-----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, CyVI2cwzMEXIg8tgU4vMyQt+Lpc4Qf6+sNPRpjxmIBF7SDglnE85sew/GphFWHsL 3J2ZP6oj/eHyEfOFxTGF0A== 0001144204-03-003203.txt : 20030618 0001144204-03-003203.hdr.sgml : 20030618 20030618173031 ACCESSION NUMBER: 0001144204-03-003203 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20030610 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20030618 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QT 5 INC CENTRAL INDEX KEY: 0000932127 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 721148906 STATE OF INCORPORATION: DE FISCAL YEAR END: 0603 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25022 FILM NUMBER: 03749274 BUSINESS ADDRESS: STREET 1: 5655 LINDERO CANYON ROAD STREET 2: SUITE 120 CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91362 BUSINESS PHONE: (866) 508-8378 MAIL ADDRESS: STREET 1: 5655 LINDERO CANYON ROAD STREET 2: SUITE 120 CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91362 FORMER COMPANY: FORMER CONFORMED NAME: MONEYZONE COM DATE OF NAME CHANGE: 20000120 FORMER COMPANY: FORMER CONFORMED NAME: EBONLINEINC COM DATE OF NAME CHANGE: 19990715 FORMER COMPANY: FORMER CONFORMED NAME: CERX VENTURE CORP DATE OF NAME CHANGE: 19981116 8-K 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): June 10, 2003 QT 5, INC (Exact name of Registrant as specified in charter) DELAWARE 0-25022 72-7148906 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification Number) 5655 LINDERO CANYON ROAD, SUITE 120 WESTLAKE VILLAGE, CALIFORNIA 91362 (Address of principal executive offices) Registrant's telephone number, including area code: (818) 338-1510 NOT APPLICABLE (Former name or former address, if changed since last report) 1 FORWARD LOOKING STATEMENTS This Form 8-K and other reports filed by Registrant from time to time with the Securities and Exchange Commission (collectively the "Filings") contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, Registrant's management as well as estimates and assumptions made by Registrant's management. When used in the Filings the words "anticipate, "believe", "estimate", "expect", "future", "intend", "plan" or the negative of these terms and similar expressions as they relate to Registrant or Registrant's management identify forward looking statements. Such statements reflect the current view of Registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to Registrant's industry, Registrant's operations and results of operations and any businesses that may be acquired by Registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Although Registrant believes that the expectations reflected in the forward looking statements are reasonable, Registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE. RESTRUCTURING OF PROMISSORY NOTES --------------------------------- On June 10, 2003, the Registrant was successfully able to restructure certain promissory notes which included a cash payment. The restructuring of the promissory notes enabled the Registrant to reduce its liability under thereunder, extend the term of the promissory notes and ensure its ability to pay the balance of the promissory notes through the sale of NICOWater TM. The Registrant had previously entered into various promissory notes ("Notes") with NDMS Investments, L.P., Devenshire Management Corp., Alliance Financial Network, Inc. and Dale Affonso (collectively, the "Holders"). The promissory notes were due on April 30, 2003. The Registrant was in default under the promissory notes. The Registrant entered into settlement agreements with the Holders whereby the promissory notes were restructured and security agreements were entered into. The full text of the settlement agreements, the restructured promissory notes and the security agreements are set forth in Exhibits 4.1 through 4.10 attached hereto and are incorporated in this Report as if fully set forth herein. LEGAL PROCEEDINGS ----------------- As of May 6, 2003 the Registrant has been responding to what the Registrant believes are unfounded allegations by Mr. Frank Longo, attorney for Mr. Marshal Thompson regarding the assignment of patent rights agreement between Mr. Thompson and the Registrant. The Registrant took affirmative action to speedily resolve the dispute by filing for arbitration on June 6, 2003. The Registrant 2 believes that Mr. Thompson's claims lack any merit. The Registrant intends to vigorously pursue its claims in the arbitration. Nevertheless, arbitration is uncertain, and the Registrant may not prevail in the arbitration and can express no opinion as to its ultimate outcome. On May 30, 2003, an individual sent a fax to Brooks Pharmacy, a customer of the Registrant, making unsubstantiated allegations with regards to the Registrant and its product NICOWater TM. On June 4, 2003, the Registrant sent the individual a letter requiring the individual to cease and desist from making such unsubstantiated allegations and is considering taking legal action against the individual. Brooks Pharmacy temporarily suspended the sale of NICOWater TM. