of time or
the giving of notice, or both, would constitute an Event of Default, and the
Debtor does hereby irrevocably constitute the Secured Party, and each of its
nominees, officers, agents, attorneys, and any other person whom the Secured
Party may designate, as the Debtor’s attorneys-in-fact, with full power and
authority to effect such adjustment, compromise and/or settlement and to endorse
any drafts drawn by an insurer of the Collateral or any part thereof and to do
everything necessary to carry out such purposes and to receive and receipt for
any unearned premiums due under policies of such insurance.  Unless
the Secured Party elects to adjust, compromise or settle losses as aforesaid,
any adjustment, compromise and/or settlement of any losses under any insurance
shall be made by the Debtor subject to final approval of the Secured Party
(regardless of whether or not an Event of Default shall have occurred) in the
case of losses exceeding $100,000.  Net insurance proceeds received by
the Secured Party under the provisions hereof or under any policy of insurance
covering the Collateral or any part thereof shall be applied to the reduction of
the Obligations (whether or not then due); provided, however, that the
Secured Party may in its sole discretion release any or all such insurance
proceeds to the Debtor.  All
insurance proceeds shall be subject to the lien and security interest of the
Secured Party hereunder.

         

        Unless
the Debtor provides the Secured Party with evidence of the insurance coverage
required by this Security Agreement, the Secured Party may purchase insurance at
the Debtor’s expense to protect the Secured party’s interests in the
Collateral.  This insurance may, but need not, protect the debtor’s
interests in the Collateral.  The coverage purchased by the Secured
Party may not pay any claims that the Debtor makes or any claim that is made
against the Debtor in connection with the Collateral.  The Debtor may
later cancel any such insurance purchased by the Secured Party, but only after
providing the Secured Party with evidence that the Debtor has obtained insurance
as required by this Security Agreement.  If the Secured Party
purchases insurance for the Collateral, the Debtor will be responsible for the
costs of that insurance, including interest and any other charges that the
Secured Party may impose in connection with the placement of the insurance,
until the effective date of the cancellation or expiration of the
insurance.  The costs of the insurance may be added to the Obligations
secured hereby.  The costs of the insurance may be more than the cost
of insurance the Debtor may be able to obtain on its own.

         

        
          
             

          

          
            -5-

            
              

            

          

          
             

          

        

         

        (i)   
 The Debtor shall at all times allow the Secured Party and its
representatives free access to and right of inspection of the Collateral; provided that, unless the
Secured Party believes in good faith an Event of Default, or any other event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, exists, any such access or inspection shall only
be required during the Debtor’s normal business hours.

         

        (j) 
   If any Collateral is in the possession or control of any of
the Debtor’s agents or processors and the Secured Party so requests, the Debtor
agrees to notify such agents or processors in writing of the Secured Party’s
security interest therein and instruct them to hold all such Collateral for the
Secured Party’s account and subject to the Secured Party’s
instructions.  The Debtor shall, upon the request of the Secured
Party, authorize and instruct all bailees and other parties, if any, at any time
processing, labeling, packaging, holding, storing, shipping or transferring all
or any part of the Collateral to permit the Secured Party and its
representatives to examine and inspect any of the Collateral then in such
party’s possession and to verify from such party’s own books and records any
information concerning the Collateral or any part thereof which the Secured
Party or its representatives may seek to verify.  As to any premises
not owned by the Debtor wherein any of the Collateral is located, the Debtor
shall, at the Secured Party’s request, cause each party having any right, title
or interest in, or lien on, any of such premises to enter into an agreement (any
such agreement to contain a legal description of such premises) whereby such
party disclaims any right, title and interest in, and lien on, the Collateral
and allows the removal of such Collateral by the Secured Party and is otherwise
in form and substance acceptable to the Secured Party; provided, however, that no
such agreement need be obtained with respect to any one location wherein the
value of the Collateral as to which such agreement has not been obtained
aggregates less than $50,000 at any one time.

         

        (k)
   The Debtor agrees from time to time to deliver to the Secured
Party such evidence of the existence, identity and location of the Collateral
and of its availability as collateral security pursuant hereto (including,
without limitation, schedules describing all Receivables created or acquired by
the Debtor, copies of customer invoices or the equivalent and original shipping
or delivery receipts for all merchandise and other goods sold or leased or
services rendered, together with the Debtor’s warranty of the genuineness
thereof, and reports stating the book value of Inventory and Equipment by major
category and location), in each case as the Secured Party may
request.  The Secured Party shall have the right to verify all or any
part of the Collateral in any manner, and through any medium, which the Secured
Party considers appropriate (including, without limitation, the verification of
Collateral by use of a fictitious name), and the Debtor agrees to furnish all
assistance and information, and perform any acts, which the Secured Party may
require in connection therewith.  The Debtor shall promptly notify the
Secured Party of any Collateral which the Debtor has determined to have been
rendered obsolete, stating the prior book value of such Collateral, its type and
location.

         

        (l)  
  The Debtor shall comply with the terms and conditions of all leases,
easements, right-of-way agreements and other similar agreements binding upon the
Debtor or affecting the Collateral or any part thereof, and all orders,
ordinances, laws and statutes of any city, state or other governmental entity,
department, or agency having jurisdiction with respect to the premises wherein
such Collateral is located or the conduct of business thereon.

         

        
          
             

          

          
            -6-

            
              

            

          

          
             

          

        

         

        (m)    Schedule D
attached hereto contains a true, complete, and current listing of all patents,
trademarks, tradestyles, copyrights, and other intellectual property rights
(including all registrations and applications therefor) owned by the Debtor as
of the date hereof that are registered with any governmental
authority.  The Debtor shall promptly notify the Secured Party in
writing of any additional intellectual property rights acquired or arising after
the date hereof, and shall submit to the Secured Party a supplement to Schedule
D to reflect such additional rights (provided the Debtor’s failure to do so
shall not impair the Secured Party’s security interest therein).  The
Debtor owns or possesses rights to use all franchises, licenses, patents,
trademarks, trade names, tradestyles, copyrights, and rights with respect to the
foregoing which are required to conduct its business.  No event has
occurred which permits, or after notice or lapse of time or both would permit,
the revocation or termination of any such rights, and the Debtor is not liable
to any person for infringement under applicable law with respect to any such
rights as a result of its business operations.

