Schedule 13D for Prolong & St. Cloud

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iy3/4bXOyBXp9dsPW7mrt5lT6hwWHfFlvbZY7eqQiXjdpjLc7INo8oEuMpaNBPy3 5gq5/qXr8pAXOhw3gw3HDQ== 0001193125-03-089409.txt : 20031204 0001193125-03-089409.hdr.sgml : 20031204 20031204160452 ACCESSION NUMBER: 0001193125-03-089409 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20031204 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PROLONG INTERNATIONAL CORP CENTRAL INDEX KEY: 0001016965 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRODUCTS OF PETROLEUM & COAL [2990] IRS NUMBER: 742234246 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-53831 FILM NUMBER: 031038143 BUSINESS ADDRESS: STREET 1: 6 THOMAS CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 7145872700 MAIL ADDRESS: STREET 1: 6 THOMAS STREET 2: STE 880 CITY: IRVINE STATE: CA ZIP: 92618 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: ST CLOUD CAPITAL PARTNERS LP CENTRAL INDEX KEY: 0001164263 IRS NUMBER: 954883837 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 433 NORTH CAMDEN DRIVE STREET 2: FIFTH FLOOR CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3105530177 MAIL ADDRESS: STREET 1: 433 NORTH CAMDEN DRIVE STREET 2: FIFTH FLOOR CITY: BEVERLY HILLS STATE: CA ZIP: 90210 SC 13D 1 dsc13d.htm SCHEDULE 13D FOR PROLONG & ST. CLOUD Schedule 13D for Prolong & St. Cloud

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 13D

UNDER THE SECURITIES EXCHANGE ACT OF 1934

PROLONG INTERNATIONAL CORPORATION

(Name of Issuer)

COMMON STOCK, $0.001 PAR VALUE

(Title of Class of Securities)

743409-10-4

(CUSIP Number)

Marshall S. Geller

St. Cloud Capital Partners, LP

10866 Wilshire Boulevard, Suite 1450

Los Angeles, California 90024

(310) 475-2700

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

Copies to:

W. Alex Voxman

Latham & Watkins LLP

633 West Fifth Street, Suite 4000

Los Angeles, California 90071

(213) 485-1234

November 24, 2003

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is subject of this Schedule 13D, and is filing this statement because of Rule 13d-1(b)(3) or (4), check the following box: ¨.

(Continued on the following page)

Page 1 of 12 Pages

SCHEDULE 13D

CUSIP No. 206013104

Page 2 of 12


1	NAME OF REPORTING PERSON St. Cloud Capital Partners, LP

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) ¨

3	SEC USE ONLY

4	SOURCE OF FUNDS WC, OO

5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)	¨

6	CITIZENSHIP OR PLACE OF ORGANIZATION USA

NUMBER OF

BENEFICIALLY

OWNED BY

EACH

REPORTING

PERSON

WITH

7 SOLE VOTING POWER

4,885,492 shares^*

8 SHARED VOTING POWER

4,885,492 shares^*

9 SOLE DISPOSITIVE POWER

4,885,492 shares^*

10 SHARED DISPOSITIVE POWER

4,885,492 shares^*

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 4,885,492 shares^*

12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES^*	¨

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.1% (based on 29,789,598 shares of Prolong International Corporation’s Common Stock outstanding as of November 13, 2003 as reported in the Company’s Form 10-Q filed November 13, 2003).

14	TYPE OF REPORTING PERSON IV, PN

*See response to Item 5(a).

SCHEDULE 13D

CUSIP No. 206013104

Page 3 of 12


1	NAME OF REPORTING PERSON SCGP, LLC

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) ¨

3	SEC USE ONLY

4	SOURCE OF FUNDS AF

5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)	¨

6	CITIZENSHIP OR PLACE OF ORGANIZATION USA

NUMBER OF

BENEFICIALLY

OWNED BY

EACH

REPORTING

PERSON

WITH

7 SOLE VOTING POWER

0 shares^*

8 SHARED VOTING POWER

4,885,492 shares^*

9 SOLE DISPOSITIVE POWER

0 shares^*

10 SHARED DISPOSITIVE POWER

4,885,492 shares^*

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 4,885,492 shares^*

12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES^*	¨

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.1% (based on 29,789,598 shares of Prolong International Corporation’s Common Stock outstanding as of November 13, 2003 as reported in the Company’s Form 10-Q filed November 13, 2003).

14	TYPE OF REPORTING PERSON OO

*See response to Item 5(a).

SCHEDULE 13D

CUSIP No. 206013104

Page 4 of 12


1	NAME OF REPORTING PERSON St. Cloud Capital, LLC

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) ¨

3	SEC USE ONLY

4	SOURCE OF FUNDS AF

5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)	¨

6	CITIZENSHIP OR PLACE OF ORGANIZATION USA

NUMBER OF

BENEFICIALLY

OWNED BY

EACH

REPORTING

PERSON

WITH

7 SOLE VOTING POWER

0 shares^*

8 SHARED VOTING POWER

4,885,492 shares^*

9 SOLE DISPOSITIVE POWER

0 shares^*

10 SHARED DISPOSITIVE POWER

4,885,492 shares^*

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 4,885,492 shares^*

12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES^*	¨

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.1% (based on 29,789,598 shares of Prolong International Corporation’s Common Stock outstanding as of November 13, 2003 as reported in the Company’s Form 10-Q filed November 13, 2003).

14	TYPE OF REPORTING PERSON OO

*See response to Item 5(a).

SCHEDULE 13D

CUSIP No. 206013104

Page 5 of 12


1	NAME OF REPORTING PERSON Marshall S. Geller

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) ¨

3	SEC USE ONLY

4	SOURCE OF FUNDS AF

5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)	¨

6	CITIZENSHIP OR PLACE OF ORGANIZATION USA

NUMBER OF

BENEFICIALLY

OWNED BY

EACH

REPORTING

PERSON

WITH

7 SOLE VOTING POWER

0 shares^*

8 SHARED VOTING POWER

4,885,492 shares^*

9 SOLE DISPOSITIVE POWER

0 shares^*

10 SHARED DISPOSITIVE POWER

4,885,492 shares^*

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 4,885,492 shares^*

12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES^*	¨

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.1% (based on 29,789,598 shares of Prolong International Corporation’s Common Stock outstanding as of November 13, 2003 as reported in the Company’s Form 10-Q filed November 13, 2003).

14	TYPE OF REPORTING PERSON IN

*See response to Item 5(a).

SCHEDULE 13D

CUSIP No. 206013104

Page 6 of 12


1	NAME OF REPORTING PERSON Cary Fitchey

2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) ¨

3	SEC USE ONLY

4	SOURCE OF FUNDS AF

5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)	¨

6	CITIZENSHIP OR PLACE OF ORGANIZATION USA

NUMBER OF

BENEFICIALLY

OWNED BY

EACH

REPORTING

PERSON

WITH

7 SOLE VOTING POWER

0 shares^*

8 SHARED VOTING POWER

4,885,492 shares^*

9 SOLE DISPOSITIVE POWER

0 shares^*

10 SHARED DISPOSITIVE POWER

4,885,492 shares^*

11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 4,885,492 shares^*

12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES^*	¨

13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.1% (based on 29,789,598 shares of Prolong International Corporation’s Common Stock outstanding as of November 13, 2003 as reported in the Company’s Form 10-Q filed November 13, 2003).

14	TYPE OF REPORTING PERSON IN

*See response to Item 5(a).

ITEM 1. SECURITY AND ISSUER.

This Schedule 13D, dated December 4, 2003 (“Schedule 13D”), relates to the common stock, $0.001 par value per share (the “Common Stock”), of Prolong International Corporation, a Nevada corporation (the “Company”), with its principal executive offices located at 6 Thomas, Irvine, California 92618. The Company’s Common Stock is listed on the American Stock Exchange.

ITEM 2. IDENTITY AND BACKGROUND.

(a) This statement is being filed jointly by St. Cloud Capital Partners, LP, a Delaware limited partnership (“St. Cloud Partners”), SCGP, LLC, a Delaware limited liability company (“SCGP”), St. Cloud Capital, LLC, a California limited liability company (“St. Cloud Capital”), Marshall S. Geller, an individual (“Mr. Geller”), and Cary Fitchey, an individual (“Mr. Fitchey”, and collectively with St. Cloud Partners, SCGP, St. Cloud Capital and Mr. Geller, the “Reporting Persons.”)

(b) The address of the principal business of each of St. Cloud Partners, SCGP, St. Cloud Capital, Mr. Geller and Mr. Fitchey is 10866 Wilshire Boulevard, Suite 1450, Los Angeles, California 90024.

(c) St. Cloud Partners is licensed by the United States Small Business Administration as a Small Business Investment Company, whose principal business is to invest in companies. The principal business of SCGP is to act as the general partner of St. Cloud Partners. The principal business of St. Cloud Capital is to provide management services to St. Cloud Partners and investment advice to SCGP. Mr. Geller and Mr. Fitchey are venture capitalists.

(d) None of the Reporting Persons have during the last five years been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

(e) None of the Reporting Persons have during the last five years been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

(f) Mr. Geller and Mr. Fitchey are citizens of the United States.

ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.

On November 24, 2003, St. Cloud Partners, entered into that certain Securities Purchase Agreement (the “Purchase Agreement”), by and among the Company, St. Cloud Partners, Prolong Super Lubricants, Inc., a Nevada corporation (“Prolong Sub”), Prolong International Holdings Ltd., a Cayman Islands company (“Cayman Sub I”), Prolong International Ltd., a Cayman Islands company (“Cayman Sub II”, and collectively with the Company, Prolong Sub and Cayman Sub I, the “Credit Parties”), Bedford Oak Capital, L.P., a Delaware limited partnership (“Bedford I”), Bedford Oak Offshore, Ltd., a Cayman Islands company (“Bedford II”), and Aspen Ventures LLC, a New York limited liability company (“Aspen”, and collectively with St. Cloud Partners, Bedford I, and Bedford II, the “Purchasers”), pursuant to which, among other things, St. Cloud Partners purchased (i) a Secured Promissory Note of Prolong Sub in the aggregate principal amount of $2,050,000 (the “Note”) and (ii) a Common Stock Purchase Warrant to purchase 4,885,492 shares of Common Stock of the Company (the “Warrant”) for an aggregate purchase price of $293,129.52. The Purchase Agreement, the Note and the Warrant are attached hereto as Exhibits 10.1, 10.5 and 10.6, respectively, and incorporated by reference herein. The funds were obtained from working capital of St. Cloud Partners and borrowings of St. Cloud Partners from the United States Small Business Administration.

ITEM 4. PURPOSE OF TRANSACTION.

St. Cloud Partners acquired the Note and Warrant for investment purposes. Its investment is subject to the terms of the Purchase Agreement, the Investors’ Rights Agreement, dated as of November 24, 2003, by and among the Company, St. Cloud Partners, Bedford I, Bedford II, Aspen and the other individuals identified therein (the “Investors’ Rights Agreement”), the Pledge and Security Agreement, dated as of November 24, 2003, by and among the Company, Prolong Sub and St. Cloud Partners, individually and as agent for the benefit of the Purchasers (the “Pledge and Security Agreement”), the Parent Guaranty, dated as of November 24, 2003, executed by the Company in favor of St. Cloud Partners, individually and as agent for the benefit of the Purchasers (the “Guaranty”), which are attached hereto as Exhibits 10.2, 10.3 and 10.4, respectively, and incorporated herein by reference.

Under the terms of the Note, interest accrues on the principal balance of $2,050,000 at the rate of: (i) 8% per annum from November 24, 2003 until June 30, 2004, and (ii) 14% per annum thereafter until the Note is fully paid. The maturity date under the Note is November 24, 2008 (or earlier, if the Note is accelerated as provided for in the Note). Subject to the limitations contained in the Note, until the Note is repaid, Prolong Sub may be obligated to make certain prepayments under the Note, including in the event of a change in control, or if, after December 31, 2004, its EBITDA exceeds certain levels specified in the Note. In addition, Prolong Sub may be obligated to make certain royalty payments to St. Cloud Partners based on a percentage of incremental net revenues of the Company and its subsidiaries pursuant to the terms of the Purchase Agreement.

Events of default which would cause the Note to accelerate, causing the principal and interest on the Note to become immediately due and payable, include, among other things: (i) the failure to make a payment for a period of five business days from when such payment is due; (ii) the breach of any covenant in the Purchase Agreement or any other Loan Document (as such term is defined in the Purchase Agreement) that is not cured within thirty days; (iii) the making or filing of certain money judgments in excess of $100,000 against any Credit Party; (iv) the suspension of the usual business activities of the Credit Parties or the winding up or liquidation of Prolong Sub’s business; (v) St. Cloud Partners ceasing to have a valid and perfected security interested in the collateral described in the Pledge and Security Agreement; and (vi) the termination of employment of Elton Alderman for any reason, provided that if such termination is a result of his death or disability and Prolong hires a replacement reasonably acceptable to St. Cloud Partners within six months, then such termination shall not be deemed an event of default under the Note. The Note is attached hereto as Exhibit 10.5 and incorporated by reference herein.

The Warrant is exercisable for 4,885,492 shares of Common Stock of the Company, for an exercise price of $0.06 per share, on or after November 24, 2003 and prior to November 24, 2013. Upon the occurrence of an event of default under the Note that involves in excess of $25,000 or that may result in losses or damages to the Company or St. Cloud in excess of $25,000 and is not cured or waived by St. Cloud Partners within thirty days, the Warrant will automatically become exercisable to purchase additional shares of Common Stock (the “Additional Warrant Shares”), equal to ten percent of the total number of shares of Common Stock outstanding as of the date of such event of default on a fully diluted basis assuming exercise of the Warrant and any options, warrants or convertible securities outstanding as of such date and including in such calculation all Additional Warrant Shares into which the Warrant becomes exercisable. The exercise price of the Additional Warrant Shares shall equal the greater of (i) the Fair Market Value (as defined in the Warrant) of the Common Stock (or other securities underlying the Warrant at such time) as of the date of the event of default, (ii) the book value per share of the Common Stock as of the date of the event of default, or (iii) the Additional Warrant Share Price (calculated in accordance with a formula contained in the Warrant). The Warrant is attached hereto as Exhibit 10.6 and incorporated by reference herein.

Pursuant to the terms of the Investors’ Rights Agreement, St. Cloud Partners has the right, but not the obligation, to designate two members to the board of directors of each of the Company and Prolong Sub (each, a “Board”). St. Cloud

Partners’ initial designees are Mr. Geller and Robert Lautz, who shall begin to serve on the Boards effective on the date the Company obtains a directors and officers insurance policy covering the directors and officers of each of the Company and Prolong Sub, in an amount equal to or in excess of $2,500,000 or such earlier date that St. Cloud Partners may specify to the Company in writing. If at any time, a Board does not for any reason include two directors designated by St. Cloud Partners, then the Company will, at the request of St. Cloud Partners, use its best efforts to cause one or two designees of St. Cloud Partners, each of whom shall be reasonably acceptable to the applicable Board, to be nominated to serve as a member of such Board. At the election of St. Cloud Partners, St. Cloud Partners may designate observers in lieu of designating nominees to the Boards, who will have the right to attend all meetings of each of the Boards and all committees thereof. In addition, under the Investors’ Rights Agreement, each of Elton Alderman, Thomas Billstein and Nico Rosier (collectively, the “Executives”) agreed to vote all shares of capital stock of the Company held by them or their affiliates to elect the directors designated by St. Cloud Capital Partners to the Company’s board.

The Reporting Persons intend to review their investment in the Company from time to time. Subject to the limitations set forth herein and depending upon (i) the price and availability of the Common Stock, (ii) subsequent developments affecting the Company, (iii) the Company’s business and prospects, (iv) other investment and business opportunities available to the Reporting Persons, (v) general stock market and economic conditions, (vi) tax considerations, and (vii) other factors deemed relevant, the Reporting Persons may decide to exercise all or a portion of the Warrant and/or increase or decrease the size of their investment in the Company.

Except as described in this Schedule 13D, none of the Reporting Persons have any present plan or proposal which relates to, or could result in, any of the events referred to in paragraphs (a) through (j), inclusive, of Item 4 of Schedule 13D. However, the Reporting Persons will continue to review the business of the Company and, depending upon one or more of the factors referred to above, may in the future propose that the Company take one or more of such actions.

ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.

(a)(1) Pursuant to the Purchase Agreement, St. Cloud Partners acquired the Warrant to purchase 4,885,492 shares of Common Stock for an exercise price of $0.06 per share. Assuming exercise of the Warrant, following the issuance of such shares, based on 29,789,598 shares of Common Stock outstanding on November 13, 2003 (and excluding outstanding options and warrants), such shares constitute approximately 14.1% of the Common Stock.

Pursuant to the Investors’ Rights Agreement described in Item 4 above and Item 6 below, the Executives are required, in specific circumstances, to vote all of the shares of Common Stock beneficially held by them and their affiliates in favor of the designees of St. Cloud Partners for election to the Company’s board. Accordingly, St. Cloud Partners may be deemed to share voting power over the shares of Common Stock owned by the Executives. The Executives own an aggregate of 5,425,900 shares of Common Stock (which includes (A) 3,896,600 shares of Common Stock beneficially owned by Elton Alderman, (B) 1,504,300 shares of Common Stock beneficially owned by Thomas Billstein, and (C) 25,000 shares of Common Stock beneficially owned by Nico Rosier) according to the Company’s Definitive Proxy Statement filed on October 9, 2003, which represents approximately 18.2% of the Company’s outstanding Common Stock based on 29,789,598 shares of Common Stock outstanding on November 13, 2003 (and excluding outstanding options and warrants). Assuming exercise of the Warrant as described above, following the issuance of such shares, such shares combined with the shares beneficially owned by the Executives would number 10,311,392, which would then constitute approximately 29.7% of the Common Stock. St. Cloud Partners expressly disclaims any admission that it has beneficial ownership of, or any pecuniary interest in, any shares of Common Stock except the 4,885,492 shares of Common Stock with respect to which it possesses sole dispositive power.

(a)(2) SCGP is a general partner of St. Cloud Partners and may be deemed to beneficially own the 4,885,492 shares of Common Stock owned by St. Cloud Partners.

Neither the filing of Schedule 13D nor any of its contents shall be deemed to constitute an admission that SCGP is the beneficial owner of the securities described in Item 5(a)(1) above for purposes of Section 13(d) of the Exchange Act or for any other purposes, and such beneficial ownership is expressly disclaimed.

(a)(3) St. Cloud Capital provides management services to St. Cloud Partners and advice to SCGP and may be deemed to beneficially own the 4,885,492 shares of Common Stock owned by St. Cloud Partners and/or SCGP. Neither the filing of Schedule 13D nor any of its contents shall be deemed to constitute an admission that St. Cloud Capital is the beneficial owner of the securities described in Item 5(a)(1) or Item 5(a)(2) above for purposes of Section 13(d) of the Exchange Act or for any other purposes, and such beneficial ownership is expressly disclaimed.

(a)(4) In Mr. Geller’s capacity as a co-founder and senior manager of SCGP, Mr. Geller shares indirect voting and dispositive power with respect to the 4,885,492 shares of Common Stock deemed to be beneficially owned by St. Cloud Partners. Neither the filing of Schedule 13D nor any of its contents shall be deemed to constitute an admission that Mr. Geller is the beneficial owner of the securities described in Item 5(a)(1) above for purposes of Section 13(d) of the Exchange Act or for any other purposes, and such beneficial ownership is expressly disclaimed.

(a)(5) In Mr. Fitchey’s capacity as senior manager of SCGP, Mr. Fitchey shares indirect voting and dispositive power with respect to the 4,885,492 shares of Common Stock deemed to be beneficially owned by St. Cloud Partners. Neither the filing of Schedule 13D nor any of its contents shall be deemed to constitute an admission that Mr. Fitchey is the beneficial owner of the securities described in Item 5(a)(1) above for purposes of Section 13(d) of the Exchange Act or for any other purposes, and such beneficial ownership is expressly disclaimed.

Assuming exercise of the Warrant:

(b)(1) St. Cloud Partners has sole power to vote or to direct the vote and dispose or to direct the disposition of 4,885,492 shares of Common Stock.

(b)(2) SCGP, as the general partner of St. Cloud Partners, shares the power to vote or to direct the vote and dispose or to direct the disposition of 4,885,492 shares of Common Stock owned by St. Cloud Partners.

(b)(3) St. Cloud Capital, as a provider of management services to St. Cloud Partners and investment advice to SCGP, shares the power to vote or to direct the vote and dispose or to direct the disposition of 4,885,492 shares of Common Stock owned by St. Cloud Partners and/or SCGP.

(b)(4) Mr. Geller, as a co-founder and senior manager of St. Cloud Partners, shares the power to vote or to direct the vote and dispose or to direct the disposition of 4,885,492 shares of Common Stock owned by St. Cloud Partners.

(b)(5) Mr. Fitchey, as senior manager of St. Cloud Partners, shares the power to vote or to direct the vote and dispose or to direct the disposition of 4,885,492 shares of Common Stock owned by St. Cloud Partners.

(d) None, to the knowledge of the Reporting Persons.

(e) Not applicable.

ITEM 6.

CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER.

SECURITIES PURCHASE AGREEMENT

In connection with St. Cloud Partners’ agreement to enter into the Purchase Agreement, the Company paid St. Cloud Partners an acceptance fee in the

amount of $25,000. In addition to the description of the Purchase Agreement set forth in Item 4 above, pursuant to the Purchase Agreement, the Company paid St. Cloud Partners a closing fee in the amount of $50,000 and reimbursed St. Cloud Partners for certain fees and expenses incurred by St. Cloud Partners in the amount of approximately $82,500.00. The Purchase Agreement contains customary representations and warranties and covenants. The Purchase Agreement is attached hereto as Exhibit 10.1 and incorporated by reference herein.

INVESTORS’ RIGHTS AGREEMENT

In addition to the description of the Investors’ Rights Agreement set forth in Item 4 and Item 5 above, pursuant to the Investors’ Rights Agreement, the Company agreed to prepare and file with the Securities and Exchange Commission (the “SEC”) prior to the February 24, 2004, a registration statement covering all of the shares of Common Stock issuable upon exercise of the Warrant. The Company agreed cause such registration statement to be declared effective by the SEC no later than the April 24, 2004. Further, if the Company registers for the resale of shares of Common Stock for the Company’s account or for the account of its other stockholders, the Company also may have to include shares held by St. Cloud Partners in such registration. St. Cloud Partners has an unlimited number of these “piggyback” registration rights. The Investors’ Rights Agreement also granted St. Cloud Partners certain preemptive rights to participate in future issuances of securities of the Company and certain co-sale rights with respect to certain sales by Executives. The Investors’ Rights Agreement is attached hereto as Exhibit 10.2 and incorporated by reference herein.

PLEDGE AND SECURITY AGREEMENT

In connection with the transaction described above, under the Pledge and Security Agreement (the “Pledge and Security Agreement”), dated as of November 24, 2003, by and among the Company, Prolong Sub and St. Cloud Partners, as security for the Company and Prolong Sub’s obligations under the Note and certain other Loan Documents, Prolong Sub granted St. Cloud Partners, individually and as agent for the benefit of the Purchasers, a security interest in the assets of the Company and Prolong Sub. The Pledge and Security Agreement provides the terms and conditions upon which St. Cloud Partners would be able to effect a sale of the collateral upon certain events of default under the Note. The Pledge and Security Agreement will terminate upon the satisfaction of all of the Company’s and Prolong Sub’s obligations under the Note and certain other Loan Documents. The Pledge and Security Agreement is attached hereto as Exhibit 10.3 and incorporated by reference herein.

GUARANTY

In connection with the transaction described above, the Company executed a Guaranty in favor of St. Cloud Partners, individually and as agent for the benefit of the Purchasers, pursuant to which the Company guaranteed the payment of Prolong Sub’s obligations under the Note and certain other Loan Documents. The Guaranty Agreement will terminate upon the satisfaction of all such obligations of Prolong Sub. The Guaranty is attached hereto as Exhibit 10.4 and incorporated by reference herein.

ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.


Exhibit 10.1		Securities Purchase Agreement, dated as of November 24, 2003, by and among St. Cloud Capital Partners, LP, a Delaware limited partnership (“St. Cloud Partners”), Prolong International Corporation, a Nevada corporation (the “Company”), Prolong Super Lubricants, Inc., a Nevada corporation (“Prolong Sub”), Prolong International Holdings Ltd., a Cayman Islands company, Prolong International Ltd., a Cayman Islands company, Bedford Oak Capital, L.P., a Delaware limited liability partnership “Bedford I”), Bedford Oak Offshores, Ltd., a Cayman Islands company (“Bedford II”), and Aspen Ventures LLC, a New York limited liability company (“Aspen”).


Exhibit 10.2		Investors’ Rights Agreement, dated as of November 24, 2003, by and among St. Cloud Partners, the Company, Bedford I, Bedford II, Aspen and the individuals identified therein.

Exhibit 10.3		Pledge and Security Agreement, dated as of November 24, 2003, by and among St. Cloud Partners, the Company and Prolong Sub.

Exhibit 10.4		Parent Guaranty, dated as of November 24, 2003, executed by the Company in favor of St. Cloud Partners.

Exhibit 10.5		Secured Promissory Note, dated as of November 24, 2003, issued by Prolong Sub in favor of St. Cloud Partners.

Exhibit 10.6		Warrant, dated as of November 24, 2003, issued by the Company to St. Cloud Partners.

Exhibit 99		Joint Filing Agreement, dated as of November 24, 2003, by and among St. Cloud Partners, SCGP, LLC, a Delaware limited liability company, St. Cloud Capital, LLC, a California limited liability company, Marshall S. Geller, an individual, and Cary Fitchey, an individual.

SIGNATURES

After reasonable inquiry and to the best of our knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct.


Dated: December 4, 2003	ST. CLOUD CAPITAL PARTNERS, LP

	By:	SCCP, LLC
	Its:	General Partner

	By:	/s/ Marshall S. Geller
		Name: Marshall S. Geller
		Title: Senior Managing Member

Dated: December 4, 2003	SCGP, LLC

	By:	/s/ Cary Fitchey
		Name: Cary Fitchey
		Title: Managing Member

Dated: December 4, 2003	ST. CLOUD CAPITAL, LLC

	By:	/s/ Cary Fitchey
		Name: Cary Fitchey
		Title: Managing Member

Dated: December 4, 2003	MARSHALL S. GELLER

	By:	/s/ Marshall S. Geller
		Marshall S. Geller

Dated: December 4, 2003	CARY FITCHEY

	By:	/s/ Cary Fitchey
		Cary Fitchey

S-1

EXHIBIT INDEX


Exhibit 10.1		Securities Purchase Agreement, dated as of November 24, 2003, by and among St. Cloud Capital Partners, LP, a Delaware limited partnership (“St. Cloud Partners”), Prolong International Corporation, a Nevada corporation (the “Company”), Prolong Super Lubricants, Inc., a Nevada corporation (“Prolong Sub”), Prolong International Holdings Ltd., a Cayman Islands company, Prolong International Ltd., a Cayman Islands company, Bedford Oak Capital, L.P., a Delaware limited liability partnership “Bedford I”), Bedford Oak Offshores, Ltd., a Cayman Islands company (“Bedford II”), and Aspen Ventures LLC, a New York limited liability company (“Aspen”).

Exhibit 10.2		Investors’ Rights Agreement, dated as of November 24, 2003, by and among St. Cloud Partners, the Company, Bedford I, Bedford II, Aspen and the individuals identified therein.

Exhibit 10.3		Pledge and Security Agreement, dated as of November 24, 2003, by and among St. Cloud Partners, the Company and Prolong Sub.

Exhibit 10.4		Parent Guaranty, dated as of November 24, 2003, executed by the Company in favor of St. Cloud Partners.

Exhibit 10.5		Secured Promissory Note, dated as of November 24, 2003, issued by Prolong Sub in favor of St. Cloud Partners.

Exhibit 10.6		Warrant, dated as of November 24, 2003, issued by the Company to St. Cloud Partners.

Exhibit 99		Joint Filing Agreement, dated as of November 24, 2003, by and among St. Cloud Partners, SCGP, LLC, a Delaware limited liability company, St. Cloud Capital, LLC, a California limited liability company, Marshall S. Geller, an individual, and Cary Fitchey, an individual.

EX-10.1 3 dex101.htm SECURITIES PURCHASE AGREEMENT, DATED 11/24/03 Securities Purchase Agreement, dated 11/24/03

EXHIBIT 10.1

Execution Copy

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is dated as of November 24, 2003, by and among PROLONG INTERNATIONAL CORPORATION, a Nevada corporation (“Parent”), PROLONG SUPER LUBRICANTS, INC., a Nevada corporation (“Borrower”), PROLONG INTERNATIONAL HOLDINGS LTD., a Cayman Islands company (“Cayman Sub I”), PROLONG INTERNATIONAL LTD., a Cayman Islands company (“Cayman Sub II”, and together with Cayman Sub I, the “Cayman Subsidiaries”), ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited partnership, and its affiliates (“St. Cloud”), BEDFORD OAK CAPITAL, L.P., a Delaware limited partnership (“Bedford I”), BEDFORD OAK OFFSHORE, LTD., a Cayman Islands company (“Bedford II”), and ASPEN VENTURES LLC, a New York limited liability company (“Aspen”), and collectively with Bedford I and Bedford II, the “Other Purchasers”). St. Cloud and the Other Purchasers are each referred to herein as “Purchaser” and collectively as “Purchasers”. Parent, Borrower, Cayman Sub I and Cayman Sub II are each referred to herein as a “Credit Party” and collectively as the “Credit Parties”.

FOR VALUE RECEIVED, and in consideration of the covenants and agreements contained herein, the parties agree as follows:

1. DEFINITIONS.

1.1 Definitions.

1.1.1 For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires,

(a) the terms defined in this Section 1 shall have the meanings assigned to them in this Section 1 and include the plural as well as the singular,

(b) the words “herein,” “hereof,” “hereto” and “hereunder” and other words of similar import shall refer to this Agreement as a whole and not to any particular Section, Subsection or other subdivision, unless the context otherwise requires, and

As used in this Agreement, the following definitions shall apply.

“Affiliate” shall mean, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power (i) to vote ten percent (10%) or more of the Securities having ordinary voting power for the election of directors of such Person or (ii) to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise.

“Agreement” shall mean this Agreement (including all Schedules and exhibits), as amended, modified or supplemented from time to time.

“Aspen Note” shall mean that certain secured promissory note, dated as of the date hereof, in the original principal amount of One Hundred Twenty Five Thousand Dollars ($125,000), issued by Borrower in favor of Aspen, as amended, modified or supplemented from time to time.

“Aspen Securities” shall mean, collectively, the Aspen Note and the Aspen Warrant.

“Aspen Warrant” shall mean that certain warrant to purchase 297,896 shares of Common Stock, issued by Parent to Aspen pursuant to this Agreement, as amended, modified or supplemented from time to time.

“Bedford I Note” shall mean that certain secured promissory note, dated as of the date hereof, in the original principal amount of One Hundred Sixty Two Thousand Five Hundred Dollars ($162,500), issued by Borrower in favor of Bedford I, as amended, modified or supplemented from time to time.

“Bedford I Securities” shall mean, collectively, the Bedford I Note and the Bedford I Warrant.

“Bedford I Warrant” shall mean that certain warrant to purchase 387,265 shares of Common Stock, issued by Parent to Bedford I pursuant to this Agreement, as amended, modified or supplemented from time to time.

“Bedford II Note” shall mean that certain secured promissory note, dated as of the date hereof, in the original principal amount of One Hundred Sixty Two Thousand Five Hundred Dollars ($162,500), issued by Borrower in favor of Bedford II, as amended, modified or supplemented from time to time.

“Bedford II Securities” shall mean, collectively, the Bedford II Note and the Bedford II Warrant.

“Bedford II Warrant” shall mean that certain warrant to purchase 387,265 shares of Common Stock, issued by Parent to Bedford II pursuant to this Agreement, as amended, modified or supplemented from time to time.

“Board” shall mean the board of directors of Parent.

“Bridge Loan Amount” shall mean One Hundred Six Thousand Six Hundred Fifty One and 23/100 Dollars ($106,651.23), representing the outstanding principal and accrued interest under the Bridge Note.

“Bridge Note” shall mean that certain promissory note, dated as of October 15, 2003 in the original principal amount of One Hundred Five Thousand Dollars ($105,000), issued by Parent in favor of St. Cloud, as amended, modified or supplemented from time to time.

“Closing” shall have the meaning set forth in Section 2.3.

“Closing Date” shall mean November 24, 2003, or such other date as the Credit Parties, on the one hand, and Purchasers, on the other hand mutually agree upon.

“Code” shall have the meaning set forth in Section 7.3.

“Commission” shall mean the Securities and Exchange Commission.

“Common Stock” shall mean common stock, par value $0.001 per share, of Parent.

“Debt Service Payments” shall mean, with respect to any period, the Credit Parties’ total interest expense payments on all Indebtedness (including, without limitation, the Notes) during such period plus the Credit Parties’ scheduled principal payments on all Indebtedness (including, without limitation, the Notes) during that same period.

“Default” shall mean any event which upon notice or lapse of time, or both notice and a lapse of time, would be an Event of Default under the Notes.

“EBITDA” shall mean earnings before interest, taxes, depreciation and amortization determined in accordance with GAAP.

“Environment” means soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins and wetlands), groundwater, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life and any other environmental medium or natural resource.

“Environmental and Safety Requirements” shall mean all federal, state, local and foreign statutes, regulations, rules, ordinances, and similar provisions having the force or effect of law, all judicial and administrative orders, judgments, directives, and determinations, all contractual obligations, permits, licenses and all common law, in each case concerning public health and safety, worker health and safety and pollution or protection of the environment (including, without limitation, all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control or cleanup of any hazardous or otherwise regulated materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation), each as amended and as now or hereafter in effect.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time and any regulations promulgated thereunder.

“ERISA Affiliates” shall have the meaning set forth in Section 5.23.2 hereof.

“Event of Default” with respect to the Notes, shall have the meaning set forth in the Notes.

“Executive Management Team” shall mean Elton Alderman, Thomas Billstein and Nico Rosier.

“Existing Subordinated Notes” shall mean the subordinated notes listed on Schedule 1 attached hereto.

“Expiration Date” shall mean, with respect to Section 7.4.11 and Section 7.4.12, the date when the Notes are repaid in full, and with respect to each covenant in Section 7 other than Section 7.4.11 and Section 7.4.12, the date that is the later to occur of (i) the date that the Notes are repaid in full and (ii) the first date that St. Cloud or its Affiliates cease to beneficially hold shares of Common Stock or Warrants representing, in the aggregate, fifty percent (50%) of the total number of shares of Underlying Common Stock originally issued to St. Cloud (assuming exercise of the Warrant).

“First Capital” shall mean First Capital Corporation, d/b/a FC Commercial Corporation, an Oklahoma corporation.

“First Capital Credit Facility” shall mean that certain Purchasing Agreement, dated as of January 31, 2003, by and between Borrower and First Capital, pursuant to which Borrower may obtain financing from First Capital for up to One Million Five Hundred Thousand Dollars ($1,500,000) from First Capital Corporation.

“GAAP” shall mean United States generally accepted accounting principles in effect from time to time applied consistently throughout the period involved.

“Incremental Revenue” shall mean, (i) with respect to the period from November 24, 2003 through December 31, 2003, an amount equal to the net revenues of Parent and its Subsidiaries for such period, determined in accordance with GAAP, minus Nine Hundred Twelve Thousand Four Hundred Twenty Two Dollars ($912,422), and (ii) with respect to any calendar quarter thereafter, an amount equal to the net revenues of Parent and its Subsidiaries for such calendar quarter, determined in accordance with GAAP, minus Two Million One Hundred Sixty One Thousand Dollars ($2,161,000).

“Indebtedness” shall mean (i) all indebtedness for borrowed money, including but not limited to the Notes, (ii) any obligation evidenced by bonds, debentures, notes or other similar instruments, (iii) any obligation to pay the deferred purchase price of property or for services (other than trade payables in the ordinary course of business), (iv) any obligation or liability of others secured by a lien on any asset of any Credit Party, whether or not such obligation or liability is assumed, (v) any guarantee or indemnity with respect to the indebtedness, obligations or liability of another Person (other than those incurred in the ordinary course of business), (vi) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by any Credit Party (even though the rights and remedies of the seller or lender under such agreement in the event of default are

limited to repossession or sale of such property), (vii) all obligations of any Credit Party, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any capital stock of any Credit Party, (viii) that portion of obligations with respect to capitalized leases that is properly classified as a liability on a balance sheet in conformity with GAAP, and (ix) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money.