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Businesses Acquired. Not applicable. (b) Pro Forma Financial Information Not applicable. (c) Exhibits Exh. No. Description ------- ----------- 4.1 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and Dale Affonso. 4.2 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and Alliance Financial Network. 4.3 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and Devenshire Management Corp. 4.4 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and NDMS Investments, L.P. 4.5 Settlement Agreement and Mutual General Releases, dated June 10, 2003, by and among Robert Moore, NDMS Investments, L.P. and QT 5, Inc. 3 4.6 Settlement Agreement and Mutual General Releases, dated June 10, 2003, by and among Robert Moore, NDMS Investments, L.P., QT 5, Inc., SBI-USA, LLC and Shelly Singhal. 4.7 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and Dale Affonso. 4.8 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and Alliance Financial Network. 4.9 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and Devenshire Management Corp. 4.10 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and NDMS Investments, L.P. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: June 18, 2003 QT 5, INC. By: /s/ Timothy J. Owens ------------------------- Timothy J. Owens Chief Executive Officer 5 EXHIBITS FILED WITH THIS REPORT Exh. No. Description - ------- ----------- 4.1 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and Dale Affonso. 4.2 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and Alliance Financial Network. 4.3 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and Devenshire Management Corp. 4.4 Secured Note, dated June 10, 2003, by and between QT 5, Inc. and NDMS Investments, L.P. 4.5 Settlement Agreement and Mutual General Releases, dated June 10, 2003, by and among Robert Moore, NDMS Investments, L.P. and QT 5, Inc. 4.6 Settlement Agreement and Mutual General Releases, dated June 10, 2003, by and among Robert Moore, NDMS Investments, L.P., QT 5, Inc., SBI-USA, LLC and Shelly Singhal. 4.7 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and Dale Affonso. 4.8 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and Alliance Financial Network. 4.9 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and Devenshire Management Corp. 4.10 Security Agreement, dated June 10, 2003, by and between QT 5, Inc. and NDMS Investments, L.P. 6 EX-4.1 3 doc2.txt Exhibit 4.1 THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE APPLICABLE SECURITIES UNDER THE ACT AND ANY STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH AN ACCOMPANYING OPINION OF COUNSEL WITH RESPECT TO THE AVAILABILITY OF ANY SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (AS DEFINED HEREIN). SECURED NOTE ------------ $50,000 June 10, 2003 Los Angeles, California WHEREAS, Dale Affonso ("Holder"), previously loaned an aggregate of Fifty Thousand Dollars ($50,000) to Quick Test 5, Inc., a Delaware corporation and predecessor in interest to QT-5, Inc., a Delaware corporation ("QT-5, Inc." or "Maker"), pursuant to that certain Bridge Promissory Note dated, September 29, 2002, (collectively, the "Previous Note"); WHEREAS, QT-5, Inc., as successor in interest to Quick Test 5, Inc. is in default under the Previous Note; WHEREAS, Holder has agreed to extend the maturity of the Previous Note and TQ-5 has agreed to provide security for amounts owed to Holder by Maker; and WHEREAS, Holder and QT-5, Inc. intend that this Secured Note supercede the Previous Note, and govern the rights and obligations of the parties hereto with respect to the amounts hereunder. FOR VALUE RECEIVED, subject to the terms and conditions herein set forth, the undersigned, Maker, hereby promises to pay to the order of Holder at 355 South Grand Avenue, Suite 2000, Los Angeles, CA 90071, or such other address or account as Holder may from time to time specify in writing to Maker, in lawful money of the United States and in immediately available funds, the principal amount of Fifty Thousand Dollars ($50,000), together with interest at the rate specified below. The due payment and performance of Maker's obligations under this Note are secured by that certain Security Agreement dated June 5, 2003, by Maker in favor of Holder. 