         

        (n) 
  Schedule G attached hereto contains a true, complete and
current listing of all Commercial Tort Claims held by the Debtor as of the date
hereof, each described by reference to the specific incident given rise to the
claim.  The Debtor agrees to execute and deliver to the Secured Party
a supplement to this Agreement in the form attached hereto as Schedule H,
or in such other form acceptable to the Secured Party, promptly upon becoming
aware of any other Commercial Tort Claim held or maintained by the Debtor
arising after the date hereof (provided the Debtor’s failure to do so shall not
impair the Secured Party’s security interest therein).

         

        (o) 
  The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments, and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including, without
limitation, (i) such financing statements, and amendments thereof or
supplements thereto, and such other instruments and documents as the Secured
Party may from time to time require in order to comply with the UCC and any
other applicable law, (ii) such agreements with respect to patents,
trademarks, copyrights, and similar intellectual property rights as the Secured
Party may from time to time require to comply with the filing requirements of
the United States Patent and Trademark Office and the United States Copyright
Office, and (iii) such control agreements with respect to Deposit Accounts,
Investment Property, Letter-of-Credit Rights, and electronic Chattel Paper, and
to cause the relevant depository institutions, financial intermediaries, and
issuers to execute and deliver such control agreements, as the Secured Party may
from time to time require.  The Debtor hereby agrees that a carbon,
photographic or other reproduction of this Security Agreement or any such
financing statement is sufficient for filing as a financing statement by the
Secured Party without notice thereof to the Debtor wherever the Secured Party in
its sole discretion desires to file the same.  The Debtor hereby
authorizes the Secured Party to file any and all financing statements covering
the Collateral or any part thereof as the Secured Party may require, including
financing statements describing the Collateral as “all assets” or “all personal
property” or words of like meaning.  The Secured Party may order lien
searches from time to time against the Debtor and the Collateral, and the Debtor
shall promptly reimburse the Secured Party for all costs and expenses incurred
in connection with such lien searches.  In the event for any reason
the law of any jurisdiction other than Illinois becomes or is applicable to the
Collateral or any part thereof, or to any of the Obligations, the Debtor agrees
to execute and deliver all such instruments and documents and to do all such
other things as the Secured Party in its sole discretion deems necessary or
appropriate to preserve, protect, and enforce the lien and security interest of
the Secured Party under the law of such other jurisdiction.  The
Debtor agrees to mark its books and records to reflect the lien and security
interest of the Secured Party in the Collateral.

            

        
          
             

          

          
            -7-

            
              

            

          

          
             

          

        

         

        (p)
   On failure of the Debtor to perform any of the covenants and
agreements herein contained, the Secured Party may, at its option, perform the
same and in so doing may expend such sums as the Secured Party may deem
advisable in the performance thereof, including, without limitation, the payment
of any insurance premiums, the payment of any taxes, liens and encumbrances,
expenditures made in defending against any adverse claims, and all other
expenditures which the Secured Party may be compelled to make by operation of
law or which the Secured Party may make by agreement or otherwise for the
protection of the security hereof.  All such sums and amounts so
expended shall be repayable by the Debtor immediately without notice or demand,
shall constitute additional Obligations secured hereunder and shall bear
interest from the date said amounts are expended at the rate per annum (computed
on the basis of a 360-day year for the actual number of days elapsed) determined
by adding 2% to the per annum interest rate applicable to Base Rate Portions
under the Credit Agreement from time to time (such rate per annum as so
determined being hereinafter referred to as the “Default
Rate”).  No such performance of any covenant or agreement by
the Secured Party on behalf of the Debtor, and no such advancement or
expenditure therefor, shall relieve the Debtor of any default under the terms of
this Security Agreement or in any way obligate the Secured Party to take any
further or future action with respect thereto.  The Secured Party, in
making any payment hereby authorized, may do so according to any bill, statement
or estimate procured from the appropriate public office or holder of the claim
to be discharged without inquiry into the accuracy of such bill, statement or
estimate or into the validity of any tax assessment, sale, forfeiture, tax lien
or title or claim.  The Secured Party, in performing any act
hereunder, shall be the sole judge of whether the Debtor is required to perform
same under the terms of this Security Agreement.  The Secured Party is
hereby authorized to charge any account of the Debtor maintained with the
Secured Party for the amount of such sums and amounts so expended.

         

        Section
4.    Special Provisions Re: Receivables.

         

        (a)  
  As of the time any Receivable becomes subject to the security
interest provided for hereby, and at all times thereafter, the Debtor shall be
deemed to have warranted as to each and all of such Receivables that all
warranties of the Debtor set forth in this Security Agreement are true and
correct with respect to each such Receivable; that each Receivable and all
papers and documents relating thereto are genuine and in all respects what they
purport to be; that each Receivable is valid and subsisting; that no such
Receivable is evidenced by any Instrument or Chattel Paper unless such
Instrument or Chattel Paper has theretofore been endorsed by the Debtor and
delivered to the Secured Party (except to the extent the Secured Party
specifically requests or authorizes the Debtor not to do so with respect to any
such Instrument or Chattel Paper); that no surety bond was required or given in
connection with such Receivable or the contracts or purchase orders out of which
the same arose; that the amount of the Receivable represented as owing is the
correct amount actually and unconditionally owing, except for normal cash
discounts on normal trade terms in the ordinary course of business; and that the
amount of such Receivable represented as owing is not disputed and is not
subject to any set-offs, credits, deductions or countercharges other than those
arising in the ordinary course of the Debtor’s business which are disclosed to
the Secured Party in writing promptly upon the Debtor becoming aware
thereof.  Without limiting the foregoing, if any Receivable arises out
of a contract with the United States of America, or any state or political
subdivision thereof, or any department, agency or instrumentality of any of the
foregoing, the Debtor agrees to notify the Secured Party and, at the Secured
Party’s request, execute whatever instruments and documents are required by the
Secured Party in order that such Receivable shall be assigned to the Secured
Party and that proper notice of such assignment shall be given under the federal
Assignment of Claims Act (or any successor statute) or any similar state or
local statute, as the case may be.