“Investors’ Rights Agreement” shall mean that certain Investors’ Rights Agreement, dated as of the date hereof, by and among Parent, Purchasers and the parties identified therein, as amended, modified or supplemented from time to time.

“Loan Documents” shall mean, collectively, this Agreement, the Pledge and Security Agreement, the Notes, the Warrants, the Investors’ Rights Agreement, the Parent Guaranty and each of the other agreements contemplated hereby and executed by the parties.

“Majority Holders” shall mean, holders of at least fifty percent (50%) of the outstanding principal balance under the Notes or, if the Notes have been repaid, holders of at least fifty percent (50%) of the total number of shares of Underlying Common Stock originally issued to Purchasers (assuming exercise of the Warrants).

“Notes” shall mean, collectively, the St. Cloud Note and the Other Purchasers Notes.

“Other Purchaser Notes” shall mean, collectively, the Bedford I Note, the Bedford II Note and the Aspen Note.

“Other Purchaser Warrants” shall mean, collectively, the Bedford I Warrant, the Bedford II Warrant and the Aspen Warrant.

“Other Purchaser Securities” shall mean, collectively, the Bedford I Securities, the Bedford II Securities and the Aspen Securities.

“Parent Guaranty” shall mean that certain Guaranty, dated as of the date hereof, executed by Parent in favor of St. Cloud, as agent for the Purchasers, as amended, modified or supplemented from time to time.

“Permitted Indebtedness” shall mean any of the following:

(A) Indebtedness incurred under the First Capital Credit Facility up to an amount equal to Two Million Dollars ($2,000,000), or any Indebtedness hereafter obtained and owed to a replacement lender selected by the Parent in place of First Capital, provided that such amount does not exceed Two Million Dollars ($2,000,000) in the aggregate and is on terms no less onerous to Borrower than the First Capital Credit Facility;

(B) Indebtedness under the Existing Subordinated Notes;

(C) any Indebtedness (other than as described in (A) and (B) above) not to exceed $100,000 in the aggregate at any given time;

(D) any Indebtedness in connection with a Permitted Lien (as defined in the Pledge and Security Agreement); and

(E) any Indebtedness of any Credit Party to Borrower or Parent.

“Person” shall mean any corporation, limited liability company, trust, partnership, individual, association or other entity.

“Pledge and Security Agreement” shall mean that certain Pledge and Security Agreement, dated as of the date hereof, by and among Parent, Borrower and St. Cloud, as agent for Purchasers, as amended, modified or supplemented from time to time, granting Purchasers a security interest in all of the assets of Borrower.

“Preferred Stock” shall mean preferred stock, par value $0.001 per share, of Parent.

“Regulatory Problem” shall mean any transaction, circumstance or situation whereby (i) a Person and such Person’s Affiliates would own, control or have power over a quantity of securities of any kind issued by Borrower or any Credit Party or any other entity greater than is permitted under any requirement of any governmental authority, or (ii) it has been asserted by any governmental regulatory agency, or such Person believes, that such Person or its Affiliates are not entitled to hold, or exercise any significant right under or with respect to, the Securities or the Underlying Common Stock held by such Person.

“Regulatory Violation” shall mean, with respect to St. Cloud, (i) a diversion of the proceeds of the issuance by Borrower and Parent of the Securities from the use reported thereof on the SBA form No. 1031 delivered at the Closing, if such diversion was effected without obtaining the prior written consent of St. Cloud (which may be withheld in its sole discretion) or (ii) a change in the principal business activity of the Credit Parties to an ineligible business activity (within the meaning of the SBIC Regulations) if such change occurs within one year after the date of the initial transactions hereunder.

“Rights Agreement” shall mean that certain Rights Agreement, dated as of October 25, 2002, by and between Parent and Continental Stock Transfer & Trust Company, as amended, modified or supplemented from time to time.

“Royalty Catch-Up Amount” shall mean, with respect to any calendar quarter, the amount by which the aggregate Royalty Payments paid in all prior calendar quarters are less than the aggregate amount that would have been paid to Purchasers if the Maximum Quarterly Royalty Payment had been paid in all prior calendar quarters.

“Royalty Payment Date” shall mean, with respect to any calendar quarter, the date that is the earlier to occur of (i) the date that Parent’s consolidated earnings for such calendar quarter are released, and (ii) thirty (30) days following the end of such calendar quarter.

“SBIC” shall mean a small business investment company licensed under the SBIC Act.

“SBIC Act” shall mean the Small Business Investment Act of 1958, as amended.

“SBIC Regulations” shall mean the Small Business Investment Company Act of 1958, as amended, and the regulations issued by the SBA thereunder, codified at Title 13 of the Code of Federal Regulations (“13 C.F.R.”), 107 and 121, as amended.

“SEC Reports” shall mean all forms, reports and documents filed by Parent with the Commission.

“Securities” shall mean, collectively, the St. Cloud Securities and the Other Purchasers Securities.

“St. Cloud Note” shall mean that certain secured promissory note, dated as of the date hereof, in the original principal amount of Two Million Fifty Thousand Dollars ($2,050,000), issued by Borrower in favor of St. Cloud, as amended, modified or supplemented from time to time.

“St. Cloud Securities” shall mean, collectively, the St. Cloud Note and the St. Cloud Warrant.

“St. Cloud Warrant” shall mean that certain warrant to purchase 4,885,492 shares of Common Stock, issued by Parent to St. Cloud pursuant to this Agreement, as amended, modified or supplemented from time to time.

“Subsidiary” shall mean, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control (or have the power to be or control) a managing director, manager or general partner of such limited liability company, partnership, association or other business entity.

“Tangible Net Worth” shall mean Parent’s consolidated net worth under GAAP (excluding intangible assets and deferred tax assets of any Credit Party).

“Taxes” shall mean any tax, duty, fee, assessment or charge of any nature whatsoever imposed by any taxing authority (including, without limitation, any gross or net income, gross or net receipts, franchise, sales, use, ad valorem, asset, value added, stamp, transfer, franchise, withholding, payroll, employment, profit sharing, capital, corporation, excise, occupation or property taxes), together with any and all penalties, fines, additions to tax or interest thereon.

“Tax Return” shall mean any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof.

“Transaction Expenses” shall mean and include (a) all out-of-pocket fees and expenses incurred by Purchasers in connection with their due diligence review of the Credit Parties (including, without limitation, background checks), the preparation, negotiation, execution and interpretation of this Agreement, the Securities, and the other Loan Documents and the agreements contemplated hereby and thereby, and the consummation of all of the transactions contemplated hereby and thereby (including, without limitation, all travel expenses incurred by representatives or agents of Purchasers and all reasonable fees and expenses of legal counsel, accountants and other third parties), which shall not exceed Ninety Thousand Dollars ($90,000) in the aggregate, (b) all reasonable fees and expenses incurred with respect to any amendments or waivers (whether or not the same become effective) under or in respect of each of the Loan Documents and the other agreements and instruments contemplated hereby and thereby, (c) all recording and filing fees, stamp and other Taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance, delivery or acquisition of any Securities or the Underlying Common Stock, and (d) the fees and expenses incurred by any Purchaser in any required filing with any governmental agency with respect to its investment hereunder or in any other required filing with any governmental agency with respect to any Credit Party which mentions such Purchaser.

“Underlying Common Stock” shall mean (i) the Common Stock issued or issuable upon exercise of the Warrants and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization.

“Warrants” shall mean, collectively, the St. Cloud Warrant and the Other Purchasers Warrants.

2. PURCHASE AND SALE OF SECURITIES.

2.1 Authorization. Borrower and Parent have authorized the issuance to Purchasers of the Securities.

2.2 Purchase and Sale.

2.2.1 (a) Borrower agrees to borrow from and, in confirmation thereof, Borrower and Parent agree to issue the St. Cloud Securities to St. Cloud and, subject to the terms and conditions set forth herein, St. Cloud agrees to lend to Borrower Two Million Fifty Thousand Dollars ($2,050,000), (b) Borrower agrees to borrow from and, in confirmation thereof, Borrower and Parent agree to issue the Bedford I Securities to Bedford I and, subject to the terms and conditions set forth herein, Bedford I agrees to lend to Borrower One Hundred Sixty Two Thousand Five Hundred Dollars ($162,500), (c) Borrower agrees to borrow from

and, in confirmation thereof, Borrower and Parent agree to issue the Bedford II Securities to Bedford II and, subject to the terms and conditions set forth herein, Bedford II agrees to lend to Borrower One Hundred Sixty Two Thousand Five Hundred Dollars ($162,500), and (d) Borrower agrees to borrow from and, in confirmation thereof, Borrower and Parent agree to issue the Aspen Securities to Aspen and, subject to the terms and conditions set forth herein, Aspen agrees to lend to Borrower One Hundred Twenty Five Thousand Dollars ($125,000). The Bridge Loan Amount and the St. Cloud Closing Fees shall be credited against the loan to be made by St. Cloud with respect to the St. Cloud Securities as set forth in Section 3.2.

2.2.2 The Credit Parties and Purchasers, having adverse interests and as a result of arms’ length negotiation, agree that (a) the fair market value of the Notes, if issued apart from the Warrants, is equal to Two Million Three Hundred Seventy Four Thousand Two Hundred Two Dollars ($2,374,202), (b) the fair market of the Warrants, if issued apart from the Notes, is equal to One Hundred Twenty Six Thousand Dollars ($126,000), and (c) all Tax Returns and other information returns of the parties relative to this Agreement, the Notes and the Warrants shall consistently reflect the matters agreed to in clauses (a) and (b) above.

2.3 Closing. The closing of the transactions contemplated herein (the “Closing”) will take place at the offices of Latham & Watkins LLP, 633 West Fifth Street, Los Angeles, California, on the Closing Date, or at such other time and at such other place as the parties may agree to in writing.

3. DELIVERIES AT CLOSING. At the Closing, the parties will deliver the following:

3.1 Deliveries by the Credit Parties. The Credit Parties will have delivered to each Purchaser or its counsel all of the following documents:

3.1.1 This Agreement, signed by a duly authorized officer of each Credit Party;

3.1.2 Each of the Notes of such Purchaser, signed by a duly authorized officer of Borrower;

3.1.3 Each of the Warrants of such Purchaser, signed by a duly authorized officer of Parent;

3.1.4 The Pledge and Security Agreement (and any collateral documents necessary to perfect a security interest in the Proprietary Information (as defined in Section 5.5.2 below) signed by a duly authorized officer of Parent and Borrower;

3.1.5 The Investors’ Rights Agreement, signed by a duly authorized officer of Parent and each member of the Executive Management Team;

3.1.6 The Parent Guaranty, signed by a duly authorized officer of Parent;

3.1.7 A certificate, dated as of the date hereof, signed by the Chief Executive Officer and President of each of Parent and Borrower in the form acceptable to each Purchaser; certifying that the representations and warranties of each Credit Party set forth in Section 5 hereof are true and correct in all material respects as of the Closing Date (except for any representations and warranties which are expressly as of another date) and certifying a true and complete copy of (i) the Articles of Incorporation and Bylaws (or any charter or similar organizational document) of each Credit Party, (ii) resolutions of the board of directors of each Credit Party, in each case, authorizing the execution, delivery and performance of this Agreement and the other Loan Documents and the consummation of the transaction contemplated thereby, (iii) resolutions of the board of directors of Parent, taking such requisite action so that neither St. Cloud nor any Affiliates shall become an “Acquiring Person,” and no “Stock Acquisition Date” or “Distribution Date” (as such term is defined in the Rights Agreement) will occur, by reason of the execution, delivery and performance of this Agreement and the other Loan Documents and the consummation of the transaction contemplated thereby; and (iv) resolutions of the board of directors of Parent and Borrower, fixing the size of each of their boards to consist of seven (7) directors and electing each of Marshall S. Geller and Robert Lautz to serve on such boards, effective on the date that Parent obtains the directors and officers insurance policy contemplated by Section 4.1 of the Investors’ Rights Agreement or such earlier date that St. Cloud may specify to Parent in writing;

3.1.8 A closing statement (in the form provided by Purchasers) signed by a duly authorized officer of Borrower;

3.1.9 The following closing fees (collectively referred to hereafter as the “St. Cloud Closing Fees”): (i) a closing fee equal to Fifty Thousand Dollars ($50,000), which shall be payable to St. Cloud at the Closing and deducted or withheld from the amount paid by St. Cloud to Borrower for the St. Cloud Securities at the Closing; and (ii) the Transaction Expenses, a written estimate (together with any supporting documentation as Borrower reasonably requests) of which shall be provided by St. Cloud to Borrower and deducted or withheld from the amount paid by St. Cloud to Borrower for the St. Cloud Securities at the Closing;

3.1.10 A Completed Small Business Administration (“SBA”) forms No. 480 (Size Status Declaration), No. 652 (Assurance of Compliance) and No. 1031 (Portfolio Financing Report, Parts A and B);

3.1.11 A certificate of insurance (which shall be attached hereto as Schedule 3.1.11) for the insurance described in Section 5.11;

3.1.12 A certificate (which shall be attached hereto as Schedule 3.1.12), dated as of the date hereof, signed by the Chief Executive Officer and President of Borrower, certifying as to the use of proceeds from the issuance of the Securities;

3.1.13 An opinion from Stradling Yocca Carlson & Rauth, counsel to the Credit Parties, dated as of the Closing Date, and addressed to each Purchaser, in the form reasonably acceptable to St. Cloud;

3.1.14 Stock certificates representing all of the capital stock of Borrower, accompanied by duly executed and undated instruments of transfer;

3.1.15 An assignment of the rights of Cayman Sub I under that certain Memorandum of Agreement (“Cayman Receivable Agreement”), dated as of July 7, 2003, by and among Cayman Sub I, Prolong Oil and Lubricant (“Prolong Oil”) and The Trustees of The Nel Trust, No. IT3389/98 (the “Nel Trust”) to Borrower; and

3.1.16 Such other documents relating to the transactions contemplated by this Agreement as any Purchaser or its counsel may reasonably request.

3.2 Deliveries by St. Cloud. St. Cloud will have delivered to Borrower the following:

3.2.1 A wire transfer to the account listed in Schedule 3.2.1 in an amount equal to Two Million Fifty Thousand Dollars ($2,050,000) less (i) the Bridge Loan Amount and less (ii) the St. Cloud Closing Fees (including the aggregate amount of estimated Transaction Expenses) described in Section 3.1.9 (it being understood by the parties that St. Cloud shall provide Borrower with the final aggregate amount of Transaction Expenses within thirty (30) days after the Closing and supporting documentation for such Transaction Expenses as Borrower may reasonably request and to the extent such final amount is less than the estimated amount deducted at the Closing, such difference shall be promptly paid by St. Cloud to Borrower, and to the extent such final amount is greater than the estimated amount deducted at the Closing, such difference shall be promptly paid by Borrower to St. Cloud);

3.2.2 This Agreement, signed by a duly authorized officer of St. Cloud;

3.2.3 The Investors’ Rights Agreement, signed by a duly authorized officer of St. Cloud;

3.2.4 The Pledge and Security Agreement, signed by a duly authorized officer of St. Cloud; and

3.2.4 An original copy of the Bridge Note, which shall be cancelled by Parent.

3.3 Deliveries by Bedford I. Bedford I will have delivered to the Credit Parties the following:

3.3.1 A wire transfer to the account listed in Schedule 3.2.1 in an amount equal to One Hundred Sixty Two Thousand Five Hundred Dollars ($162,500);

3.3.2 This Agreement, signed by a duly authorized officer of Bedford I; and

3.3.3 The Investors’ Rights Agreement, signed by a duly authorized officer of Bedford I.

3.3 Deliveries by Bedford II. Bedford II will have delivered to the Credit Parties the following:

3.3.1 A wire transfer to the account listed in Schedule 3.2.1 in an amount equal to One Hundred Sixty Two Thousand Five Hundred Dollars ($162,500);

3.3.2 This Agreement, signed by a duly authorized officer of Bedford II; and

3.3.3 The Investors’ Rights Agreement, signed by a duly authorized officer of Bedford II.

3.4 Deliveries by Aspen. Aspen will have delivered to the Credit Parties the following:

3.4.1 A wire transfer to the account listed in Schedule 3.2.1 in an amount equal to One Hundred Twenty Five Thousand Dollars ($125,000);

3.4.2 This Agreement, signed by a duly authorized officer of Aspen; and

3.4.3 The Investors’ Rights Agreement, signed by a duly authorized officer of Aspen.

3.5 Security Filings. All filings, recordings and other actions which any Purchaser or its counsel deem necessary or advisable to establish, preserve and perfect a priority security interest on all of the existing and future assets of Parent and Borrower shall have occurred and evidence, satisfactory in form and substance to each Purchaser’s counsel, that all required filings and recordings have been made and liens have been created in favor of such Purchaser, shall have been delivered to each Purchaser, including UCC-1 Financing Statements.

4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each Purchaser severally represents and warrants to the Credit Parties as of the Closing as follows:

4.1 Due Authorization; Validity and Binding Effect. Each of the Loan Documents to which such Purchaser is a party has been duly and validly authorized, executed and delivered on behalf of such Purchaser and constitutes a valid and legally binding obligation of such Purchaser, enforceable in accordance with its terms, subject to bankruptcy and other laws of general application affecting the rights and remedies of creditors and the availability of equitable remedies.

4.2 Accredited Investor; Investment Intent.

4.2.1 This Agreement is made with such Purchaser in reliance upon such Purchaser’s representation to Borrower and Parent, which by such Purchaser’s execution of this Agreement, such Purchaser hereby confirms, that (A) the

Securities to be acquired by such Purchaser are being acquired for investment for such Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, except that (without any limitation on such Purchaser’s rights to sell, assign or otherwise transfer all or any part of the Securities to be acquired by such Purchaser) such Purchaser may, in its sole discretion grant one or more participation interests in the Securities to be acquired by such Purchaser; and (B) such Purchaser has full power and authority to enter into this Agreement.

4.2.2 Such Purchaser has not been attracted to the purchase of the Securities by any general publication or advertising.

4.2.3 Such Purchaser has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities to be acquired by such Purchaser, and represents that it has had an opportunity to ask questions and receive answers from Borrower and Parent regarding Borrower and Parent, their business and prospects, and the terms and conditions of the offering of the Securities. The foregoing, however, does not limit or modify the representations and warranties of the Credit Parties contained in this Agreement or any of the other Loan Documents.

4.2.4 Such Purchaser has not been organized for the purpose of acquiring the Securities and is an investor in securities of privately-held companies and acknowledges that it is able to protect its interests in connection with the purchase of the Securities to be acquired by such Purchaser, can bear the economic risk of its investment with full understanding that it can lose its entire investment in the Securities without producing a material adverse change in its financial condition, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities to be acquired by such Purchaser.

4.2.5 Such Purchaser is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated by the Commission, as presently in effect and is a small business investment company licensed by the Small Business Administration.

4.2.6 Such Purchaser understands that (A) neither the Securities to be acquired by such Purchaser nor the sale thereof to it has been registered under the Securities Act of 1933, as amended (the “Securities Act”), or under any state securities law; (B) no registration statement has been filed with the Commission, nor with any other regulatory authority and that, as a result, any benefit which might normally accrue to an investor such as such Purchaser by an impartial review of such a registration statement by the Commission or other regulatory commission will not be forthcoming; and (C) the Securities are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from Borrower and Parent in a transaction not involving a public offering and that under such laws and applicable regulations such Securities may

be resold without registration under the Securities Act only in certain limited circumstances. In this connection, such Purchaser represents that it is familiar with the Commission’s Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. Such Purchaser further represents that such Purchaser shall not sell, assign or transfer the Securities except for sales, assignments or transfers pursuant to an effective registration statement or Rule 144 promulgated under the Securities Act. Such Purchaser shall not knowingly transfer the Securities to any Person who is a competitor of any Credit Party.

4.2.6 Such Purchaser understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Credit Parties are relying upon the truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the Securities.

4.3 Legend. Such Purchaser understands that until (a) the Securities may be sold by the Purchaser under Rule 144 or (b) such time as the resale of the Securities have been registered under the Securities Act, the certificates representing the Securities will bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities):

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.”

4.4 No Brokers. Such Purchaser has taken no action which would give rise to any claim by any person other than St. Cloud for brokerage commissions, finder’s fees or similar payments relating to this Agreement, or the transactions contemplated hereby or thereby.

5. REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES. The Credit Parties, jointly and severally, represent and warrant to each Purchaser as of the date hereof as follows:

5.1 Organization and Corporate Power. Each of Parent and Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada, has all requisite power and authority to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute and deliver the Loan Documents, to issue the Securities and to carry out the provisions of the Loan Documents. Each of the Cayman Subsidiaries is a company duly organized, validly existing and

in good standing under the laws of the Cayman Islands, has all requisite power and authority to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute and deliver the Loan Documents and to carry out the provisions of the Loan Documents. Each of the Credit Parties has only one jurisdiction of organization. Each Credit Party is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of property owned or leased by it or the conduct of its business requires such qualification unless the failure to be so qualified would not materially adversely affect Borrower or the Credit Parties’ business, operations or financial condition. The copies of the Bylaws and Articles of Incorporation of each of Parent and Borrower and the organizational documents of each of the Cayman Subsidiaries furnished to Purchasers’ counsel reflect all amendments made thereto at any time prior to the Closing and are correct and complete in all respects.

5.2 Capitalization and Related Matters.

5.2.1 As of November 24, 2003, the authorized capital of Parent consists of 150,000,000 shares of Common Stock, 29,798,598 of which are issued and outstanding and 50,000,000 shares of Preferred Stock, no shares of which are issued and outstanding. The authorized capital share of Borrower consists of 50,000,000 shares of common stock, par value $0.001 per share, 15,968,000 shares of which are issued and outstanding, and all of which are directly owned and held of record by Parent. The authorized capital share of Cayman Sub I consists of 50,000 shares of common stock, par value $1.00 per share, 50,000 shares of which are issued and outstanding, and all of which are directly owned and held of record by Parent. The authorized capital share of Cayman Sub II consists of 50,000 shares of common stock, par value $1.00 per share, 50,000 shares of which are issued and outstanding, and all of which are directly owned and held of record by Cayman Sub I.

5.2.2 Except as set forth in Section 5.2.1 or on Schedule 5.2.2, no Credit Party has outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, or has outstanding any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans. No Credit Party is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock. All of the outstanding shares of each Credit Party’s capital stock are validly issued, fully paid and nonassessable. The Underlying Common Stock has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Warrants and Parent’s Articles of Incorporation, will be duly and validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under applicable state and federal securities laws.

5.2.3 Assuming the truth and accuracy of the representations and warranties of each Purchaser contained in this Agreement, the offer, sale and issuance of the

Securities as contemplated by this Agreement and the Underlying Common Stock are, or will be, exempt from the registration and prospectus delivery requirements of the Securities Act, and are, or will be, exempt from registration or qualification under the registration, permit or qualification requirements of all applicable state securities laws.

5.3 Subsidiaries. (a) Except as set forth on Schedule 5.3, Parent does not own, directly or indirectly, any securities of any Person, other than Borrower and Cayman Sub I, (b) Borrower does not own, directly or indirectly, any securities of any Person, (c) Cayman Sub I does not own, directly or indirectly, any securities of any Person, other than Cayman Sub II, (d) Cayman Sub II does not own, directly or indirectly, any securities of any Person, and (e) none of the officers of any Credit Party owns, directly or indirectly, any security or financial interest in any other Person which competes with or does business with the Credit Parties or which would be reasonably likely to interfere with the performance by such officers of his or her duties to the Credit Parties. All the business of the Credit Parties is, and for the period covered by the Financial Statements has been and the period from September 30, 2003 through the date hereof, conducted through Borrower, and neither Parent nor any of the Cayman Subsidiaries hold any assets except as described on Schedule 5.3.

5.4 Authorization; No Breach. The execution and delivery of each of the Loan Documents have been duly authorized by each of the Credit Parties, to the extent a party thereto. Each Loan Document constitutes a valid and binding obligation of each Credit Party, to the extent a party thereto, enforceable in accordance with its terms subject to bankruptcy and other laws of general application affecting the rights and remedies of creditors and the availability of equitable remedies. The execution, delivery and compliance with and performance by each of the Credit Parties of the Loan Documents does not and will not (i) conflict with or result in a breach of the terms, conditions or provisions of; (ii) constitute a default under; (iii) except as contemplated by the Pledge and Security Agreement, result in the creation of any lien, security interest, charge or encumbrance upon any Credit Party’s capital stock or assets pursuant to; (iv) give any third party the right to accelerate any material obligation under; (v) result in a material violation of; or (vi) require any authorization, consent, approval, permit, exemption or other action by or notice to any court or administrative or governmental body pursuant to (A) the Bylaws or the Articles of Incorporation (or any charter or similar organizational document) of any Credit Party, (B) any law, statute, rule or regulation to which any Credit Party is subject or (C) any agreement (excluding the Loan Documents), instrument, order, judgment or decree to which any Credit Party is subject.

5.5 Assets.

5.5.1 No officer, Affiliate, consultant or employee of any Credit Party owns or has any interest, directly or indirectly, in any of the property owned by or leased by any Credit Party or in any license or product development agreement with any Credit Party. Except as set forth in Schedule 5.5.1, Borrower has good and marketable title to, or a valid leasehold interest in, all of its properties of any kind other than Proprietary Information (as defined below) and interests in such properties, which constitute all the properties and interests in property other than Proprietary Information that are used in the business of the Credit Parties (as

conducted or as currently proposed to be conducted), free and clear of restrictions or conditions on transfer or assignment and free and clear of mortgages, liens, pledges, charges, encumbrances, equities, claims, easements, rights of way, covenants, conditions or restrictions.

5.5.2 Except as set forth on Schedule 5.5.2, Borrower has good title to and exclusive ownership of all patents, patent applications, trademarks, service marks and domain names, together with the goodwill of the business associated therewith, copyrights, trade names, mask works, proprietary information, know-how, processes, models, designs, trade secrets, customer and supplier lists, market surveys, plans, procedures and other intellectual property rights (collectively the “Proprietary Information”), which are used or held for use in the operation or conduct of the business of the Credit Parties as presently conducted and currently proposed to be conducted, free and clear of restrictions or conditions on transfer or assignment and free and clear of payments and fees, mortgages, liens, pledges, charges, encumbrances, equities, claims, covenants, conditions or restrictions. The business of the Credit Parties as presently conducted and as currently proposed to be conducted does not and to the knowledge of the Credit Parties, will not conflict or infringe with the Proprietary Information of others. No Affiliate, officer, consultant or employee of any Credit Party has any right in any of the Proprietary Information.

5.5.3 Each Credit Party has taken commercially reasonable measures to protect the secrecy, value and confidentiality of the Proprietary Information. No Credit Party has disclosed the contents of any Proprietary Information to Persons other than its officers and employees or to other Persons who have executed appropriate confidentiality agreements. To the knowledge of Borrower, no officer, consultant or employee of any Credit Party is under any restriction, whether contractual, or by virtue of previous employment or otherwise, that would prevent such Person from performing his or her duties for any Credit Party or prevent any Credit Party from using the Proprietary Information. No Credit Party is a party to any nondisclosure or confidentiality agreements not entered into in the ordinary course of business.

5.5.4 Borrower owns, or has a valid leasehold interest in, all of the equipment and other fixed assets of the Credit Parties which are necessary and sufficient for the efficient operation of the business of the Credit Parties as currently conducted and currently proposed to be conducted and all of such assets are in good operating condition, normal wear and tear excepted.

5.6 Litigation. Except as set forth on Schedule 5.6, there are no (i) actions, proceedings or investigations pending or, to the best knowledge of Borrower, threatened, involving any Credit Party or the officers, key employees or consultants of any Credit Party, before any court or before any administrative agency or office; or (ii) violations by any Credit Party or any officer or key employee or consultant of any Credit Party, of any foreign, federal, state or local laws, regulations or orders, including but not limited to, environmental protection laws and occupational and safety laws relating to job conditions or safety and federal and state

laws governing the sale and distribution of consumer products, and no Credit Party has received any correspondence or communications with respect to any possible violation or investigation of the same.

5.7 Employee Compensation. The SEC Reports list all executive officers of Parent and a description of all forms of compensation and employee benefits payable to them required to be disclosed therein. Except as set forth in the SEC Reports, no Credit Party is a party to or bound by any employment agreement not terminable at will or having more than one month’s severance pay or which requires, or which could require, compensation and benefits of more than Six Thousand Dollars ($6,000) per month, collective employment contracts, deferred compensation agreements, bonus plans, profit sharing plans, pension plans or any other plans or programs subject to ERISA or health, disability, sick pay or other employee benefits. Borrower believes that relations with its employees are satisfactory.

5.8 Material Licenses, Agreements and Related Party Agreements. Except as attached as exhibits to the SEC Reports or on Schedule 5.8, no Credit Party is a party to, nor is any of its property bound by, (i) any agreement requiring the performance by any Credit Party of any obligation for a period of time extending beyond one year from the date hereof, calling for or which could result in the payment or receipt of consideration of more than Twenty Five Thousand Dollars ($25,000), or licensing any material Proprietary Information of any Credit Party or any third party; (ii) any agreement or understanding between any Credit Party and any officer, employee or consultant of any Credit Party, other than employee compensation and benefits entered into in the ordinary course of business; (iii) any loan or credit agreements providing for the extension of credit in excess of Twenty Five Thousand Dollars ($25,000) to or from any Credit Party; (iv) any agreements or commitments containing a provision limiting the ability of any Credit Party to compete with any Person or engage in any line of business; (v) any agreement requiring any Credit Party to guaranty the obligations of any Person; (vi) any agreement requiring any Credit Party to provide indemnification to any officer or director of the Credit Parties; or (vii) any agreements providing for the payment of any royalties based on revenues (or a specific revenue stream) of any Credit Party. There is no default or event that with notice or lapse of time, or both, would constitute a default by any party to any of the foregoing agreements. No Credit Party has received notice nor does it have knowledge that any party to any of these agreements intends to cancel or terminate any of these agreements or to exercise or not exercise any options under any of these agreements or to seek a renegotiation or adjustment of any material provisions. True, correct and complete copies of each of the agreements listed on Schedule 5.8 have been provided by Borrower to each Purchaser.

5.9 Registration Rights. Except for the rights granted to Purchasers under this Agreement and as set forth on Schedule 5.9, Parent has not granted any registration rights or preemptive rights to any holder or prospective holder of its securities.

5.10 Financial Statements. Each Purchaser has received true, correct and complete copies of (a) the audited consolidated balance sheets of Parent and its Subsidiaries dated as of December 31, 2002 (the “Balance Sheet Date”), and the related audited statements of income and cash flows of Parent and its Subsidiaries for the year then ended, and (b) the unaudited balance sheet of Parent and its Subsidiaries dated as of September 30, 2003, and the

related unaudited statements of income and cash flows of Parent and its Subsidiaries for the nine month period then ended (such audited and unaudited year-end and interim statements, including the related notes and schedules thereto, are referred to herein as the “Financial Statements”). The Financial Statements have been prepared by the Credit Parties from the books and records of the Credit Parties and, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments that will not individually or in the aggregate be material, fairly and accurately present the financial position and results of operations, the shareholders’ equity and cash flows of the Credit Parties at the dates and for the periods reflected thereon in accordance with GAAP applied on a consistent basis throughout the periods indicated, except for the failure of the unaudited Financial Statements to include footnotes required by GAAP. The Credit Parties maintain a standard system of accounting established and administered in accordance with GAAP. No Credit Party has any material liabilities or obligations, absolute, contingent or otherwise, other than (a) liabilities set forth in the Financial Statements, (b) liabilities incurred in the ordinary course of business subsequent to September 30, 2003 and (c) obligations under contracts and commitments incurred in the ordinary course of business and not required under GAAP to be reflected in such financial statements, which, in both cases, individually or in the aggregate, are not material to the financial condition, operations or prospects of the Credit Parties. Except as set forth on Schedule 5.10, all of the revenues and expenses set forth on the Financial Statements are for the account of or incurred by Parent or Borrower, all of the assets and liabilities set forth on the balance sheets included in the Financial Statements are assets and liabilities of Parent or Borrower, all revenues and expenses of the Credit Parties for periods subsequent to the period covered by the Financial Statements were for the account of Parent or Borrower, and no assets or liabilities set forth on the Financial Statements have been transferred from Parent or Borrower to any other Credit Party.

5.11 Insurance. The insurance coverage of the Credit Parties with respect to their properties, assets and business is reasonable and customary for corporations engaged in similar lines of business, including business interruption insurance, and is in full force and effect. Borrower shall use commercially reasonable efforts to ensure that the insurance policies with respect to such coverage include an additional insured endorsement payable in favor of Purchaser, and Borrower shall not cancel such insurance policies without the consent of St. Cloud.

5.12 Extent of Offering. No Credit Party, nor any agent acting on any Credit Party’s behalf, has offered or will offer or solicit any offers to buy any securities from, any Person or Persons so as to require the issuance or sale of the Securities to be registered pursuant to the provisions of Section 5 of the Securities Act or prevent Parent and Borrower from utilizing the provisions of Section 25102(f) of the California Corporate Securities Law of 1968 or any other applicable state securities law exemption from qualification.

5.13 Finder’s or Broker’s Fees. Except as set forth on Schedule 5.13, there are no claims for brokerage commissions, finders’ fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon any Credit Party.

5.14 Governmental Consent, etc. No material permit, consent, approval, authorization of, declaration to, or filing with any governmental authority is required in

connection with (i) the execution, delivery and performance of this Agreement or any of the other Loan Documents by the applicable Credit Parties, or (ii) the consummation by the Credit Parties of the transactions contemplated hereby and thereby, except (A) as have already been obtained or accomplished, or (B) for such filings as are required pursuant to applicable federal and state securities laws and blue sky laws filings shall be made by Parent on or before the applicable due date for such filing. Each Credit Party has all material licenses, permits or registrations needed to conduct the business of the Credit Parties as currently conducted and proposed to be conducted, and such licenses, permits or registrations are in full force and effect.

5.15 Absence of Certain Changes or Events. Except as set forth in the SEC Reports or on Schedule 5.15, since the Balance Sheet Date, there has not been any:

(a)

actual or threatened adverse change in the business, assets, liabilities, financial condition, operations or prospects of Borrower or the Credit Parties taken as a whole;

(b)

change in accounting methods, principles or practices by any Credit Party affecting any of its assets;

(c)

revaluation by any Credit Party of any of its assets;

(d)

damage, destruction or loss (whether or not covered by insurance) adversely affecting any of the assets of any Credit Party;

(e)

cancellation of any Indebtedness or waiver or release of any right or claim of Borrower or any other Credit Party relating to its activities or properties which had or will have an adverse effect on the business, assets, liabilities, financial condition, operations or prospects of Borrower or the Credit Parties taken as a whole;

(f)

amendment, cancellation or termination of any contract, commitment, agreement, transaction or permit relating to any assets of any Credit Party which is not in the ordinary course of business;

(g)

mortgage, pledge or other encumbrance of any assets of any Credit Party;

(h)

sale, assignment or transfer of any assets of any Credit Party outside the ordinary course of business;

(i)

failure to pay or satisfy when due any liability of Borrower in a excess of One Hundred Thousand Dollars ($100,000);

(j)

incurrence of any liability or any commitment or any other transaction in excess of One Hundred Thousand Dollars ($100,000) entered into by Borrower outside the ordinary course of business;

(k)

amendment to the Articles of Incorporation or Bylaws (or any charter or similar organizational document) of any Credit Party;

(l)

(1) new employment, deferred compensation or other similar agreement entered into by any Credit Party or increase in the compensation of any director, officer, employee or agent of any Credit Party, (2) grant of any severance, continuation or termination pay to any director, officer, employee or agent of any Credit Party, (3) increase in the benefits payable or potentially payable under any severance, continuation or termination pay policies or employment agreements with any director, officer, employee or agent of any Credit Party, or (4) change in the terms of any bonus, pension, insurance, health or other benefit plan of any Credit Party;

(m)

agreement entered into between any Credit Party and any director, officer, shareholder or Affiliate of any Credit Party;

(n)

issuance of any shares of capital stock or other equity interests in any Credit Party or payment of any dividend payments or other distributions or payments in respect of the capital stock of any Credit Party;

(o)

other event or condition which in any one case or in the aggregate has or might reasonably be expected to have a Material Adverse Effect (as such term is defined in the Pledge and Security Agreement); or

(p)

agreement by any Credit Party to do any of the things described in the preceding clauses (a) through (o) other than as expressly provided for herein.