7 SECTION 1. INTEREST. The unpaid principal balance of this Note outstanding shall accrue interest from the date above first written at the rate of twelve percent (12%) per annum, and such interest shall be payable on the Maturity Date (as defined below). Interest hereon shall be calculated on the basis of a 365-day year until all accrued and unpaid interest is paid in full. If this Note is not paid when due, the unpaid balance shall bear interest at the lesser of: (1) the rate of twenty percent (20%) per annum; or (2) the maximum rate permitted by law (the "Default Rate"), payable in cash monthly in arrears. SECTION 2. PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The entire amount due hereunder, including principal and accrued interest, shall be due and payable on December 1, 2003 (the "Maturity Date"). All payments shall be applied first to accrued but unpaid interest on the unpaid principal balance and the remainder to principal. All interest due and payable hereunder which is not paid when due for any reason shall, to the extent permitted by applicable law, be cumulated and accrue interest at the Default Rate. SECTION 3. PREPAYMENT AND REDEMPTION. The principal amount of this Note may be prepaid, in whole or in part, at any time or from time to time without any penalty to Maker;. SECTION 4. TRANSFER, EXCHANGE AND REPLACEMENT OF NOTE. Subject to the provisions of Section 5.2 hereof, Holder may transfer this Note in whole or in part. This Note shall be transferable on the note register of Maker maintained at the office of Maker's transfer agent or at the principal executive office of Maker, upon delivery thereof duly endorsed by Holder, or accompanied (as reasonably required by Maker) by proper evidence of succession, assignment or authority to transfer executed by Holder. In addition, Holder and, if applicable, any transferee shall comply with the terms of Section 5.2 hereof. Upon any registration of transfer, Maker shall execute a new Note or Notes to the persons entitled thereto. Each transferee and subsequent transferee shall accept this Note subject to all of the terms and conditions set forth herein, as if such transferee or subsequent transferee were deemed the Holder. Maker may deem and treat the person in whose name this Note is registered as the absolute, true and lawful owner of this Note for all purposes. Upon receipt by Maker of evidence reasonably satisfactory to it of loss, theft, destruction or mutilation of this Note, Maker shall make and deliver a new Note of like tenor in lieu of this Note, if (i) in case of loss, theft or destruction, Maker receives indemnity reasonably satisfactory to it, (ii) Maker is reimbursed for all reasonable expenses incidental to such replacement, and (iii) this Note is surrendered and canceled, if mutilated. For purposes of clause (i) above, Maker agrees that an unsecured indemnity from the original Holder of this Note shall be reasonably satisfactory to Maker. SECTION 5. INVESTMENT ACQUISITION AND RESTRICTIONS ON TRANSFER. SECTION 5.1 INVESTMENT REPRESENTATIONS. By acceptance of this Note, Holder represents and warrants to Maker as follows: 8 (a) Holder understands that the Note has not been registered under federal or state securities laws and has been or will be issued, as the case may be, pursuant to exemptions from registration contained in such laws; and (b) Holder has acquired the Note solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution of the Note in violation of applicable securities laws. SECTION 5.2 RESTRICTIONS ON TRANSFER. Holder, by the acceptance of this Note, agrees that Holder will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of this Note or any interest in the same in violation of the Securities Act of 1933, as amended, or any applicable state securities laws. SECTION 6. DEFAULTS AND REMEDIES. SECTION 6.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) Maker fails to pay any amount due under this Note when due and is unable to cure such failure within three (3) business days of receipt of written notice from Holder that it is in default; (b) Maker fails to observe, perform or comply with any covenant, agreement or term contained in this Note or the Security Agreement and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (c) Any representation, warranty or certification made by Maker pursuant to this Note, the Settlement Agreement of even date, or the Security Agreement having been false or misleading in any material respect as of the date made, and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (d) Maker or any Subsidiary thereof applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property; Maker or any Subsidiary admits in writing its inability, or is generally unable, to pay its debts as they become due for a period of ninety (90) consecutive days; Maker or any Subsidiary thereof makes a general assignment for the benefit of creditors; any proceeding is instituted by or against Maker or any Subsidiary thereof seeking to adjudicate it a bankrupt or insolvent, seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debts, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property, provided that, in any such case, if the same is dismissed or vacated within ninety (90) days of being instituted, then any such default shall be deemed cured; or Maker or any Subsidiary thereof takes any corporate action to authorize any of the actions set forth above; 9 (e) a material part of the operations or business of Maker and its Subsidiaries, considered as a whole, shall be suspended or cease for a period exceeding thirty (30) days; (f) Maker purports or attempts to assign or delegate any of its rights or obligations hereunder or the Security Agreement; (g) Maker fails to (i) ship in any