         

        
          
             

          

          
            -8-

            
              

            

          

          
             

          

        

         

        (b)
   Unless and until an Event of Default occurs, any merchandise
or other goods which are returned by a customer or account debtor or otherwise
recovered may be resold by the Debtor in the ordinary course of its business as
presently conducted in accordance with Section 6(b) hereof; and, during the
existence of any Event of Default, such merchandise and other goods shall be set
aside at the request of the Secured Party and held by the Debtor as trustee for
the Secured Party and shall remain part of the Secured Party’s
Collateral.  Unless and until an Event of Default occurs, the Debtor
may settle and adjust disputes and claims with its customers and account
debtors, handle returns and recoveries and grant discounts, credits and
allowances in the ordinary course of its business as presently conducted for
amounts and on terms which the Debtor in good faith considers advisable; and,
during the existence of any Event of Default, at the Secured Party’s request,
the Debtor shall notify the Secured Party promptly of all returns and recoveries
and, on the Secured Party’s request, deliver any such merchandise or other goods
to the Secured Party.  During the existence of any Event of Default,
at the Secured Party’s request, the Debtor shall also notify the Secured Party
promptly of all disputes and claims and settle or adjust them at no expense to
the Secured Party, but no discount, credit or allowance other than on normal
trade terms in the ordinary course of business as presently conducted shall be
granted to any customer or account debtor and no returns of merchandise or other
goods shall be accepted by the Debtor without the Secured Party’s
consent.  The Secured Party may, at all times during the existence of
any Event of Default, settle or adjust disputes and claims directly with
customers or account debtors for amounts and upon terms which the Secured Party
considers advisable.

         

        (c) 
   Unless delivered to the Secured Party or its agent, all
tangible Chattel Paper and Instruments shall contain a legend acceptable to the
Secured Party indicating that such Chattel Paper or Instrument is subject to the
security interest of the Secured Party contemplated by this Security
Agreement.

         

        Section 5.    Collection
of Receivables.

         

        (a) 
  Except as otherwise provided in this Security Agreement, the Debtor
shall make collection of all Receivables and may use the same to carry on its
business in accordance with sound business practice and otherwise subject to the
terms hereof.

         

        (b)    Whether
or not any Event of Default has occurred and whether or not the Secured Party
has exercised any or all of its rights under other provisions of this
Section 5, in the event the Secured Party requests the Debtor to do
so:

         

        (i) 
   all Instruments and Chattel Paper at any time constituting
part of the Receivables or any other Collateral (including any postdated checks)
shall, upon receipt by the Debtor, be immediately endorsed to and deposited with
the Secured Party; and/or

         

        
          
             

          

          
            -9-

            
              

            

          

          
             

          

        

        
           

          (ii)    the
Debtor shall instruct all customers and account debtors to remit all payments in
respect of Receivables or any other Collateral to a lockbox or lockboxes under
the sole custody and control of the Secured Party and which are maintained at
post office(s) in Chicago, Illinois selected by the Secured
Party.

        

         

        (c)  
 Whether or not any Event of Default has occurred and whether or not the
Secured Party has exercised any or all of its rights under other provisions of
this Section 5, the Secured Party or its designee may notify the Debtor’s
customers and account debtors at any time that Receivables or any other
Collateral have been assigned to the Secured Party or of the Secured Party’s
security interest therein, and either in its own name, or the Debtor’s name, or
both, demand, collect (including, without limitation, through a lockbox
analogous to that described in Section 5(b)(ii) hereof), receive, receipt
for, sue for, compound and give acquittance for any or all amounts due or to
become due on Receivables or any other Collateral, and in the Secured Party’s
discretion file any claim or take any other action or proceeding which the
Secured Party may deem necessary or appropriate to protect or realize upon the
security interest of the Secured Party in the Receivables or any other
Collateral.

         

        (d)
   Any proceeds of Receivables or other Collateral transmitted to
or otherwise received by the Secured Party pursuant to any of the provisions of
Sections 5(b) or 5(c) hereof may be handled and administered by the Secured
Party in and through a remittance account at the Secured Party, and the Debtor
acknowledges that the maintenance of such remittance account by the Secured
Party is solely for the Secured Party’s convenience and that the Debtor does not
have any right, title or interest in such remittance account or any amounts at
any time standing to the credit thereof. The Secured Party may, after the
occurrence and during the continuation of any Event of Default or of any event
or condition which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default, apply all or any part of
any proceeds of Receivables or other Collateral received by it from any source
to the payment of the Obligations (whether or not then due and payable), such
applications to be made in such amounts, in such manner and order and at such
intervals as the Secured Party may from time to time in its discretion
determine, but not less often than once each week.  The Secured Party
need not apply or give credit for any item included in proceeds of Receivables
or other Collateral until the Secured Party has received final payment therefor
at its office in cash or final solvent credits current in Chicago, Illinois,
acceptable to the Secured Party as such.  However, if the Secured
Party does give credit for any item prior to receiving final payment therefor
and the Secured Party fails to receive such final payment or an item is charged
back to the Secured Party for any reason, the Secured Party may at its election
in either instance charge the amount of such item back against the remittance
account or any account of the Debtor maintained with the Secured Party, together
with interest thereon at the Default Rate.  Concurrently with each
transmission of any proceeds of Receivables or other Collateral to the
remittance account, the Debtor shall furnish the Secured Party with a report in
such form as the Secured Party shall require identifying the particular
Receivable or other Collateral from which the same arises or
relates.  Unless and until an Event of Default or an event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default shall have occurred and be continuing, the
Secured Party will release proceeds of Collateral which the Secured Party has
not applied to the Obligations as provided above from the remittance account
from time to time promptly after receipt thereof.  The Debtor hereby
indemnifies the Secured Party from and against all liabilities, damages, losses,
actions, claims, judgments, costs, expenses, charges and reasonable attorneys’
fees suffered or incurred by the Secured Party because of the maintenance of the
foregoing arrangements; provided, however, that the
Debtor shall not be required to indemnify the Secured Party for any of the
foregoing to the extent they arise solely from the gross negligence or willful
misconduct of the Secured Party.  The Secured Party
shall have no liability or responsibility to the Debtor for accepting any check,
draft or other order for payment of money bearing the legend “payment in full”
or words of similar import or any other restrictive legend or endorsement
whatsoever or be responsible for determining the correctness of any
remittance.

         

        
          
             

          

          
            -10-

            
              

            

          

          
             

          

        

         

        Section 6.    Special
Provisions Re:  Inventory and Equipment.