5.16 Small Business Matters.

5.16.1 The Credit Parties acknowledge that St. Cloud is a federally licensed SBIC under the SBIC Act. Borrower, together with its “affiliates” (as that term is defined in 13 C.F.R. Section 121.103), is a “small business concern” within the meaning of the SBIC Regulations, including 13 C.F.R. Section 121.103. After giving effect to the transactions contemplated by the Loan Documents, the Credit Parties will have 500 or fewer full-time equivalent employees. The information regarding Borrower and its affiliates set forth in the SBA forms Nos. 480, 652 and 1031 delivered at the Closing is accurate and complete. Copies of such forms have been completed and executed by Borrower and delivered to St. Cloud at the Closing together with a written statement of Borrower regarding its planned use of the proceeds from the transactions contemplated by the Loan Documents. No Credit Party presently engages in, and no Credit Party shall hereafter engage in, any activities, nor shall any Credit Party use directly or indirectly the proceeds of the transactions contemplated by the Loan Documents for any purpose, for which an SBIC is prohibited from providing funds by the SBIC Regulations (including 13 C.F.R. Section 107.720).

5.16.2 The primary business activities of Borrower and the other Credit Parties do not involve, directly or indirectly, providing funds to others, purchasing or discounting debt obligations, factoring or long-term leasing of equipment with no provision for maintenance or repair, and no Credit Party is classified under

Section 53 (Real Estate) of the NAICS manual. The assets of the business of Borrower and the other Credit Parties (the “Business”) will not be reduced or consumed, generally without replacement, as the life of the Business progresses, and the nature of the Business does not require that a stream of cash payments be made to the Business’s financing sources, on a basis associated with the continuing sale of assets.

5.17 Affiliated Transactions. Except as set forth on Schedule 5.17, no officer, director, employee or Affiliate of any Credit Party or any individual related by blood, marriage or adoption to any such individual or any entity in which any such Person or individual owns any beneficial interest, is a party to any agreement, contract, commitment, transaction or arrangement with any Credit Party or has any material interest in any material property used by any Credit Party, except for (a) employment arrangements and compensation in the ordinary course of business and (b) transactions which in the aggregate shall not exceed Ten Thousand Dollars ($10,000).

5.18 Solvency. Borrower and each other Credit Party is solvent as of the date of this Agreement and no Credit Party shall become insolvent as a result of the consummation of the transactions contemplated by this Agreement or the other Loan Documents. Borrower and each other Credit Party is, and after giving effect to the transactions contemplated by this Agreement shall be, able to pay its debts as they become due, and Borrower’s and each other Credit Party’s property now has, and after giving effect to the transactions contemplated hereby shall have, a fair salable value greater than the amounts required to pay its debts (including a reasonable estimate of the amount of all contingent liabilities). Borrower and each other Credit Party has adequate capital to carry on its business, and after giving effect to the transactions contemplated by this Agreement, Borrower and each other Credit Party shall have adequate capital to conduct its business. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of Borrower or any other Credit Party.

5.19 Minute Books. The minute books of the Credit Parties provided to each Purchaser contain a complete summary of all meetings of directors and shareholders since 1997 and reflect all transactions referred to in such minutes accurately in all material respects.

5.20 Projections. Attached hereto as Schedule 5.20 is a true and complete copy of the latest pro forma projections of the consolidated income and cash flows of Borrower for the fiscal years ending 2004 and 2005. Such projections are based on underlying assumptions of Borrower which provide a reasonable basis for the projections contained therein. Such projections have been prepared on the basis of the assumptions set forth therein, which Borrower reasonably believes are fair and reasonable in light of the historical financial performance of Borrower and of current and reasonably foreseeable business conditions and reflect the reasonable estimate of Borrower of the results of operations and other information projected therein.

5.21 Tax Returns and Tax Matters. Each Credit Party has timely filed all Tax Returns which are required to be filed, and all such Tax Returns are true, correct and complete in all material respects. Each Credit Party has paid all Taxes which are payable and

due. There is no proposed, asserted or assessed material Tax deficiency against any Credit Party. No Credit Party has received written notice from any taxing authority in a jurisdiction in which such Credit Party does not file a Tax Return stating that such Credit Party is or may be subject to taxation by that jurisdiction.

5.22 Environmental and Safety Matters. Except as set forth on Schedule 5.22:

5.22.1 Each Credit Party is now and has always been in compliance in all material respects with all Environmental and Safety Requirements.

5.22.2 Without limiting the generality of the foregoing, each Credit Party has obtained and complied with, and is in compliance with, in all material respects, all permits, licenses and other authorizations that may be required pursuant to Environmental and Safety Requirements for the occupation of its facilities and the operation of its business.

5.22.3 No Credit Party has received any written or oral notice regarding any actual or alleged material violation of Environmental and Safety Requirements, or any material liabilities, obligations or responsibilities or potential material liabilities, obligations or responsibilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to such Credit Party or its facilities arising under Environmental and Safety Requirements, nor is any Credit Party aware of any information which might form the basis of any such notice.

5.22.4 None of the following exists or, or to the knowledge of any Credit Party, formerly existed at any property or facility owned or operated by any Credit Party: (i) underground storage tanks; (ii) asbestos-containing material in any form or condition; (iii) materials or equipment containing polychlorinated biphenyls; (iv) landfills, surface impoundments, or disposal areas, or (v) maintenance area or vehicle or equipment wash area.

5.22.5 No Credit Party has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or could give rise to material liabilities, obligations or responsibilities of such Credit Party, including any liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”) or the Solid Waste Disposal Act, as amended, or any other Environmental and Safety Requirements, nor has any Credit Party released or waived any third party, either expressly or by operation of law, from any liability, obligation or responsibility relating to any Environmental and Safety Requirements.

5.22.6 To the knowledge of any Credit Party, no facts, events or conditions relating to the past or present facilities, properties or operations of any Credit Party will prevent, hinder or limit continued compliance in all material respects with Environmental and Safety Requirements, give rise to any investigatory, remedial or corrective obligations pursuant to Environmental and Safety Requirements, or give rise to any other material liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental and Safety Requirements, including any relating to onsite or offsite releases or threatened releases of hazardous materials, substances or wastes, personal injury, property damage or natural resources damage.

5.22.7 Neither this Agreement nor the consummation of the transaction that is the subject of this Agreement will result in any obligations for site investigation or cleanup, or notification to or consent of government agencies or third parties, pursuant to any of the so-called “transaction-triggered” or “responsible property transfer” Environmental and Safety Requirements.

5.22.8 No Credit Party has, either expressly or by operation of law, assumed or undertaken any liability, including any obligation for corrective or remedial action, of any other Person relating to Environmental and Safety Requirements.

5.22.9 Each Credit Party has provided each Purchaser with true, correct and complete copies of all environmental reports, assessments or investigations and all parts thereof (including any drafts of such items) regarding any property currently or formerly owned, leased or operated by such Credit Party.

5.23 Employee Benefits and Plans.

5.23.1 Schedule 5.23.1 sets forth a true and complete list of each “employee benefit plan” as defined in Section 3(3) of ERISA, and any other plan, policy, program practice, agreement, understanding or arrangement (whether written or oral) providing compensation or other benefits to any current or former director, officer, employee or consultant (or to any dependent or beneficiary thereof) of the Credit Parties or any ERISA Affiliates (as defined below), which are now, or were within the past six years, maintained, sponsored or contributed to by any Credit Party or any ERISA Affiliate, or under which any Credit Party or any ERISA Affiliate has any obligation or liability, whether actual or contingent, including, without limitation, all incentive, bonus, deferred compensation, vacation, holiday, cafeteria, medical, disability, stock purchase, stock option, stock appreciation, phantom stock, restricted stock or other stock-based compensation plans, policies, programs, practices or arrangements (each a “Credit Party Benefit Plan”). For purposes of this Agreement, “ERISA Affiliate” shall mean any entity (whether or not incorporated) other than the Credit Parties that, together with any Credit Party, is considered under common control and treated as one employer under Section 414(b), (c), (m) or (o) of the Code. No Credit Party, nor to the knowledge of Borrower, any other Person, has any express or implied commitment, whether legally enforceable or not, to

modify, change or terminate any Credit Party Benefit Plan, other than with respect to a modification, change or termination required by ERISA, the Code or any other applicable law or governmental rule or regulation.

5.23.2 Each Credit Party Benefit Plan has been administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code, and contributions required to be made under the terms of any of the Credit Party Benefit Plans as of the date of this Agreement have been timely made or, if not yet due, have been properly reflected on the most recent consolidated balance sheet filed or incorporated by reference in Parent’s audited consolidated financial statements prior to the date of this Agreement. With respect to the Credit Party Benefit Plans, no event has occurred and, to the knowledge of Borrower, there exists no condition or set of circumstances in connection with which any Credit Party could be subject to any material liability (other than for routine benefit liabilities) under the terms of, or with respect to, such Credit Party Benefit Plans, ERISA, the Code or any other applicable law or governmental rule or regulation.

5.23.3 Except as disclosed on Schedule 5.23.3: (i) each Credit Party Benefit Plan which is intended to qualify under Section 401(a), Section 401(k), Section 401(m) or Section 4975(e)(6) of the Code has received a favorable determination letter from the IRS as to its qualified status, and each trust established in connection with any Credit Party Benefit Plan which is intended to be exempt from federal income taxation under Section 501(a) of the Code is so exempt, and to Borrower’s knowledge no fact or event has occurred that could reasonably be expected to adversely affect the qualified status of any such Credit Party Benefit Plan or the exempt status of any such trust; (ii) to Borrower’s knowledge there has been no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code and other than a transaction that is exempt under a statutory or administrative exemption) with respect to any Credit Party Benefit Plan that could result in material liability to any Credit Party or any ERISA Affiliate; (iii) no suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of Borrower is threatened, against or with respect to any such Credit Party Benefit Plan, including any audit or inquiry by the IRS or United States Department of Labor (other than routine benefits claims); (iv) none of the assets of Borrower or any ERISA Affiliate is, or may reasonably be expected to become, the subject of any lien arising under ERISA or Section 412(n) of the Code; (v) no Credit Party nor any ERISA Affiliate has any material liability under ERISA Section 502; (vi) all tax, annual reporting and other governmental filings required by ERISA and the Code have been timely filed with the appropriate governmental entity with respect to each Credit Party Benefit Plan; (vii) all contributions and payments to or under each Credit Party Benefit Plan which can appropriately be deducted under either Code Section 162 or 404 are, to the knowledge of Borrower, deductible; and (viii) no excise tax could be imposed upon any Credit Party under Chapter 43 of the Code.

5.23.4 No Credit Party Benefit Plan is a “multiemployer plan” (as defined in Section 3(37) or 4001(a)(3) of ERISA) (a “Multiemployer Plan”) or is subject to Title IV of ERISA or Section 412 of the Code, and no Credit Party nor any ERISA Affiliate has sponsored or contributed to or been required to contribute to a Multiemployer Plan or other pension plan subject to Title IV of ERISA or Section 412 of the Code (a “Pension Plan”).

5.23.5 Except as set forth on Schedule 5.23.5 or as required by applicable law, no Credit Party Benefit Plan provides any of the following retiree or post-employment benefits to any person: medical, disability or life insurance benefits. No Credit Party Benefit Plan is a voluntary employee benefit association under Section 501(a)(9) of the Code. Each Credit Party and each of its ERISA Affiliates are in compliance in all material respects with (i) the requirements of the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the regulations (including proposed regulations) thereunder and any similar state law and (ii) the applicable requirements of the Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations thereunder.

5.23.6 No Credit Party maintains, sponsors, contributes to or has any liability with respect to any employee benefit plan program or arrangement that provides benefits to non-resident aliens with no United States source income outside of the United States.

5.24 Use of Proceeds. No part of the proceeds of the Securities will be used for purchasing or carrying any “margin stock” (within the meaning of Regulation U) or for the purpose of purchasing, carrying or trading in any securities under such circumstances as to involve the Credit Parties in a violation of Regulation X or to involve any broker or dealer in a violation of Regulation T. No indebtedness being reduced or retired out of the proceeds of the Securities was or will be incurred for the purpose of purchasing or carrying any “margin stock” (within the meaning of Regulation U). None of the transactions contemplated by this Agreement (including, without limitation, the direct and indirect use of proceeds of the Securities) will violate or result in a violation of Regulation T, Regulation U or Regulation X.

5.25 Rights Agreement. The board of directors of Parent has taken the requisite action such that none of the Purchasers nor any of their Affiliates shall become an “Acquiring Person,” and no “Stock Acquisition Date” or “Distribution Date” (as such term is defined in the Rights Agreement) will occur, by reason of the approval, execution or delivery of this Agreement, the other Loan Documents or the consummation of the transactions contemplated hereby and thereby, including without limitation, the issuance of the Warrants and the issuance of the shares of Common Stock upon exercise of the Warrants (including the Additional Warrant Shares (as such term is defined in the Warrants)).

5.26 Disclosure. Neither this Agreement, nor any of the other Loan Documents, nor any of the schedules, attachments, or certificates attached to this Agreement or any of the other Loan Documents, or delivered by any Credit Party at the Closing, contains any untrue statements of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading. There is no fact which Borrower has not disclosed to Purchasers, in writing, which could reasonably be anticipated to have a Material Adverse Effect.

6. REVENUE PARTICIPATION.

6.1 In consideration for Purchasers’ agreement to acquire the Securities, Borrower agrees to make quarterly royalty payments (“Royalty Payments”) to Purchasers in an aggregate amount (pro rated to each Purchaser based on the original principal amounts of the Notes) equal to (A) the lesser of (i) fifteen percent (15%) of the Incremental Revenue for such quarter and (ii) (a) with respect to the period from November 24, 2003 through December 31, 2003, sixty three one hundredth percent (0.63%) of all principal and accrued interest on the Notes outstanding as of December 31, 2003, or (b) with respect to any calendar quarter thereafter, one and one half percent (1.5%) of all principal and accrued interest on the Notes outstanding as of the midpoint of such calendar quarter (the amount contemplated by this clause (ii) is referred to as the “Maximum Quarterly Royalty Payment”) plus (B) the Royalty Catch-Up Amount; provided, however, that any payments required to be made prior to the quarter ended September 30, 2004 shall accrue and instead be paid in four equal installments (the “Installment Payments”) on each Royalty Payment Date (in addition to any other Royalty Payments required to be paid on each such Royalty Payment Date) beginning with the Royalty Payment Date for the quarter ended September 30, 2004 (except that if an Event of Default occurs under the Notes, then any accrued but unpaid Royalty Payments shall become due and payable immediately); further provided that no Royalty Payment with respect to a calendar quarter (excluding, for this purpose, Installment Payments) shall exceed twenty five percent (25%) of Incremental Revenue for such calendar quarter, and any unpaid Royalty Catch-Up Amount resulting from this limitation shall be carried forward to the following calendar quarter.

7. COVENANTS.

7.1 Financial Statements and Other Information. Until the applicable Expiration Date, Borrower shall deliver to each Purchaser the following

7.1.1 Within thirty (30) days after the end of each monthly accounting period in each fiscal year (or when furnished to any lender or other third party, if earlier), (A) unaudited statements (prepared in form reasonably satisfactory to St. Cloud), certified by Parent’s principal financial officer and principal executive officer, of income, retained earnings and changes in financial position of the Credit Parties for such monthly period and for the period from the beginning of such fiscal year to the end of such monthly period and a balance sheet of the Credit Parties as of the end of such monthly period, setting forth in each case comparisons to figures for the corresponding periods in the preceding fiscal year and comparisons to budgets prepared by Borrower, and (B) a copy of any borrowing base certificate or similar document submitted to any lender or other third party.

7.1.2 Within forty-five (45) days after the end of each quarterly accounting period in each fiscal year (or when filed with the Securities and Exchange Commission or furnished to any lender or other third party, if earlier), unaudited statements (prepared in form satisfactory to each Purchaser), certified by Parent’s principal financial officer and principal executive officer, of income, retained

earnings and changes in financial position of the Credit Parties or such quarterly period and for the period from the beginning of such fiscal year to the end of such quarterly period and a balance sheet of the Credit Parties as of the end of such quarterly period, setting forth in each case comparisons to figures for the corresponding periods in the preceding fiscal year and comparisons to budgets prepared by Borrower.

7.1.3 Within ninety (90) days after the end of each fiscal year (or when filed with the Securities and Exchange Commission or furnished to any lender or other third party, if earlier), statements of income, retained earnings and changes in financial position of the Credit Parties for such fiscal year, and a balance sheet of the Credit Parties as of the end of such fiscal year, setting forth in each case in comparative form corresponding figures for the preceding fiscal year.

7.1.4 All financial statements required to be delivered hereby shall be (A) prepared in accordance with GAAP, consistently applied, except in the case of unaudited financial statements, which may not contain all footnotes required by GAAP; (B) prepared on a consolidated and consolidating basis; (C) with respect to the financial statements described in Section 7.1.2 and Section 7.1.3, accompanied by a management discussion and analysis of the Credit Parties’ financial condition, changes in financial condition and results of operations, as compared to the comparable period in the preceding fiscal year; (D) in the case of annual statements, be audited by an independent accounting firm approved by the Board; and (E) in the case of quarterly statements, shall be accompanied by a compliance certificate from Parent’s principal financial officer and principal executive officer certifying that each Credit Party is in compliance with each covenant set forth in the Loan Documents and no default has occurred with respect to this Agreement, or any of the other Loan Documents or with respect to any Indebtedness in favor of banks or other financial institutions.

7.1.5 Promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of Borrower’s or any other Credit Party’s operations and financial affairs or in conjunction with any annual or interim audit given to Borrower or any Credit Party by its independent accountants (and not otherwise contained in other materials provided pursuant to this Section).

7.1.6 Thirty (30) days prior to the commencement of each fiscal year, a comprehensive annual budget or forecast which shall include annual consolidated and consolidating budgets prepared on a monthly basis for Borrower for such fiscal year (displaying anticipated statements of income, retained earnings, changes in financial position and balance sheets and containing such internal narrative as appropriate). In addition, said plan will include a capital expenditure plan which shall be presented to the Board for its approval within thirty (30) days after the commencement of each fiscal year.

7.1.7 Promptly, but in any event within ten (10) days after the discovery of any material adverse event, change or circumstance affecting Borrower or any other Credit Party (including, but not limited to, any material change adversely affecting the revenue or cash flow of Borrower or the Credit Parties taken as a whole, the filing of any litigation or administrative claim against Borrower or any other Credit Party, involving a claim in excess of One Hundred Thousand Dollars ($100,000) or which, if concluded adversely, could reasonably be expected to have a Material Adverse Effect, or the existence of any dispute with any Person which involves, in Borrower’s judgment, a reasonable likelihood of such litigation being filed or any investigation or proceeding instituted or threatened by any federal or state regulatory agency or any notice of default by Borrower or any other Credit Party under any material agreement to which it is a party) (A) an officers’ certificate specifying the nature and period of existence thereof, and what actions Borrower or any other Credit Party has taken and/or proposes to take with respect thereto; and (B) copies of any filings, complaints or notices delivered to or served upon any Credit Party in connection therewith.

7.1.8 Promptly, but in any event within three (3) days after any Credit Party’s receipt of notice of the intention of any customer that has accounted for over ten percent (10%) of the Credit Parties’ aggregate revenues for the immediately preceding twelve month period to cease doing business with the Credit Parties or to materially reduce the volume purchased from the Credit Parties.

7.1.9 Within three (3) business days after transmission thereof, copies of all such financial statements, proxy statements and reports as Parent sends to its shareholders (“Shareholders”), and copies of all registration statements and all regular, special or periodic reports which Parent files with any state securities regulatory agency, the Commission or with any securities exchange on which any of its securities are then listed, and copies of all press releases and other statements made available generally by any Credit Party to the public concerning material developments in the Credit Parties’ business.

7.1.10 With reasonable promptness, such other information and financial data concerning the Credit Parties as any Person entitled to receive materials under this section may reasonably request including but not limited to data on the impact of the investment by such Purchaser on jobs created or retained, revenue and taxes, and other economic benefits.

7.2 Inspection of Property. The Credit Parties will permit any representative designated by St. Cloud upon reasonable notice, during normal business hours, to (i) visit and inspect any of the properties of any Credit Party, (ii) examine the financial records of any Credit Party and make copies thereof or extracts therefrom, and (iii) discuss the affairs, finances and accounts of any Credit Party with the officers, key employees and independent accountants of the Credit Parties. If either Purchaser has reasonable grounds for conducting an inspection, Borrower shall reimburse the applicable Purchaser for all commercially reasonable costs and expenses incurred by such Purchaser in connection with any such inspection.

7.3 Unfunded Liabilities - ERISA. No Credit Party shall incur any liability or tax under Section 4971 of the Internal Revenue Code of 1986, as amended (the “Code”) in respect of an accumulated funding deficiency (or obtain any waiver under Section 412(d) of the Code or Section 303 of ERISA) or incur any material liability to the Pension Benefit Guaranty Corporation in connection with any employee benefit plan of any Credit Party. No Reportable Event, as defined in Title IV of ERISA, will occur or continue with respect to any such plan.

7.4 Restrictions. Until the applicable Expiration Date, no Credit Party shall, without the prior written consent of the Majority Holders:

7.4.1 Incur Indebtedness other than Permitted Indebtedness and the obligations hereunder;

7.4.2 Pay or authorize any dividend or make or authorize any distribution upon any of its equity securities (other than dividends or distributions from the Cayman Subsidiaries to Parent);

7.4.3 Redeem, purchase or otherwise acquire, any of its equity securities or any security convertible into, or any option, warrant or other right to acquire any of its equity securities;

7.4.4 Increase compensation or other benefits to any Person, other than in the ordinary course of business consistent with past practice with respect to non-officer employees and except as may be approved by the Compensation Committee of the Board of Directors with respect to executives and officers;

7.4.5 Merge or consolidate with any Person, or sell, lease, license or otherwise dispose of any of its assets, having a fair market value, in the aggregate, of more than One Hundred Thousand Dollars ($100,000) (other than shares of capital stock of Oryxe Energy International, Inc. (“Oryxe”) held by Parent or sales of assets in the ordinary course of its business) or liquidate, dissolve, recapitalize or reorganize in any form of transaction;

7.4.6 Make loans, advances to, guarantees for the benefit of, or investments in, any Person except (i) to employees in the ordinary course of business to the extent not prohibited by Section 402 of the Sarbanes-Oxley Act of 2002 or (ii) investments made in the ordinary course of business in (A) obligations of the United States government or any agency thereof or obligations guaranteed by the United States government, (B) certificates of deposit of commercial banks insured by the Federal Deposit Insurance Corporation, or (C) commercial paper with a rating of at least Prime-l according to Moodys Investors Service, Inc., in each case having a maturity not in excess of one year;

7.4.7 Enter into the active management or operation of any business other than the business currently conducted by the Credit Parties unless approved by the Board;

7.4.8 Enter into any transaction with any Affiliate, director, officer, or employee of any Credit Party involving, in the aggregate, more than Ten Thousand Dollars ($10,000), except that Borrower may enter into employment arrangements approved by the Compensation Committee of the Board of Directors;

7.4.9 Create or permit to continue in existence any lien upon any assets of Borrower other than (A) purchase money liens or operating leases in the ordinary course of business, (B) liens for taxes not yet due and payable, (C) liens arising out of Indebtedness authorized by the Board, and for which St. Cloud has provided its prior written consent, (D) liens in favor of Purchasers under the Loan Documents; and (E) liens under the First Capital Credit Facility and the Existing Subordinated Notes;

7.4.10 Create or form a Subsidiary whether by acquisition, new capitalization, merger or otherwise; provided, that in the event that Purchasers shall consent to the formation or acquisition by any Credit Party of any new Subsidiary, or participation in any partnership or joint venture, whether or not wholly owned, such Credit Party shall promptly and diligently take all actions necessary or required by Purchasers to cause such corporation, partnership, or other entity or venture to become a “Credit Party” for all purposes of this Agreement and a “Grantor” under a pledge and security agreement in favor of St. Cloud, as agent for Purchasers (or any successor agent), in form and substance similar to the Pledge and Security Agreement;

7.4.11 Except as set forth on Schedule 7.4.11, issue any equity securities, including but not limited to Common Stock, securities convertible into Common Stock or options, warrants or other rights to acquire Common Stock (other than options to purchase up to 4,000,000 shares of Common Stock under Parent’s Amended and Restated 1997 Stock Incentive Plan, including options outstanding as of the date hereof);

7.4.12 (a) permit Tangible Net Worth to be less than (i) $100,000 as of the end of any quarterly period in year 2004; (ii) $500,000 as of the end of any quarterly period in year 2005; (iii) $1,000,000 as of the end of any quarterly period in year 2006; and (iv) $1,500,000 as of the end of any quarterly period thereafter.

(b) permit the ratio of EBITDA of the Credit Parties (excluding the Cayman Subsidiaries) to Debt Service Payments to be less than: (i) 0.25x for the twelve month period ending on any of March 31, 2004, June 30, 2004 or September 30, 3004; (ii) 0.50x for the twelve month period ending on December 31, 2004; (iii) 1.0x for the twelve month period ending on the last day of any quarterly period in year 2005; (iii) 2.0x for the twelve month period ending on the last day of any quarterly period in year 2006; and (iv) 3.0x for the twelve month period ending on the last day of any quarterly period thereafter;

7.4.13 Allow any officer or director of any Credit Party to use any assets of any Credit Party in such a manner as would violate such person’s fiduciary duties to such Credit Party or its shareholders;

7.4.14 (A) Change the name, business structure, FEIN, organizational number or identity of any Credit Party, or add any new fictitious name, or cease to be a “registered organization” within meaning of Section 9-307 if the Uniform Commercial Code, or relocate the chief executive office of any Credit Party or (B) other than in the ordinary course of business with respect to the sale of Inventory (as such term is defined in the Pledge and Security Agreement), move, relocate, or transfer, whether by sale or otherwise, any assets of any Credit Party necessary to the operation of the Credit Parties’ business;

7.4.15 Amend the articles of incorporation or bylaws of Parent or any other Credit Party in any manner which would adversely affect the Purchasers;

7.4.16 Effect a reverse stock split or subdivision of any shares of capital stock of Parent;

7.4.17 Enter or consummate any off-balance sheet transactions (as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act);

7.4.18 Enter into any contracts not in the ordinary course of business involving obligations of any Credit Party in excess of One Hundred Thousand Dollars ($100,000) or modify or amend any material contract (including, without limitation, the First Capital Credit Facility and the Existing Subordinated Notes); or

7.4.19 Register any securities of Parent under the Securities Act in connection with an underwritten public offering unless St. Cloud reasonably consents to such registration (it being understood that it would not be unreasonable for St. Cloud to withhold its consent in any such registration in which St. Cloud would not have registration rights that are pari passu with each other holder of securities of the Company having registration rights); or

7.4.20 Take any action, or fail to take any action, which would result in the invalidity, abandonment, misuse or unenforceability of any Proprietary Information or which would, to the knowledge of the Credit Parties, infringe upon or misappropriate any rights of other Persons.

7.5 Affirmative Covenants. Until the applicable Expiration Date, each Credit Party shall, unless waived by the Majority Holders:

7.5.1 At all times cause to be done all things necessary to maintain, preserve and renew (i) its existence as a corporation, (ii) its patent registrations (if any)and (iii) all material licenses and permits (if any) necessary for the conduct of its business;

7.5.2 Maintain and keep its properties (if any) in good repair, working order and condition (ordinary wear and tear excepted), and from time to time make all necessary or desirable repairs, renewals and replacements, so that its businesses may be properly and advantageously conducted at all times;

7.5.3 Pay and discharge, when payable, all Taxes, assessments and governmental charges imposed upon its properties or upon the income or profits therefrom (in each case before the same become delinquent and before penalties accrue thereon) and all claims for labor, materials or supplies which if unpaid might by law become a lien upon any of its property, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves, determined in accordance with GAAP, have been set aside on its books with respect thereto;

7.5.4 Comply with all other material obligations which it incurs pursuant to any material contract or agreement, whether oral or written, express or implied, as such obligations become due, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves have been set aside on its books with respect thereto (without limiting the generality of the foregoing and subject to the terms of the Subordination Agreement, the Credit Parties shall make all payments when due under First Capital Credit Facility and the Existing Subordinated Notes);

7.5.5 Comply with all applicable laws, rules and regulations of all foreign and domestic governmental authorities, the violation of which would have a Material Adverse Effect;

7.5.6 Continue in force with good and responsible insurance companies the insurance described in Section 5.11 and Section 7.8;

7.5.8 Maintain adequate books and accounts in accordance with sound business practices and GAAP consistently applied;

7.5.9 Take commercially reasonable steps to protect trade secrets of the Credit Parties; and

7.5.10 Promptly, but in any event within ten (10) days after discovery by any Credit Party or any officers, directors or employees of any Credit Party, notify St. Clouds of any default by any Credit Party under a material agreement;

7.6 Business Operations. The Credit Parties agree that on or after the date hereof, all of their business operations shall be conducted through and for the account of Borrower or Parent, and none of the Cayman Subsidiaries shall conduct any business operations or hold any assets unless the Borrower and Parent shall have first taken all reasonably necessary actions (as determined by St. Cloud) to grant the Borrower a valid and first priority security interest in all of the assets of such Cayman Subsidiary.

7.7 Agency Fee. Borrower shall pay St. Cloud or its Affiliate a reasonable and customary agency fee to be mutually agreed upon by St. Cloud and Borrower in the event that Borrower engages St. Cloud, or an Affiliate thereof, to act as an agent for securing additional financing for Borrower beyond the original principal amount of the Notes, including any effort to increase this credit facility.

7.8 Key Man Insurance. Within fourteen (14) days after the Closing Date, Borrower shall deliver to St. Cloud evidence that it has applied for term life insurance on the life of Elton Alderman, and until such time as the principal and accrued interest under the Notes have been paid in full, Borrower shall maintain such insurance policy, in an amount equal to no less than the amount of the outstanding principal and accrued interest under the Notes plus any accrued but unpaid Royalty Payments (including any unpaid Royalty Catch-Up Amounts) pursuant to Section 6.1, with Purchasers as the primary loss beneficiary and payee thereunder (it being understood that any insurance proceeds received by Purchasers shall be applied to the then outstanding principal and accrued interest on the Notes (pro rata based on the original principal amounts of the Notes) immediately upon receipt thereof until the Notes are paid in full, and any remaining proceeds shall be paid to Borrower).

No Credit Party shall (i) cancel such insurance policies without providing at least twenty (20) days prior written notice to St. Cloud or (ii) change the beneficiary thereunder without the prior written consent of St. Cloud. Borrower shall cause the insurer under such insurance policies to provide St. Cloud with a certificate of insurance evidencing the insurance policies described in this Section 7.8.

7.9 Termination of Covenants. The covenants set forth in this Agreement shall, unless otherwise specified, survive and continue in full force for so long as amounts due under the Notes remain outstanding.

7.10 St. Cloud’s Cure of Default. In the event that any Credit Party should be in breach or default of any material agreement, lease or contract, Borrower shall immediately give notice of such fact to St. Cloud who shall have the right, but not the obligation, to cure such default, where possible or permitted, on behalf of such Credit Party. Any monies advanced by St. Cloud on behalf of any Credit Party for such purposes shall become an obligation of Borrower to St. Cloud, and shall bear interest at the same rate as that provided for in the St. Cloud Note.

7.11 Further Assurances. Each Credit Party shall take and cause to be taken all actions reasonably requested by a Purchaser consistent with the terms of this Agreement to effect the transactions contemplated by this Agreement and the Loan Documents, including but not limited to the execution and delivery of additional financing statements and other security agreements granting such Purchaser a lien upon the tangible and intangible personal property and other assets of the Credit Parties.

7.12 Use of Proceeds.

(a) Borrower shall use the proceeds from the issuance of the Securities only in the manner set forth on Schedule 3.1.12.

(b) No Credit Party shall use the proceeds of the Securities for purchasing or carrying any “margin stock” (within the meaning of Regulation U) or for the purpose of purchasing, carrying or trading in any securities under such circumstances as to involve the Credit Parties in a violation of Regulation X or to involve any broker or dealer in the violation of Regulation T.

7.13 Stock Certificates of Cayman Sub I. As soon as practicable after the date hereof (but in any event within sixty (60) days after the Closing Date), the Credit Parties shall deliver to St. Cloud or its counsel stock certificates representing sixty-five percent (65%) of the capital stock of Cayman Sub I, accompanied by duly executed and undated instruments of transfer.

7.14 Stock Certificates of Oryxe. As soon as practicable after the date hereof (but in any event within sixty (60) days after the Closing Date), the Credit Parties shall deliver to St. Cloud or its counsel stock certificates representing all of the capital stock of Oryxe held by Parent, accompanied by duly executed and undated instruments of transfer (it being understood that St. Cloud shall permit Parent to sell the stock represented by such stock certificates and shall deliver such stock certificates to Parent at such time as is necessary to effect any such sale).

7.15 The Cayman Receivables Agreement. As soon as practicable after the date hereof (but in any event within sixty (60) days after the Closing Date), the Credit Parties shall deliver to St. Cloud or its counsel an acknowledgement and consent executed by each of Prolong Oil and the Nel Trust, acknowledging and consenting to the assignment described in Section 3.1.15 and acknowledging that Borrower may pledge its rights under the Cayman Receivable Agreement to the Purchasers.

7.16 Directors and Officers Liability Insurance. As soon as practicable after the date hereof (but in any event within thirty (30) days after the Closing Date), the Credit Parties shall deliver to St. Cloud evidence of directors and officers liability insurance, which shall cover the directors and officers of each of Parent and Borrower, in an amount equal to or in excess of Two Million Five Hundred Dollars ($2,500,000).

7.17 Bailee Acknowledgments. As soon as practicable after the date hereof (but in any event within thirty (30) days after the Closing Date), the Credit Parties shall deliver to St. Cloud an acknowledgement in substantially the form attached hereto as Schedule 7.17, from each bailee or warehouseman identified on Schedule II to the Pledge and Security Agreement.

7.17 Calculation for Warrants. As soon as practicable after the date hereof, the Credit Parties shall deliver to Purchasers a statement setting forth the book value per share of the Common Stock on the Closing Date, which shall include the basis for such calculation.

8. SBIC REGULATORY PROVISIONS

8.1 Use of Proceeds.

8.1.1 At such times as St. Cloud reasonably requests, Borrower shall deliver to s St. Cloud a written statement certified by Borrower’s chief financial officer describing in reasonable detail the use of the proceeds from the transactions contemplated by the Loan Documents by Borrower. In addition to any other rights granted hereunder, Borrower shall grant St. Cloud and the SBA access to Borrower’s books and records for the purpose of verifying the use of such proceeds and verifying the certifications made by Borrower in SBA forms Nos. 480, 652 and 1031, delivered pursuant to Section 3.1.11 and for the purpose of determining whether the principal business activity of Borrower and the other Credit Parties continues to constitute an eligible business activity (within the meaning of the SBIC Regulations).

8.1.2 Borrower shall not, and no other Credit Party shall, use any proceeds from the transactions contemplated by the Loan Documents substantially for a foreign operation, and no more than forty-nine percent (49%) of the employees or tangible assets of the Credit Parties will be outside the United States (unless Borrower can show to the SBA’s satisfaction, that proceeds from the transactions contemplated by the Loan Documents will be used for a specific domestic purpose).

8.1.3 Borrower shall not, and no other Credit Party shall, use any proceeds from the transactions contemplated by the Loan Documents for any purpose contrary to public interest (including, but not limited to, activities which are in violation of law) or inconsistent with free enterprise, in each case, within the meaning of 13 C.F.R. Section 107.720.