calendar month at least ten thousand (10,000) cases of NicoWater and (ii) generate gross sales of at least $280,000 from the sale of NicoWater in any month; or (h) the Security Agreement or this Note shall, at any time after its execution and delivery, for any reason cease to be in full force and effect (unless such occurrence is in accordance with its terms or after payment hereof) or shall be declared null and void or the validity or enforceability thereof shall be contested by Maker, or Maker denies that it has further liability or obligation thereunder. SECTION 6.2 REMEDIES. During the continuance of any Event of Default, Holder may, at its sole option, declare the entire unpaid principal balance and accrued, unpaid interest on this Note (if any) immediately due and payable, by written notice to Maker, in which event Maker immediately shall pay to Holder the entire unpaid principal balance of this Note together with accrued, unpaid interest thereon to the date of such payment. No delay or omission of Holder to exercise any right or power occurring upon any Event of Default hereunder shall impair any such right or power or shall be construed as a waiver of any such Event of Default or an acquiescence therein. To the fullest extent permitted by law, Holder's rights and remedies under this Note shall be cumulative, and Holder shall have all other rights and remedies not inconsistent herewith as are provided under the Uniform Commercial Code as in effect in the relevant jurisdictions, by law or in equity. No exercise by Holder of one right or remedy shall be deemed an election, no waiver by Holder of any default on the part of the Maker shall be deemed a continuing waiver (unless expressly so provided therein), and no delay by Holder shall constitute a waiver, election or acquiescence by it. SECTION 6.3 WAIVERS BY MAKER. Maker waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of interest on interest and delinquence in taking any action to collect any sums owing under this Note or in a proceeding against any of the rights or interests in or to properties securing payment of this Note, except as otherwise expressly provided herein. SECTION 7. COLLATERAL. The amounts due under this Secured Convertible Note are secured by a pledge of all of the tangible and intangible assets of Maker pursuant to that certain Security Agreement, dated as of June 5, 2003, by and among Maker and Holder. SECTION 8. MISCELLANEOUS. 10 SECTION 8.1 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and may be delivered by personal service, or sent by registered or certified mail, return receipt requested, with postage thereon fully prepaid. All such communications shall be addressed to the Holder of record at its address appearing on the books of Maker. SECTION 8.2 SUCCESSORS. 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 subsequent Holders of this Note. SECTION 8.3 ASSIGNMENT; PARTICIPATIONS. Maker and Holder shall include the successors and assigns thereof; provided, however, that Maker may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Holder. Holder may, without the consent of Maker, at any time assign or grant participations in all or any portion of this Note or its rights hereunder; provided, however, that any such assignment or participation shall be in accordance with applicable law, including without limitation all applicable federal and state securities laws, and subject to the provisions of Section 5.2. SECTION 8.4 NO ORAL MODIFICATION. The provisions, terms and conditions of this Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. SECTION 8.5 GOVERNING LAW. MAKER ACKNOWLEDGES THAT THE TRANSACTIONS CONTEMPLATED BY THIS NOTE BEAR A REASONABLE RELATION TO THE STATE OF CALIFORNIA IN THAT, INTER ALIA, MAKER'S PRINCIPAL PLACE OF BUSINESS IS IN THE STATE OF CALIFORNIA AND THE PROCEEDS OF THE SALE OF THIS NOTE ARE TO BE PAID IN CALIFORNIA, AND A SUBSTANTIAL PART OF THE NEGOTIATIONS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS NOTE HAVE OCCURRED IN THE STATE OF CALIFORNIA. THIS NOTE IS DELIVERED IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF CALIFORNIA WITHOUT GIVING ANY EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. IT IS THE INTENT OF MAKER THAT THE LAWS OF CALIFORNIA REGARDING USURY AND THE CHARGING OF INTEREST APPLY TO THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 8.6 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Maker hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Secured Note or the subject matter hereof brought by any party hereto or their respective successors or assigns; 11 (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Secured Note or the subject matter hereof may not be enforced in or by such court; (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. SECTION 8.7 HEADINGS. The Section headings in this Secured Note are nserted for purposes of convenience only, and shall not affect in any way the meaning or interpretation hereof. SECTION 8.8 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Secured