         

        (a) 
   The Debtor shall at its own cost and expense maintain, keep
and preserve the Inventory in good and merchantable condition and keep and
preserve the Equipment in good repair, working order and condition, ordinary
wear and tear excepted, and, without limiting
the foregoing, make all necessary and proper repairs, replacements and additions
to the Equipment so that the efficiency thereof shall be fully preserved and
maintained.

         

        (b) 
  The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by
the Secured Party, use, consume and sell the Inventory in the ordinary course of
its business, but a sale in the ordinary course of business shall not under any
circumstance include any transfer or sale in satisfaction, partial or complete,
of a debt owing by the Debtor.

         

        (c) 
   The Debtor may, until an Event of Default has occurred and is continuing
and thereafter until otherwise notified by
the Secured Party, sell Equipment to the extent permitted under the Credit
Agreement.

         

        (d) 
  As of the time any Inventory or Equipment becomes subject to the
security interest provided for hereby and at all times thereafter, the Debtor
shall be deemed to have warranted as to any and all of such Inventory and
Equipment that all warranties of the Debtor set forth in this Security Agreement
are true and correct with respect to such Inventory and Equipment; that all of
such Inventory and Equipment is located at a location set forth pursuant to
Section 3(b) hereof; and that, in the case of Inventory, such Inventory is
new and unused and in good and merchantable condition.  The Debtor
warrants and agrees that no Inventory is or will be consigned to any other
person without the Secured Party’s prior written consent.

         

        (e)
   Upon the Secured Party’s request, the Debtor shall at its own
cost and expense cause the lien of the Secured Party in and to any portion of
the Collateral subject to a certificate of title law to be duly noted on such
certificate of title or to be otherwise filed in such manner as is prescribed by
law in order to perfect such lien and shall cause all such certificates of title
and evidences of lien to be deposited with the Secured Party.

         

        (f) 
   Except for Equipment from time to time located on the real
estate described on Schedule E attached hereto and as otherwise disclosed
to the Secured Party in writing, none of the Equipment is or will be attached to
real estate in such a manner that the same may become a fixture.

         

        (g) 
   If any of the Inventory is at any time evidenced by a document
of title, such document shall be promptly delivered by the Debtor to the Secured
Party except to the extent the Secured Party specifically requests the Debtor
not to do so with respect to any such document.

         

        
          
             

          

          
            -11-

            
              

            

          

          
             

          

        

         

        Section 7.    Special
Provisions Re:  Investment Property and Deposits.

         

        (a) 
   Unless and until an Event of Default has occurred and is
continuing and thereafter until notified to the contrary by the Secured Party
pursuant to Section 9(d) hereof:

         

        (i) 
   the Debtor shall be entitled to exercise all voting and/or
consensual powers pertaining to the Investment Property or any part thereof, for
all purposes not inconsistent with the terms of this Security Agreement or any
other document evidencing or otherwise relating to any Obligations;
and

         

        (ii) 
   the Debtor shall be entitled to receive and retain all cash
dividends paid upon or in respect of the Investment Property.

         

        (b) 
  All Investment Property (including all securities, certificated or
uncertificated, securities accounts, and commodity accounts) of the Debtor on
the date hereof is listed and identified on Schedule F attached hereto and
made a part hereof. The Debtor shall promptly notify the Secured Party of any
other Investment Property acquired or maintained by the Debtor after the date
hereof, and shall submit to the Secured Party a supplement to Schedule F to
reflect such additional rights (provided the Debtor’s failure to do so shall not
impair the Secured Party’s security interest therein).  Certificates
for all certificated securities now or at any time constituting Investment
Property shall be promptly delivered by the Debtor to the Secured Party duly
endorsed in blank for transfer or accompanied by an appropriate assignment or
assignments or an appropriate undated stock power or powers, in every case
sufficient to transfer title thereto including, without limitation, all stock
received in respect of a stock dividend or resulting from a split-up,
revision or reclassification of the Investment Property or any part thereof or
received in addition to, in substitution of or in exchange for the Investment
Property or any part thereof as a result of a merger, consolidation or
otherwise.  With respect to any uncertificated securities or any
Investment Property held by a securities intermediary, commodity intermediary,
or other financial intermediary of any kind, unless the Secured Party requests
otherwise, the Debtor shall execute and deliver, and shall cause any such issuer
or intermediary to execute and deliver, an agreement among the Debtor, the
Secured Party, and such issuer or intermediary in form and substance reasonably
satisfactory to the Secured Party which provides, among other things, for the
issuer’s or intermediary’s agreement that it shall comply with entitlement
orders, and apply any value distributed on account of any such Investment
Property, as directed by the Secured Party without further consent by the
Debtor.  The
Secured Party may at any time, after the occurrence of an Event of Default or an
event or condition which with the lapse of time or the giving of notice, or
both, would constitute an Event of Default, cause to be transferred into its
name or the name of its nominee or nominees all or any part of the Investment
Property hereunder.

         

        (c) 
   Unless and until an Event of Default, or an event or condition
which with the lapse of time or the giving of notice, or both, would constitute
an Event of Default, has occurred and is continuing, the Debtor may sell or
otherwise dispose of any Investment Property, provided that the Debtor
shall not sell or otherwise dispose of any capital stock of or other equity
interests in any direct or indirect subsidiary without the prior written consent
of the Secured Party.  After the occurrence and during the
continuation of any Event of Default or of any event or condition which with the
lapse of time or the giving of notice, or both, would constitute an Event of
Default, the Debtor shall not sell all or any part of the Investment Property
without the prior written consent of the Secured Party.

         

        
          
             

          

          
            -12-

            
              

            

          

          
             

          

        

         

        (d)
   The Debtor represents that on the date of this Security
Agreement, none of the Investment Property consists of margin stock (as such
term is defined in Regulation U of the Board of Governors of the Federal
Reserve System) except to the extent the Debtor has delivered to the Secured
Party a duly executed and completed Form U-1 with respect to such
stock.  If at any time the Investment Property or any part thereof
consists of margin stock, the Debtor shall promptly so notify the Secured Party
and deliver to the Secured Party a duly executed and completed Form U-1 and
such other instruments and documents reasonably requested by the Secured Party
in form and substance satisfactory to the
Secured Party.