8.2 Regulatory Violation. Upon the occurrence of a Regulatory Violation or in the event that St. Cloud determines in its good faith judgment that a Regulatory Violation has occurred, in addition to any other rights and remedies to which it may be entitled as a holder of the St. Cloud Securities and any Underlying Common Stock (whether under this Agreement, the instruments evidencing the St. Cloud Securities, the other Loan Documents or otherwise), subject to applicable law, St. Cloud shall have the right to the extent required under the SBIC Regulations to demand the immediate repurchase of all of the outstanding St. Cloud Securities and Underlying Common Stock owned by St. Cloud at a price equal to the purchase price paid for such St. Cloud Securities and Underlying Common Stock, plus all accrued interest on the St. Cloud Note, by delivering written notice of such demand to Borrower. Borrower shall pay the purchase price for such St. Cloud Securities and Underlying Common Stock by a cashier’s or certified check or by wire transfer of immediately available funds to St. Cloud within thirty (30) days after Borrower’s receipt of the demand notice, and upon such payment, St. Cloud shall deliver the certificates evidencing the St. Cloud Securities and Underlying Common Stock to be repurchased duly endorsed for transfer or accompanied by duly executed forms of assignment.

8.3 Regulatory Compliance Cooperation. In the event that St. Cloud believes that it has a Regulatory Problem, St. Cloud shall have the right to transfer the St. Cloud

Securities and Underlying Common Stock without regard to any restrictions on transfer set forth in this Agreement or any of the Loan Documents other than the restrictions under applicable securities law, and the Credit Parties shall take all such actions as are reasonably requested by St. Cloud in order to (i) effectuate and facilitate any transfer by St. Cloud of the St. Cloud Securities and Underlying Common Stock then held by St. Cloud to any Person designated by St. Cloud; (ii) permit St. Cloud (or any of its Affiliates) to exchange all or any portion of the Common Stock then held by it on a share-for-share basis for shares of a series of nonvoting stock in Parent, which nonvoting stock shall be identical in all respects to Common Stock, except that such stock shall be nonvoting and shall be convertible into Common Stock on such terms as are requested by St. Cloud in light of regulatory considerations then prevailing; and (iii) amend this Agreement, the Articles of Incorporation and Bylaws of Parent, and related agreements and instruments to effectuate and reflect the foregoing.

8.4 Economic Impact Information. Promptly after the end of each calendar year (but in any event prior to February 28 of the succeeding calendar year), Borrower shall deliver to St. Cloud a written assessment of the economic impact of St. Cloud’s investment, specifying the full-time equivalent jobs created or retained in connection with the investment, the impact of the investment on the businesses of the Credit Parties and on Taxes paid by the Credit Parties and their employees.

8.5 Sales of Securities to St. Cloud. Without St. Cloud’s consent, Parent will not issue securities to St. Cloud in the future if such issuance would cause to St. Cloud to be deemed to be a member of an “Investor Group” in “Control” of Parent (as such terms are defined in 13 C.F.R. Section 107.865).

8.6 Business Activity. For a period of one (1) year following the date hereof, neither Borrower nor any other Credit Party will change its business activity if such change would render Borrower or any other Credit Party ineligible to receive financial assistance from St. Cloud (within the meanings of 13 C.F.R. Sections 107.720 and 107.760(b)).

8.7 Number of Shareholders. Parent will notify St. Cloud from time to time when the number of its Shareholders decreases below fifty (50).

8.8 Compliance With Non-Discrimination Requirements. Each Credit Party shall comply at all times with the non-discrimination requirements of 13 C.F.R. Parts 112, 113 and 117.

9. MISCELLANEOUS.

9.1 Agreement to Maintain Confidentiality. Purchasers and the Credit Parties agree that, except with the prior written permission of the other party, they will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Purchasers and the Credit Parties to maintain in confidence, any written, oral, or other confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder, unless (a) such information is already known to such party or is lawfully disclosed to such party by a third party that, to the knowledge of such party receiving such

information, is not bound by a confidentiality agreement, or other contractual, legal or fiduciary obligation of confidentiality, or (b) such information is or becomes generally available to the public other than as a result of a breach of this Section 9.1, or (c) such information is independently developed by such party, or (d) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the transactions contemplated by this Agreement, or (e) the furnishing or use of such information is required by or necessary or appropriate in connection with legal proceedings. Notwithstanding the foregoing, each Purchaser may disclose such confidential information to actual or potential partners or members of such Purchaser; provided that the Purchaser disclosing such confidential information shall be liable for any breach of this Section 9.1 by any such partner or member.

9.1 Expenses. Borrower agrees to pay and save Purchasers harmless against liability for the payment of the Transaction Expenses.

9.2 Remedies. Any Person having any rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover any sums allowable under Section 7.10 or any damages by reason of any breach of any provision of this Agreement, and to exercise all other rights granted by law or equity, which rights may be exercised cumulatively and not alternatively. The prevailing party in any such dispute shall receive its reasonable attorneys’ fees and costs.

9.3 Consent to Amendments. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended and the Credit Parties may take any action herein prohibited, or omit to perform any act herein required to be performed by them, with and only with the written consent of St. Cloud. Borrower agrees pay any fees incurred in connection with any consent, waiver or amendment of any Loan Document. No course of dealing between any Credit Party and the holder of any Securities or any delay in exercising any rights hereunder will operate as a waiver of any rights of any such holders.

9.4 Survival of Representations and Warranties. All representations and warranties contained herein or made in writing by any party in connection herewith will survive the execution and delivery of this Agreement for a period of eighteen (18) months, except with respect to the representations and warranties set forth in Section 5.21 and Section 5.23 which shall survive until thirty (30) days following the expiration of the applicable statute of limitations (with extensions) with respect to the matters addressed in such sections, regardless of any investigation made by any Purchaser or on its behalf.

9.5 Successors and Assigns. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not.

9.6 Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

9.7 Counterparts. This Agreement may be executed in two or more counterparts any one of which need not contain the signatures of more than one party, but all such counterparts when taken together will constitute one and the same Agreement.

9.8 Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

9.9 Notices. Any notice, demand or other communication required or permitted under the terms of this Agreement shall be in writing and shall be made by telegram, telex or electronic transmitter or certified or registered mail, return receipt requested, and shall be deemed to be received by the addressee on the date delivery is confirmed, if sent by Fed Ex, Express Mail, or other similar overnight delivery service, the date of electronic confirmation of receipt, if sent by telegram, telex, telecopy or electronic transmitter, and three (3) business days after mailing, if sent by certified or registered mail, with postage prepaid, and properly addressed. Notices shall be addressed as provided below:

If to St. Cloud to:		St. Cloud Capital Partners, LP
		10866 Wilshire Blvd., Suite 1450
		Los Angeles, California 90024
		Facsimile: (310) 475-0550
		Attention: Robert Lautz

With a copy to:		Latham & Watkins LLP
		633 West Fifth Street, Suite 4000
		Los Angeles, California 90071
		Facsimile: (213) 891-8763
		Attention: W. Alex Voxman, Esq.

If to Bedford I:		Bedford Oak Capital, L.P.
		100 S. Bedford Road
		Mt. Kisco, New York 10549
		Facsimile: (914) 242-5798
		Attention: Harvey P. Eisen

If to Bedford II:		Bedford Oak Offshore, Ltd.
		100 S. Bedford Road
		Mt. Kisco, New York 10549
		Facsimile: (914) 242-5798
		Attention: Harvey P. Eisen

If to Aspen:		Aspen Ventures LLC
		210 East 39th Street
		New York, New York 10016
		Facsimile: (212) 679-3816
		Attention: Fred B. Tarter


If to any Credit Party:		Prolong Super Lubricants, Inc.
		6 Thomas
		Irvine, California 92618
		Facsimile: (949) 587-2707
		Attention: Chief Executive Officer

With a copy to:		Stradling Yocca Carlson & Rauth
		660 Newport Center Drive, Suite 1600
		Newport Beach, California 92660
		Facsimile: (949) 725-4100
		Attention: Michael E. Flynn, Esq.

Any party may change its address for this purpose by giving a written notice thereof as herein provided.

9.10 Governing Law. The validity, meaning and effect of this Agreement shall be determined in accordance with the laws of California applicable to contracts made and to be performed in that state.

9.11 No Strict Construction. The Credit Parties hereby waive the benefit of any statute or rule of law or judicial decision, including without limitation, California Civil Code § 1654, which would otherwise require that the provisions of this Agreement be construed or interpreted most strongly against the party responsible for the drafting thereof.

9.12 Schedules. All schedules and the exhibit are an integral part of this Agreement.

9.13 Final Agreement. This Agreement, together with the other Loan Documents, constitutes the final agreement of the parties concerning the matters herein, and supersedes all prior and contemporaneous agreements and understandings.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties have executed this Securities Purchase Agreement to be effective as of the date first above written.

PARENT:		ST. CLOUD:

PROLONG INTERNATIONAL CORPORATION		ST. CLOUD CAPITAL PARTNERS, L.P.

By:	/s/ Elton Alderman	By:	SCCP, LLC
	Name: Elton Alderman	Its:	General Partner
	Title: President and Chief Executive Officer
			By: /s/ Marshall S. Geller
			Name: Marshall S. Geller Its: Senior Managing Member

BORROWER:

PROLONG SUPER LUBRICANTS, INC.

By:	/s/ Elton Alderman
	Name: Elton Alderman Title: President and Chief Executive Officer

CAYMAN SUB I:

PROLONG INTERNATIONAL HOLDINGS LTD.

By:	/s/ Elton Alderman
	Name: Elton Alderman
	Title: President and Chief Executive Officer

CAYMAN SUB II:

PROLONG INTERNATIONAL LTD.

By:	/s/ Elton Alderman
	Name: Elton Alderman Title: President and Chief Executive Officer

S-1

BEDFORD OAK CAPITAL, L.P.

By:		/s/ Harvey P. Eisen
		Name: Harvey P. Eisen Title: Chairman and Managing Partner

BEDFORD OAK OFFSHORE, LTD.

By:		/s/ Harvey P. Eisen
		Name: Harvey P. Eisen Title: Chairman and Managing Partner

ASPEN VENTURES LLC

By:		/s/ Fred B. Tarter
		Name: Fred B. Tarter Title: President

S-2

EX-10.2 4 dex102.htm INVESTORS' RIGHTS AGREEMENT, DATED 11/24/03 Investors' Rights Agreement, dated 11/24/03

EXHIBIT 10.2

Execution Copy

INVESTORS’ RIGHTS AGREEMENT

This INVESTORS’ RIGHTS AGREEMENT (this “Agreement”) is made as of the 24th day of November, 2003, by and among PROLONG INTERNATIONAL CORPORATION, a Nevada corporation (the “Company”), ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited partnership (the “St. Cloud”), BEDFORD OAK CAPITAL, L.P., a Delaware limited partnership (“Bedford I”), BEDFORD OAK OFFSHORE, LTD., a Cayman Island company (“Bedford II”), ASPEN VENTURES LLC, a New York limited liability company (“Aspen”), and collectively with Bedford I and Bedford II, the “Other Purchasers”), the individuals identified on Exhibit A attached hereto (collectively, “Executives” or individually without distinction as an “Executive”), and each other person who becomes a Holder (as defined below) hereunder. St. Cloud and the Other Purchasers are at times collectively referred to herein as “Investors” or individually without distinction as an “Investor”. Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned thereto in the Securities Purchase Agreement (as defined below).

RECITALS

WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as of even date hereof (the “Securities Purchase Agreement”), by and among the Company, Prolong Super Lubricants, Inc., a Nevada corporation (“Prolong Sub”), Prolong International Holdings Ltd., a Cayman Islands company, Prolong International Ltd., a Cayman Islands company, and Investors, each Investor is purchasing a Secured Promissory Note of Prolong Sub and a Common Stock Purchase Warrant (each, a “Warrant”), representing the right to acquire certain shares of the common stock, par value $0.001 per share, of the Company (the “Common Stock”);

WHEREAS, the Company’s shares of Common Stock are registered with the Securities and Exchange Commission (the “SEC”) and quoted on the American Stock Exchange;

WHEREAS, to induce Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide to Investors certain rights to register shares of Common Stock issuable upon exercise of the Warrants, preemptive rights with respect to certain issuances by the Company of its securities and co-sale rights with respect to certain sales by Executives; and

WHEREAS, the execution and delivery of this Agreement by the parties hereto is a condition to the closing of the transactions contemplated by the Securities Purchase Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein and in the Securities Purchase Agreement, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1. Registration Rights.

1.1 Definitions. For purposes of this Section 1:

(a) The terms “register,” “registered,” and “registration” refer to a registration effected by preparing and filing one or more Registration Statements or similar document in compliance with the Securities Act of 1933, as amended (the “Securities Act”), and the declaration or ordering of effectiveness of such Registration Statement or document;

(b) The term “Registrable Securities” refers to the (i) Common Stock issued or issuable upon exercise of the Warrants and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization; provided that any securities deemed Registrable Securities in accordance herewith shall cease to be Registrable Securities (A) upon the sale of such Securities to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) upon the sale of such Securities in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale;

(c) The number of shares of “Registrable Securities then outstanding” shall equal the number of shares of Common Stock outstanding which are Registrable Securities, plus the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities;

(d) The term “Registration Statement” means a registration statement on Form S-1 or Form S-3 or any similar or successor form then appropriate for or applicable to the offer and sale of the Registrable Securities and filed under the Securities Act;

(e) The term “Holder” means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.8 of this Agreement; and

(f) The term “Existing Registration Rights Agreements” means that certain Registration Rights Agreement, dated as of March 2000, by and between the Company and ABQ Dolphin, L.P., that certain Registration Rights Agreement, dated as of November 13, 2002, by and between the Company and the persons or entities party thereto and that certain Registration Rights Agreement, dated as of June 5, 2003, by and between the Company and the persons or entities party thereto.

Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Securities Purchase Agreement.

1.2 Registration.

(a) Right to Include Registrable Stock. If the Company proposes to register any of its securities under the Securities Act in connection with the public offering of

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such securities solely for cash (other than a registration on Form S-4 or Form S-8, or any successor or similar forms), it will each such time promptly (but not later than 30 days before the anticipated date of filing such Registration Statement) give written notice to each Holder. Upon the written request of any of the Holders made within fifteen (15) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holders and the intended method of distribution thereof), the Company will effect the registration under the Securities Act of all Registrable Securities which the Company has been requested to register by any of the Holders in accordance with the intended methods of distribution specified in such request; provided that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the Registration Statement filed in connection with such registration, the Company determines for any reason not to proceed with such registration, the Company may, upon giving written notice of such determination to the Holders, be relieved of its obligation to register any Registrable Securities in connection with such registration and (ii) in case of a determination by the Company to delay registration of its securities, the Company will be permitted to delay the registration of Registrable Securities for the same period as the delay in registering such other securities; provided, however, that the provisions of this Section 1.2(a) will not be deemed to limit or otherwise restrict the rights of the Holders under Section 1.2(b).

(b) Mandatory Registration. In addition to the foregoing, the Company shall prepare and file with the SEC prior to February 24, 2004 a Registration Statement or Registration Statements (as necessary) covering all of the Holders’ Registrable Securities. The Company shall cause such Registration Statement to be declared effective by the SEC no later than April 24, 2004.

(c) Priority. If the managing underwriter for a registration (other than with respect to a Registration Statement filed pursuant to Section 1.2(b) above) involving an underwritten offering advises the Company in writing that, in its opinion, the number of securities of the Company (including Registrable Securities) requested to be included in such registration by the holders thereof exceeds the number of securities of the Company (the “Sale Number”) which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company will include (i) first, all securities of the Company that the Company proposes to register for its own account, (ii) second, to the extent that the number of securities to be included by the Company for its own account is less than the Sale Number, the securities subject to the Existing Registration Rights Agreements and (iii) third, a number of the Registrable Securities (the “Adjusted Allocation”) equal to the difference between (A) the Sale Number and (B) the securities proposed to be sold by the Company and the securities subject to the Existing Registration Rights Agreements. The Adjusted Allocation shall be allocated among the selling Holders pro rata based on the number of Registrable Securities initially sought to be registered by each selling Holder. For purposes of the preceding sentence, for any selling Holder which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling Holder,” and any pro-rata reduction with respect to such “selling Holder” shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such “selling Holder,” as defined in this sentence.

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(d) Legal Counsel. The Holders shall have the right to select one legal counsel to review and oversee any offering pursuant to this Section 1.2 (the “Legal Counsel”). The Company shall cooperate with the Legal Counsel in performing the Company’s obligations under the terms of this Agreement.

(e) Ineligibility of Form S-3. In the event that Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form and (ii) undertake to register the resale of the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall use its best efforts to maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

(f) Sufficient Number of Shares Registered. Without limiting the Company’s obligation to cover all the outstanding Registrable Securities in the Registration Statement contemplated by Section 1.2(b), in the event the number of shares available under a Registration Statement filed pursuant to Section 1.2(b) is for any reason insufficient to cover all of the Registrable Securities which such Registration Statement is required to cover, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover at least 100% of the Registrable Securities (based on the market price of the Common Stock on the trading day immediately preceding the date of filing of such amendment or new Registration Statement), in each case, as soon as reasonably practicable, but in any event not later than thirty (30) business days after the necessity therefor arises. The Company shall use its reasonable best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed “insufficient to cover all of the Registrable Securities” if the number of Registrable Securities issued or issuable upon exercise of the Warrants covered by such Registration Statement is greater than the number of shares of Common Stock available for resale under the Registration Statement to cover shares issued or issuable upon exercise of the Warrants.

1.3 Obligations of the Company. Whenever required under Section 1.2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) Prepare and file with the SEC a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective;

(b) Keep the Registration Statement contemplated by Section 1.2(b) effective until April 24, 2007;

(c) Prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement;

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(d) Permit each Holder of Registrable Securities covered by such Registration Statement to review and comment upon the Registration Statements and all amendments and supplements to the Registration Statements (except for Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any similar or successor report and registration statements on Form S-8) at least five (5) business days prior to their filing with the SEC and not file any document containing information relating to a Holder to which such Holder reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement under Section 1.2(b) or any amendment or supplement thereto without the prior approval of St. Cloud, which consent shall not be unreasonably withheld. The Company shall furnish to each Holder of Registrable Securities covered by such Registration Statement, without charge, (i) any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to any Registration Statement, (ii) promptly after the same is prepared and filed with the SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial statements and schedules and all exhibits and (iii) upon the effectiveness of any Registration Statement, one copy of the prospectus included in such Registration Statement and all amendments and supplements thereto.

(e) Furnish to the Holders of Registrable Securities covered by such Registration Statement such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them;

(f) Use its best efforts to register and qualify the securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders of Registrable Securities covered by such Registration Statement; provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;

(g) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement;

(h) Notify each Holder of Registrable Securities covered by such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Upon the occurrence of any event contemplated by this Section 1.3(h), prepare a supplement or post-effective amendment to each Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

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(i) Prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, however, if such an order or suspension is issued, the Company shall use its best efforts to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Holder who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose;

(j) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; and

(k) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

1.4 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under Section 1.2(a) to include any of the Holders’ securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company.

1.5 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to the terms of this Agreement, including, without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, qualification or compliance will be borne by the Company. In addition, the Company shall reimburse the Holders for the reasonable fees and disbursements of Legal Counsel in connection with registrations, filings or qualifications pursuant to Section 1.2 or Section 1.3 of this Agreement, which shall not exceed $10,000 in connection with a Registration Statement.

1.6 Indemnification. In the event any Registrable Securities are included in a Registration Statement under Section 1.2:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon

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any of the following statements, omissions or violations (collectively a “Violation”): (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 1.6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to any Holder, underwriter or controlling person for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person.

(b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such Registration Statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this Section 1.6(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 1.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further that in no event shall any indemnity under this Section 1.6(b) exceed the net proceeds from the offering received by such Holder.

(c) Promptly after receipt by an indemnified party under this Section 1.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which

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may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if there may be one or more legal defenses available to such indemnified party or parties that are different from or additional to those available to the indemnifying party. The failure to deliver written notice to the indemnifying party within a reasonable period of time after the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section 1.6, except to the extent such indemnifying party is materially prejudiced. The omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.6.

(d) If the indemnification provided for in this Section 1.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; provided that in no event shall any contribution by a Holder under this Section 1.6(d) exceed the net proceeds from the offering received by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in an underwriting agreement by and among the Company, the managing underwriter of such offering, and each Holder participating in such underwriting, entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

(f) The obligations of the Company and Holders under this Section 1.6 shall survive the completion of any offering of Registrable Securities in a Registration Statement under Section 1.2, and otherwise.

1.7 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:

(a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times;

(b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

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(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form.

1.8 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to Section 1.2 may be assigned by a Holder to a transferee or assignee (or subsequent transferee or assignee) (each, an “Investor Assignee”); provided that the Holders shall not be permitted to transfer such rights to more than a total of five (5) transferees or assignees (including any subsequent transferees or assignees) pursuant to this Section 1.8; provided further that the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; provided further that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act; provided further such Holder does not knowingly transfer the Registrable Securities to any Person who is a competitor of the Company; provided further that any such transferee or assignee agrees to become bound by the terms of this Agreement and such transferee shall be deemed an “Investor” and a “Holder” hereof. For the purposes of determining the number of transferees or assignees, the holdings of transferees and assignees of (a) a partnership who are partners (including limited partners) or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) or (b) a limited liability company who are members or former members of such limited liability company (including spouses and ancestors, lineal descendants and siblings of such members or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership or limited liability company, as applicable (and all such holdings shall be considered to be held by a single Holder for such purpose); provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 1.2.

1.9 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder’s Registrable Securities.

1.10 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of sixty-six and two-third percent (66²/3%) or more of the outstanding Registrable Securities,

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enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2(b) hereof, (b) to include such securities in any registration filed under Section 1.2(a) hereof unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included, or (c) to make a demand registration which could result in such registration statement being declared effective prior to the effective date of the Registration Statement filed pursuant to Section 1.2(b) hereof.

1.11 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 1.2 after such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares during a three (3)-month period without registration.

2. Preemptive Rights.

2.1 Preemptive Rights. Subject to the terms and conditions specified in this Section 2.1, the Company hereby grants to each Investor a right to participate in future issuances by the Company of its Shares (as hereinafter defined).

Each time the Company proposes to offer or sell any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock (“Shares”), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions:

(a) The Company shall deliver a notice by certified mail (a “Notice”) to each Investor stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered or sold, and (iii) the price and terms, if any, upon which it proposes to offer or sell such Shares.

(b) Within twenty (20) calendar days after delivery of the Notice, each Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the sum of the number of shares of Common Stock issued upon exercise of the Warrants plus the number of shares of Common Stock issuable upon exercise of the Warrants (collectively, the “Underlying Common Stock”), in each case, then held by such Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all Warrants).

(c) The Company may, during the sixty (60) day period following the expiration of the period provided in Section 2.1(b) hereof, offer the remaining unsubscribed portion of the Shares to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within ninety (90) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be sold unless first reoffered to each Investor in accordance herewith.

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(d) The preemptive rights in this Section 2.1 shall not be applicable (i) to the issuance or sale by the Company of any of its capital stock pursuant to any employee benefit plan (including any option plan, restricted stock plan, stock purchase plan or similar plans or arrangements), (ii) to or after consummation of any underwritten public offering or any other public offering by the Company in which shares are offered at market price, (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) to the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or similar transactions, which issuances are primarily for other than equity financing purposes, or (vi) to any issuance in connection with a stock split, reverse stock split, reclassification, recapitalization, consolidation, merger or similar event.

(e) The rights under this Section 2.1 may be assigned by any Investor (or assignee thereof) to an Investor Assignee.

2.2 Termination of Section 2 . The agreements and covenants contained in this Section 2 shall terminate on the later to occur of: (a) the date on which all principal and interest outstanding under the Notes are paid in full by the Company, or (b) the date on which St. Cloud and its affiliates cease to beneficially hold shares of Common Stock or Warrants representing, in the aggregate, fifty percent (50%) of the total number of shares of Underlying Common Stock originally issued to St. Cloud.

3. Co-Sale Rights.

If any Executive proposes to sell or transfer any shares of Common Stock (“Shares”) to any person other than a Permitted Transferee (as defined below), in one or more related transactions (other than a transfer pursuant to an effective registration statement and other than transfers under Rule 144 promulgated under the Securities Act) such Executive shall provide each Investor with written notice of the proposed transfer stating the terms and conditions of such sale or transfer including, without limitation, the number of Shares proposed to be sold or transferred, the nature of such sale or transfer and the consideration to be paid and the name and address of each prospective purchaser or transferee (the “Notice”). Each Investor shall have the right (the “Co-Sale Right”), exercisable upon written notice to such Executive within ten (10) business days after receipt of the Notice to participate in such Executive’s sale of Shares pursuant to the specified terms and conditions set forth in the Notice. To the extent an Investor exercises such Co-Sale Right in accordance with the terms and conditions set forth below, the number of Shares which such Executive may sell or transfer pursuant to the proposed sale or transfer described in the Notice shall be correspondingly reduced. The Co-Sale Right of each Investor shall be subject to the following terms and conditions:

3.1 Calculation of Shares. Each Investor may sell all or any part of its shares of Underlying Common Stock equal to the product obtained by multiplying (i) the aggregate number of Shares covered by the Notice by (ii) a fraction, the numerator of which is the total number of shares of Underlying Common Stock owned by such Investor at the time, and the denominator of which is the sum of (A) the total number of shares of Underlying Common Stock

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owned by Investors participating in such sale plus (B) the total number of shares of Common Stock at the time owned by such Executive, including shares transferred by such Executive to Permitted Transferees in accordance with this Agreement.

3.2 Delivery of Certificates. Each Investor may effect its participation in the sale by delivering to such Executive for transfer to the prospective purchaser one or more certificates, properly endorsed for transfer, which represent the securities which such Investor elects to sell.

3.3 Transfer. The stock certificate or certificates which such Investor delivers to such Executive pursuant to Section 3.2 shall be delivered by such Executive to the prospective purchaser in consummation of the sale pursuant to the terms and conditions specified in the Notice, and such Executive shall promptly thereafter remit to such Investor that portion of the sale proceeds to which such Investor is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase securities from an Investor exercising its Co-Sale Right hereunder, such Executive shall not sell to such prospective purchaser or purchasers any Shares unless and until, simultaneously with such sale, such Executive shall purchase such securities from such Investor for the same consideration and on the same terms and conditions as the proposed transfer described in the Notice (which terms and conditions shall be no less favorable than those governing the sale to the purchaser by such Executive).

3.4 Permitted Transfers. The provisions of Section 3 of this Agreement shall not pertain or apply to:

(a) Any bona fide gift;

(b) Any transfer pursuant to applicable laws of descent and distribution, to the spouse or any lineal descendant (including by adoption) of such Executive, or

(c) Any transfer to a trust of which such Executive is the trustee and which is established for estate planning purposes;

provided that, in each case, that (i) such Executive shall inform Investors of such transfer or gift prior to effecting it, and (ii) the transferee or donee (each a “Permitted Transferee”) shall furnish Investors with a written agreement to be bound by and comply with the provisions of this Section 3 applicable to such Executive.

3.5 Assignment. The rights under this Section 3 may be assigned by any Investor (or assignee thereof) to an Investor Assignee.

3.6 Termination of Section 3. The agreements and covenants contained in this Section 3 shall terminate on the date on which all principal and interest outstanding under the Notes is paid in full by the Company; provided that if the closing price per share of Common Stock, as reported by the American Stock Exchange or any other exchange upon which the Company’s stock is then listed for any ten (10) consecutive trading day period after the date the Notes have been repaid in full does not equal or exceed $1.00 (as adjusted for stock splits, reverse stock splits, reclassifications, recapitalizations, consolidations, mergers or similar events

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occurring after the date hereof), then the agreements and covenants contained in this Section 3 shall not terminate until the date which St. Cloud and its affiliates cease to beneficially hold shares of Common Stock or Warrants representing, in the aggregate, fifty percent (50%) of the total number of shares of Underlying Common Stock originally issued to St. Cloud.

4. Board Representation and Observer Rights; Voting Agreement.

4.1 Board Representation. The Company shall have and maintain a board of directors consisting of no more than seven directors, and shall cause Prolong Sub to maintain a board of directors consisting of no more than seven directors. St. Cloud shall have the right, but not the obligation, to designate two members (each such person shall be referred to herein as a “St. Cloud Director”) to the board of directors of each of the Company and Prolong Sub (together, the “Boards”). Upon the request of St. Cloud, the Company agrees to, and shall cause Prolong Sub to, appoint two members of each of the Boards as St. Cloud Directors, each of whom shall be reasonably acceptable to the applicable Board. If at any time, a Board does not for any reason include two St. Cloud Directors (including by virtue of the suspension, removal, retirement, resignation or death of any St. Cloud Director), then the Company shall, at the request of the St. Cloud, use its best efforts to cause one or two designees of St. Cloud, each of whom shall be reasonably acceptable to the applicable Board, to be nominated to serve as a member of such Board so that such Board will include two St. Cloud Directors. Subject to applicable law, the Company shall not, and shall cause Prolong Sub not to, replace any St. Cloud Director without the prior written consent of St. Cloud. In the event the Company or Prolong Sub enters into indemnification agreements with any of its directors, the Company shall enter, and shall cause Prolong Sub to enter, into an indemnification agreement with each St. Cloud Director and provide indemnification to each St. Cloud Director on the same terms and conditions as is provided to the other directors of the Company or Prolong Sub, as applicable. The Company shall maintain officers and directors and officers liability insurance in an amount equal to or in excess of Two Million Five Hundred Dollars ($2,500,000). St. Cloud’s designees shall initially be Marshall Geller and Robert Lautz, each of whom shall be deemed reasonably acceptable to the Board.

4.2 Observer Right. At the election of the St. Cloud, St. Cloud may designate an observer (any such person shall be referred to herein as an “St. Cloud Observer”) in lieu of, designating a St. Cloud Director. The St. Cloud Observer shall have the right to attend as an observer all meetings of each of the Boards and all committees thereof, and shall be entitled to receive all written materials and other information (including copies of meeting minutes) given to directors in connection with such meetings at the same time such materials and information are given to the directors. If the Company or Prolong Sub proposes to take any action by written consent in lieu of a meeting of its board of directors or of any committee thereof, the Company shall give, or shall cause Prolong Sub to give, written notice thereof to the St. Cloud Observer prior to the effective date of such consent describing in reasonable detail the nature and substance of such action.

4.3 Notice of Meetings. The Company shall provide, and shall cause Prolong Sub to provide, each St. Cloud Director and each St. Cloud Observer, if any, adequate written notice of each meeting of each of the Boards (which shall be held at least quarterly) and each committee thereof at the same time and in the same manner as notice is given to all other directors of the Company or Prolong Sub, as applicable, in accordance with the Company’s or Prolong Sub’s Bylaws, as applicable.

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4.4 Fees and Reimbursement of Costs. Each St. Cloud Director shall be entitled to a fee and/or other compensation equal to the fee and/or other compensation paid by the Company, if any, to any outside Board member. The Company shall pay the reasonable out-of-pocket expenses of each St. Cloud Director and each St. Cloud Observer, if any, incurred in connection with attending such board and committee meetings.

4.5 Voting. Each of the Executives agree that all shares of capital stock of the Company held by them or their affiliates that are entitled to vote in the election of directors generally (the “Voting Shares”) shall be voted at each annual and special meeting of the shareholders of the Company at which, and each action by written consent of the shareholders of the Company by which, members of the Board are to be elected, to elect the St. Cloud Directors to the Board. In the event that any Executive shall fail to vote the Voting Shares it is entitled to vote for the election of the St. Cloud Directors, such Executive shall be deemed immediately upon the existence of such a breach to have granted to St. Cloud a proxy to its Voting Shares to ensure that such shares will be voted for the St. Cloud Directors. Each Executive acknowledges that each proxy granted hereby, including any successive proxy if need be, is given to secure the performance of a duty, is coupled with an interest, and shall be irrevocable until the duty is performed.

4.6 Assignment. In the event that St. Cloud or its affiliates transfers shares of Common Stock or Warrants representing, in the aggregate, fifty percent (50%) of the total number of shares of Underlying Common Stock originally issued to St. Cloud (assuming exercise of the Warrant) to any Person, St. Cloud may assign its rights under this Section 4 to such Person.

4.7 Termination of Section 4 . The agreements and covenants contained in this Section 4 shall terminate on the later to occur of: (a) the date on which all principal and interest outstanding under the Note is paid in full by the Company, or (b) the date on which St. Cloud and its affiliates cease to beneficially hold shares of Common Stock or Warrants representing, in the aggregate, fifty percent (50%) of the total number of shares of Underlying Common Stock originally issued to St. Cloud .

5. Lock-Up Agreement

Each Executive agrees that it shall not, without the prior written consent of St. Cloud, (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, securities convertible into or exercisable or exchangeable for Common Stock that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the SEC), or (b) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any shares of Common Stock; provided that this Section 5 shall not apply to transfers to Permitted Transferees so long as the

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Permitted Transferee executes an agreement stating that the Permitted Transferee is receiving and holding such the shares of Common Stock transferred to it subject to the provisions of this Section 5 and that there shall be no further transfer of such shares of Common Stock except in accordance with this Section 5. The provisions of Section 5 shall terminate on the date that is the earlier to occur of (i) 270 days following the date that the Registration Statement contemplated by Section 1.2(b) is declared effective by the SEC and (ii) the date that the average closing price per share of Common Stock, as reported by the American Stock Exchange or any other exchange upon which the Company’s stock is then listed, for the prior ten (10) consecutive trading days exceeds $0.75 (as adjusted for stock splits, reverse stock splits, reclassifications, recapitalizations, consolidations, mergers or similar events occurring after the date hereof).

6. Miscellaneous.

6.1 Further Assurances. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper, or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its best efforts to obtain all necessary waivers, consents, and approvals, and effecting all necessary registrations and filings.

6.2 Transfer; Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

6.3 Governing Law. The validity, meaning and effect of this Agreement shall be determined in accordance with the laws of California applicable to contracts made and to be performed in that state.

6.4 Notices. Any notice, demand or other communication required or permitted under the terms of this Agreement shall be in writing and shall be made by telegram, telex or electronic transmitter or certified or registered mail, return receipt requested, and shall be deemed to be received by the addressee on the date delivery is confirmed, if sent by Fed Ex, Express Mail, or other similar overnight delivery service, the date of electronic confirmation of receipt, if sent by telegram, telex, telecopy or electronic transmitter, and three (3) business days after mailing, if sent by certified or registered mail, with postage prepaid, and properly addressed. Notices shall be addressed as provided below:

If to St. Cloud:		St. Cloud Capital Partners, LP
		10866 Wilshire Blvd., Suite 1450
		Los Angeles, California 90024
		Facsimile: (310) 475-0550
		Attention: Robert Lautz

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with copies to:		Latham & Watkins LLP
		633 West Fifth Street, Suite 4000
		Los Angeles, California 90071
		Facsimile: (213) 891-8763
		Attention: W. Alex Voxman, Esq.

If to Bedford I:		Bedford Oak Capital, L.P.
		100 S. Bedford Road
		Mt. Kisco, New York 10549
		Facsimile: (914) 242-5798
		Attention: Harvey P. Eisen

If to Bedford II:		Bedford Oak Offshore, Ltd.
		100 S. Bedford Road
		Mt. Kisco, New York 10549
		Facsimile: (914) 242-5798
		Attention: Harvey P. Eisen

If to Aspen:		Aspen Ventures LLC
		210 East 39th Street
		New York, New York 10016
		Facsimile: (212) 679-3816
		Attention: Fred B. Tarter

If to the Company:		Prolong Super Lubricants, Inc.
		6 Thomas
		Irvine, California 92618
		Facsimile: (949) 587-2707
		Attention: Chief Executive Officer

with copies to:		Stradling Yocca Carlson & Rauth
		660 Newport Center Drive, Suite 1600
		Newport Beach, California 92660
		Facsimile: (949) 725-4100
		Attention: Michael E. Flynn, Esq.

6.5 Amendments and Waivers. Any term of this Agreement may be amended or waived only with the written consent of the Company and the holders of sixty-six and two-third percent (66²/3%) of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 6.5 shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company; provided that any amendment that treats any Holder in a materially adverse manner that is different than any other holder will require the separate approval of such Holder.