Note or the rights and duties of the parties in relation hereto, the prevailing party will be entitled, in addition to any other relief granted, to all costs and expenses incurred by such prevailing party, including, without limitation, all reasonable attorneys' fees. SECTION 8.9 TIME OF THE ESSENCE. Time is of the essence with respect to every provision hereof. SECTION 8.10 USURY. Notwithstanding any other provision of this Secured Note to the contrary, all agreements among the Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the delivery of the proceeds of this Secured Note, acceleration of maturity of the unpaid principal balance, the addition of accrued interest to principal or otherwise, shall the amount paid, charged for, contracted for, received or agreed to be paid to Holder for the use, forbearance or detention of the money to be delivered under this Note exceed the highest lawful rate permissible under applicable usury laws as prescribed by a court of competent jurisdiction ("Applicable Law"). If, from any circumstances whatsoever, interest would otherwise be payable to Holder in excess of the maximum amount permissible under Applicable Law, the interest payable to Holder shall be reduced to the maximum amount permissible under Applicable Law, and if from any circumstances Holder shall ever receive anything deemed interest by Applicable Law in excess of the maximum amount permissible under Applicable Law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid principal balance hereof, such excess shall be refunded to Maker. All interest paid or agreed to be paid to Holder shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under Applicable 12 Law. Holder, by its acceptance hereof, expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under Applicable Law. This Section 8.10 shall control agreements between Maker and Holder. This covenant shall survive the payment in full of this Secured Note. 13 IN WITNESS WHEREOF, Maker has executed this Secured Note as of the date first above written. "MAKER" QT-5, Inc., a Delaware corporation By: /s/ Steve Reder --------------------------------- Steve Reder President, Director By: /s/ Timothy Owens --------------------------------- Tim Owens Chief Executive Officer, Director 14 EX-4.2 4 doc3.txt Exhibit 4.2 THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE APPLICABLE SECURITIES UNDER THE ACT AND ANY STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH AN ACCOMPANYING OPINION OF COUNSEL WITH RESPECT TO THE AVAILABILITY OF ANY SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (AS DEFINED HEREIN). SECURED NOTE ------------ $25,000 JUNE 10, 2003 LOS ANGELES, CALIFORNIA WHEREAS, Alliance Financial Network, Inc. ("Holder"), previously loaned an aggregate of Twenty-Five Thousand Dollars ($25,000) to Quick Test 5, Inc., a Delaware corporation and predecessor in interest to QT-5, Inc., a Delaware corporation ("QT-5, Inc." or "Maker"), pursuant to that certain Bridge Promissory Note dated, September 29, 2002, (collectively, the "Previous Note"); WHEREAS, QT-5, Inc., as successor in interest to Quick Test 5, Inc. is in default under the Previous Note; WHEREAS, Holder has agreed to extend the maturity of the Previous Note and TQ-5 has agreed to provide security for amounts owed to Holder by Maker; and WHEREAS, Holder and QT-5, Inc. intend that this Secured Note supercede the Previous Note, and govern the rights and obligations of the parties hereto with respect to the amounts hereunder. FOR VALUE RECEIVED, subject to the terms and conditions herein set forth, the undersigned, Maker, hereby promises to pay to the order of Holder at Alliance Financial Network, Inc., c/o Bill Bossung, 2436 West Coast Highway, Suite 2A, Newport Beach, CA 92663, or such other address or account as Holder may from time to time specify in writing to Maker, in lawful money of the United States and in immediately available funds, the principal amount of Twenty-Five Thousand Dollars ($25,000), together with interest at the rate specified below. The due payment and performance of Maker's obligations under this Note are secured by that certain Security Agreement dated June 5, 2003, by Maker in favor of Holder. 1 SECTION 1. INTEREST. The unpaid principal balance of this Note outstanding shall accrue interest from the date above first written at the rate of twelve percent (12%) per annum, and such interest shall be payable on the Maturity Date (as defined below). Interest hereon shall be calculated on the basis of a 365-day year until all accrued and unpaid interest is paid in full. If this Note is not paid when due, the unpaid balance shall bear interest at the lesser of: (1) the rate of twenty percent (20%) per annum; or (2) the maximum rate permitted by law (the "Default Rate"), payable in cash monthly in arrears. SECTION 2. PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The entire amount due hereunder, including principal and accrued interest, shall be due and payable on December 1, 2003 (the "Maturity Date"). All payments shall