         

        (e) 
   Notwithstanding anything to the contrary contained herein, in
the event any Investment Property is subject to the terms of a separate security
agreement in favor of the Secured Party, the terms of such separate security
agreement shall govern and control unless otherwise agreed to in writing by the
Secured Party.

         

        (f) 
   All Deposit Accounts of the Debtor on the date hereof are
listed and identified (by account number and depository institution) on
Schedule F attached hereto and made a part hereof. The Debtor shall
promptly notify the Secured Party of any other Deposit Account opened or
maintained by the Debtor after the date hereof, and shall submit to the Secured
Party a supplement to Schedule F to reflect such additional accounts
(provided the Debtor’s failure to do so shall not impair the Secured Party’s
security interest therein).  With respect to any Deposit Account
maintained by a depository institution other than the Secured Party, and as a
condition to the establishment and maintenance of any such Deposit Account
except as otherwise agreed to in writing by the Secured Party, the Debtor, the
depository institution, and the Secured Party shall execute and deliver an
account control agreement in form and substance satisfactory to the Secured
Party which provides, among other things, for the depository institution’s
agreement that it will comply with instructions originated by the Secured Party
directing the disposition of the funds in the Deposit Account without further
consent by such Debtor.

         

        Section 8.    Power of
Attorney.  In addition to any other powers of attorney
contained herein, the Debtor hereby appoints the Secured Party, its nominee, and
any other person whom the Secured Party may designate, as the Debtor’s
attorney-in-fact, with full power and authority upon the occurrence and during
the continuation of any Event of Default to sign the Debtor’s
name on verifications of Receivables and other Collateral; to send requests for
verification of Collateral to the Debtor’s customers, account debtors and other
obligors; to endorse the Debtor’s name on any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security that may come into the
Secured Party’s possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part thereof; to sign
the Debtor’s name on any invoice or bill of lading relating to any Collateral,
on claims to enforce collection of any Collateral, on notices to and drafts
against customers and account debtors and other obligors, on schedules and
assignments of Collateral, on notices of assignment and on public records; to
notify the post office authorities to change the address for delivery of the
Debtor’s mail to an address designated by the Secured Party; to receive, open
and dispose of all mail addressed to the Debtor; and to do all things necessary
to carry out this Agreement.  The Debtor hereby ratifies and approves
all acts of any such attorney and agrees that neither the Secured Party nor any
such attorney will be liable for any acts or omissions nor for any error of
judgment or mistake of fact or law other than such person’s gross negligence or
willful misconduct.  The Secured Party may file one or more financing
statements disclosing its security interest in any or all of the Collateral
without the Debtor’s signature appearing thereon.  The Debtor also
hereby grants the Secured Party a power of attorney to execute any such
financing statements, or amendments and supplements to financing statements, on
behalf of the Debtor without notice thereof to the Debtor.  The
foregoing powers of attorney, being coupled with an interest, are irrevocable
until the Obligations have been fully paid and satisfied and all agreements of
the Secured Party to extend credit to or for the account of the Debtor have
expired or otherwise have been terminated.

         

        
          
             

          

          
            -13-

            
              

            

          

          
             

          

        

         

        Section 9.    Defaults
and Remedies.

         

        (a) 
   The occurrence of any “Event of Default” (as defined in the
Credit Agreement) shall constitute an “Event of Default”
hereunder.

         

        (b) 
   Upon the occurrence and during the continuation of any Event of Default,
the Secured Party shall have, in addition to all other rights provided herein or
by law, the rights and remedies of a secured party under the UCC (regardless of
whether the UCC is the law of the jurisdiction where the rights or remedies are
asserted and regardless of whether the UCC applies to the affected Collateral),
and further the Secured Party may, without demand and without advertisement,
notice, hearing or process of law, all of which the Debtor hereby waives, at any
time or times, sell and deliver all or any part of the Collateral (and any other
property of the Debtor attached thereto or found therein) held by or for it at
public or private sale, for cash, upon credit or otherwise, at such prices and
upon such terms as the Secured Party deems advisable, in its sole
discretion.  In addition to all other sums due the Secured Party
hereunder, the Debtor shall pay the Secured Party all costs and expenses
incurred by the Secured Party, including reasonable attorneys’ fees and
court costs, in obtaining, liquidating or enforcing payment of Collateral or the
Obligations or in the prosecution or defense of any action or proceeding by or
against the Secured Party or the Debtor concerning any matter arising out of or
connected with this Security Agreement or the Collateral or the Obligations,
including, without limitation, any of the foregoing arising in, arising under or
related to a case under the United States Bankruptcy Code (or any successor
statute).  Any requirement of reasonable notice shall be met if such
notice is personally served on or mailed, postage prepaid, to the Debtor in
accordance with Section 12(b) hereof at least 10 days before the time
of sale or other event giving rise to the requirement of such notice; provided however, no
notification need be given to the Debtor if the Debtor has signed, after an
Event of Default has occurred, a statement renouncing any right to notification
of sale or other intended disposition.  The Secured Party shall not be
obligated to make any sale or other disposition of the Collateral regardless of
notice having been given.  The Secured Party may be the purchaser at
any such sale.  The Debtor hereby waives all of its rights of
redemption from any such sale.  The Secured Party may postpone or
cause the postponement of the sale of all or any portion of the Collateral by
announcement at the time and place of such sale, and such sale may, without
further notice, be made at the time and place to which the sale was postponed or
the Secured Party may further postpone such sale by announcement made at such
time and place.  The Secured Party has no obligation to prepare the
Collateral for sale.  The Secured Party may sell or otherwise dispose
of the Collateral without giving any warranties as to the Collateral or any part
thereof, including disclaimers of any warranties of title or the like, and the
Debtor acknowledges and agrees that the absence of such warranties shall not
render the disposition commercially unreasonable.