6.6 Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

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6.7 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

6.8 Entire Agreement. This Agreement, the Securities Purchase Agreement and each of the other Loan Documents collectively constitute the entire agreement among the parties with respect to the transactions contemplated hereby, thereby and related matters and collectively supersede any prior negotiations, understandings or agreements with respect hereto or thereto. The representations, warranties, covenants and agreements set forth in this Agreement, the Securities Purchase Agreement and any other Loan Documents (a) shall survive the Closing, (b) shall terminate only in accordance with their respective terms and (c) are the only representations, warranties, covenants and agreements among the parties.

6.9 Counterparts. This Agreement may be executed in two or more counterparts any one of which need not contain the signatures of more than one party, but all such counterparts when taken together will constitute one and the same Agreement.

6.10 Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

6.11 Aggregation of Stock. All shares of Common Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

6.12 No Strict Construction. The Company hereby waives the benefit of any statute or rule of law or judicial decision, including without limitation, California Civil Code § 1654, which would otherwise require that the provisions of this Agreement be construed or interpreted most strongly against the party responsible for the drafting thereof.

[SIGNATURE PAGES FOLLOWS]

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The parties have executed this Investors’ Rights Agreement as of the date first set forth above.

THE COMPANY:

PROLONG INTERNATIONAL CORPORATION

By:		/s/ Elton Alderman
		Name: Elton Alderman Title: President and Chief Executive Officer

EXECUTIVES:

ELTON ALDERMAN

/s/ Elton Alderman

THOMAS BILLSTEIN

/s/ Thomas Billstein

NICO ROSIER

/s/ Nico Rosier

INVESTORS:

ST. CLOUD CAPITAL PARTNERS, LP

By:		SCCP, LLC
Its:		General Partner

By:		/s/ Marshall S. Geller
		Name: Marshall S. Geller Title: Senior Managing Member

S-1

BEDFORD OAK CAPITAL, L.P.

By:	/s/ Harvey P. Eisen

	Name:	Harvey P. Eisen
	Title:	Chairman and Managing Partner

BEDFORD OAK OFFSHORE, LTD.

By:	/s/ Harvey P. Eisen

	Name:	Harvey P. Eisen
	Title:	Chairman and Managing Partner

ASPEN VENTURES LLC

By:	/s/ Fred B. Tarter

	Name:	Fred B. Tarter
	Title:	President

S-2

EXHIBIT A

EXECUTIVES

Elton Alderman

Thomas Billstein

Nico Rosier

EX-10.3 5 dex103.htm PLEDGE & SECURITY AGREEMENT, DATED 11/24/03 Pledge & Security Agreement, dated 11/24/03

EXHIBIT 10.3

Execution Copy

PLEDGE AND SECURITY AGREEMENT

dated as of November 24, 2003

among

PROLONG INTERNATIONAL CORPORATION

PROLONG SUPER LUBRICANTS, INC.

and

ST. CLOUD CAPITAL PARTNERS, LP,

as Collateral Agent

TABLE OF CONTENTS

		PAGE
Section 1.	DEFINITIONS	1

Section 2.	GRANT OF SECURITY	8

Section 3.	SECURITY FOR OBLIGATIONS.	9

Section 4.	REPRESENTATIONS AND WARRANTIES AND COVENANTS.	10

Section 5.	DIVIDENDS, DISTRIBUTIONS AND VOTING	25

Section 6.	FURTHER ASSURANCES.	26

Section 7.	COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT, IRREVOCABLE POWER OF ATTORNEY	28

Section 8.	REMEDIES.	29

Section 9.	COLLATERAL AGENT	33

Section 10.	CONTINUING SECURITY INTEREST; TRANSFER OF SECURED OBLIGATIONS	34

Section 11.	STANDARD OF CARE; COLLATERAL AGENT MAY PERFORM.	34

Section 12.	INDEMNITY AND EXPENSES.	34

Section 13.	MISCELLANEOUS.	35

SCHEDULE I – GENERAL INFORMATION

SCHEDULE II – LOCATION OF INVENTORY AND EQUIPMENT

SCHEDULE III – INVESTMENT RELATED PROPERTY

SCHEDULE IV – MATERIAL CONTRACTS

SCHEDULE V – LETTERS OF CREDIT

SCHEDULE VI – INTELLECTUAL PROPERTY

SCHEDULE VII – COMMERCIAL TORT CLAIMS

EXHIBIT A – PLEDGE SUPPLEMENT

EXHIBIT B – JOINDER AGREEMENT

This PLEDGE AND SECURITY AGREEMENT, dated as of November 24, 2003 (this “Agreement”), among each of the undersigned (together with any other Person that executes a Joinder Agreement each, a “Grantor” and collectively, the “Grantors”), and ST. CLOUD CAPITAL PARTNERS, LP, acting in the capacity of agent for the benefit of the Purchasers (the “Collateral Agent”).

RECITALS:

WHEREAS, reference is made to that certain Securities Purchase Agreement, dated as of the date hereof (as it may be amended, restated, supplemented or otherwise modified from time to time, the “Securities Purchase Agreement”), by and among each Grantor, the Cayman Subsidiaries, and the Purchasers, pursuant to which the Secured Parties have purchased the Notes.

WHEREAS, it is a condition precedent to the purchase of the Notes by the Purchasers under the Securities Purchase Agreement that Grantors shall have granted the security interests and undertaken the obligations contemplated by this Agreement.

NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, and in order to induce the Secured Parties to purchase the Notes, each Grantor and the Collateral Agent agree as follows:

Section 1. DEFINITIONS

(a) General Definitions. In this Agreement, the following terms shall have the following meanings:

“Account Debtor” shall mean each Person who is obligated on a Receivable or any Supporting Obligation related thereto.

“Accounts” shall mean all “accounts” as defined in Article 9 of the UCC.

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

“Authenticate” shall mean “authenticate” as defined in Article 9 of the UCC.

“Bankruptcy Code” shall mean Title 11 of the United States Code entitled “Bankruptcy”, as now and hereafter in effect, or any successor statute.

“Cash Proceeds” shall mean all proceeds of any Collateral consisting of cash, checks and other near-cash items.

“Chattel Paper” shall mean all “chattel paper” as defined in Article 9 of the UCC, including, without limitation, “electronic chattel paper” or “tangible chattel paper”, as each term is defined in the UCC.

“Collateral” shall have the meaning set forth in Section 2(a) hereof.

“Collateral Agent” shall have the meaning set forth in the preamble.

“Collateral Documents” shall mean this Agreement and all other instruments, documents and agreements delivered by any of the parties to the Loan Documents pursuant to this Agreement or any other Loan Document in order to grant, perfect and/or establish or maintain the priority of a security interest in favor of the Collateral Agent on any real, personal or mixed property of such party as security for the Secured Obligations.

“Collateral Records” shall mean books, records, ledger cards, files, correspondence, customer lists, blueprints, technical specifications, manuals, computer software, computer printouts, tapes, disks and other electronic storage media and related data processing software and similar items that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon.

“Collateral Support” shall mean all property (real or personal) assigned, hypothecated or otherwise securing any Collateral and shall include any security agreement or other agreement granting a lien or security interest in such real or personal property.

“Commercial Tort Claims” shall mean all “commercial tort claims” as defined in the UCC, including, without limitation, all commercial tort claims listed and described with specification on Schedule VII hereto (as such Schedule may be amended or supplemented from time to time).

“Commodities Accounts” (i) shall mean all “commodity accounts” as defined in Article 9 of the UCC and (ii) shall include, without limitation, all of the accounts listed on Schedule III hereto under the heading “Commodities Accounts” (as such Schedule may be amended or supplemented from time to time).

“Copyright Licenses” shall mean any and all agreements granting any right in, to or under Copyrights (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule VI(B) (as such Schedule may be amended or supplemented from time to time).

“Copyrights” shall mean all United States, state and foreign copyrights, including but not limited to copyrights in software and databases, and all Mask Works (as defined under 17 U.S.C. 901 of the U.S. Copyright Act), whether registered or unregistered, now or hereafter in force throughout the world, all registrations and applications for any of the foregoing including, without limitation, the applications referred to in Schedule VI(A) (as such Schedule may be amended or supplemented from time to time), all rights corresponding thereto throughout the world, all extensions and renewals of any thereof, the right to sue for past, present and future infringements of any of the foregoing, and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages, and proceeds of suit.

“Deposit Accounts” (i) shall mean all “deposit accounts” as defined in Article 9 of the UCC and (ii) shall include, without limitation, all of the accounts listed on Schedule III hereto under the heading “Deposit Accounts” (as such Schedule may be amended or supplemented from time to time).

“Documents” shall mean all “documents” as defined in Article 9 of the UCC.

“Documents Evidencing Goods” shall mean all Documents evidencing, representing or issued in connection with Goods.

“Equipment” shall mean: (i) all “equipment” as defined in the UCC, (ii) all machinery, manufacturing equipment, data processing equipment, computers, office equipment, furnishings, furniture, appliances, and tools (in each case, regardless of whether characterized as equipment under the UCC), (iii) all Fixtures and (iv) all accessions or additions thereto, all parts thereof, whether or not at any time of determination incorporated or installed therein or attached thereto, and all replacements therefor, wherever located, now or hereafter existing.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto.

“Event of Default” shall have the meaning set forth in the Notes.

“Fixtures” shall mean all “fixtures” as defined in Article 9 of the UCC.

“General Intangibles” (i) shall mean all “general intangibles” as defined in Article 9 of the UCC and (ii) shall include, without limitation, all interest rate or currency protection or hedging arrangements, all contracts, all tax refunds and all licenses, permits, concessions and authorizations, (in each case, regardless of whether characterized as general intangibles under the UCC).

“Goods” (i) shall mean all “goods” as defined in Article 9 of the UCC and (ii) shall include, without limitation, all Inventory, Equipment, Documents Evidencing Goods and Software Embedded In Goods.

“Indemnitee” shall mean the Collateral Agent, and its Affiliates’ officers, partners, directors, trustees, employees, agents.

“Instruments” shall mean all “instruments” as defined in Article 9 of the UCC.

“Insurance” shall mean: (i) all insurance policies covering any or all of the Collateral (regardless of whether the Collateral Agent is the loss payee thereof) and (ii) any key man life insurance policies.

“Intellectual Property” shall mean, collectively, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks, the Trademark Licenses, the Trade Secrets, and the Trade Secret Licenses.

“Intellectual Property Licenses” shall mean, collectively, the Copyright Licenses, Patent Licenses, Trademark Licenses, and Trade Secret Licenses.

“Inventory” shall mean: (i) all “inventory” as defined in the UCC and (ii) all goods held for sale or lease or to be furnished under contracts of service or so leased or furnished, all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in any Grantor’s business; all goods in which any Grantor has an interest in mass or a joint or other interest or right of any kind; and all goods which are returned to or repossessed by any Grantor, and all accessions thereto and products thereof (in each case, regardless of whether characterized as inventory under the UCC).

“Investment Accounts” shall mean the Securities Accounts, Commodities Accounts and Deposit Accounts.

“Investment Related Property” shall mean: (a) all “investment property” (as such term is defined in Article 9 of the UCC) and (b) all of the following (regardless of whether classified as investment property under the UCC): all (i) Pledged Equity Interests, (ii) Pledged Debt, (iii) the Investment Accounts and (iv) Certificates of Deposit.

“Joinder Agreement” means an agreement in the substantially the form of Exhibit B hereto whereby an additional person becomes a Grantor hereunder as required by the Securities Purchase Agreement.

“Letter of Credit Right” shall mean “letter-of-credit right” as defined in the UCC.

“Lien” shall mean (i) any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any agreement to give any of the foregoing, any conditional sale or other Title retention agreement, and any lease in the nature thereof) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing and (ii) in the case of Pledged Equity Interests, any purchase option, call or similar right of a third party with respect to such Pledged Equity Interests.

“Loan Documents” shall have the meaning given such term in the Securities Purchase Agreement.

“Material Adverse Effect” shall mean a material adverse effect on (i) the business, operations, properties, assets, condition (financial or otherwise) or prospects of Grantors and its subsidiaries taken as a whole; (ii) the ability of any Grantor to fully and timely perform its Secured Obligations; (iii) the legality, validity, binding effect or enforceability against any Grantor of a Loan Document to which it is a party; or (iv) the rights, remedies and benefits available to, or conferred upon, any agent and Collateral Agent under any Secured Obligation.

“Material Contract” shall mean any contract or other arrangement to which any Grantor is a party for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect.

“Money” shall mean “money” as defined in the UCC.

“Notes” means those certain Secured Promissory Notes, each dated as of the date hereof and executed by Prolong Super Lubricants, Inc. in favor of each of the Purchasers, as the same may be amended, restated, supplemented or otherwise modified from time to time.

“Patent Licenses” shall mean all agreements granting any right in, to, or under Patents (whether such Grantor is licensee or licensor thereunder) including without limitation, each agreement referred to in Schedule VI(D) hereto (as such Schedule may be amended or supplemented from time to time).

“Patents” shall mean all United States, state and foreign patents and applications for letters patent, including, but not limited to, each patent and patent application referred to in

Schedule VI(C) hereto (as such Schedule may be amended or supplemented from time to time), all reissues, divisions, continuations, continuations-in-part, extensions, renewals, and reexaminations of any of the foregoing, all rights corresponding thereto throughout the world, the right to sue for past, present and future infringements of any of the foregoing and all proceeds of the foregoing including, without limitation, royalties, income, payments, claims, damages, and proceeds of suit.

“Payment Intangible” shall have the meaning specified in Article 9 of the UCC.

“Permitted Lien” shall mean liens permitted pursuant to Section 7.4.9 of the Securities Purchase Agreement.

“Permitted Sale” shall mean those sales, transfers or assignments permitted by Section 7.4.5 of the Securities Purchase Agreement.

“Pledge Supplement” means an agreement in substantially the form of Exhibit A hereto.

“Person” shall mean and include natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governmental authorities.

“Pledged Debt” shall mean all indebtedness for borrowed money owed to such Grantor, whether or not evidenced by any instrument or promissory note, including, without limitation, all indebtedness described on Schedule III hereto under the heading “Pledged Debt” (as such Schedule may be amended or supplemented from time to time), all monetary obligations owing to any Grantor from any other Grantor the instruments evidencing any of the foregoing, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing.

“Pledged Equity Interests” shall mean all Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests, Pledged Trust Interests and any other participation or other interests in any equity or profits of any business entity.

“Pledged LLC Interests” shall mean all interests in any limited liability company including, without limitation, all limited liability company interests listed on Schedule III hereto under the heading “Pledged LLC Interests” (as such Schedule may be amended or supplemented from time to time) and the certificates, if any, representing such limited liability company interests and any interest of such Grantor on the books and records of such limited liability company or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such limited liability company interests and any other warrant, right or option to acquire any of the foregoing.

“Pledged Partnership Interests” shall mean all interests in any general partnership, limited partnership, limited liability partnership or other partnership including, without limitation, all partnership interests listed on Schedule III hereto under the heading “Pledged Partnership Interests” (as such Schedule may be amended or supplemented from time to time) and the certificates, if any, representing such partnership interests and any interest of such Grantor on the books and records of such partnership or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such partnership interests and any other warrant, right or option to acquire any of the foregoing.

“Pledged Stock” shall mean all shares of capital stock owned by such Grantor, including, without limitation, all shares of capital stock described on Schedule III hereto under the heading “Pledged Stock” (as such Schedule may be amended or supplemented from time to time), and the certificates, if any, representing such shares and any interest of such Grantor in the entries on the books of the issuer of such shares or on the books of any securities intermediary pertaining to such shares, and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares and any other warrant, right or option to acquire any of the foregoing.

“Pledged Trust Interests” shall mean all interests in a Delaware business trust or other trust including, without limitation, all trust interests listed on Schedule III hereto under the heading “Pledged Trust Interests” (as such Schedule may be amended or supplemented from time to time) and the certificates, if any, representing such trust interests and any interest of such Grantor on the books and records of such trust or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such trust interests and any other warrant, right or option to acquire any of the foregoing.

“Proceeds” shall mean: (i) all “proceeds” as defined in Article 9 of the UCC, (ii) payments or distributions made with respect to any Investment Related Property and (iii) whatever is receivable or received when Collateral or proceeds are sold, leased, licensed, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary.

“Purchaser” shall have the meaning given such term in the Securities Purchase Agreement.

“Receivables” shall mean all (i) Accounts, (ii) Chattel Paper, (iii) Payment Intangibles, (iv) Instruments and (v) to the extent not otherwise covered above, all other rights to payment, whether or not earned by performance, for goods or other property sold, leased, licensed, assigned or otherwise disposed of, or services rendered or to be rendered, regardless of how classified under the UCC together with all of Grantors’ rights, if any, in any goods or other property giving rise to such right to payment and all Collateral Support and Supporting Obligations related thereto and all Receivables Records.

“Receivables Records” shall mean (i) all original copies of all documents, instruments or other writings or electronic records or other Records evidencing the Receivables, (ii) all books, correspondence, credit or other files, Records, ledger sheets or cards, invoices, and other papers relating to Receivables, including, without limitation, all tapes, cards, computer tapes, computer discs, computer runs, record keeping systems and other papers and documents relating to the Receivables, whether in the possession or under the control of Grantor or any computer bureau or agent from time to time acting for Grantor or otherwise, (iii) all evidences of the filing of financing statements and the registration of other instruments in connection therewith, and amendments, supplements or other modifications thereto, notices to other creditors or agents thereof, and certificates, acknowledgments, or other writings, including, without limitation, lien search reports, from filing or other registration officers, (iv) all credit information, reports and memoranda relating thereto and (v) all other written or non-written forms of information related in any way to the foregoing or any Receivable.

“Record” shall have the meaning specified in the UCC.

“Registered Organization” shall mean an organization organized solely under the law of a single State or the United States and as to which the State or the United States must maintain a public record showing the organization to have been organized.

“Securities Purchase Agreement” shall have the meaning set forth in the preamble.

“Secured Obligations” shall mean all obligations of every nature of each Grantor from time to time owing to the Collateral Agent or any Secured Party hereunder, under the Securities Purchase Agreement, the Notes or any other Loan Document (other than the Warrants or the Investors’ Rights Agreement) whether for principal, interest (including interest which, but for the filing of a petition in bankruptcy with respect to such Grantor, would have accrued on any obligation, whether or not a claim is allowed against such Grantor for such interest in the related bankruptcy proceeding).

“Secured Party” shall mean the Collateral Agent, the Purchasers, and the holders from time of time of any Secured Obligations.

“Securities” shall mean any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing.

“Securities Accounts” (i) shall mean all “securities accounts” as defined in Article 8 of the UCC and (ii) shall include, without limitation, all of the accounts listed on Schedule III hereto under the heading “Securities Accounts” (as such Schedule may be amended or supplemented from time to time).

“Software Embedded in Goods” means, with respect to any Goods, any computer program embedded in Goods and any supporting information provided in connection with a transaction relating to the program if (i) the program is associated with the Goods in such a manner that it customarily is considered part of the Goods or (ii) by becoming the owner of the Goods a person acquires a right to use the program in connection with the Goods.

“State” shall mean a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.

“Supporting Obligation” shall mean all “supporting obligations” as defined in the UCC.

“Trade Secret Licenses” shall mean any and all agreements granting any right in or to Trade Secrets (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule VI(G) hereto (as such Schedule may be amended or supplemented from time to time).

“Trade Secrets” shall mean all trade secrets and all other confidential or proprietary information and know-how, whether or not reduced to a writing or other tangible form, including all documents and things embodying, incorporating, or referring in any way to such Trade Secret, the right to sue for past, present and future infringement of any Trade Secret, and all proceeds of the foregoing, including, without limitation, royalties, income, payments, claims, damages, and proceeds of suit.

“Trademark Licenses” shall mean any and all agreements granting any right in or to Trademarks (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule VI(F) hereto (as such Schedule may be amended or supplemented from time to time).

“Trademarks” shall mean all United States, state and foreign trademarks, service marks, certification marks, collective marks, trade names, corporate names, d/b/as, business names, fictitious business names, internet domain names, trade styles, logos, other source or business identifiers, designs and general intangibles of a like nature, rights of publicity and privacy pertaining to the right to use names likeness and biographical data as real, all registrations and applications for any of the foregoing including, but not limited to, the registrations and applications referred to in Schedule VI(E) hereto (as such Schedule may be amended or supplemented from time to time), the goodwill of the business symbolized by the foregoing, the right to sue for past, present and future infringement or dilution of any of the foregoing or for any injury to goodwill, and all proceeds of the foregoing, including, without limitation, royalties, income, payments, claims, damages, and proceeds of suit.

“UCC” shall mean the Uniform Commercial Code as in effect from time to time in the State of California.

(b) Definitions; Interpretation. All capitalized terms used herein (including the preamble and recitals hereto) and not otherwise defined herein shall have the meanings ascribed thereto in the Securities Purchase Agreement or, if not defined therein, in the UCC. With respect to terms defined in more than one article of the UCC, unless otherwise specified such terms shall have the meaning specified in Article 9 of the UCC. References to “Sections,” “Exhibits” “Annexes” and “Schedules” shall be to Sections, Exhibits, Annexes and Schedules, as the case may be, of this Agreement (as such Sections, Exhibits, Annexes and Schedules may be amended or supplemented from time to time in accordance with the terms of this Agreement), unless otherwise specifically provided. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. The use herein of the word “include” or “including”, when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as “without limitation” or “but not limited to” or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. If any conflict or inconsistency exists between this Agreement and the Securities Purchase Agreement, the Securities Purchase Agreement shall govern. All references herein to provisions of the UCC shall include all successor provisions under any subsequent version or amendment to any Article of the UCC.

Section 2. GRANT OF SECURITY

(a) Grant of Security. Each Grantor hereby grants to the Collateral Agent a security interest and continuing lien on all of such Grantor’s right, title and interest in, to and under all personal property of such Grantor including, but not limited to the following , in each case whether now owned or existing or hereafter acquired or arising and wherever located (all of which being hereinafter collectively referred to as the “Collateral”):

(1) Documents;

(2) General Intangibles;

(3) Goods (including, without limitation, Documents Representing Goods and Software Embedded in Goods);

(4) Insurance;

(5) Intellectual Property;

(6) Investment Related Property (including, without limitation, Deposit Accounts);

(7) Letter of Credit Rights and letters of credit;

(8) Money;

(9) Receivables and Receivable Records;

(10) Commercial Tort Claims;

(11) to the extent not otherwise included above, Material Contracts, motor vehicles, choses in action and all other personal property of any kind and all Collateral Records, Collateral Support and Supporting Obligations relating to any of the foregoing; and

(12) to the extent not otherwise included above, all Proceeds, products, accessions, rents and profits of or in respect of any of the foregoing.

(b) Certain Limited Exclusions. Notwithstanding anything herein to the contrary, in no event shall the security interest granted under Section 2(a) hereof attach to (i) any lease, license, contract, property rights or agreement to which any Grantor is a party or any of its rights or interests thereunder if and for so long as the grant of such security interest shall constitute or result in (1) the abandonment, invalidation or unenforceability of any right, title or interest of any Grantor therein or (2) in a breach or termination pursuant to the terms of, or a default under, any such lease, license, contract property rights or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9406, 9407, 9408 or 9409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law or principles of equity), provided, however, that such security interest shall attach immediately at such time as the condition causing such abandonment, invalidation or unenforceability shall be remedied and, to the extent severable, shall attach immediately to any portion of such lease, license, contract, property rights or agreement that does not result in any of the consequences specified in (1) or (2) including, without limitation, any proceeds of such lease, license, contract, property rights or agreement; or (ii) in any of the outstanding capital stock of a “controlled foreign corporation” (as defined in the Internal Revenue Code of 1986, as amended) in excess of 65% of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; provided that immediately upon the amendment of the Internal Revenue Code to allow the pledge of a greater percentage of the voting power of capital stock in a controlled foreign corporation without material adverse tax consequences to a Grantor, the Collateral shall include, and the security interest granted by such Grantor shall attach to, such greater percentage of capital stock of each controlled foreign corporation.

Section 3. SECURITY FOR OBLIGATIONS.

(a) Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt and complete payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. §362(a) (and any successor provision thereof)), of all Secured Obligations.

(b) Continuing Liability under Collateral. Notwithstanding anything herein to the contrary, (i) each Grantor shall remain liable for all obligations under the Collateral and nothing contained herein is intended or shall be a delegation of duties to the Collateral Agent or any Secured Party and (ii) each Grantor shall remain liable under each of the agreements included in the Collateral, including, without limitation, any agreements relating to Pledged Partnership Interests or Pledged LLC Interests, to perform all of the obligations undertaken by it thereunder all in accordance with and pursuant to the terms and provisions thereof and neither the Collateral Agent nor any Secured Party shall have any obligation or liability under any of such agreements by reason of or arising out of this Agreement or any other document related thereto nor shall the Collateral Agent nor any Secured Party have any obligation to make any inquiry as to the nature or sufficiency of any payment received by it or have any obligation to take any action to collect or enforce any rights under any agreement included in the Collateral, including, without limitation, any agreements relating to Pledged Partnership Interests or Pledged LLC Interests, (iii) the exercise by the Collateral Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral.

Section 4. REPRESENTATIONS AND WARRANTIES AND COVENANTS.

(a) Generally.

(i) Representations and Warranties. Each Grantor hereby represents and warrants that:

(1) such Grantor owns the Collateral purported to be owned by it or otherwise has the rights it purports to have in each item of Collateral and, as to all Collateral whether now existing or hereafter acquired, will continue to own or have such rights in each item of the Collateral (unless otherwise disposed of in connection with a Permitted Sale), in each case free and clear of any and all Liens, rights or claims of all other Persons (other than Permitted Liens), including, without limitation, liens arising as a result of such Grantor becoming bound (as a result of merger or otherwise) as debtor under a security agreement entered into by another Person;

(2) such Grantor has been duly organized as a corporation solely under the laws of the jurisdiction set forth in Schedule I(A) hereto and remains duly existing as such. Such Grantor has not filed any certificates of domestication, transfer or continuance in any other jurisdiction;

(3) the execution and delivery of this Agreement by such Grantor and the performance by it of its obligations under this Agreement are within its corporate or other powers and have been duly authorized by all necessary corporate or other action;

(4) upon the filing of UCC financing statements naming such Grantor as debtor and the Collateral Agent as secured party and describing the Collateral in the filing offices set forth opposite such Grantor’s name on Schedule I(E) hereof (as such Schedule may be amended or supplemented from time to time) and other filings delivered by such Grantor, the security interests granted to the Collateral Agent hereunder constitute valid and perfected Liens;

(5) other than the financing statements filed in favor of the Collateral Agent, no effective UCC financing statement, fixture filing or other instrument similar in effect under any applicable law covering all or any part of the Collateral is on file in any filing or recording office except for (x) financing statements for which proper termination statements have been delivered to the Collateral Agent for filing and (y) financing statements filed in connection with Permitted Liens;

(6) no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for either (i) the pledge or grant by any Grantor of the Liens purported to be created in favor of the Collateral Agent hereunder or (ii) the exercise by Collateral Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created hereunder or created or provided for by applicable law), except (A) for the filings contemplated by clause (4) above and (B) as may be required, in connection with the disposition of any Investment Related Property, by laws generally affecting the offering and sale of Securities and as may be required under federal laws pertaining to Intellectual Property;

(7) all actions and consents, including all filings, notices, registrations and recordings necessary or desirable for the exercise by the Collateral Agent of the voting or other rights provided for in this Agreement or the exercise of remedies in respect of the Collateral have been made or obtained;

(8) such Grantor has indicated on Schedule I(A) hereto (as such Schedule may be amended or supplemented from time to time): (w) the type of organization of such Grantor, (x) the jurisdiction of organization of such Grantor, (y) its organizational identification number, if any, and (z) the jurisdiction where the chief executive office or its sole place of business is (or if such Grantor is a natural person principal residence and principal place of business), and for the one-year period preceding the date hereof has been, located.

(9) the full legal name of such Grantor is as set forth on Schedule I(A) and it has not done in the last five (5) years, and does not do, business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule I(B) (as such Schedule may be amended or supplemented from time to time);

(10) except as provided on Schedule I(C), it has not changed its jurisdiction of organization, chief executive office or sole place of business (or, if such Grantor is a natural person, principal residence or principal place of business) or its corporate structure in any way (e.g. by merger, consolidation, change in corporate form or otherwise) within the past five (5) years;

(11) such Grantor has not within the last five (5) years become bound (whether as a result of merger or otherwise) as debtor under a security agreement entered into by another Person, which has not heretofore been terminated other than the agreements identified on Schedule I(D) hereof (as such Schedule may be amended or supplemented from time to time);

(12) all information supplied by any Grantor with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects; and

(13) none of the Collateral constitutes, or is the Proceeds of, “farm products” (as defined in the UCC).

(ii) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(1) except for the security interest created by this Agreement, it shall not create or suffer to exist any Lien upon or with respect to any of the Collateral, except Permitted Liens, and such Grantor shall defend the Collateral against all Persons at any time claiming any interest therein;

(2) such Grantor shall not produce, use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral;

(3) without limiting any prohibitions or restrictions on mergers in the Securities Purchase Agreement, such Grantor shall not change such Grantor’s name, identity, corporate structure (e.g. by merger, consolidation, change in corporate form or otherwise), sole place of business (or principal residence if such Grantor is a natural person), chief executive office, type of organization or jurisdiction of organization or establish any trade names unless such Grantor shall have (a) notified the Collateral Agent in writing at least thirty (30) days prior to any such change or establishment, identifying such new proposed name, identity, corporate structure, sole place of business (or principal residence if such Grantor is a natural person), chief executive office, jurisdiction of organization or trade name and providing such other information in connection therewith as the Collateral Agent may reasonably request and (b) taken all actions necessary or advisable to maintain the continuous validity, perfection and the same or better priority of the Collateral Agent’s security interest in the Collateral granted or intended to be granted and agreed to hereby, which in the case of any merger or other change in corporate structure shall include, without limitation, executing and delivering to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, upon completion of such merger or other change in corporate structure confirming the grant of the security interest hereunder;

(4) if the Collateral Agent or any Secured Party gives value to enable any Grantor to acquire rights in or the use of any Collateral, such Grantor shall use such value for such purposes and such Grantor further agrees that repayment of any Obligation shall apply on a “first-in, first-out” basis so that the portion of the value used to acquire rights in any Collateral shall be paid in the chronological order such Grantor acquired rights therein;

(5) such Grantor shall pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith; provided, such Grantor shall in any event pay such taxes, assessments, charges, levies or claims not later than five (5) days prior to the date of any proposed sale under any judgment, writ or warrant of

attachment entered or filed against such Grantor or any of the Collateral as a result of the failure to make such payment;

(6) upon such Grantor or any officer of such Grantor obtaining knowledge thereof, such Grantor shall promptly notify the Collateral Agent in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of any Grantor or the Collateral Agent to dispose of the Collateral or any portion thereof, or the rights and remedies of the Collateral Agent in relation thereto, including, without limitation, the levy of any legal process against the Collateral or any portion thereof;

(7) such Grantor shall not take or permit any action which could impair the Collateral Agent’s rights in the Collateral; and

(8) such Grantor shall not sell, transfer or assign (by operation of law or otherwise) any Collateral except for Permitted Sales.

(b) Equipment and Inventory.

(i) Representations and Warranties. Each Grantor represents and warrants that:

(1) all of the Equipment and Inventory included in the Collateral is kept for the past five (5) years only at the locations specified in Schedule II hereto (as such Schedule may be amended or supplemented from time to time);

(2) any Inventory now or hereafter produced by any Grantor included in the Collateral have been and will be produced in compliance with the requirements of the Fair Labor Standards Act, as amended, and the rules and regulations thereunder; and

(3) except as set forth on Schedule II, none of the Inventory or Equipment is in the possession of an issuer of a negotiable document (as defined in Section 7104 of the UCC) therefor or otherwise in the possession of a bailee or warehouseman.

(ii) Covenants and Agreements. Each Grantor covenants and agrees that:

(1) such Grantor shall keep the Equipment and Inventory in the locations specified on Schedule II hereto unless it shall have (a) notified the Collateral Agent in writing at least thirty (30) days prior to any change in locations, identifying such new locations and providing such other information in connection therewith as the Collateral Agent may reasonably request and (b) taken all actions necessary or advisable to maintain the continuous validity, perfection and the same or better priority of the Collateral Agent’s security interest in the Collateral intended to be granted and agreed to hereby, or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory;

(2) such Grantor shall keep correct and accurate records of the Inventory, including, without limitation, itemizing and describing the kind, type and quantity of such Inventory, such Grantor’s cost therefor and, where applicable, the

current list prices for such Inventory and such other information as is customarily maintained under similar circumstances by Persons of established reputation engaged in similar business, and in any event in conformity with generally accepted accounting principles;

(3) such Grantor shall not deliver any Document Evidencing Goods to any Person other than the issuer of such Document to claim the Goods evidenced therefor or the Collateral Agent;

(4) if any Equipment or Inventory is in possession or control of any third party, including, without limitation, any warehouseman, bailee or agent, each Grantor shall join with the Collateral Agent in notifying the third party of the Collateral Agent’s security interest and obtaining an Authenticated acknowledgment from such third party that it is holding the Equipment and Inventory for the benefit of the Collateral Agent; and

(5) with respect to any item of Equipment which is covered by a certificate of Title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, upon the reasonable request of the Collateral Agent, (A) provide information with respect to any such Equipment, (B) execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, and (C) deliver to the Collateral Agent copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of Title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby.

(c) Receivables.

(i) Representations and Warranties. Each Grantor represents and warrants that:

(1) each Receivable (a) is and will be the legal, valid and binding obligation of the Account Debtor in respect thereof, representing an unsatisfied obligation of such Account Debtor, (b) is and will be enforceable in accordance with its terms, (c) is not and will not be subject to any setoffs, defenses, taxes, counterclaims (except with respect to refunds, returns and allowances in the ordinary course of business with respect to damaged merchandise) and (d) is and will be in compliance with all applicable laws, whether federal, state, local or foreign;

(2) none of the Account Debtors in respect of any Receivable is the government of the United States, any agency or instrumentality thereof, any state or municipality or any foreign sovereign. No Receivable requires the consent of the Account Debtor in respect thereof in connection with the security interest hereunder, except any consent which has been obtained;

(3) such Grantor has delivered to the Collateral Agent a complete and correct copy of each standard form of document under which a Receivable may arise.

(ii) Covenants and Agreements: Each Grantor hereby covenants and agrees that:

(1) such Grantor shall keep and maintain at its own cost and expense satisfactory and complete records of the Receivables, including, but not limited to, the originals of all documentation with respect to all Receivables and records of all payments received and all credits granted on the Receivables, all merchandise returned and all other dealings therewith;

(2) such Grantor shall perform in all material respects all of its obligations with respect to the Receivables;

(3) such Grantor shall not amend, modify, terminate or waive any provision of any Receivable in any manner which could reasonably be expected to have a Material Adverse Effect. Other than in the ordinary course of business as generally conducted by such Grantor on and prior to the date hereof, and except as otherwise provided in subsection (5) below, following an Event of Default, such Grantor shall not (w) grant any extension or renewal of the time of payment of any Receivable, (x) compromise or settle any dispute, claim or legal proceeding with respect to any Receivable in an amount in excess of One Hundred Thousand Dollars ($100,000) for less than the total unpaid balance thereof, (y) release, wholly or partially, any Person liable for the payment thereof, or (z) allow any credit or discount thereon;

(4) at the reasonable request of the Collateral Agent, such Grantor shall mark conspicuously, in form and manner reasonably satisfactory to the Collateral Agent, all Chattel Paper, Instruments and other evidence of Receivables (other than any delivered to the Collateral Agent as provided herein), as well as the Receivables Records with an appropriate reference to the fact that the Collateral Agent has a security interest therein;

(5) except as otherwise provided in this subsection, such Grantor shall continue to collect all amounts due or to become due to such Grantor under the Receivables and any Supporting Obligation and diligently exercise each material right it may have under any Receivable, any Supporting Obligation or Collateral Support, in each case, at its own expense, and in connection with such collections and exercise, such Grantor shall take such action as such Grantor or the Collateral Agent may deem necessary or advisable. Notwithstanding the foregoing, the Collateral Agent shall have the right at any time to notify, or require any Grantor to notify, any Account Debtor of the Collateral Agent’s security interest in the Receivables and any Supporting Obligation and, in addition, at any time following the occurrence and during the continuation of an Event of Default, the Collateral Agent may: (1) direct the Account Debtors under any Receivables to make payment of all amounts due or to become due to such Grantor thereunder directly to the Collateral Agent; (2) notify, or require any Grantor to notify, each Person maintaining a lockbox or similar arrangement to which Account Debtors under any Receivables have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to the Collateral Agent; and (3) and subject to Section 8 below, enforce, at the expense of such Grantor, collection of any such Receivables and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. If the Collateral Agent notifies any Grantor that it has elected to collect the Receivables in

accordance with the preceding sentence, any payments of Receivables received by such Grantor shall be forthwith (and in any event within two (2) Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, into an account maintained under the sole dominion and control of the Collateral Agent, and until so turned over, all amounts and proceeds (including checks and other instruments) received by such Grantor in respect of the Receivables, any Supporting Obligation or Collateral Support shall be received in trust for the benefit of the Collateral Agent hereunder and shall be segregated from other funds of such Grantor and such Grantor shall not adjust, settle or compromise the amount or payment of any Receivable, or release wholly or partly any Account Debtor or obligor thereof, or allow any credit or discount thereon; and

(6) such Grantor shall use its best efforts to keep in full force and effect any Supporting Obligation or Collateral Support relating to any Receivable.