be applied first to accrued but unpaid interest on the unpaid principal balance and the remainder to principal. All interest due and payable hereunder which is not paid when due for any reason shall, to the extent permitted by applicable law, be cumulated and accrue interest at the Default Rate. SECTION 3. PREPAYMENT AND REDEMPTION. The principal amount of this Note may be prepaid, in whole or in part, at any time or from time to time without any penalty to Maker;. SECTION 4. TRANSFER, EXCHANGE AND REPLACEMENT OF NOTE. Subject to the provisions of Section 5.2 hereof, Holder may transfer this Note in whole or in part. This Note shall be transferable on the note register of Maker maintained at the office of Maker's transfer agent or at the principal executive office of Maker, upon delivery thereof duly endorsed by Holder, or accompanied (as reasonably required by Maker) by proper evidence of succession, assignment or authority to transfer executed by Holder. In addition, Holder and, if applicable, any transferee shall comply with the terms of Section 5.2 hereof. Upon any registration of transfer, Maker shall execute a new Note or Notes to the persons entitled thereto. Each transferee and subsequent transferee shall accept this Note subject to all of the terms and conditions set forth herein, as if such transferee or subsequent transferee were deemed the Holder. Maker may deem and treat the person in whose name this Note is registered as the absolute, true and lawful owner of this Note for all purposes. Upon receipt by Maker of evidence reasonably satisfactory to it of loss, theft, destruction or mutilation of this Note, Maker shall make and deliver a new Note of like tenor in lieu of this Note, if (i) in case of loss, theft or destruction, Maker receives indemnity reasonably satisfactory to it, (ii) Maker is reimbursed for all reasonable expenses incidental to such replacement, and (iii) this Note is surrendered and canceled, if mutilated. For purposes of clause (i) above, Maker agrees that an unsecured indemnity from the original Holder of this Note shall be reasonably satisfactory to Maker. SECTION 5. INVESTMENT ACQUISITION AND RESTRICTIONS ON TRANSFER. SECTION 5.1 INVESTMENT REPRESENTATIONS. By acceptance of this Note, Holder represents and warrants to Maker as follows: 2 (a) Holder understands that the Note has not been registered under federal or state securities laws and has been or will be issued, as the case may be, pursuant to exemptions from registration contained in such laws; and (b) Holder has acquired the Note solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution of the Note in violation of applicable securities laws. SECTION 5.2 RESTRICTIONS ON TRANSFER. Holder, by the acceptance of this Note, agrees that Holder will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of this Note or any interest in the same in violation of the Securities Act of 1933, as amended, or any applicable state securities laws. SECTION 6. DEFAULTS AND REMEDIES. SECTION 6.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) Maker fails to pay any amount due under this Note when due and is unable to cure such failure within three (3) business days of receipt of written notice from Holder that it is in default; (b) Maker fails to observe, perform or comply with any covenant, agreement or term contained in this Note or the Security Agreement and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (c) Any representation, warranty or certification made by Maker pursuant to this Note, the Settlement Agreement of even date, or the Security Agreement having been false or misleading in any material respect as of the date made, and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (d) Maker or any Subsidiary thereof applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property; Maker or any Subsidiary admits in writing its inability, or is generally unable, to pay its debts as they become due for a period of ninety (90) consecutive days; Maker or any Subsidiary thereof makes a general assignment for the benefit of creditors; any proceeding is instituted by or against Maker or any Subsidiary thereof seeking to adjudicate it a bankrupt or insolvent, seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debts, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property, provided that, in any such case, if the same is dismissed or vacated within ninety (90) days of being instituted, then any such default shall be deemed cured; or Maker or any Subsidiary thereof takes any corporate action to authorize any of the actions set forth above; 3 (e) a material part of the operations or business of Maker and its Subsidiaries, considered as a whole, shall be suspended or cease for a period exceeding thirty (30) days; (f) Maker purports or attempts to assign or delegate any of its rights or obligations hereunder or the Security Agreement; (g) Maker fails to (i) ship in any calendar month at least ten thousand (10,000) cases of NicoWater and (ii) generate gross sales of at least $280,000 