         

        
          
             

          

          
            -14-

            
              

            

          

          
             

          

        

         

        (c) 
   Without in any way limiting the foregoing, upon the occurrence
and during the continuation of any Event of Default,
the Secured Party shall have the right, in addition to all other rights provided
herein or by law, to take physical possession of any and all of the Collateral
and anything found therein, the right for that purpose to enter without legal
process any premises where the Collateral may be found (provided such entry be
done lawfully), and the right to maintain such possession on the Debtor’s
premises (the Debtor hereby agreeing to lease such premises without cost or
expense to the Secured Party or its designee if the Secured Party so requests)
or to remove the Collateral or any part thereof to such other places as the
Secured Party may desire.  Upon the occurrence and during the
continuation of any Event of Default, the Secured Party shall have the right to
exercise any and all rights with respect to all Deposit Accounts of the Debtor,
including, without limitation, the right to direct the disposition of the funds
in each Deposit Account and to collect, withdraw and receive all amounts due or
to become due or payable under each such Deposit Account.  Upon the
occurrence and during the continuation of any Event of Default, the Debtor
shall, upon the Secured Party’s demand, promptly assemble the Collateral and
make it available to the Secured Party at a place designated by the Secured
Party.  If the Secured Party exercises its right to take possession of
the Collateral, the Debtor shall also at its expense perform any and all other
steps requested by the Secured Party to preserve and protect the security
interest hereby granted in the Collateral, such as placing and maintaining signs
indicating the security interest of the Secured Party, appointing overseers for
the Collateral and maintaining Collateral records.

         

        (d)
   Without in any way limiting the foregoing, upon the
occurrence and
during the continuation of any Event of Default, all rights of the Debtor to
exercise the voting and/or consensual powers which it is entitled to exercise
pursuant to Section 7(a)(i) hereof and/or to receive and retain the
distributions which it is entitled to receive and retain pursuant to
Section 7(a)(ii) hereof, shall, at the option of the Secured Party, cease
and thereupon become vested in the Secured Party, which, in addition to all
other rights provided herein or by law, shall then be entitled solely and
exclusively to exercise all voting and other consensual powers pertaining to the
Investment Property (including, without limitation, the right to deliver notice
of control with respect to any Investment Property held in a securities account
or commodity account and deliver all entitlement orders with respect thereto)
and/or to receive and retain the distributions which the Debtor would otherwise
have been authorized to retain pursuant to Section 7(a)(ii) hereof and
shall then be entitled solely and exclusively to exercise any and all rights of
conversion, exchange or subscription or any other rights, privileges or options
pertaining to any Investment Property as if the Secured Party were the absolute
owner thereof.  Without limiting the foregoing, the Secured Party
shall have the right to exchange, at its discretion, any and all of the
Investment Property upon the merger, consolidation, reorganization,
recapitalization or other readjustment of the respective issuer thereof or upon
the exercise by or on behalf of any such issuer or the Secured Party of any
right, privilege or option pertaining to any Investment Property and, in
connection therewith, to deposit and deliver any and all of the Investment
Property with any committee, depositary, transfer agent, registrar or other
designated agency upon such terms and conditions as the Secured Party may
determine.  In the event the Secured Party in good faith believes any
of the Collateral constitutes restricted securities within the meaning of any
applicable securities laws, any disposition thereof in compliance with such laws
shall not render the disposition commercially unreasonable.

         

        (e) 
   Without in any way limiting the foregoing, the Debtor hereby
grants to the Secured Party a royalty-free irrevocable license and right to use
all of the Debtor’s patents, patent applications, patent licenses, trademarks,
trademark registrations, trademark licenses, trade names, trade styles,
copyrights, copyright applications, copyright licenses, and similar intangibles
in connection with any foreclosure or other realization by the Secured Party on
all or any part of the Collateral.  The license and right granted the
Secured Party hereby shall be without any royalty or fee or charge
whatsoever.

         

        
          
             

          

          
            -15-

            
              

            

          

          
             

          

        

         

        (f)  
  The powers conferred upon the Secured Party hereunder are solely to
protect its interest in the Collateral and shall not impose on it any duty to
exercise such powers.  The Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession or control if such Collateral is accorded treatment substantially
equivalent to that which the Secured Party accords its own property, consisting
of similar type assets, it being understood, however, that the Secured Party
shall have no responsibility for ascertaining or taking any action with respect
to calls, conversions, exchanges, maturities, tenders or other matters relating
to any such Collateral, whether or not the Secured Party has or is deemed to
have knowledge of such matters.  This Security Agreement constitutes
an assignment of rights only and not an assignment of any duties or obligations
of the Debtor in any way related to the Collateral, and the Secured Party shall
have no duty or obligation to discharge any such duty or
obligation.  The Secured Party shall have no responsibility for taking
any necessary steps to preserve rights against any parties with respect to any
Collateral or initiating any action to protect the Collateral against the
possibility of a decline in market value.  Neither the Secured Party
nor any party acting as attorney for the Secured Party shall be liable for any
acts or omissions or for any error of judgment or mistake of fact or law other
than their gross negligence or willful misconduct.

         

        (g)  
  Failure by the Secured Party to exercise any right, remedy or option
under this Security Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated.  The rights and remedies of the Secured Party
under this Security Agreement shall be cumulative and not exclusive of any other
right or remedy which the Secured Party may have.

         

        Section 10.    Application of
Proceeds.  The proceeds and avails of the Collateral at any
time received by the Secured Party after the occurrence and during the
continuation of any Event of Default shall, when received by the Secured Party
in cash or its equivalent, be applied by the Secured Party as
follows:

         

        (i) 
   first, to the payment and satisfaction of all sums paid and
costs and expenses incurred by the Secured Party hereunder or otherwise in
connection herewith, including such monies paid or incurred in connection with
protecting, preserving or realizing upon the Collateral or enforcing any of the
terms hereof, including reasonable attorneys’ fees and court costs, together
with any interest thereon (but without preference or priority of principal over
interest or of interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and

         

        (ii)   
second, to the payment and satisfaction of the remaining Obligations, whether or
not then due (in whatever order the Secured Party elects), both for interest and
principal.

         

        The
Debtor shall remain liable to the Secured Party for any
deficiency.  Any surplus remaining after the full payment and
satisfaction of the foregoing shall be returned to the Debtor or to whomsoever
the Secured Party reasonably determines is lawfully entitled
thereto.

         

        Section 11.    Continuing
Agreement.  This Security Agreement shall be a continuing
agreement in every respect and shall remain in full force and effect until all
of the Obligations, both for principal and interest, have been fully paid and
satisfied and all agreements of the Secured Party to extend credit to or for the
account of the Debtor have expired or otherwise have been
terminated.  Upon such termination of this Security Agreement, the
Secured Party shall, upon the request and at the expense of the Debtor,
forthwith release its security interest hereunder.