(iii) Delivery and Control of Receivables. With respect to any Receivables in excess of $100,000 in the aggregate from a single Person or its affiliate that are evidenced by, or constitutes, Tangible Chattel Paper or Instruments, each Grantor shall cause each originally executed copy thereof to be delivered to the Collateral Agent (or its agent or designee) appropriately indorsed to the Collateral Agent or indorsed in blank: (a) with respect to any such Receivables in existence on the date hereof, on or prior to the date hereof and (b) with respect to any such Receivables hereafter arising, within ten (10) days of such Grantor acquiring rights therein. With respect to any Receivables in excess of $100,000 in the aggregate from a single Person or its affiliate which would constitute “electronic chattel paper” under the UCC, each Grantor shall take all steps necessary to give the Collateral Agent control (within the meaning of Section 9105 of the UCC) over such Receivables : (a) with respect to any such Receivables in existence on the date hereof, on or prior to the date hereof and (b) with respect to any such Receivables hereafter arising, within ten (10) days of such Grantor acquiring rights therein. Any Receivable not otherwise required to be delivered or subjected to the control of the Collateral Agent in accordance with this subsection (iii) shall be delivered or subjected to such control upon request of the Collateral Agent.

(d) Pledged Equity Interests and Pledged Debt.

(i) Representations and Warranties. Each Grantor hereby represents and warrants that:

(1) Schedule III hereto (as such Schedule may be amended or supplemented from time to time) sets forth under the headings “Pledged Stock,” “Pledged LLC Interests,” “Pledged Partnership Interests,” and “Pledged Trust Interests,” respectively, all of the Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests owned by any Grantor and such Pledged Equity Interests constitute the percentage of issued and outstanding shares of stock, percentage of membership interests, percentage of partnership interests or percentage of beneficial interest of the respective issuers thereof indicated on such Schedule;

(2) except as set forth on Schedule III(B) hereto, such Grantor has not acquired any equity interests of another entity within the past five (5) years.

(3) such Grantor is the record and beneficial owner of the Pledged Equity Interests free of all Liens, rights or claims of other Persons other than Permitted

Liens and there are no outstanding warrants, options or other rights to purchase, or shareholder, voting trust or similar agreements outstanding with respect to, or property that is convertible into, or that requires the issuance or sale of, any Pledged Equity Interests;

(4) except for any consents that have been obtained and remain in full force and effect, no consent of any Person including any other general or limited partner, any other member of a limited liability company, any other shareholder or any other trust beneficiary is necessary or desirable in connection with the creation, perfection or first priority status of the security interest of the Collateral Agent in any Pledged Equity Interests or the exercise by the Collateral Agent of the voting or other rights provided for in this Agreement or the exercise of remedies in respect thereof; and

(5) Schedule III hereto (as such Schedule may be amended or supplemented from time to time) sets forth under the heading “Pledged Debt” all of the Pledged Debt owned by any Grantor and all of such Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default and constitutes all of the issued and outstanding inter-company indebtedness evidenced by an instrument or certificated security of the respective issuers thereof owing to such Grantor.

(ii) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(1) without the prior written consent of the Collateral Agent, such Grantor shall not vote to enable or take any other action to: (a) amend or terminate any partnership agreement, limited liability company agreement, certificate of incorporation, by-laws or other organizational documents in any way that materially changes the rights of such Grantor with respect to any Investment Related Property or adversely affects the validity, perfection or priority of the Collateral Agent’s security interest, (b) permit any issuer of any Pledged Equity Interest that is a direct or indirect subsidiary of any Grantor to issue any additional stock, partnership interests, limited liability company interests or other equity interests of any nature or to issue securities convertible into or granting the right of purchase or exchange for any stock or other equity interest of any nature of such issuer, (c) other than as permitted under the Securities Purchase Agreement, permit any issuer of any Pledged Equity Interest that is a direct or indirect subsidiary of any Grantor to dispose of all or a material portion of their assets, (d) waive any default under or breach of any terms of organizational document relating to the issuer of any Pledged Equity Interest or the terms of any Pledged Debt, or (e) cause any issuer of any Pledged Partnership Interests or Pledged LLC Interests which are not securities (for purposes of the UCC) on the date hereof to elect or otherwise take any action to cause such Pledged Partnership Interests or Pledged LLC Interests to be treated as securities for purposes of the UCC; provided, however, notwithstanding the foregoing, if any issuer of any Pledged Partnership Interests or Pledged LLC Interests takes any such action in violation of the foregoing in this clause (e), such Grantor shall promptly notify the Collateral Agent in writing of any such election or action and, in such event, shall take all steps necessary or advisable to establish the Collateral Agent’s “control” thereof;

(2) such Grantor shall comply with all of its obligations under any partnership agreement or limited liability company agreement relating to Pledged

Partnership Interests or Pledged LLC Interests and shall enforce all of its rights with respect to any Investment Related Property;

(3) without the prior written consent of the Collateral Agent, such Grantor shall not permit any issuer of any Pledged Equity Interest that is a direct or indirect subsidiary of any Grantor to merge or consolidate unless (i) such issuer creates a security interest that is perfected by a filed financing statement (that is not effective solely under Section 9508 of the UCC) in collateral in which such new debtor has or acquires rights, and (ii) all the outstanding capital stock or other equity interests of the surviving or resulting corporation, limited liability company, partnership or other entity is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding equity interests of any other constituent Grantors; provided that if the surviving or resulting Grantors upon any such merger or consolidation involving an issuer which is a controlled foreign corporation (as defined in the U.S. Internal Revenue Code of 1986, as amended), then such Grantor shall only be required to pledge equity interests in accordance with Section 2(b);

(4) such Grantor consents to the grant by each other Grantor of a security interest in all Investment Related Property to the Collateral Agent and, without limiting the foregoing, consents to the transfer of any Pledged Partnership Interest and any Pledged LLC Interest to the Collateral Agent or its designee following an Event of Default and to the substitution of the Collateral Agent or its designee as a partner in any partnership or as a member in any limited liability company with all the rights and powers related thereto;

(5) such Grantor shall notify the Collateral Agent of any default under any Pledged Debt that has caused, either in any case or in the aggregate, a Material Adverse Effect; and

(6) in the event such Grantor acquires rights in any Pledged Equity Interest or Pledged Debt after the date hereof, it shall deliver to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, reflecting such new Pledged Equity Interest or Pledged Debt and all other Pledged Equity Interest or Pledged Debt. Notwithstanding the foregoing, it is understood and agreed that the security interest of the Collateral Agent shall attach to all Pledged Equity Interest or Pledged Debt immediately upon any Grantor’s acquisition of rights therein and shall not be affected by the failure of any Grantor to deliver a supplement to Schedule III as required hereby.

(iii) Delivery and Control. Each Grantor agrees that with respect to any Pledged Equity Interest or Pledged Debt hereafter acquired by such Grantor, it shall comply with the provisions of this subsection (iii) immediately upon acquiring rights therein, in each case in form and substance satisfactory to the Collateral Agent. With respect to any Pledged Equity Interest or Pledged Debt that is represented by a certificate or that is an “instrument” (other than any Investment Related Property credited to a Securities Account) such Grantor shall cause such certificate or instrument to be delivered to the Collateral Agent, indorsed in blank by an “effective indorsement” (as defined in Section 8107 of the UCC), regardless of whether such certificate constitutes a “certificated security” for purposes of the UCC. With respect to any Pledged Equity Interest or Pledged Debt that is an “uncertificated security” for purposes of the UCC (other than any “uncertificated securities” credited to a Securities Account), such Grantor shall cause the issuer of such uncertificated security to either (i) register the Collateral Agent as the registered

owner thereof on the books and records of the issuer or (ii) execute an agreement, in form and substance satisfactory to the Collateral Agent, pursuant to which such issuer agrees to comply with the Collateral Agent’s instructions with respect to such uncertificated security without further consent by such Grantor. If any issuer of any Pledged Equity Interest or Pledged Debt is located in a jurisdiction outside of the United States, each Grantor shall take such additional actions, including, without limitation, causing the issuer to register the pledge on its books and records or making such filings or recordings, in each case as may be necessary or advisable, under the laws of such issuer’s jurisdiction to insure the validity, perfection and priority of the security interest of the Collateral Agent. Upon the occurrence of an Event of Default, subject to any contractual restrictions relating to the right to transfer the shares of capital stock of Oryxe Energy International, Inc. held by Prolong International Corporation as in effect on the date hereof, the Collateral Agent shall have the right, without notice to any Grantor, to transfer all or any portion of Pledged Equity Interest or Pledged Debt to its name or the name of its nominee or agent. In addition, the Collateral Agent shall have the right at any time, without notice to any Grantor, to exchange any certificates or instruments representing any Pledged Equity Interest or Pledged Debt for certificates or instruments of smaller or larger denominations.

(e) Investment Accounts.

(i) Representations and Warranties. Each Grantor hereby represents and warrants that:

(1) Schedule III hereto (as such Schedule may be amended or supplemented from time to time) sets forth under the headings “Securities Accounts” and “Commodities Accounts,” respectively, all of the Securities Accounts and Commodities Accounts in which such Grantor has an interest. Such Grantor is the sole entitlement holder of each such Securities Account and Commodities Account, and such Grantor has not consented to, and is not otherwise aware of, any Person (other than the Collateral Agent pursuant hereto and First Capital) having “control” (within the meanings of Sections 8106 and 9106 of the UCC) over, or any other interest in, any such Securities Account or Commodity Account or any securities or other property credited thereto;

(2) Schedule III hereto (as such Schedule may be amended or supplemented from time to time) sets forth under the heading “Deposit Accounts” all of the Deposit Accounts in which such Grantor has an interest and such Grantor is the sole account holder of each such Deposit Account and such Grantor has not consented to, and is not otherwise aware of, any Person (other than the Collateral Agent pursuant hereto) having either sole dominion and control (within the meaning of common law) or “control” (within the meaning of Section 9104 of the UCC) over, or any other interest in, any such Deposit Account or any money or other property deposited therein; and

(ii) Covenants and Agreements. In the event any Grantor acquires rights in any Securities Accounts, Securities Entitlements, Deposit Accounts or Commodity Accounts after the date hereof, such Grantor shall deliver to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, reflecting such new Securities Accounts, Securities Entitlements, Deposit Accounts or Commodity Accounts and all other Securities Accounts, Securities Entitlements, Deposit Accounts or Commodity Accounts. Notwithstanding the foregoing, it is understood and agreed that the security interest of the Collateral Agent shall attach to all Securities Accounts, Securities Entitlements, Deposit Accounts or Commodity Accounts

immediately upon any Grantor’s acquisition of rights therein and shall not be affected by the failure of any Grantor to deliver a supplement to Schedule III as required hereby.

(iii) Delivery and Control. Each Grantor agrees that with respect to any Investment Related Property consisting of Securities Accounts or Securities Entitlements, such Grantor shall cause the securities intermediary maintaining such Securities Account or Securities Entitlement to enter into an agreement, in form and substance satisfactory to the Collateral Agent, pursuant to which such securities intermediary shall agree to comply with the Collateral Agent’s “entitlement orders” without further consent by such Grantor and shall establish the Collateral Agent shall have “control” (within the meaning of Section 9106 of the UCC) over such Securities Accounts or Securities Entitlements. With respect to any Investment Related Property that is a “Deposit Account,” such Grantor shall cause the depositary institution maintaining such account to enter into an agreement, in form and substance satisfactory to the Collateral Agent, pursuant to which the depositary institution shall agree to comply with the Collateral Agent’s instructions without further consent by such Grantor and shall establish the Collateral Agent shall have “control” (within the meaning of Section 9104 of the UCC) over such Deposit Account. With respect to any Investment Related Property that is a “Commodity Account,” such Grantor shall cause the commodity intermediary maintaining such account to enter into an agreement, in form and substance satisfactory to the Collateral Agent, pursuant to which the Collateral Agent shall have “control” (within the meaning of Section 9106 of the UCC) over such Commodity Account. Each Grantor shall have entered into such control agreement or agreements with respect to: (i) any Securities Accounts, Securities Entitlements or Deposit Accounts that exist on the date hereof, on or prior to the date hereof and (ii) any Securities Accounts, Securities Entitlements, Deposit Accounts or Commodity Accounts that are created or acquired after the date hereof, as of or prior to the deposit or transfer of any such Securities Entitlements or funds, whether constituting moneys or investments, into such Securities Accounts, Deposit Accounts or Commodity Accounts.

(f) Material Contracts.

(i) Representations and Warranties. Each hereby represents and warrants that:

(1) Schedule IV hereto sets forth all of the Material Contracts to which such Grantor has rights;

(2) the Material Contracts, true and complete copies (including any amendments or supplements thereof) of which have been furnished to the Collateral Agent, have been duly authorized, executed and delivered by the Grantor party thereto, are in full force and effect and are binding upon and enforceable against such Grantor party thereto in accordance with their respective terms. There exists no default under any Material Contract by any party thereto and neither such Grantor, nor to its best knowledge, any other Person party thereto is likely to become in default thereunder and no Person party thereto has any defenses, counterclaims or right of set-off with respect to any Material Contract; and

(3) no Material Contract requires consent of or notice to any Person in connection with the transactions contemplated hereunder, except such as has been given or made.

(ii) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(1) in addition to any rights under this Agreement relating to Receivables, the Collateral Agent may at any time notify, or require any Grantor to so notify, the counterparty on any Material Contract of the security interest of the Collateral Agent therein. In addition, after the occurrence and during the continuance of an Event of Default, the Collateral Agent may upon written notice to the applicable Grantor, notify, or require any Grantor to notify, the counterparty to make all payments under the Material Contracts directly to the Collateral Agent;

(2) such Grantor shall deliver promptly to the Collateral Agent a copy of each material demand, notice or document received by it relating in any way to any Material Contract;

(3) such Grantor shall deliver promptly to the Collateral Agent, and in any event within ten (10) Business Days, after (1) any Material Contract of such Grantor is terminated or amended in a manner that is materially adverse to such Grantor or (2) any new Material Contract is entered into by such Grantor, a written statement describing such event, with copies of such material amendments or new contracts, delivered to the Collateral Agent (to the extent such delivery is permitted by the terms of any such Material Contract, provided, no prohibition on delivery shall be effective if it were bargained for by such Grantor with the intent of avoiding compliance with this Agreement, and an explanation of any actions being taken with respect thereto);

(4) such Grantor shall perform in all material respects all of its obligations with respect to the Material Contracts;

(5) such Grantor shall promptly and diligently exercise each material right (except the right of termination) it may have under any Material Contract, any Supporting Obligation or Collateral Support, in each case, at its own expense, and in connection with such collections and exercise, such Grantor shall take such action as such Grantor may deem necessary or advisable; and

(6) such Grantor shall use its best efforts to keep in full force and effect any Supporting Obligation or Collateral Support relating to any Material Contract.

(g) Letter of Credit Rights.

(i) Representations and Warranties. Each Grantor hereby represents and warrants that:

(1) all material letters of credit to which such Grantor has rights is listed on Schedule V hereto; and

(2) such Grantor has obtained the consent of each issuer of any material letter of credit to the assignment of the proceeds of the letter of credit to the Collateral Agent.

(ii) Covenants and Agreements. Each Grantor hereby covenants and agrees that with respect to any material letter of credit hereafter arising, such Grantor shall obtain the

consent of the issuer thereof to the assignment of the proceeds of the letter of credit to the Collateral Agent and shall deliver to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto. Notwithstanding the foregoing, it is understood and agreed that the security interest of the Collateral Agent shall attach to all letters of credit immediately upon any Grantor’s acquisition of rights therein and shall not be affected by the failure of any Grantor to deliver a supplement to Schedule V as required hereby.

(h) Intellectual Property.

(i) Representations and Warranties. Except as disclosed in Schedule VI(H) (as such Schedule may be amended or supplemented from time to time), each Grantor hereby represents and warrants that:

(1) Schedule VI (as such Schedule may be amended or supplemented from time to time) sets forth a true and complete list of (i) all United States, state and foreign registrations of and applications for Patents, Trademarks, and Copyrights owned by such Grantor and (ii) all Patent Licenses, Trademark Licenses and Copyright Licenses, granting rights in any Patents, Trademarks or Copyrights owned by Grantor and any other such licenses that are material to the business of such Grantor;

(2) all registrations and applications of such Grantor for Copyrights, Patents and Trademarks are standing in the name of such Grantor;

(3) such Grantor is the sole and exclusive owner of the entire right, title, and interest in and to all Intellectual Property on Schedule VI (as such Schedule may be amended or supplemented from time to time), and owns or has the valid right to use all other Intellectual Property used in or necessary to conduct its business, free and clear of all Liens, claims, encumbrances and licenses, except for Permitted Liens and the Intellectual Property Licenses set forth on Schedule VI(B), (D), (F) and (G) (as each may be amended or supplemented from time to time);

(4) all Intellectual Property owned by such Grantor and, to the best of such Grantor’s knowledge, licensed to such Grantor: (i) is subsisting, (ii) is valid and enforceable and (iii) has not been adjudged invalid or unenforceable, in whole or in part; and such Grantor has performed all acts and has paid all renewal, maintenance, and other fees and taxes required to maintain each and every registration and application of Intellectual Property that such Grantor owns in full force and effect;

(5) no action or proceeding before any court or administrative authority is pending or, to such Grantor’s knowledge, threatened against such Grantor challenging such Grantor’s right to register, the validity of, or such Grantor’s rights to own, use, or license any Intellectual Property;

(6) such Grantor has been using appropriate statutory notice of registration in connection with its use of registered Trademarks, proper marking practices in connection with the use of Patents, and appropriate notice of copyright in connection with the publication of Copyrights material to the business of such Grantor;

(7) such Grantor uses adequate standards of quality in the manufacture, distribution, and sale of all products sold and in the provision of all services

rendered under or in connection with all Trademarks owned by such Grantor and has taken all action necessary to insure that all licensees of such Trademarks use such adequate standards of quality;

(8) the conduct of such Grantor’s business does not infringe upon any trademark, patent, copyright, trade secret or similar intellectual property right owned or controlled by a third party; no claim is pending, or to the best of such Grantor’s knowledge, threatened, that the conduct of such Grantor’s business or the use of any Intellectual Property owned or used by Grantor violates the asserted rights of any third party;

(9) to the best of such Grantor’s knowledge, no third party is infringing upon any Intellectual Property owned or used by such Grantor;

(10) no settlement or consents, covenants not to sue, nonassertion assurances, or releases have been entered into by such Grantor or to which such Grantor is bound that adversely effect such Grantor’s rights to own or use any Intellectual Property; and

(11) such Grantor has not made any agreements to assign, sell, transfer or grant an option or license for any Intellectual Property that has not been terminated or released. There is no effective financing statement or other document or instrument now executed, or on file or recorded in any public office, granting a security interest in or otherwise encumbering any part of the Intellectual Property, other than in favor of the Collateral Agent, in favor of First Capital under the First Capital Credit Facility and in favor of the holders of the Existing Subordinated Notes.

(ii) Covenants and Agreements. Each Grantor hereby covenants and agrees as follows:

(1) except for Intellectual Property that is not in use and has negligible value, such Grantor shall not do any act or omit to do any act whereby any of the Intellectual Property which is material to the business of the Grantors may lapse, or become abandoned, dedicated to the public, or unenforceable, or which would adversely affect the validity, grant, or enforceability of the security interest granted therein;

(2) except for copyrights of negligible value, such Grantor shall, within thirty (30) days of the creation or acquisition of any Copyrightable work which is material to the business of the Grantors, apply to register the Copyright in the United States Copyright Office;

(3) such Grantor shall promptly notify the Collateral Agent if such Grantor knows or has reason to know that any item of the Intellectual Property of any Grantor that is in use or has more than negligible value may become (a) abandoned or dedicated to the public or placed in the public domain, (b) invalid or unenforceable, or (c) subject to any adverse determination or development (including the institution of proceedings) in any action or proceeding in the United States Patent and Trademark Office, the United States Copyright Office, and state registry, any foreign counterpart of the foregoing, or any court arbitral tribunal or regulatory agency;

(4) such Grantor shall take all reasonable steps in the United States Patent and Trademark Office, the United States Copyright Office, any state registry or any foreign counterpart of the foregoing, to pursue any application and maintain any registration of each Trademark, Patent, and Copyright owned by any Grantor and which is now or shall become included in the Intellectual Property including, but not limited to, those items on Schedule VI(A), (C) and (E) (as each may be amended or supplemented from time to time) except for those pertaining to IP that are no longer in use and has negligible value;

(5) in the event that any Intellectual Property owned by or exclusively licensed to any Grantor is infringed, misappropriated, or diluted by a third party, such Grantor shall promptly take all reasonable actions to stop such infringement, misappropriation, or dilution and protect its exclusive rights in such Intellectual Property including, but not limited to, the initiation of a suit for injunctive relief and to recover damages;

(6) each Grantor shall maintain the level of the quality of products sold and services rendered under any Trademark at a level at least substantially consistent with the quality of such products and services as of the date hereof, and each Grantor shall take all steps necessary to insure that licensees of such Trademarks use such standards of quality;

(7) such Grantor shall take all steps reasonably necessary to protect the confidentiality of all material Trade Secrets of any Grantor, including, without limitation, entering into confidentiality agreements with employees and labeling and restricting access to confidential information and documents;

(8) such Grantor shall promptly (but in no event more than thirty (30) days) report to the Collateral Agent (i) the filing of any application to register any Intellectual Property whether it owns in whole or in part or to the best of its knowledge which it is exclusively licensing from a third party with the United States Patent and Trademark Office, the United States Copyright Office, or any state registry or foreign counterpart of the foregoing (whether such application is filed by such Grantor or through any agent, employee, licensor, licensee, or designee thereof), (ii) the registration of any Intellectual Property by any such office, or (iii) the acquisition of any application or registration and, in each case, shall execute and deliver to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto an executed Trademark Security Agreement, Patent Security Agreement, or Copyright Security Agreement in form and substance satisfactory to the Agent;

(9) except with the prior consent of the Collateral Agent or as permitted under the Securities Purchase Agreement, no Grantor shall execute, and there will not be on file in any public office, any financing statement or other document or instruments, except financing statements or other documents or instruments filed or to be filed in favor of the Collateral Agent, and no Grantor shall sell, assign, transfer, license, grant any option, or create or suffer to exist any Lien upon or with respect to the Intellectual Property, except for the Lien created by and under this Security Agreement and the other Loan Documents, any liens created in favor of First Capital under the First Capital Credit Facility and any liens if favor of the holders of the Existing Subordinated Notes.

(10) such Grantor shall hereafter use commercially reasonable efforts so as not to permit the inclusion in any contract to which it hereafter becomes a party of any provision that would impair or prevent the creation of a security interest in, or the assignment of, such Grantor’s rights and interests in any Intellectual Property acquired under such Contracts;

(11) such Grantor shall use proper statutory notice in connection with its use of any of the Intellectual Property; and

(12) such Grantor shall continue to collect, at its own expense, all amounts due or to become due to such Grantor in respect of any Intellectual Property. In connection with such collections, such Grantor may take (and, at the Collateral Agent’s reasonable direction, shall take) such action as such Grantor or the Collateral Agent may deem reasonably necessary or advisable to enforce collection of such amounts. Notwithstanding the foregoing, the Collateral Agent shall have the right at any time, to notify, or require any Grantor to notify, any obligors with respect to any such amounts of the existence of the security interest created hereby.

(i) Commercial Tort Claims

(i) Representations and Warranties. Each Grantor hereby represents and warrants that Schedule VII (as such Schedule may be amended or supplemented from time to time) sets forth all Commercial Tort Claims of each Grantor.

(ii) Covenants and Agreements. Each Grantor hereby covenants and agrees that with respect to any Commercial Tort Claim hereafter arising, such Grantor shall deliver to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, identifying such new Commercial Tort Claims.

Section 5. DIVIDENDS, DISTRIBUTIONS AND VOTING.

(a) Dividends and Distributions. Except as provided in the next sentence, in the event any Grantor receives (x) any dividends, interest or distributions on any Investment Related Property, or (y) any securities or other property upon the merger, consolidation, liquidation or dissolution of any issuer of any Investment Related Property, then (1) such dividends, interest or distributions and securities or other property shall be included in the definition of Collateral without further action and (2) such Grantor shall immediately take all steps, if any, necessary or advisable to ensure the validity, perfection, priority and, if applicable, control of the Collateral Agent over such dividends, distributions, interest, securities or other property (including, without limitation, delivery thereof to the Collateral Agent) and pending any such action such Grantor shall be deemed to hold such dividends, distributions, interest, securities or other property in trust for the benefit of the Collateral Agent and shall be segregated from all other property of such Grantor. Notwithstanding the foregoing, so long as no Event of Default shall have occurred and be continuing, the Collateral Agent authorizes each Grantor to retain all ordinary cash dividends and distributions paid in the normal course of the business of the issuer and consistent with the past practice of the issuer and all scheduled payments of interest;

(b) Voting.

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

(1) except as otherwise provided under the covenants and agreements relating to Investment Related Property in this Agreement or elsewhere herein or in the Securities Purchase Agreement, each Grantor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Investment Related Property or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Securities Purchase Agreement; provided, no Grantor shall exercise or refrain from exercising any such right if the Collateral Agent shall have notified such Grantor that, in the Collateral Agent’s reasonable judgment, such action would have a Material Adverse Effect on the value of the Investment Related Property or any part thereof, except solely to the extent required to vote in such manner under any agreement restricting Prolong International Corporation’s right to vote its shares of capital stock of Oryxe Energy International, Inc.; and provided further, such Grantor shall give the Collateral Agent at least five (5) Business Days prior written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right; it being understood, however, that neither the voting by such Grantor of any Pledged Stock for, or such Grantor’s consent to, the election of directors (or similar governing body) at a regularly scheduled annual or other meeting of stockholders or with respect to incidental matters at any such meeting, nor such Grantor’s consent to or approval of any action otherwise permitted under this Agreement and the Securities Purchase Agreement, shall be deemed inconsistent with the terms of this Agreement or the Securities Purchase Agreement, and no notice of any such voting or consent need be given to the Collateral Agent; and

(2) the Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to the applicable Grantor all proxies, and other instruments as such Grantor may from time to time reasonably request for the purpose of enabling such Grantor to exercise the voting and other consensual rights when and to the extent which it is entitled to exercise pursuant to clause (1) above;

(ii) Upon the occurrence and during the continuation of an Event of Default:

(1) all rights of any Grantor to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant hereto shall cease and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights, except to the extent prohibited by any agreement restricting Prolong International Corporation’s right to vote its shares of capital stock of Oryxe Energy International, Inc., in which event Grantor agrees to vote in accordance with any such agreement in accordance with the Collateral Agent’s instruction; and

(2) in order to permit the Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions which it may be entitled to receive hereunder: (1) each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the Collateral Agent all proxies, dividend payment orders and other instruments as the Collateral Agent may from time to time reasonably request and (2) each Grantor acknowledges that the Collateral Agent may utilize the power of attorney set forth in Section 7.

Section 6. ACCESS; RIGHT OF INSPECTION AND FURTHER ASSURANCES.

(a) Access; Right of Inspection. The Collateral Agent shall have the same access and inspection rights as the Purchasers under the Securities Purchase Agreement.

(b) Further Assurances.

(i) Each Grantor agrees that from time to time, at the expense of such Grantor, that such Grantor shall promptly Authenticate, execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Collateral Agent may reasonably request, in order to create and/or maintain the validity, perfection or priority of and protect any security interest granted or purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor shall:

(1) file such financing or continuation statements, or amendments thereto, and execute and deliver such other agreements, instruments, endorsements, powers of attorney or notices, as may be necessary or desirable, or as the Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby;

(2) take all actions necessary to ensure the recordation of appropriate evidence of the liens and security interest granted hereunder in the Intellectual Property with any intellectual property registry in which said Intellectual Property is registered or in which an application for registration is pending including, without limitation, the United States Patent and Trademark Office, the United States Copyright Office, the various Secretaries of State, and the foreign counterparts on any of the foregoing;

(3) at any reasonable time, upon request by the Collateral Agent, exhibit the Collateral to and allow inspection of the Collateral by the Collateral Agent, or persons designated by the Collateral Agent; and

(4) at the Collateral Agent’s request, appear in and defend any action or proceeding that may affect such Grantor’s title to or the Collateral Agent’s security interest in all or any part of the Collateral.

(ii) Each Grantor hereby authorizes the filing of any financing statements or continuation statements, and amendments to financing statements, or any similar document, or the filing or recording of this Agreement (and all schedules, annexes and exhibits hereto), in any jurisdictions and with any filing offices as the Collateral Agent may determine, in its sole discretion, are necessary or advisable to perfect or otherwise protect the security interest granted to the Collateral Agent herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Collateral Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to the Collateral Agent herein, including, without limitation, describing such property as “all assets” or “all personal property, whether now owned or hereafter acquired. Each Grantor shall furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail.

(iii) Each Grantor hereby authorizes the Collateral Agent to modify this Agreement after obtaining such Grantor’s approval of or signature to such modification by amending Schedule VI hereto (as such Schedule may be amended or supplemented from time to time) to include reference to any right, Title or interest in any existing Intellectual Property or any Intellectual Property acquired or developed by any Grantor after the execution hereof.

Section 7. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT, IRREVOCABLE POWER OF ATTORNEY. Each Grantor hereby irrevocably appoints the Collateral Agent (such appointment being coupled with an interest) as such Grantor’s attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, the Collateral Agent or otherwise, from time to time in the Collateral Agent’s discretion to take any action and to execute any instrument that the Collateral Agent may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, the following:

(i) upon the occurrence and during the continuance of any Event of Default, to obtain and adjust insurance required to be maintained by such Grantor or paid to the Collateral Agent pursuant to the Loan Documents;

(ii) upon the occurrence and during the continuance of any Event of Default, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral;

(iii) upon the occurrence and during the continuance of any Event of Default, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (ii) above;

(iv) upon the occurrence and during the continuance of any Event of Default, to file any claims or take any action or institute any proceedings that the Collateral Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Collateral Agent with respect to any of the Collateral;

(v) to prepare, sign, and file for recordation in any intellectual property registry, appropriate evidence of the lien and security interest granted herein in the Intellectual Property in the name of such Grantor as assignor;

(vi) to take or cause to be taken all actions necessary to perform or comply or cause performance or compliance with the terms of this Agreement, including, without limitation, access to pay or discharge taxes or Liens (other than Permitted Liens) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by the Collateral Agent in its sole discretion, any such payments made by the Collateral Agent to become obligations of such Grantor to the Collateral Agent, due and payable immediately without demand; and

(vii) upon the occurrence and during the continuance of any Event of Default, generally to sell, transfer, lease, license, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent’s option and such Grantor’s expense, at any time or from time to time, all acts and things that the Collateral Agent deems reasonably necessary or appropriate to protect, preserve or realize upon the Collateral and

the Collateral Agent’s security interest therein in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.

Section 8. REMEDIES.

(a) Generally.

(i) If any Event of Default shall have occurred and be continuing, the Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it at law or in equity, all the rights and remedies of the Collateral Agent on default under the UCC (whether or not the UCC applies to the affected Collateral) to collect, enforce or satisfy any Secured Obligations then owing, whether by acceleration or otherwise, and also may pursue any of the following separately, successively or simultaneously:

(1) require any Grantor to, and each Grantor hereby agrees that it shall at its expense and promptly upon request of the Collateral Agent forthwith, assemble all or part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at a place to be designated by the Collateral Agent that is reasonably convenient to both parties;

(2) enter onto the property where any Collateral is located and take possession thereof with or without judicial process;

(3) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent the Collateral Agent deems appropriate;

(4) without notice except as specified below or under the UCC, sell, assign, lease, license (on an exclusive or nonexclusive basis) or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Collateral Agent’s offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as the Collateral Agent may deem commercially reasonable; and

(ii) The Collateral Agent or any Secured Party may be the purchaser of any or all of the Collateral at any public or private (to the extent to portion of the Collateral being privately sold is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations) sale in accordance with the UCC and the Collateral Agent, as collateral agent for and representative of the Secured Parties, shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such sale made in accordance with the UCC, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by the Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification.

The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor agrees that it would not be commercially unreasonable for the Collateral Agent to dispose of the Collateral or any portion thereof by using Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets. Each Grantor hereby waives any claims against the Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, each Grantor shall be liable for the deficiency and the fees of any attorneys employed by the Collateral Agent to collect such deficiency. Each Grantor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to the Collateral Agent, that the Collateral Agent has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section shall in any way alter the rights of the Collateral Agent hereunder.

(iii) The Collateral Agent may sell the Collateral without giving any warranties as to the Collateral. The Collateral Agent may specifically disclaim or modify any warranties of title or the like. This procedure will not be considered to adversely effect the commercial reasonableness of any sale of the Collateral.

(iv) The Collateral Agent shall have no obligation to marshal any of the Collateral.

(v) If any Event of Default shall have occurred and be continuing, the Collateral Agent shall have the right to notify, or require each Grantor to notify, any obligors with respect to amounts due or to become due to such Grantor in respect of the Collateral, of the existence of the security interest created herein, to direct such obligors to make payment of all such amounts directly to the Collateral Agent, and, upon such notification and at the expense of such Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done:

(1) all amounts and proceeds (including checks and other instruments) received by any Grantor in respect of amounts due to such Grantor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of the Collateral Agent hereunder, shall be segregated from other funds of such Grantor and shall be forthwith paid over or delivered to the Collateral Agent in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by the sections of this Agreement relating to Cash Proceeds; and

(2) Grantors shall not adjust, settle or compromise the amount or payment of any such amount in excess of One Hundred Thousand

Dollars ($100,000) or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon, except as done in the ordinary course of business.

(b) Application of Proceeds. Except as expressly provided elsewhere in this Agreement, all proceeds received by the Collateral Agent in respect of any sale, any collection from, or other realization upon all or any part of the Collateral shall be applied in full or in part by the Collateral Agent against, the Secured Obligations in the following order of priority: first, to the payment of all costs and expenses of such sale, collection or other realization, including reasonable compensation to the Collateral Agent and its agents and counsel, and all other expenses, liabilities and advances made or incurred by the Collateral Agent in connection therewith, and all amounts for which the Collateral Agent is entitled to indemnification hereunder (in its capacity as the Collateral Agent) and all advances made by the Collateral Agent hereunder for the account of the applicable Grantor, and to the payment of all costs and expenses paid or incurred by the Collateral Agent in connection with the exercise of any right or remedy hereunder or under any Loan Document, all in accordance with the terms hereof or thereof; second, to the extent of any excess of such proceeds, to the payment of all other Secured Obligations for the ratable benefit of each Secured Party; and third, to the extent of any excess of such proceeds, to the payment to or upon the order of such Grantor or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.

(c) Sales on Credit. If Collateral Agent sells any of the Collateral upon credit, the Grantors will be credited only with payments actually made by purchaser and received by Collateral Agent and applied to indebtedness of the Purchaser. In the event the purchaser fails to pay for the Collateral, Collateral Agent may resell the Collateral and the Grantors shall be credited with proceeds of the sale.