from the sale of NicoWater in any month; or (h) the Security Agreement or this Note shall, at any time after its execution and delivery, for any reason cease to be in full force and effect (unless such occurrence is in accordance with its terms or after payment hereof) or shall be declared null and void or the validity or enforceability thereof shall be contested by Maker, or Maker denies that it has further liability or obligation thereunder. SECTION 6.2 REMEDIES. During the continuance of any Event of Default, Holder may, at its sole option, declare the entire unpaid principal balance and accrued, unpaid interest on this Note (if any) immediately due and payable, by written notice to Maker, in which event Maker immediately shall pay to Holder the entire unpaid principal balance of this Note together with accrued, unpaid interest thereon to the date of such payment. No delay or omission of Holder to exercise any right or power occurring upon any Event of Default hereunder shall impair any such right or power or shall be construed as a waiver of any such Event of Default or an acquiescence therein. To the fullest extent permitted by law, Holder's rights and remedies under this Note shall be cumulative, and Holder shall have all other rights and remedies not inconsistent herewith as are provided under the Uniform Commercial Code as in effect in the relevant jurisdictions, by law or in equity. No exercise by Holder of one right or remedy shall be deemed an election, no waiver by Holder of any default on the part of the Maker shall be deemed a continuing waiver (unless expressly so provided therein), and no delay by Holder shall constitute a waiver, election or acquiescence by it. SECTION 6.3 WAIVERS BY MAKER. Maker waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of interest on interest and delinquence in taking any action to collect any sums owing under this Note or in a proceeding against any of the rights or interests in or to properties securing payment of this Note, except as otherwise expressly provided herein. SECTION 7. COLLATERAL. The amounts due under this Secured Convertible Note are secured by a pledge of all of the tangible and intangible assets of Maker pursuant to that certain Security Agreement, dated as of June 5, 2003, by and among Maker and Holder. SECTION 8. MISCELLANEOUS. 4 SECTION 8.1 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and may be delivered by personal service, or sent by registered or certified mail, return receipt requested, with postage thereon fully prepaid. All such communications shall be addressed to the Holder of record at its address appearing on the books of Maker. SECTION 8.2 SUCCESSORS. 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 subsequent Holders of this Note. SECTION 8.3 ASSIGNMENT; PARTICIPATIONS. Maker and Holder shall include the successors and assigns thereof; provided, however, that Maker may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Holder. Holder may, without the consent of Maker, at any time assign or grant participations in all or any portion of this Note or its rights hereunder; provided, however, that any such assignment or participation shall be in accordance with applicable law, including without limitation all applicable federal and state securities laws, and subject to the provisions of Section 5.2. SECTION 8.4 NO ORAL MODIFICATION. The provisions, terms and conditions of this Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. SECTION 8.5 GOVERNING LAW. MAKER ACKNOWLEDGES THAT THE TRANSACTIONS CONTEMPLATED BY THIS NOTE BEAR A REASONABLE RELATION TO THE STATE OF CALIFORNIA IN THAT, INTER ALIA, MAKER'S PRINCIPAL PLACE OF BUSINESS IS IN THE STATE OF CALIFORNIA AND THE PROCEEDS OF THE SALE OF THIS NOTE ARE TO BE PAID IN CALIFORNIA, AND A SUBSTANTIAL PART OF THE NEGOTIATIONS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS NOTE HAVE OCCURRED IN THE STATE OF CALIFORNIA. THIS NOTE IS DELIVERED IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF CALIFORNIA WITHOUT GIVING ANY EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. IT IS THE INTENT OF MAKER THAT THE LAWS OF CALIFORNIA REGARDING USURY AND THE CHARGING OF INTEREST APPLY TO THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 8.6 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Maker hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Secured Note or the subject matter hereof brought by any party hereto or their respective successors or assigns; 5 (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Secured Note or the subject matter hereof may not be enforced in or by such court; (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. SECTION 8.7 HEADINGS. The Section headings in this Secured Note are inserted for purposes of convenience only, and shall not affect in any way the meaning or interpretation hereof. SECTION 8.8 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Secured Note or the rights and duties of the parties in relation hereto, the prevailing party will be entitled, in addition