         

        
          
             

          

          
            -16-

            
              

            

          

          
             

          

        

         

        Section 12.    Miscellaneous.

         

        (a)
    This Security Agreement cannot be changed or terminated
orally.  All of the rights, privileges, remedies and options given to
the Secured Party hereunder shall inure to the benefit of its successors and
assigns, and all the terms, conditions, covenants, agreements, representations
and warranties of and in this Security Agreement shall bind the Debtor and its
legal representatives, successors and assigns, provided that the Debtor may not
assign its rights or delegate its duties hereunder without the Secured Party’s
prior written consent.

         

        (b)
    Except as otherwise specified herein, all notices hereunder
shall be in writing (including, without limitation, notice by telecopy) and
shall be given to the relevant party at its address or telecopier number set
forth below (or, if no such address is set forth below, at the address of the
Debtor as shown on the records of the Secured Party), or such other address or
telecopier number as such party may hereafter specify by notice to the other
given by courier, by United States certified or registered mail, by telecopy or
by other telecommunication device capable of creating a written record of such
notice and its receipt.  Notices hereunder shall be
addressed:

        

        
          	
                  to
      the Debtor at:

                	
                  to
      the Secured Party at:

                
	 
      	 
      
	
                  CTI
      Industries Corporation

                	
                  Harris
      N.A.

                
	
                  22160
      North Pepper Road

                	
                  111
      West Monroe Street – 5W

                
	
                  Barrington,
      Illinois 60010

                	
                  Chicago,
      Illinois 60603

                
	
                  Attention:          Stephen
      M. Merrick

                	
                  Attention:
                Timothy J.
      Moran

                
	
                  Telephone:       
      (847) 620-1308

                	
                  Telephone:        
      (312) 461-2633

                
	
                  Facsimile:         (847)
      382-1219

                	
                  Facsimile:         
      (312) 502-3922

                
	 
      	 
      
	
                  with
      a copy to:

                	
                  with
      a copy to:

                
	 
      	 
      
	
                  Vanasco,
      Genelly & Miller

                	
                  McGuireWoods
      LLP

                
	
                  33
      North LaSalle Street, Suite 2200

                	
                  77
      West Wacker Drive, Suite 4100

                
	
                  Chicago,
      Illinois 60602

                	
                  Chicago,
      Illinois 60601

                
	
                  Attention:
                Gerald
      Miller

                	
                  Attention:
                Arthur B.
      Muir

                
	
                  Telephone:
              (312)
    786-5100

                	
                  Telephone:         (312)
      750-3595

                
	
                  Facsimile:          (312)
      786-5111

                	
                  Facsimile:          (312)
      698-4568

                

        

         

        Each such
notice, request or other communication shall be effective (i) if given by
telecopier, when such telecopy is transmitted to the telecopier number specified
in this Section and a confirmation of such telecopy has been received by the
sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered
at the addresses specified in this Section.

         

        
          
             

          

          
            -17-

            
              

            

          

          
             

          

        

         

        (c) 
   In the event and to the extent that any provision hereof shall
be deemed to be invalid or unenforceable by reason of the operation of any law
or by reason of the interpretation placed thereon by any court, this Security
Agreement shall to such extent be construed as not containing such provision,
but only as to such locations where such law or interpretation is operative, and
the invalidity or unenforceability of such provision shall not affect the
validity of any remaining provisions hereof, and any and all other provisions
hereof which are otherwise lawful and valid shall remain in full force and
effect.

         

        (d)  
  This Security Agreement shall be deemed to have been made in the
State of Illinois and shall be governed by, and construed in accordance with,
the laws of the State of Illinois.  Section headings used in this
Security Agreement are for convenience of reference only and are not a part of
this Agreement for any other purpose.

         

        (e)  
  This Security Agreement may be executed in any number of
counterparts, and by different parties hereto on separate counterpart signature
pages, and all such counterparts taken together shall be deemed to constitute
one and the same instrument.  The Debtor acknowledges that this
Security Agreement is and shall be effective upon its execution and delivery by
the Debtor to the Secured Party, and it shall not be necessary for the Secured
Party to execute this Security Agreement or any other acceptance hereof or
otherwise to signify or express its acceptance hereof.

         

        (f) 
   The Debtor hereby submits to the nonexclusive jurisdiction of
the United States District Court for the Northern District of Illinois and of
any Illinois State court sitting in the City of Chicago for purposes of all
legal proceedings arising out of or relating to this Security Agreement or the
transactions contemplated hereby. The Debtor irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such proceeding brought in such a court and any claim
that any such proceeding brought in such a court has been brought in an
inconvenient forum. The
Debtor and the Secured Party each hereby irrevocably waive any and all right to
trial by jury in any legal proceeding arising out of or relating to this
Security Agreement or the transactions contemplated hereby.

         

        [signature
page follows]

        
          
             

          

          
            -18-

            
              

            

          

          
             

          

        

         

        In
Witness Whereof, the Debtor has caused this Security Agreement to be duly
executed and delivered in Chicago, Illinois, as of the date and year first above
written.

        

        
          
            	 
      	 
      	
                    CTI
      Industries Corporation

                  
	 
      	 
      	 
      
	 
      	
                    By: 

                  	
                    /s/ Stephen M. Merrick

                  
	 
      	 
      	
                    Executive
      Vice-President and Chief Financial

                    Officer

                  

          

        

         

        Accepted
and agreed to in Chicago, Illinois, as of the date and year first above
written.

        

        
          
            	 
      	 
      	
                    Harris N.A.

                  
	 
      	 
      	 
      
	 
      	
                    By: 

                  	
                    /s/ Timothy J. Moran        

                  
	 
      	 
      	
                    Senior
      Vice-President

                  

          

        

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule
A

         

        Locations

         

        
          	
                  Item
      1.

                	
                  Places
      of Business (including Debtor’s chief executive office and principal place
      of business):

                

        

         

        22160
N. Pepper Road, Lake Barrington, IL 60010

         

        
          	
                  Item
      2.

                	
                  Permitted
      Collateral Locations:

                

        

         

        2760
Spectrum Drive, Elgin, IL 60124

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule
B

         

        Other
Names

         

        
          	
                  A.