(d) Cash and Cash Proceeds. If an Event of Default shall have occurred and be continuing, (1) the Collateral Agent shall have the right to apply the balance from any Deposit Account or instruct the bank at which any Deposit Account is maintained to pay the balance of any Deposit Account to or for the benefit of the Collateral Agent and (2) all Cash and Cash Proceeds shall be held by such Grantor in trust for the Collateral Agent, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required) and held by the Collateral Agent. All such funds from any Deposit Account, Cash and Cash Proceeds or any other Money held by the Collateral Agent may, in the sole discretion of the Collateral Agent, (A) be held by the Collateral Agent for the ratable benefit of each Secured Party, as collateral security for the Secured Obligations (whether matured or unmatured) and/or (B) then, or at any time thereafter, be applied by the Collateral Agent against the Secured Obligations then due and owing.

(e) Investment Related Property. In addition to the rights and remedies specified above, the following provisions shall also be applicable to Investment Related Property. Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the “Securities Act”) and applicable state securities laws, the Collateral Agent may be compelled, with respect to any sale of all or any part of the Investment Related Property conducted without prior registration or qualification of such Investment Related Property under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree to, among other things, acquire the Investment Related Property for their own account, for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges that any such private sale may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, each Grantor agrees that any such private sale shall be deemed to have been made in a

commercially reasonable manner and that the Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Investment Related Property for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. If the Collateral Agent determines to exercise its right to sell any or all of the Investment Related Property, upon written request, each Grantor shall and shall cause each issuer of any Pledged Stock to be sold hereunder, each partnership and each limited liability company from time to time to furnish to the Collateral Agent all such information as the Collateral Agent may request in order to determine the number and nature of interest, shares or other instruments included in the Investment Related Property which may be sold by the Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.

(f) Intellectual Property. In addition to the rights and remedies specified above, the following provisions shall also be applicable to Intellectual Property.

(i) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default:

(1) the Collateral Agent shall have the right (but not the obligation) to bring suit or otherwise commence any action or proceeding in the name of any Grantor, the Collateral Agent or otherwise, in the Collateral Agent’s sole discretion, to enforce any Intellectual Property, in which event such Grantor shall, at the request of the Collateral Agent, do any and all lawful acts and execute any and all documents required by the Collateral Agent in aid of such enforcement and such Grantor shall promptly, upon demand, reimburse and indemnify the Collateral Agent as provided in the Section in this Agreement relating to indemnity and expenses in connection with the exercise of its rights under this Section, and, to the extent that the Collateral Agent shall elect not to bring suit to enforce any Intellectual Property as provided in this Section, each Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Intellectual Property by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing as shall be necessary to prevent such infringement;

(2) upon written demand from the Collateral Agent, each Grantor shall grant, assign, convey or otherwise transfer to the Collateral Agent or such Collateral Agent’s designee all of such Grantor’s right, title and interest in and to the Intellectual Property and shall execute and deliver to the Collateral Agent such documents as are reasonably necessary or appropriate to carry out the intent and purposes of this Agreement;

(3) within five (5) Business Days after written notice from the Collateral Agent, each Grantor shall make available to the Collateral Agent, to the extent within such Grantor’s power and authority, such personnel in such Grantor’s employ on the date of such Event of Default as the Collateral Agent may reasonably designate, by name, title or job responsibility, to permit such Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by such Grantor under or in connection with the Trademarks, Trademark Licenses, such persons to be available to perform their prior functions on the Collateral Agent’s behalf and to be compensated by the Collateral Agent at such Grantor’s expense on a per diem, pro-rata

basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default.

(ii) Solely for the purpose of enabling the Collateral Agent to exercise rights and remedies under this Section 8(f)(ii) and at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to the Collateral Agent, to the extent it has the right to do so, an irrevocable, nonexclusive worldwide license (exercisable without payment of royalty or other compensation to such Grantor), subject, in the case of Trademarks, to sufficient rights to quality control and inspection in favor of the Trademark Owner to avoid the risk of invalidation of said Trademarks, to use, operate under, license, or sublicense any Intellectual Property now or hereafter owned by or licensed to such Grantor.

Section 9. COLLATERAL AGENT

The Collateral Agent has been appointed to act as Collateral Agent hereunder by each Secured Party by their acceptance of the benefits hereof. The Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Securities Purchase Agreement. Without the written consent of the Collateral Agent, no amendment, modification, termination, or consent shall be effective if the effect thereof would release all or substantially all of the Collateral except as expressly provided herein. In furtherance of the foregoing provisions of this Section, each Secured Party, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Secured Party that all rights and remedies hereunder may be exercised solely by the Collateral Agent for the benefit of each Secured Party in accordance with the terms of this Section. Collateral Agent may resign at any time by giving thirty (30) days’ prior written notice thereof to each Secured Party and the Grantors, and Collateral Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to the Grantors and Collateral Agent signed by the parties holding more than 50% of the Secured Obligations (the “Requisite Parties”). Upon any such notice of resignation or any such removal, Requisite Parties shall have the right, upon five (5) Business Days’ notice to the Collateral Agent, following receipt of the Grantors’ consent (which shall not be unreasonably withheld or delayed and which shall not be required while an Event of Default exists), to appoint a successor Collateral Agent. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, that successor shall become Collateral Agent under this Agreement, and such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, Securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent’s resignation or removal hereunder as the Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was the Collateral Agent hereunder.

Section 10. CONTINUING SECURITY INTEREST; TRANSFER OF SECURED OBLIGATIONS

This Agreement shall create a continuing security interest in the Collateral and shall remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the commitments and any other contingent obligation included in the Secured Obligations, be binding upon each Grantor, its successors and assigns, and inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing, but subject to the terms of the Loan Documents, each Secured Party may assign or otherwise transfer any Secured Obligations held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to each Secured Party herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the commitments and any other contingent obligation included in the Secured Obligations, the security interest granted hereby shall terminate hereunder and of record and all rights to the Collateral shall revert to Grantors. Upon any such termination the Collateral Agent shall, at Grantors’ expense, execute and deliver to Grantors such documents as Grantors shall reasonably request to evidence such termination.

Section 11. STANDARD OF CARE; COLLATERAL AGENT MAY PERFORM.

The powers conferred on the Collateral Agent hereunder are solely to protect its interest in the Collateral and the interests of the Secured Parties and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or otherwise. If any Grantor fails to perform any agreement contained herein, the Collateral Agent may itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent incurred in connection therewith shall be payable by each Grantor and pending such payment shall be included in the obligations secured hereby.

Section 12. INDEMNITY AND EXPENSES.

(a) Indemnity. Each Grantor agrees:

(i) to defend (subject to Indemnitees’ selection of counsel), indemnify, pay and hold harmless each Indemnitee, from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby and by the other Loan Documents (including without limitation enforcement of this Agreement and the other Loan Documents), except to the extent such claims, losses or liabilities result from such Indemnitee’s gross negligence or willful misconduct; and

(ii) to pay to the Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses as set forth in this Agreement.

(b) Expenses. Each Grantor agrees to pay promptly all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Collateral Agent, for the benefit of each Secured Party pursuant hereto, including search, filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums and reasonable fees, expenses and disbursements of counsel to Collateral Agent and of counsel providing any opinions that Collateral Agent may request in respect of the Collateral or the Liens created pursuant to the Collateral Documents; all the actual costs and reasonable fees, expenses and disbursements of any auditors, accountants, consultants or appraisers; all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any appraisers, consultants, advisors and agents employed or retained by Collateral Agent and its counsel) in connection with the custody or preservation of any of the Collateral; and after the occurrence of an Event of Default, all costs and expenses, including reasonable attorneys’ fees (including allocated costs of internal counsel) and costs of settlement, incurred by Collateral Agent in enforcing any Secured Obligations of or in collecting any payments due from any Grantor hereunder or under the other Loan Documents by reason of such Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral) or in connection with any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a “work-out” or pursuant to any insolvency or bankruptcy cases or proceedings.

(c) Survival. The obligations of each Grantor in this Section 12 shall survive the termination of this Agreement and the discharge of such Grantor’s other obligations under this Agreement for a period of eighteen (18) months thereafter.

Section 13. MISCELLANEOUS.

(a) Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given to a Grantor or Collateral Agent, shall be sent to such Person’s address as set forth in the Securities Purchase Agreement or in the other relevant Loan Document. Each notice hereunder shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service and signed for against receipt thereof, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided, no notice to Collateral Agent shall be effective until received by Collateral Agent.

(b) Amendments and Waivers.

(i) Collateral Agent’s Consent. Subject to Section 9, no amendment, modification, termination or waiver of any provision of this Agreement, or consent to any departure by any Grantor therefrom, shall in any event be effective without the written concurrence of the Collateral Agent.

(ii) No Waiver; Remedies Cumulative. No failure or delay on the part of the Collateral Agent in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights, powers and remedies existing under this Agreement and the other Loan Documents are cumulative, and not exclusive of, any rights or remedies otherwise available. Any forbearance or failure to exercise, and any delay in exercising, any right, power or remedy hereunder shall not

impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy.

(c) Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns including all persons who become bound as debtor to this Agreement. No Grantor shall, without the prior written consent of the Collateral Agent, assign any right, duty or obligation hereunder.

(d) Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default if such action is taken or condition exists.

(e) Survival of Representations, Warranties and Agreements. All representations, warranties and agreements made herein shall survive the execution and delivery hereof. Notwithstanding anything herein or implied by law to the contrary, the agreements of each Grantor set forth in Sections 11 and 12 shall survive the termination of this Agreement for a period of eighteen (18) months thereafter.

(f) Marshalling; Payments Set Aside. Collateral Agent shall not be under any obligation to marshal any assets in favor of any Grantor or any other Person or against or in payment of any or all of the Secured Obligations.

(g) Severability. In case any provision in or obligation hereunder shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.

(h) Headings. Section headings herein are included herein for convenience of reference only and shall not constitute a part hereof for any other purpose or be given any substantive effect.

(i) APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

(j) CONSENT TO JURISDICTION. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GRANTOR ARISING OUT OF OR RELATING HERETO OR ANY OTHER LOAN DOCUMENT, OR ANY OF THE OBLIGATIONS, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF LOS ANGELES. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE APPLICABLE GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH THIS SECTION 13; AGREES THAT SUCH SERVICE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE APPLICABLE GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; AND AGREES COLLATERAL AGENT RETAINS THE RIGHT TO SERVE

PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST ANY GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION.

(k) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING HEREUNDER OR UNDER ANY OF THE OTHER LOAN DOCUMENTS. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 13(K) AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

(l) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

(m) Effectiveness. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Grantors and the Collateral Agent of written or telephonic notification of such execution and authorization of delivery thereof.

(n) Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between Grantors and the Collateral Agent and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

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

“GRANTORS”

PROLONG SUPER LUBRICANTS, INC.

By:		/s/ Elton Alderman
		Name: Elton Alderman
		Title: President and Chief Executive Officer

PROLONG INTERNATIONAL CORPORATION

By:		/s/ Elton Alderman
		Name: Elton Alderman
		Title: President and Chief Executive Officer

ST. CLOUD CAPITAL PARTNERS, LP
as the Collateral Agent

By: SCCP, LLC
Its: General Partner

By:		/s/ Marshall S. Geller
		Name: Marshall S. Geller
		Title: Senior Managing Member

EX-10.4 6 dex104.htm PARENT GUARANTY, DATED 11/24/03 Parent Guaranty, dated 11/24/03

EXHIBIT 10.4

Execution Copy

GUARANTY

This GUARANTY (this “Guaranty”), dated as of November 24, 2003, is entered into by and between PROLONG INTERNATIONAL CORPORATION, a Nevada corporation (“Guarantor”), and ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited partnership, individually and as agent for the benefit of Lenders (“Agent”). “Lenders” shall mean, collectively, ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited partnership (“St. Cloud”), BEDFORD OAK CAPITAL, L.P., a Delaware limited partnership, BEDFORD OAK OFFSHORE, LTD., a Cayman Islands company, and ASPEN VENTURES LLC, a New York limited liability company, and their respective successors and assigns.

W I T N E S S E T H:

WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as of the date hereof, by and among Guarantor, Prolong Super Lubricants, Inc., a Nevada corporation (“Borrower”), Prolong International Holdings Ltd., a Cayman Islands company, Prolong International Ltd., a Cayman Islands company, and Lenders (as from time to time amended, restated, supplemented or otherwise modified, the “Securities Purchase Agreement”), each Lender is purchasing a Secured Promissory Note of Borrower and a Common Stock Purchase Warrant, representing the right to acquire certain shares of the common stock, par value $0.001 per share, of Guarantor;

WHEREAS, Guarantor owns 100% of the outstanding capital stock of Borrower and as such will derive direct and indirect economic benefits from Lenders’ purchase of the Notes pursuant to the Securities Purchase Agreement; and

WHEREAS, in order to induce Lenders to enter into the Securities Purchase Agreement and the other Loan Documents and to induce Lenders to purchase the Notes as provided for in the Securities Purchase Agreement, Guarantor has agreed to guarantee payment of the Secured Obligations (as such term is defined in the Pledge and Security Agreement).

NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, and to induce Lenders to purchase the Notes under the Securities Purchase Agreement, it is agreed as follows:

1. DEFINITIONS.

Capitalized terms used herein shall have the meanings assigned to them in the Securities Purchase Agreement, unless otherwise defined herein.

References to this “Guaranty” shall mean this Guaranty, including all amendments, modifications and supplements and any annexes, exhibits and schedules to any of the foregoing, and shall refer to this Guaranty as the same may be in effect at the time such reference becomes operative.

2. THE GUARANTY.

2.1 Guaranty of Guaranteed Obligations of Borrower. Guarantor hereby unconditionally guarantees to Agent and Lenders, and their respective successors, endorsees, transferees and assigns, the prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of the Secured Obligations of Borrower (hereinafter the “Guaranteed Obligations”). Guarantor agrees that this Guaranty is a guaranty of payment and performance and not of collection, and that its obligations under this Guaranty shall be primary, absolute and unconditional, irrespective of, and unaffected by:

(a) the genuineness, validity, regularity, enforceability or any future amendment of, or change in this Guaranty, any other Loan Document or any other agreement, document or instrument to which any Guarantor and/or any other Credit Party is or may become a party;

(b) the absence of any action to enforce this Guaranty or any other Loan Document or the waiver or consent by Agent and/or Lenders with respect to any of the provisions thereof;

(c) the existence, value or condition of, or failure to perfect any Lien (as such term is defined in the Pledge and Security Agreement) of Agent against, any Collateral (as such term is defined in the Pledge and Security Agreement) for the Guaranteed Obligations or any action, or the absence of any action, by Agent in respect thereof (including, without limitation, the release of any such security); or

(d) the insolvency of any Credit Party; or

(e) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor,

it being agreed by Guarantor that its obligations under this Guaranty shall not be discharged until the Guaranteed Obligations are discharged in full (the “Termination Date”). Guarantor shall be regarded, and shall be in the same position, as principal debtor with respect to the Guaranteed Obligations. Guarantor agrees that any notice or directive given at any time to Agent which is inconsistent with the waiver in the immediately preceding sentence shall be null and void and may be ignored by Agent and Lenders, and, in addition, may not be pleaded or introduced as evidence in any litigation relating to this Guaranty for the reason that such pleading or introduction would be at variance with the written terms of this Guaranty, unless Agent has specifically agreed otherwise in writing. It is agreed among Guarantor, Agent and Lenders that the foregoing waivers are of the essence of the transaction contemplated by the Loan Documents and that, but for this Guaranty and such waivers, Agent and Lenders would decline to enter into the Securities Purchase Agreement.

2.2 Demand by Agent or Lenders. In addition to the terms of the Guaranty set forth in Section 2.1 hereof, and in no manner imposing any limitation on such terms, it is expressly understood and agreed that, if, at any time, the outstanding principal amount of the Guaranteed Obligations under the Loan Documents (including all accrued interest thereon) is declared to be

immediately due and payable, then Guarantor shall, without demand, pay to the holders of the Guaranteed Obligations the entire outstanding Guaranteed Obligations due and owing to such holders. Payment by Guarantor shall be made to Agent in immediately available funds to an account, designated by Agent or at the address set forth herein for the giving of notice to Agent or at any other address that may be specified in writing from time to time by Agent, and shall be credited and applied to the Guaranteed Obligations.

2.3 Enforcement of Guaranty. In no event shall Agent have any obligation (although it is entitled, at its option) to proceed against Borrower or any other Credit Party or any Collateral pledged to secure Guaranteed Obligations before seeking satisfaction from the Guarantor, and Agent may proceed, prior or subsequent to, or simultaneously with, the enforcement of Agent’s rights hereunder, to exercise any right or remedy which it may have against any Collateral, as a result of any Lien it may have as security for all or any portion of the Guaranteed Obligations.

2.4 Waiver.

(a) In addition to the waivers contained in Section 2.1 hereof, Guarantor waives and agrees to the maximum extent permitted by law that it shall not at any time insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshaling of assets or redemption laws, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by Guarantor of its Guaranteed Obligations under, or the enforcement by Agent or Lenders of, this Guaranty. Guarantor hereby waives diligence, presentment and demand (whether for non-payment or protest or of acceptance, maturity, extension of time, change in nature or form of the Guaranteed Obligations, acceptance of further security, release of further security, composition or agreement arrived at as to the amount of, or the terms of, the Guaranteed Obligations, notice of adverse change in Borrower’s financial condition or any other fact which might increase the risk to Guarantor) with respect to any of the Guaranteed Obligations or all other demands whatsoever and waives to the maximum extent permitted by law the benefit of all provisions of law which are or might be in conflict with the terms of this Guaranty. Guarantor represents, warrants and agrees that, as of the date of this Guaranty, its obligations under this Guaranty are not subject to any offsets or defenses against Agent or Lenders or any Credit Party of any kind. Guarantor further agrees that its obligations under this Guaranty shall not be subject to any counterclaims, offsets or defenses against Agent or any Lender or against any Credit Party of any kind which may arise in the future.

(b) Additionally, Guarantor further acknowledges and agrees that California Civil Code Section 2856 authorizes and validates waivers of a guarantor’s rights of subrogation and reimbursement and waivers of certain other rights and defenses available to a guarantor under California law. Based on the preceding sentence and without limiting the generality of the foregoing waivers contained in this Section 2.4(b) or any other provision hereof, Guarantor expressly waives to the maximum extent permitted by law any and all rights and defenses (except the defense of indefeasible final payment in full), which might otherwise be available to such Guarantor under California Civil Code

Sections 2787 to 2855, inclusive, 2899 and 3433 and under California Code of Civil Procedure Sections 580a, 580b, 580d and 726 (or any of such sections), or any other jurisdiction to the extent the same are applicable to this Guaranty or the agreements, covenants or obligations of Guarantor hereunder

2.5 Benefit of Guaranty. The provisions of this Guaranty are for the benefit of Agent and Lenders and their respective successors, transferees, endorsees and assigns, and nothing herein contained shall impair, as between any Credit Party and Agent or Lenders, the obligations of any Credit Party under the Loan Documents. In the event all or any part of the Guaranteed Obligations are transferred, indorsed or assigned by Agent or any Lender to any Person or Persons, any reference to “Agent” or “Lender” herein shall be deemed to refer equally to such Person or Persons.

2.6 Modification of Guaranteed Obligations, Etc. Guarantor hereby acknowledges and agrees that Agent and Lenders may at any time or from time to time, with or without the consent of, or notice to, Guarantor:

(a) change or extend the manner, place or terms of payment of, or renew or alter all or any portion of, the Guaranteed Obligations;

(b) take any action under or in respect of the Loan Documents in the exercise of any remedy, power or privilege contained therein or available to it at law, equity or otherwise, or waive or refrain from exercising any such remedies, powers or privileges;

(d) extend or waive the time for any Credit Party’s performance of, or compliance with, any term, covenant or agreement on its part to be performed or observed under the Loan Documents, or waive such performance or compliance or consent to a failure of, or departure from, such performance or compliance;

(e) take and hold Collateral for the payment of the Guaranteed Obligations guaranteed hereby or sell, exchange, release, dispose of, or otherwise deal with, any property pledged, mortgaged or conveyed, or in which Agent or Lenders have been granted a Lien, to secure any Secured Obligations;

(f) release anyone who may be liable in any manner for the payment of any amounts owed by Guarantor or any other Credit Party to Agent or any Lender;

(g) modify or terminate the terms of any intercreditor or subordination agreement pursuant to which claims of other creditors of Guarantor or any other Credit Party are subordinated to the claims of Agent and Lenders; and/or

(h) apply any sums by whomever paid or however realized to any amounts owing by Guarantor or any other Credit Party to Agent or any Lender in such manner as Agent or any Lender shall determine in its discretion;

and Agent and Lenders shall not incur any liability to Guarantor as a result thereof, and no such action shall impair or release the Guaranteed Obligations of Guarantor under this Guaranty.

2.7 Reinstatement. This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against any Credit Party or Guarantor for liquidation or reorganization, should any Credit Party or Guarantor become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of such Credit Party’s or Guarantor’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Guaranteed Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by Agent or any Lender, whether as a “voidable preference”, “fraudulent conveyance”, or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Guaranteed Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

2.8 Waiver of Subrogation, Etc. Notwithstanding anything to the contrary in this Guaranty, or in any other Loan Document, Guarantor hereby:

(a) expressly and irrevocably waives to the maximum extent permitted by law, on behalf of itself and its successors and assigns (including any surety), any and all rights at law or in equity to subrogation, to reimbursement, to exoneration, to contribution, to indemnification, to set off or to any other rights that could accrue to a surety against a principal, to a guarantor against a principal, to a guarantor against a maker or obligor, to an accommodation party against the party accommodated, to a holder or transferee against a maker, or to the holder of any claim against any Person, and which Guarantor may have or hereafter acquire against any Credit Party in connection with or as a result of Guarantor’s execution, delivery and/or performance of this Guaranty, or any other documents to which Guarantor is a party or otherwise; and

(b) acknowledges and agrees (i) that this waiver is intended to benefit Agent and Lenders and shall not limit or otherwise effect Guarantor’s liability hereunder or the enforceability of this Guaranty, and (ii) that Agent, Lenders and their respective successors and assigns are intended third party beneficiaries of the waivers and agreements set forth in this Section 2.8 and their rights under this Section 2.8 shall survive payment in full of the Guaranteed Obligations.

2.9 Election of Remedies. If Agent may, under applicable law, proceed to realize benefits under any of the Loan Documents giving Agent and Lenders a Lien upon any Collateral owned by any Credit Party, either by judicial foreclosure or by non-judicial sale or enforcement, Agent may, at its sole option, determine which of such remedies or rights it may pursue without affecting any of such rights and remedies under this Guaranty. If, in the exercise of any of its rights and remedies, Agent shall forfeit any of its rights or remedies, including its right to enter a deficiency judgment against any Credit Party, whether because of any applicable laws pertaining to “election of remedies” or the like, Guarantor hereby consents to such action by Agent and waives to the maximum extent permitted by law any claim based upon such action, even if such action by Agent shall result in a full or partial loss of any rights of subrogation which Guarantor

might otherwise have had but for such action by Agent. Any election of remedies which results in the denial or impairment of the right of Agent to seek a deficiency judgment against any Credit Party shall not impair Guarantor’s obligation to pay the full amount of the Guaranteed Obligations. In the event Agent shall bid at any foreclosure or trustee’s sale or at any private sale permitted by law or the Loan Documents, Agent may bid all or less than the amount of the Guaranteed Obligations and the amount of such bid need not be paid by Agent but shall be credited against the Guaranteed Obligations. The amount of the successful bid at any such sale shall be conclusively deemed to be the fair market value of the collateral and the difference between such bid amount and the remaining balance of the Guaranteed Obligations shall be conclusively deemed to be the amount of the Guaranteed Obligations guaranteed under this Guaranty, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Agent and Lenders might otherwise be entitled but for such bidding at any such sale.

2.10 Funds Transfers. If Guarantor shall engage in any transaction as a result of which Borrower is required to make a mandatory prepayment under Section 2.1.1 of the Notes and the Borrower is unable to make such mandatory prepayment, Guarantor shall distribute to, or make a contribution to the capital of, the Borrower an amount equal to the mandatory prepayment required under Section 2.1.1 of the Notes.

3. DELIVERIES.

In a form satisfactory to Agent, Guarantor shall deliver to Agent (with sufficient copies for each Lender), concurrently with the execution of this Guaranty and the Securities Purchase Agreement, the Loan Documents and other instruments, certificates and documents as are required to be delivered by Guarantor to Lenders under the Securities Purchase Agreement.

4. FURTHER ASSURANCES.

Guarantor agrees, upon the written request of Agent or any Lender, to execute and deliver to Agent or such Lender, from time to time, any additional instruments or documents reasonably considered necessary by Agent or such Lender to cause this Guaranty to be, become or remain valid and effective in accordance with its terms.

5. PAYMENTS FREE AND CLEAR OF TAXES.

All payments required to be made by Guarantor hereunder shall be made to Agent and Lenders free and clear of, and without deduction for, any and all present and future Taxes. If Guarantor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder, (a) the sum payable shall be increased as much as shall be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 5) Agent or Lenders, as applicable, receive an amount equal to the sum they would have received had no such deductions been made, (b) Guarantor shall make such deductions, and (c) Guarantor shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Within thirty (30) days after the date of any payment of Taxes, Guarantor shall furnish to Agent the original or a certified copy of a receipt evidencing payment thereof. Guarantor shall indemnify and, within ten (10) days after demand

therefor, pay Agent and each Lender for the full amount of Taxes (including any Taxes imposed by any jurisdiction on amounts payable under this Section 5) paid by Agent or such Lender, as appropriate, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto.

6. OTHER TERMS.

6.1 Entire Agreement. This Guaranty, together with the other Loan Documents, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a guaranty of the loans and advances under the Loan Documents and/or the Guaranteed Obligations.

6.2 Headings. The headings in this Guaranty are for convenience of reference only and are not part of the substance of this Guaranty.

6.3 Severability. Whenever possible, each provision of this Guaranty shall be interpreted in such a manner to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

(a)

If to Agent, at:

St. Cloud Capital Partners, LP

10866 Wilshire Blvd., Suite 1450

Los Angeles, California 90024

Facsimile: (310) 475-0550

Attention: Robert Lautz

With

a copy to:

Latham & Watkins LLP

633 West Fifth Street, Suite 4000

Los Angeles, California 90071

Facsimile: (213) 891-8763

Attention: W. Alex Voxman, Esq.

(b)

If to Guarantor, at:

Prolong Super Lubricants, Inc.

6 Thomas

Irvine, California 92618

Facsimile: (949) 587-2707

Attention: Chief Executive Officer

With

a copy to:

Stradling, Yocca, Carlson & Rauth

660 Newport Center Drive, Suite 1600

Newport Beach, California 92660

Facsimile: (949) 725-4100

Attention: Michael E. Flynn, Esq.

Any party may change its address for this purpose by giving a written notice thereof as herein provided.

6.5 Successors and Assigns. This Guaranty and all obligations of Guarantor hereunder shall be binding upon the successors and assigns of Guarantor (including a debtor-in-possession on behalf of Guarantor) and shall, together with the rights and remedies of Agent, for itself and for the benefit of Lenders, hereunder, inure to the benefit of Agent and Lenders, all future holders of any instrument evidencing any of the Secured Obligations and their respective successors and assigns. No sales of participations, other sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing the Secured Obligations or any portion thereof or interest therein shall in any manner affect the rights of Agent and Lenders hereunder. Guarantor may not assign, sell, hypothecate or otherwise transfer any interest in or obligation under this Guaranty.

6.6 No Waiver; Cumulative Remedies; Amendments. Neither Agent nor any Lender shall by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by Agent and then only to the extent therein set forth. A waiver by Agent, for itself and the ratable benefit of Lenders, of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Agent would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of Agent or any Lender, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Guaranty may be waived, altered, modified, supplemented or amended except by an instrument in writing, duly executed by Agent and Guarantor.

6.7 Termination. This Guaranty is a continuing guaranty and shall remain in full force and effect until the Termination Date. Upon payment and performance in full of the

Guaranteed Obligations, Agent shall deliver to Guarantor such documents as Guarantor may reasonably request to evidence such termination.

6.8 Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall collectively and separately constitute one and the same agreement.

6.9 Security. To secure payment of Guarantor’s obligations under this Guaranty, concurrently with the execution of this Guaranty, Guarantor has entered into a Pledge and Security Agreement pursuant to which Guarantor has granted to Agent for the benefit of Lenders a security interest in substantially all of its personal property and pursuant to which Guarantor has pledged all of the capital stock of Borrower to Agent for the benefit of Lenders.

6.10 Subordination. All indebtedness now or hereafter owing by any Credit Party to any Guarantor for borrowed money or otherwise is hereby subordinated to the payment in full in cash of the Secured Obligations, and, payments of such indebtedness is restricted (and may only be made and accepted) in the manner set forth in the Notes. Subsequent to an Event of Default under any of the Loan Documents, no Guarantor shall accept payment of all or any portion of such subordinated indebtedness until satisfaction in full of the Secured Obligations. All security interests, liens and encumbrances which any Guarantor now or hereafter may have upon any of the assets of Borrower or any other Credit Party are hereby subordinated to all security interests, liens and encumbrances heretofore, now or hereafter granted to Agent and/or Lenders pursuant to the Loan Documents.

6.11 Governing Law. The validity, meaning and effect of this Agreement shall be determined in accordance with the laws of California applicable to contracts made and to be performed in that state.

6.12 No Strict Construction. Guarantor hereby waives the benefit of any statute or rule of law or judicial decision, including without limitation, California Civil Code Section 1654, which would otherwise require that the provisions of this Agreement be construed or interpreted most strongly against the party responsible for the drafting thereof.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Guaranty as of the date first above written.

PROLONG INTERNATIONAL CORPORATION

By:		/s/ Elton Alderman
		Name: Elton Alderman
		Title: President and Chief Executive Officer

ST. CLOUD CAPITAL PARTNERS, LP, as Agent

By:		SCCP, LLC
Its:		General Partner

By:		/s/ Marshall S. Geller

		Name: Marshall S. Geller
		Title: Senior Managing Member

S-1

EX-10.5 7 dex105.htm SECURED PROMISSORY NOTE, DATED 11/24/03 Secured Promissory Note, dated 11/24/03

EXHIBIT 10.5

Execution Copy

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND THUS MAY NOT BE TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER THAT ACT OR SUCH LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION OR QUALIFICATION IS AVAILABLE.

SECURED PROMISSORY NOTE

$2,050,000.00

Due November 24, 2008

FOR VALUE RECEIVED, PROLONG SUPER LUBRICANTS, INC., a Nevada corporation (the “Maker”), promises to pay to the order of ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited partnership (“Payee”), or its registered assigns, the sum of Two Million Fifty Thousand Dollars ($2,050,000) and to pay interest thereon at the rate of: (i) eight percent (8.0%) per annum (the “Initial Interest Rate”) from the date hereof until June 30, 2004, and (ii) fourteen percent (14.0%) per annum (the “Second Interest Rate”) thereafter until this Secured Promissory Note (as amended, modified or supplemented from time to time, this “Note”) is fully paid.

Principal and interest shall be payable as set forth below:

(1) Commencing on December 31, 2003, and on the last business day of each succeeding month through and including June 30, 2004, interest only shall be paid by wire transfer in equal installments of Thirteen Thousand Six Hundred Sixty Six and 67/100 ($13,666.67) each;

(2) Commencing on July 31, 2004, and on the last business day of each succeeding month through and including November 30, 2004, interest only shall be paid by wire transfer in equal installments of Twenty Three Thousand Nine Hundred Sixteen and 67/100 ($23,916.67) each;

(3) Commencing on December 31, 2004, and on the last business day of each succeeding month through and including October 31, 2008, principal and interest shall be paid by wire transfer in equal installments of Thirty Eight Thousand Four Hundred Seventeen and 02/100 ($38,417.02) each; and

(4) All unpaid principal amount of this Note, together with all accrued but unpaid interest hereon, shall be paid by the Maker to Payee in a lump sum payment November 24, 2008 (the “Due Date”).

Any payment of principal or interest not paid within five (5) business days after its due date shall be subject to a five percent (5%) charge on the unpaid payment.

During the occurrence and continuation of an Event of Default (defined below) the Initial Interest Rate or Second Interest Rate, as applicable, shall be increased five percent

(5%) per annum. In no event shall Payee be entitled to interest exceeding the maximum rate permitted by law or under the applicable regulations promulgated by the United States Small Business Administration (the “SBA”). If any excess interest is provided for or shall be adjudicated to be so provided for in this Note, or if any payment or other consideration under this Note or Section 6.1 of the Agreement (as defined below) is determined by the SBA to exceed the amount permitted under applicable regulations promulgated by the SBA, then in such event: (i) the provisions of this paragraph shall govern and control; (ii) the Maker shall not be obligated to pay the amount of such interest or other payment or consideration to the extent that it is in excess of the maximum amount permitted by law or under applicable regulations promulgated by the SBA, and the same shall be construed as a mutual mistake of the parties; and (iii) any such excess which may have been collected or attributed shall, at the option of Holder, be subtracted from the then unpaid principal amount hereof, or refunded to the Maker.

Both principal hereof and interest thereon are payable at such place as Payee may from time to time designate in writing, in lawful money of the United States of America and in immediately available funds by wire transfer. Interest hereunder shall be computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed.

This Note is secured by that certain Pledge and Security Agreement dated as of the date hereof, by and among the Maker, Payee and Parent, as amended, restated, amended and restated, supplemented or otherwise modified from time to time (the “Pledge and Security Agreement”).

This Note is subject to the terms and conditions set forth below:

I. DEFINITIONS.

As used in this Note, the following terms shall mean:

“Agreement” shall mean that certain Securities Purchase Agreement dated as of the date hereof, by and among the Maker, Payee, Parent, Prolong International Holdings Ltd., a Cayman Islands company, Prolong International Ltd., a Cayman Islands company, Bedford Oak Capital, L.P., a Delaware limited partnership, Bedford Oak Offshore, Ltd., a Cayman Islands company, and Aspen Ventures LLC, a New York limited liability company, as amended, modified or supplemented from time to time.

“Board” shall mean the board of directors of Parent.

“Continuing Members” shall mean a member of the Board who either (a) was a member of the Board on the day before the Closing or (b) became a member of the Board after the day before the Closing and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Board.

“EBITDA” shall mean the consolidated earnings before interest, taxes, depreciation and amortization of the Credit Parties, determined in accordance with generally accepted accounting principles.

“Event of Default” shall have the meaning given such term in Section 4 below.

“Note” shall mean this Note and any note delivered in substitution or exchange therefor as provided herein.

“Note Percentage” shall mean a fraction, the numerator of which is the original principal amount of this Note and the denominator of which is Two Million Five Hundred Thousand Dollars ($2,500,000).

“Parent” shall mean Prolong International Corporation, a Nevada corporation.

“Total Debt Service Payments” shall mean, with respect to any period, Maker’s total scheduled principal and interest payments during such period under the Notes issued pursuant to the Agreement.

“Triggering Event” shall mean any sale, transfer or issuance or series of sales or issuances of Parent’s capital stock, or any merger, consolidation or other transaction involving Parent where the shareholders of Parent immediately prior to such event do not retain more than a fifty percent (50%) voting power or interest in Parent or the successor corporation or other entity, as the case may be, (ii) any transfer of capital stock of Maker or other transaction which results in the Maker ceasing to be a wholly-owned subsidiary of Parent; (iii) any sale of all or a substantial portion of the assets of Maker, (iv) after the Closing, any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934) other than Payee or its affiliates (including any other Purchaser), shall acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of more than twenty-five percent (25%) of the outstanding securities (on a fully diluted basis and taking into account any securities or contract rights exercisable, exchangeable or convertible into equity securities) of Parent having voting rights in the election of directors under normal circumstances, or (v) a majority of the members of the Board shall cease to be Continuing Members.

Any capitalized terms used herein without definition shall have the meaning set forth in the Agreement.

II. PREPAYMENT OF NOTE.

2.1 Mandatory Prepayments.

2.1.1 Full Prepayment. Except as set forth below, all principal and accrued but unpaid interest on this Note shall immediately become due and payable upon the occurrence of a Triggering Event.

2.1.2 Partial Prepayment. Until such time that this Note is fully repaid, if the Total Debt Service Payments during any six consecutive month period commencing after December 31, 2004 are less than sixty percent (60%) of EBITDA for such period, Maker shall, in addition to making the payments required to be made under this Note, prepay an amount with respect to such six month period equal to the lesser of: (a) (i) sixty percent (60%) of EBITDA for such six month period minus Total Debt Service Payments for such period multiplied by (ii) the Note Percentage and (b) (i) (A) the amount set forth in the last column entitled “Accrued Sweep” of Exhibit A attached hereto

corresponding to the applicable six month period minus (B) any prepayments previously made under this Section 2.1.2 multiplied by (ii) the Note Percentage. An example of the application of this Section 2.1.2 is set forth on Exhibit B attached hereto. Payments under this Section 2.1.2 with respect to any six month period shall be due on the date that is the earlier to occur of: (i) five (5) business days after Parent’s consolidated earnings for the last quarter of such six month period are released, (ii) five (5) business days after Parent files its Report on Form 10-Q or Report on Form 10-K or similar report covering the period that includes the last quarter of such six month period or (iii) 45 days following the end of any six month period ending June 30 and 90 days following the end of any six month period ending December 31; provided, however, that any prepayments made by Maker pursuant to this Section 2.1.2 shall not be subject to any prepayment premium described in Section 2.2.

2.2 Optional Prepayment. At any time, the Maker shall have the right to prepay all or part of the outstanding principal amount of this Note in installments not less than the lesser of (i) One Hundred Thousand Dollars ($100,000) and (ii) the remaining outstanding principal balance of this Note; provided that (i) the Maker gives not less than thirty (30) days’ prior written notice to Payee of the Maker’s election to prepay this Note, and (ii) the Maker pays a prepayment premium to Payee equal to (a) if such prepayment is made prior to November 30, 2004, five percent (5%) of the principal amount of this Note being prepaid; (b) if such prepayment is made between November 30, 2004 and the November 30, 2005, four percent (4%) of the principal amount of this Note being prepaid; (c) if such prepayment is made between November 30, 2005 and November 30, 2006, three percent (3%) of the principal amount of this Note being prepaid; (d) if such prepayment is made between November 30, 2006 and November 30, 2007, two percent (2%) of the principal amount of this Note being prepaid, or (e) if such prepayment is made between November 30, 2007 and the Due Date, one percent (1%) of the principal amount of this Note being prepaid, in each case, calculated as of the prepayment date. Payee shall notify the Maker of the amount and basis of determination of the prepayment premium. Payee shall not be obligated to accept any prepayment of the principal balance of this Note unless such prepayment is accompanied by the applicable prepayment premium and all accrued interest and other sums due under this Note. The Maker may not prepay this Note on a Friday or on any day preceding a public holiday, or the equivalent for banks generally under the laws of the State of California.

2.3 Prepayment Not to Affect Exercise of Warrant. No mandatory or optional prepayment shall affect any exercise or other rights under the Warrant.

2.4 Interest Adjustment. The Maker and Payee agree that if this Note were not issued with the Warrant, the interest rate would be no more than one percent (1%) higher.

III. REPLACEMENT OF NOTE.

Upon receipt of evidence reasonably satisfactory to the Maker of the ownership of and the loss, theft, destruction or mutilation of this Note and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement in an amount reasonably satisfactory to the Maker, or (in the case of mutilation) upon surrender and cancellation of the mutilated Note, the Maker will execute and deliver, in lieu thereof, a new Note of like tenor.

IV. EVENTS OF DEFAULT.

The occurrence and continuation of any of the events or conditions described in Section 4.1 or Section 4.2 shall be an “Event of Default.”

4.1 Payee Action. The occurrence of any of the following Events of Default shall, at the option of Payee, entitle Payee to declare all sums of principal and interest then remaining unpaid, and all other amounts payable hereon, due and payable, all without demand, presentment, notice or protest, all of which hereby are expressly waived, and permit Payee to exercise any other right available to it under the Loan Documents or otherwise available to it at law or in equity, all of which rights and powers may be exercised cumulatively.

4.1.1 Failure to Pay Principal or Interest. Failure to pay any installment of principal when due or interest hereon within five (5) business days of the date when due.

4.1.2 Breach of Covenants. The breach by any Credit Party of any covenant in the Agreement or any other Loan Document that is not cured within thirty (30) days after written notice thereof to the Maker.

4.1.3 Breach of Representations and Warranties. The representations or warranties of the Credit Parties made in the Loan Documents or in any statement or certificate at any time given in writing to Payee pursuant to the Agreement or this Note or in connection therewith or herewith, shall prove to have been false or misleading in any material respect as of the date such representations and warranties were made.

4.1.4 Judgments. The making or filing of any money judgment, writ or similar process in excess of One Hundred Thousand Dollars ($100,000) against any Credit Party or any of the property or other assets of any Credit Party which shall remain unsatisfied, unvacated, unhanded or unstayed until the date that is the earlier to occur of thirty (30) days after such judgment, writ or similar process is entered and five (5) days prior to the date of any proposed sale thereunder.

4.1.5 Default in Other Agreements. The occurrence of any event of default or other event triggering acceleration of any indebtedness by any Credit Party under any note, agreement or other instrument involving the issuance of indebtedness (but not including any trade payables incurred in the ordinary course of business), whether such indebtedness now exists or may hereafter be created, if, as a result of such event of default or other event, the maturity of such indebtedness has been accelerated or has otherwise become or been declared to be due prior to its stated maturity and the principal amount of such indebtedness which has been accelerated or has otherwise become or been declared to be due exceeds, individually or in the aggregate, One Hundred Thousand Dollars ($100,000).

4.1.6 Attachments. The levying of any writ of attachment against any property or other assets of any Credit Party not fully covered by insurance in force valued individually or in the aggregate at an amount equal to or greater than One Hundred Thousand Dollars ($100,000) unless a Credit Party posts a bond or obtains other relief for the release of such attachment within thirty (30) days.

4.1.7 Suspension of Business. The suspension of the usual business activities of the Credit Parties or the winding up or liquidation of the Maker’s business.

4.1.8 Challenges by the Maker. The Maker shall challenge, or institute or join in any proceedings to challenge the validity, binding effect or enforceability of this Note or any endorsement of this Note or any other obligation to Payee under the Loan Documents.

4.1.9 Certain Agreements. The Pledge and Security Agreement or the Parent Guaranty or any provision thereof shall cease to be in full force or effect or shall be declared to be null or void or otherwise unenforceable in whole or in part; or Payee shall not have or shall cease to have a valid and perfected security interest in the collateral described in the Pledge and Security Agreement; provided that the failure of Payee to have a valid and perfected security interest in the shares of capital stock of the Cayman Subsidiaries shall not be deemed an Event of Default hereunder so long as the Credit Parties deliver to St. Cloud stock certificates representing sixty-five percent (65%) of the capital stock of Cayman Sub I in accordance with Section 7.13 of the Agreement.

4.1.10 Change in Management. The termination of the employment of Elton Alderman for any reason (including, without limitation, as a result of resignation); provided, however, that if such termination is as a result of his death or disability and Parent hires a replacement reasonably acceptable to Payee within six months thereafter, then such termination shall not be deemed an Event of Default hereunder.

4.1.11 Other. The failure of the Maker to perform or observe any other material term, covenant or agreement to be performed or observed by it pursuant to this Note and the continuance thereof for a period of thirty (30) days after written notice thereof to the Maker.

4.2 Acceleration Without Specific Action. The occurrence of any of the following Events of Default shall make all sums of principal and interest then remaining unpaid and all other amounts payable hereon due and payable, all without demand, presentment, notice or protest, all of which hereby are expressly waived, and permit Payee to exercise any other right available to it at law or in equity, all of which rights and powers may be exercised cumulatively.

4.2.1 Bankruptcy. The voluntary institution of bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors by any Credit Party; or the institution of any such proceedings against any Credit Party, which involuntary proceedings shall not have been vacated by appropriate court order within sixty (60) days of such institution.

4.2.2 Dissolution. Any order, judgment or decree shall have been entered against any Credit Party decreeing the dissolution or liquidation of such Credit Party and such order shall remain undischarged or unstayed for a period of thirty (30) days.

4.2.3 Insolvency, Receiver or Trustee. The making by any Credit Party of an assignment for the benefit of creditors; or the making by any Credit Party of an offer of settlement, composition or extension to the claims of all or substantially all of a Credit Party’s creditors or the application for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or the appointment otherwise of such a receiver or trustee or a committee of the Maker’s creditors.

V. TRANSFER OF SECURITIES.

Subject to the restrictions on transfer contained in the Agreement, this Note and all rights hereunder are transferable in whole or in part on the books of the Maker maintained for such purpose at its principal office referred to above by Payee in person or by a duly authorized attorney, upon surrender of this Note properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Each taker and holder of this Note, by taking or holding the same, consents and agrees that this Note when endorsed in blank shall be deemed negotiable and agrees that when this Note shall have been so endorsed, Payee hereof may be treated by the Maker and all other persons dealing with this Note, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, or to the transfer hereof on the books of the Maker, any notice to the contrary notwithstanding; but until such transfer on such books, the Maker may treat Payee hereof as the owner for all purposes.

VI. METHODS; ADDRESSES.

Any notice, demand or other communication required or permitted under the terms of this Note shall be in writing and shall be made by telegram, telex or electronic transmitter (including, without limitation, facsimile) or certified or registered mail, return receipt requested, and shall be deemed to be received by the addressee on the date delivery is confirmed, if sent by Fed Ex, Express Mail, or other similar overnight delivery service, the date of electronic confirmation of receipt, if sent by telegram, telex, telecopy or electronic transmitter, and three (3) business days after mailing, if sent by certified or registered mail, with postage prepaid, and properly addressed. Notices shall be addressed as provided below:

(a)	If to Payee:	St. Cloud Capital Partners, LP
		10866 Wilshire Blvd., Suite 1450
		Los Angeles, California 90024
		Facsimile: (310) 475-0550
		Attention: Robert Lautz

	With copy to:	Latham & Watkins LLP
		633 West Fifth Street, Suite 4000
		Los Angeles, California 90071
		Facsimile: (213) 891-8763
		Attention: W. Alex Voxman, Esq.

(b)	If to the Maker:	Prolong Super Lubricants, Inc.
		6 Thomas
		Irvine, California 92618
		Facsimile: (949) 587-2707
		Attention: Chief Executive Officer

	With a copy to:	Stradling Yocca Carlson & Rauth
		660 Newport Center Drive, Suite 1600
		Newport Beach, California 92660
		Facsimile: (949) 725-4100
		Attention: Michael E. Flynn, Esq.

Any party may change its address for this purpose by giving a written notice thereof as herein provided.

VII. MISCELLANEOUS.

7.1 Survival of Covenants. All agreements and covenants made herein shall survive the execution and delivery hereof.

7.2 Failure or Indulgence Not Waiver. No failure or delay on the part of Payee or any other holder of this Note to exercise any right, power or privilege under this Note and no course of dealing between the Maker and Payee shall impair such right, power or privilege or operate as a waiver of any default or an acquiescence therein, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies expressly provided in this Note are cumulative to, and not exclusive of, any rights or remedies that Payee would otherwise have. No notice to or demand on the Maker in any case shall entitle the Maker to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of Payee to any other or further action in any circumstances without notice or demand.

7.3 Cost of Collection. The Maker agrees to indemnify Payee against any losses, claims, damages and liabilities and related expenses, including counsel fees and expenses, incurred by Payee in connection with the collection and enforcement of this Note (including, without limitation, in connection with any bankruptcy, insolvency, reorganization or workout). In addition, the Maker agrees to pay, and to save Payee harmless from all liability for, any stamp or other documentary taxes which may be payable in connection with the Maker’s execution or delivery of this Note.

All payments made by the Maker under this Note shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp

or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on Payee as a result of a present or former connection between Payee and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from Payee having executed, delivered or performed its obligations or received a payment under, or enforced, this Note). If any such non-excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings (“Non-Excluded Taxes”) are required to be withheld from any amounts payable to Payee under this Note, the amounts so payable to Payee shall be increased to the extent necessary to yield to Payee (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Note. Whenever any Non-Excluded Taxes are payable by the Maker, as promptly as possible thereafter (and, in any event, within five (5) business days) the Maker shall send to Payee for its own account a certified copy of an original official receipt received by the Maker showing payment thereof. If the Maker fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to Payee the required receipts or other required documentary evidence, the Maker shall indemnify, defend and hold Payee harmless for any incremental taxes, interest or penalties that may become payable by Payee as a result of any such failure.

The agreements in this Section 7.3 shall survive the termination of this Note and the payment of the loan and all other amounts payable hereunder.

7.4 Governing Law. This Note has been executed in and shall be governed by the laws of the State of California. As part of the consideration for Payee’s investment herein, the Maker and Payee hereby agree that all actions or proceedings arising directly or indirectly hereunder, whether instituted by Payee or the Maker, may, at the option of Payee, be litigated in courts having situs within the State of California, County of Los Angeles and the Maker hereby expressly consents to the jurisdiction of any local, state or federal court located within said state and county, and consents that any service of process in such action or proceeding may be made by personal service upon the Maker wherever the Maker may be located, or by certified or registered mail directed to the Maker at its last known address. The Maker and Payee waive trial by jury, any objection based on forum non conveniens, and any objection to venue of any action instituted hereunder in such County.

7.5 Modification. Neither this Note nor any provision hereof may be amended, modified, waived, discharged or terminated with respect to Payee unless agreed to in writing by the holder of this Note and the Maker.

7.6 Severability. Whenever possible, each provision of this Note will be interpreted in such manner as to be effective and valid under applicable law, but, if any provision of this Note is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Note.

7.7 Further Assurance. At any time or from time to time upon the request of Payee, the Maker will execute and deliver such further documents and do such other acts and things as Payee may reasonably request in order fully to effectuate the purposes of this Note, and to provide for the payment of the principal and interest due hereunder.

7.8 Successors. The Maker may not pledge, assign or transfer any of its rights or obligations under this Note without the prior written consent of Payee. Any purported assignment or transfer in breach of this Note shall be of no force and effect. Subject to the transfer restrictions contained in the Agreement, Payee may assign and participate any of its interests in this Note and this Note to any Person. Each reference herein to powers or rights of Payee shall also be deemed a reference to the same power or right of such assignees, to the extent of the interest assigned to them. All the covenants, agreements, representations and warranties contained in this Note shall bind the parties hereto and their respective heirs, executors, administrators, distributees, successors and assigns, including any Person to whom Payee has granted a participation interest in this Note.

7.9 Headings. The section headings in this Note are inserted for purposes of convenience only and shall have no substantive effect.

7.10 No Strict Construction. The Maker hereby waives the benefit of any statute or rule of law or judicial decision, including without limitation California Civil Code § 1654, which would otherwise require that the provisions of this Note be construed or interpreted most strongly against the party responsible for the drafting thereof.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the Maker has caused this Note to be signed and delivered by its duly authorized officer and to be dated November 24, 2003.

MAKER:

PROLONG SUPER LUBRICANTS, INC., a Nevada corporation

By:		/s/ Elton Alderman
		Name: Elton Alderman
		Title: President and Chief Executive Officer

EX-10.6 8 dex106.htm WARRANT, DATED 11/24/03 Warrant, dated 11/24/03

EXHIBIT 10.6

Execution Copy

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS SO REGISTERED OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE. THIS LEGEND SHALL BE IMPRINTED ON ANY WARRANT ISSUED IN EXCHANGE FOR THIS WARRANT.

WARRANT TO PURCHASE

COMMON STOCK OF

Prolong International Corporation

THIS CERTIFIES that, for value received, ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited partnership (“St. Cloud”), or its permitted assigns (collectively, the “Holder”), is entitled to purchase from PROLONG INTERNATIONAL CORPORATION, a Nevada corporation (the “Company”), at any time, and from time to time, during the exercise period referred to in Section 1 hereof, 4,885,492 fully paid, validly issued and nonassessable shares (the “Warrant Shares”) of common stock of the Company, $0.001 par value per share (the “Common Stock”), at the exercise price of $0.06 (the “Warrant Share Price”); provided that if an Event of Default occurs under the St. Cloud Note (as defined in the Securities Purchase Agreement (as defined below)) that involves in excess of Twenty Five Thousand Dollars ($25,000) or may result in losses or damages to the Company or Holder in excess of Twenty Five Thousand Dollars ($25,000) and is not cured or waived by Holder within thirty (30) days thereafter, then this Warrant shall automatically become exercisable to purchase an additional number of Warrant Shares (any such additional Warrant Shares shall be considered Warrant Shares hereunder and are also sometimes referred to as “Additional Warrant Shares”) equal to (A) the Warrant Percentage (as defined below) multiplied by (B) ten percent (10%) of the total number of shares of Common Stock outstanding as of the date of the Event of Default on a fully diluted basis assuming exercise of this Warrant and any other options, warrants or convertible securities outstanding as of such date and including in such calculation all Additional Warrant Shares into which this Warrant becomes exercisable, except that to the extent required by Rule 713 of the American Stock Exchange, the Warrant Share Price for such Additional Warrant Shares (and only for such Additional Warrant Shares) shall equal the greater of (i) the Fair Market Value (as defined herein) of the Common Stock (or other securities underlying this Warrant at such time) as of the date of the Event of Default, (ii) the book value per share of the Common Stock as of the date of the Event of Default, or (iii) the Additional Warrant Share Price (as calculated below):

X = A + (A – $0.06)(B)

Where:

X = the Additional Warrant Share Price

A = the greater of (i) the closing price of the Common Stock as reported by the American Stock Exchange on the Closing Date (as such term is defined in the Securities Purchase Agreement) or (ii) the book value per share of the Common Stock on the Closing Date

B = the number of Warrant Shares represented by this Warrant on the date of the Event of Default plus the number of shares of Common Stock issued upon exercise of this Warrant on or prior to the date of the Event of Default

C = the Additional Warrant Shares into which this Warrant becomes exercisable

The components used in the calculation of Additional Warrant Share Price shall be appropriately adjusted for stock splits, reverse stock splits, reclassifications, recapitalizations, consolidations, mergers or similar events occurring after the Closing Date. As used above, “Warrant Percentage” shall mean a fraction, the numerator of which is the number of Warrant Shares (other than Additional Warrant Shares) into which this Warrant is exercisable as of the date on which this Warrant becomes exercisable for Additional Warrant Shares and the denominator of which is the number of Warrant Shares (other than Additional Warrant Shares) into which all then outstanding Stock Purchase Warrants (as defined below) are exercisable as of such date. Notwithstanding the foregoing, the initial exercise price for the Additional Warrant Shares shall be set such that in no event shall the weighted average exercise price for the Warrant Shares (including the Additional Warrants Shares) be less than the greater of (i) the closing price of the Common Stock as reported by the American Stock Exchange on the Closing Date or (ii) the book value per share of the Common Stock on the Closing Date (in each case, as adjusted for stock splits, reverse stock splits, reclassifications, recapitalizations, consolidations, mergers or similar events occurring after the Closing Date).

The number of Warrant Shares issuable upon exercise of this Warrant and the Warrant Share Price are subject to adjustment from time to time as hereinafter set forth. As used herein, the term “Warrant” shall include any warrant or warrants hereafter issued in consequence of the exercise of this Warrant in part or transfer of this Warrant in whole or in part and any warrant or warrants into which this Warrant may be divided or exchanged. As used herein, the term “Warrant Share Price” shall also refer to the Additional Warrant Share Price for the purchase of the Additional Warrant Shares. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them

in the Securities Purchase Agreement, dated as of even date hereof, by and among the Company, St. Cloud, Prolong Super Lubricants, Inc., a Nevada corporation, Prolong International Holdings Ltd., a Cayman Islands company, Prolong International Ltd., a Cayman Islands company, Bedford Oak Capital, L.P., a Delaware limited partnership, Bedford Oak Offshore, Ltd., a Cayman Islands company, and Aspen Ventures LLC, a New York limited liability company (the “Securities Purchase Agreement”).

1. Exercise; Payment for Ownership Interest.

1.1 Upon the terms and subject to the conditions set forth herein, this Warrant may be exercised in whole or in part by the Holder hereof at any time, or from time to time, on or after the date hereof and prior to 5 p.m. California time on the earlier to occur of November 24, 2013 or thirty (30) days after the date that the Company delivers to each Holder an expiration notice (as described in and in accordance with Section 10 hereof) (such earlier date, the “Expiration Date”) by presentation and surrender of this Warrant to the principal offices of the Company, or at the office of its Transfer Agent (as defined in Section 9 hereof), if any, together with the Purchase Form attached hereto, duly executed, and accompanied by payment to the Company of the Warrant Share Price multiplied by the number of Warrant Shares as to which this Warrant is then being exercised; provided, however, that in the event of any merger, consolidation or sale of all or substantially all the assets of the Company resulting in any distribution to the Company’s stockholders, prior to the Expiration Date, the Holder shall have the right to exercise this Warrant commencing at such time through the Expiration Date into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Warrant might have been exercisable immediately prior thereto. Any transfer of Warrant Shares obtained by the Holder in exercise of this Warrant is subject to the requirement that such securities be registered under the Securities Act of 1933, as amended (the “1933 Act”), and applicable state securities laws or an opinion of counsel reasonably satisfactory to the Company that such transfer is exempt from registration under such laws. The Holder of this Warrant shall be deemed to be a stockholder of the Warrant Shares as to which this Warrant is exercised in accordance herewith effective immediately after the close of business on the date on which the Holder shall have delivered to the Company this Warrant in proper form for exercise and payment by certified or official bank check or wire transfer of the cash purchase price for the number of Warrant Shares as to which the exercise is being made, notwithstanding that the stock transfer books of the Company shall be then closed or that certificates representing such Warrant Shares shall not then be physically delivered to the Holder.

1.2 All or any portion of the Warrant Share Price may be paid by surrendering Warrants effected by presentation and surrender of this Warrant to the Company, or at the office of its Transfer Agent, if any, with a Cashless Exercise Form annexed hereto duly executed (a “Cashless Exercise”). Such presentation and surrender shall be deemed a waiver by the Company of the Holder’s obligation to pay all or any portion of the

aggregate Warrant Share Price in cash. In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares for which the Holder desires to exercise this Warrant by a fraction, the numerator of which shall be the difference between the Fair Market Value (as defined below) and the Warrant Share Price, and the denominator of which shall be the Fair Market Value. For purposes of any computation under this Warrant, the “Fair Market Value” per share of Common Stock at any date shall be deemed to be the average for the ten (10) consecutive business days immediately prior to the Cashless Exercise of the daily closing prices of the Common Stock on the American Stock Exchange or such other principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the closing prices as reported by the Nasdaq SmallCap Market or the Nasdaq National Market, or if not then included for quotation on the Nasdaq SmallCap Market or the Nasdaq National Market, the average of the highest reported bid and lowest reported asked prices as reported by the OTC Bulletin Board or the National Quotations Bureau, as the case may be, or if not then publicly traded, the fair market price, not less than book value thereof, of the Common Stock as determined in good faith by the independent members of the Board of Directors of the Company.

1.3 If this Warrant shall be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder as to which the Warrant has not been exercised. If this Warrant is exercised in part, such exercise shall be for a whole number of Warrant Shares. If this Warrant shall be exercised in part and, at the time of such exercise, is exercisable for Additional Warrant Shares that have a different Warrant Share Price, then Holder shall specify the extent (if any) to which it is exercising this Warrant to acquire such Additional Warrant Shares. Upon any exercise and surrender of this Warrant, the Company (a) will issue and deliver to the Holder a certificate or certificates in the name of the Holder for the largest whole number of Warrant Shares to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional Warrant Share to which the Holder otherwise might be entitled, cash in an amount equal to the Fair Market Value of such fractional Warrant Share, and (b) will deliver to the Holder such other securities, properties or cash which the Holder may be entitled to receive upon such exercise, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant.

2. Anti-Dilution Provisions. The Warrant Share Price in effect at any time and the number and kind of securities issuable upon exercise of this Warrant and the Warrant Share Price shall be subject to adjustment from time to time upon the happening of certain events as follows:

2.1 Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization, reclassification or any other change of capital stock of the

Company, or any consolidation or merger of the Company with another person, or the sale or transfer of all or substantially all of its assets to another person shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for their shares of Common Stock, then provision shall be made by the Company, in accordance with this Section 2.1, whereby the Holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in addition to or in exchange for, as applicable, the Warrant Shares subject to this Warrant immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such securities or assets as would have been issued or payable with respect to or in exchange for the aggregate Warrant Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby if exercise of the Warrant had occurred immediately prior to such reorganization, reclassification, consolidation, merger or sale. The Company will not effect any such consolidation, merger, sale, transfer or lease unless prior to the consummation thereof the successor entity (if other than the Company) resulting from such consolidation or merger or the entity purchasing such assets shall assume by written instrument (a) the obligation to deliver to the Holder such securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to purchase, and (b) all other obligations of the Company under this Warrant. The provisions of this Section 2.1 shall similarly apply to successive consolidations, mergers, exchanges, sales, transfers or leases. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or transfer, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Section 2 hereof.

2.2 Stock Dividends and Securities Distributions. If, at any time or from time to time after the date of this Warrant, the Company shall distribute to the holders of shares of Common Stock (a) securities (including rights, warrants, options or another form of convertible securities) other than securities of the Company, (b) property, other than cash, or (c) cash, without fair payment therefor, then, and in each such case, the Holder, upon the exercise of this Warrant, shall be entitled to receive such securities, property and cash which the Holder would hold on the date of such exercise if, on the date of the distribution, the Holder had been the holder of record of the shares of Common Stock issued upon such exercise and, during the period from the date of this Warrant to and including the date of such exercise, had retained such shares of Common Stock and the securities, property and cash receivable by the Holder during such period, subject, however, to the Holder agreeing to any conditions to such distribution as were required of all other holders of shares of Common Stock in connection with such distribution.

2.3 Other Adjustments. In addition to those adjustments set forth in Section 2.1 and Section 2.2, but without duplication of the adjustments to be made under such Sections, if the Company:

(a) makes a distribution on its Common Stock in shares of its Common Stock;

(b) subdivides or reclassifies its outstanding shares of Common Stock into a greater number of shares;

(d) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; and/or

(e) issues, by reclassification of its Common Stock, any shares of its capital stock;

then the number and kind of Warrant Shares purchasable upon exercise of this Warrant shall be adjusted so that the Holder upon exercise hereof shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had this Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 2.3 shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or issuance. If, as a result of an adjustment made pursuant to this Section 2.3, the Holder of this Warrant thereafter surrendered for exercise shall become entitled to receive shares of two (2) or more classes of capital stock or shares of Common Stock and any other class of capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to all holders of Warrants promptly after such adjustment) shall determine the allocation of the adjusted Warrant Share Price between or among shares of such classes of capital stock or shares of Common Stock and such other class of capital stock.

The adjustment to the number of Warrant Shares purchasable upon the exercise of this Warrant described in this Section 2.3 shall be made each time any event listed in paragraphs (a) through (e) of this Section 2.3 occurs.

Simultaneously with all adjustments to the number and/or kind of securities, property and cash under this Section 2.3 to be issued in connection with the exercise of this Warrant, the Warrant Share Price will also be appropriately and proportionately adjusted.

(f) In the event that at any time, as a result of an adjustment made pursuant to this Section 2.3, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 2.1 and Section 2.2 above.

2.4 Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Warrant Share Price pursuant to this Section 2, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment, including a statement of the adjusted Warrant Share Price or adjusted number of shares of Common Stock, if any, issuable upon exercise of each Warrant, describing the transaction giving rise to such adjustments and showing in detail the facts upon which such adjustment or readjustment is based. The Company will forthwith mail, by first class mail, postage prepaid, a copy of each such certificate to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, and to its Transfer Agent. Any Holder of this Warrant may change his address by written notice to the Company at its office (or at such other office or agency of the Company as it may from time to time designate in writing to the Holder) requesting such change.

2.5 Other Notices. If at any time:

(a) the Company shall (i) offer for subscription pro rata to the holders of shares of the Common Stock any additional equity in the Company or other rights; (ii) pay a dividend in additional shares of the Common Stock or distribute securities or other property to the holders of shares of the Common Stock (including, without limitation, evidences of indebtedness and equity and debt securities); or (iii) issue securities convertible into, or rights or warrants to purchase, securities of the Company;

(b) there shall be any capital reorganization or reclassification or consolidation or merger of the Company with, or sale, transfer or lease of all or substantially all of its assets to, another entity; or

then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, (a) at least fifteen (15) days’ prior written notice of the date on which the books of the Company shall close or a record shall be taken for such subscription rights, dividend, distribution or issuance, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least fifteen (15) days’ prior written notice of the date when the same shall

take place if no stockholder vote is required and at least fifteen (15) days’ prior written notice of the record date for stockholders entitled to vote upon such matter if a stockholder vote is required. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such subscription rights, the date on which the holders of shares of Common Stock shall be entitled to exercise their rights with respect thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Failure to give the notice referred to herein shall not affect the validity or legality of the action which should have been the subject of the notice.

2.6 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or Bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, including, without limitation, voluntary bankruptcy proceedings, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but shall at all times in good faith assist in the carrying out of all the provisions of this Section 2 and in the taking of all such action as may be necessary or appropriate on order to protect the rights of the registered holder of this Warrant against impairment.

3. No Voting Rights. This Warrant shall not be deemed to confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof.

4. Warrants Transferable. Subject to the transfer restrictions in the Securities Purchase Agreement and the Investors’ Rights Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, at the principal offices of the Company by the Holder hereof, upon surrender of this Warrant properly endorsed; provided, however, that without the prior written consent of the Company, this Warrant and all rights hereunder may be transferred only (a) pursuant to an exemption from registration under the 1933 Act and the Company shall have received an opinion of counsel to such effect, or (b) pursuant to the registration of this Warrant or the Warrant Shares under the 1933 Act.

5. Warrants Exchangeable; Assignment; Loss, Theft, Destruction, Etc. This Warrant is exchangeable, without expense, upon surrender hereof by the Holder hereof at the principal offices of the Company, or at the office of its Transfer Agent, if any, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the Warrant Shares which may be subscribed for and purchased hereunder, each such new Warrant to represent the right to subscribe for and

purchase such Warrant Shares as shall be designated by such Holder hereof at the time of such surrender. Upon surrender of this Warrant to the Company at its principal office, or at the office of its Transfer Agent, if any, with an instrument of assignment duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be cancelled. This Warrant may be divided or combined with other warrants which carry the same rights upon presentation hereof at the principal office of the Company, or at the office of its Transfer Agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of a bond or indemnity satisfactory to the Company, or, in the case of any such mutilation, upon surrender or cancellation of this Warrant, the Company will issue to the Holder hereof a new Warrant of like tenor, in lieu of this Warrant, representing the right to subscribe for and purchase the Warrant Shares which may be subscribed for and purchased hereunder. Any such new Warrant executed and delivered shall constitute an additional contractual obligation of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone.

6. Legends. Any certificate evidencing the securities issued upon exercise of this Warrant shall bear a legend in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS SO REGISTERED OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE.

7. Modifications and Waivers. The terms of this Warrant may be amended, modified or waived only by (i) the written agreement of the Company and the Holder or (ii) the written agreement of the Company and the holders of a Majority of Warrants. “Majority of Warrants” shall mean holders of Stock Purchase Warrants (as defined below) that would, upon exercise of the outstanding Stock Purchase Warrants, hold a majority of the Warrant Shares issued upon such exercise. “Stock Purchase Warrants” shall mean all warrants issued to the Purchasers under the Securities Purchase Agreement.

8. Miscellaneous. The Company shall pay all expenses and other charges payable in connection with the preparation, issuance and delivery of this Warrant and all substitute Warrants. The Holder shall pay all taxes (other than any issuance taxes, including, without limitation, documentary stamp taxes, transfer taxes and other governmental charges, which shall be paid by the Company) in connection with such issuance and delivery of this Warrant and the Warrant Shares.

The Company shall maintain, at the office or agency of the Company maintained by the Company, books for the registration and transfer of the Warrant.

9. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, solely for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of this Warrant, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of this Warrant.

The Company or, if appointed, the Transfer Agent for the Common Stock (the “Transfer Agent”) and every subsequent transfer agent for any shares of the Company’s capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Warrant on file with the Transfer Agent and with every subsequent transfer agent for any shares of the Company’s capital stock issuable upon the exercise of the rights of purchase represented by this Warrant. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto transmitted to the Holder pursuant to Section 2.4 hereof.

The Company covenants that all Warrant Shares which may be issued upon exercise of this Warrant will, upon issue, be fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof.

10. Expiration Notice. Upon St. Cloud’s sale of eighty percent (80%) of the Warrant Shares to an unaffiliated third party, St. Cloud shall provide written notice to the Company of such event. At any time thereafter, the Company shall have the right to send a notice to Holder in writing stating that such sale has been consummated and that the Expiration Date shall occur thirty (30) days following delivery of such notice to Holder.

11. Registration Rights. Subject to the restrictions set forth therein, the Holder shall be entitled to the registration rights with respect to the Warrant Shares as set forth in the Investors’ Rights Agreement.

12. Equity Participation. This Warrant is issued in connection with the Securities Purchase Agreement. It is intended that this Warrant constitute an equity participation under California law and not constitute interest on the Note. If under any circumstances whatsoever, fulfillment of any obligation of this Warrant, the Securities Purchase Agreement, or any other agreement or document executed in connection with

the Securities Purchase Agreement, shall violate the lawful limit of any applicable usury statute or any other applicable law with regard to obligations of like character and amount, then the obligation to be fulfilled shall be reduced to such lawful limit, such that in no event shall there occur, under this Warrant, the Securities Purchase Agreement, or any other document or instrument executed in connection with the Securities Purchase Agreement, any violation of such lawful limit, but such obligation shall be fulfilled to the lawful limit. If any sum is collected in excess of the lawful limit, such excess shall be applied to reduce the principal amount of the Note and, following full payment of the Note, shall be returned to the Company.

13. Descriptive Headings and Governing Law. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with the laws of the State of California, and the rights of the parties shall be governed by, the law of such State.

14. Severability. If any provision of this Warrant or the application thereof to any person or circumstances shall be invalid or unenforceable to any extent, the remainder of this Warrant and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

15. No Strict Construction. The Company hereby waives the benefit of any statute or rule of law or judicial decision, including without limitation California Civil Code § 1654, which would otherwise require that the provisions of this Warrant be construed or interpreted most strongly against the party responsible for the drafting thereof.

[SIGNATURE PAGE FOLLOWS]

Execution Copy

IN WITNESS WHEREOF, this Warrant has been executed as of the 24th day of November, 2003.

PROLONG INTERNATIONAL CORPORATION

By:		/s/ Elton Alderman
		Name: Elton Alderman
		Title: President and Chief Executive Officer

EX-99 9 dex99.htm JOINT FILING AGREEMENT, DATED 11/24/03 Joint Filing Agreement, dated 11/24/03

EXHIBIT 99

JOINT FILING AGREEMENT

The undersigned hereby agree to jointly file a statement on Schedule 13D, together with any amendments thereto (collectively, the “Schedule 13Ds”), with the Securities and Exchange Commission pursuant to the requirements of Rule 13d-1(k) under the Securities Exchange Act of 1934, as amended. This Joint Filing Agreement may be signed in counterpart copies.

Dated: December 4, 2003	ST. CLOUD CAPITAL PARTNERS, LP

	By:	SCCP, LLC
	Its:	General Partner

	By:	/s/ Marshall S. Geller
		Name: Marshall S. Geller
		Title: Senior Managing Member

Dated: December 4, 2003	SCGP, LLC

	By:	/s/ Cary Fitchey
		Name: Cary Fitchey
		Title: Managing Member

Dated: December 4, 2003	ST. CLOUD CAPITAL, LLC

	By:	/s/ Cary Fitchey
		Name: Cary Fitchey
		Title: Managing Member

Dated: December 4, 2003	MARSHALL S. GELLER

	By:	/s/ Marshall S. Geller
		Marshall S. Geller

Dated: December 4, 2003	CARY FITCHEY

	By:	/s/ Cary Fitchey
		Cary Fitchey

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