                	
                  Prior
      Legal Names

                

        

         

        Container
Technologies, Inc.

         

        CTI
Merger Corporation

         

        
          	
                  B.

                	
                  Trade
      Names

                

        

        

        NONE.

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule C

         

        Permitted
Encumbrances

        

        
          
            
              
                
                  
                    	
                            Secured Party

                          	
                            Collateral

                          	 	
                            Description of Obligation

                            (including Outstanding

                            Principal Balance)

                          	 
	 
      	 
      	 	 	 
	
                            RBS

                          	
                            leases
      on pouch machines

                          	 	$	948,296.00	 

                  

                

              

            

          

        

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule D

         

        Intellectual
Property Rights

         

        See
attached lists of Patents and Trademarks and License
Agreements.

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule
E

         

        Real
Estate Legal Descriptions

        

        THAT
PART OF THE SOUTH 1/2 OF SECTION 21, TOWNSHIP 43 NORTH, RANGE 9, EAST OF THE
THIRD PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT A POINT IN THE
EAST LINE OF THE WEST 1/2 OF THE SOUTH EAST 1/4 OF SAID SECTION 21, 691.81 FEET
NORTH OF THE SOUTHEAST CORNER THEREOF; THENCE WEST PARALLEL WITH THE SOUTH LINE
OF SAID SOUTH EAST 1/4 746.66 FEET; THENCE NORTH PARALLEL WITH THE EAST LINE OF
THE SAID WEST 1/2 OF THE SOUTH EAST 1/4 291.81 FEET; THENCE EAST PARALLEL WITH
THE SOUTH LINE OF SAID SOUTH EAST 1/4 746.66 FEET TO THE EAST LINE OF THE WEST
1/2 OF THE SOUTH EAST 1/4; THENCE SOUTH 291.81 FEET TO THE POINT OF BEGINNING,
IN LAKE COUNTY, ILLINOIS

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule F

         

        Investment
Property and Deposits

         

        
          
            	
                    A.

                  	
                    Investment
      Property

                  	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
                    Charter
      One Bank

                  	
                    Money
      Market Account

                  	
                    450010-877-6

                  
	 
      	 
      	 
      	 
      
	 
      	
                    Charles
      Schwab

                  	
                    Investment
      Account

                  	
                    6102-5669

                  
	 
      	 
      	 
      	 
      
	 
      	
                    Oppenheimer

                  	
                    Investment
      Account

                  	
                    G40-1397554

                  
	 
      	 
      	 
      	 
      
	
                    B.

                  	
                    Deposits

                  	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
                    Lockbox

                  	 
      	
                    450247-274-2

                  
	 
      	 
      	 
      	 
      
	 
      	
                    CTI
      Industries Operating Acct.

                  	 
      	
                    450010-868-7

                  
	 
      	 
      	 
      	 
      
	 
      	
                    Money
      Market

                  	 
      	
                    450010-877-6

                  

          

        

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

        Schedule G

         

        Commercial
Tort Claims

         

        NONE.

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

         

        Schedule H

         

        Supplement
to Security Agreement

         

        This
Supplement to Security Agreement (the "Supplement") is dated
as of this 29th day of April 2010, from CTI
Industries Corporation, an Illinois corporation (the “Debtor”), to
Harris N.A. (the “Secured
Party”).

         

        Preliminary
Statements

         

        A.The Debtor and the Secured Party are
parties to that certain Security Agreement dated as of April 29, 2010 (such
Security Agreement, as the same may from time to time be amended, modified or
restated, being hereinafter referred to as the “Security
Agreement”).  All capitalized terms used herein without
definition shall have the same meanings herein as such terms are defined in the
Security Agreement.

         

        B.Pursuant to the Security Agreement,
the Debtor granted to the Secured Party, among other things, a continuing
security interest in all Commercial Tort Claims.

         

        C.The Debtor has acquired a Commercial
Tort Claim, and executes and delivers this Supplement to confirm and assure the
Secured Party's security interest therein.

         

        Now,
Therefore, in consideration of the benefits accruing to the Debtor, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

         

        1.In order to secure payment of the
Obligations, whether now existing or hereafter arising, the Debtor does hereby
grant to the Secured Party a continuing lien on and security interest in the
Commercial Tort Claim described below:

         

        
          
            
              
                
                  
                    
                      
                        	 	 	  
	 	 	  
	 	
                                 

                              	
                                 

                              

                      

                    

                  

                

              

            

          

        

        
          
            	 	 	
                      

                  

          

        

         

        2.Schedule G (Commercial Tort
Claims) to the Security Agreement is hereby amended to include reference to the
Commercial Tort Claim referred to in Section 1 above.  The
Commercial Tort Claim described herein is in addition to, and not in
substitution or replacement for, the Commercial Tort Claims heretofore described
in and subject to the Security Agreement, and nothing contained herein shall in
any manner impair the priority of the liens and security interests heretofore
granted by the Debtor in favor of the Secured Party under the Security
Agreement.

         

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

         

        3.The Debtor agrees to execute and
deliver such further instruments and documents and do such further acts and
things as the Secured Party may deem necessary or proper to carry out more
effectively the purposes of this Supplement.

         

        4.No reference to this Supplement need
be made in the Security Agreement or in any other document or instrument making
reference to the Security Agreement, any reference to the Security Agreement in
any of such items to be deemed a reference to the Security Agreement as
supplemented hereby.  The Debtor acknowledges that this Supplement
shall be effective upon its execution and delivery by the Debtor to the Secured
Party, and it shall not be necessary for the Secured Party to execute this
Supplement or any other acceptance hereof or otherwise to signify or express its
acceptance hereof.

         

        5.This Agreement shall be governed by
and construed in accordance with the State of Illinois (without regard to
principles of conflicts of law).

         

        [SIGNATURE
PAGE FOLLOWS]

        
          
             

          

          
            2

            
              

            

          

          
             

          

        

         

        
          
            
              	 
      	 
      	
                      CTI
      INDUSTRIES CORPORATION

                    
	 
      	 
      	 
      
	 
      	
                      By: 

                    	
                      /s/ Stephen M. Merrick

                    
	 
      	Executive
      Vice-President and Chief Financial
Officer

            

          

        

        
          
             

          

          
            3

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