to any other relief granted, to all costs and expenses incurred by such prevailing party, including, without limitation, all reasonable attorneys' fees. SECTION 8.9 TIME OF THE ESSENCE. Time is of the essence with respect to every provision hereof. SECTION 8.10 USURY. Notwithstanding any other provision of this Secured Note to the contrary, all agreements among the Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the delivery of the proceeds of this Secured Note, acceleration of maturity of the unpaid principal balance, the addition of accrued interest to principal or otherwise, shall the amount paid, charged for, contracted for, received or agreed to be paid to Holder for the use, forbearance or detention of the money to be delivered under this Note exceed the highest lawful rate permissible under applicable usury laws as prescribed by a court of competent jurisdiction ("Applicable Law"). If, from any circumstances whatsoever, interest would otherwise be payable to Holder in excess of the maximum amount permissible under Applicable Law, the interest payable to Holder shall be reduced to the maximum amount permissible under Applicable Law, and if from any circumstances Holder shall ever receive anything deemed interest by Applicable Law in excess of the maximum amount permissible under Applicable Law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid principal balance hereof, such excess shall be refunded to Maker. All interest paid or agreed to be paid to Holder shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under Applicable 6 Law. Holder, by its acceptance hereof, expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under Applicable Law. This Section 8.10 shall control agreements between Maker and Holder. This covenant shall survive the payment in full of this Secured Note. 7 IN WITNESS WHEREOF, Maker has executed this Secured Note as of the date first above written. "MAKER" QT-5, Inc., a Delaware corporation By: /s/ Steve Reder --------------------------------- Steve Reder President, Director By: /s/ Timothy Owens --------------------------------- Tim Owens Chief Executive Officer, Director 8 EX-4.3 5 doc4.txt Exhibit 4.3 THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE APPLICABLE SECURITIES UNDER THE ACT AND ANY STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH AN ACCOMPANYING OPINION OF COUNSEL WITH RESPECT TO THE AVAILABILITY OF ANY SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (AS DEFINED HEREIN). SECURED NOTE $25,000 JUNE 10, 2003 LOS ANGELES, CALIFORNIA WHEREAS, Devenshire Management Corp. ("Holder"), previously loaned an aggregate of Twenty-Five Thousand Dollars ($25,000) to Quick Test 5, Inc., a Delaware corporation and predecessor in interest to QT-5, Inc., a Delaware corporation ("QT-5, Inc." or "Maker"), pursuant to that certain Bridge Promissory Notes dated, September 29, 2002, (collectively, the "Previous Note"); WHEREAS, QT-5, Inc., as successor in interest to Quick Test 5, Inc. is in default under the Previous Note; WHEREAS, Holder has agreed to extend the maturity of the Previous Note and TQ-5 has agreed to provide security for amounts owed to Holder by Maker; and WHEREAS, Holder and QT-5, Inc. intend that this Secured Note supercede the Previous Note, and govern the rights and obligations of the parties hereto with respect to the amounts hereunder. FOR VALUE RECEIVED, subject to the terms and conditions herein set forth, the undersigned, Maker, hereby promises to pay to the order of Holder at Devenshire Management Corp., 1925 Century Park East, Suite 880, Los Angeles, CA 90067, or such other address or account as Holder may from time to time specify in writing to Maker, in lawful money of the United States and in immediately available funds, the principal amount of Twenty-Five Thousand Dollars ($25,000), together with interest at the rate specified below. The due payment and performance of Maker's obligations under this Note are secured by that certain Security Agreement dated June 5, 2003, by Maker in favor of Holder. 1 SECTION 1. INTEREST. The unpaid principal balance of this Note outstanding shall accrue interest from the date above first written at the rate of twelve percent (12%) per annum, and such interest shall be payable on the Maturity Date (as defined below). Interest hereon shall be calculated on the basis of a 365-day year until all accrued and unpaid interest is paid in full. If this Note is not paid when due, the unpaid balance shall bear interest at the lesser of: (1) the rate of twenty percent (20%) per annum; or (2) the maximum rate permitted by law (the "Default Rate"), payable in cash monthly in arrears. SECTION 2. PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The entire amount due hereunder, including principal and accrued interest, shall be due and payable on December 1, 2003 (the "Maturity Date"). All payments shall be applied first to accrued but unpaid interest on the unpaid principal balance and the remainder to principal. All interest due and payable hereunder which is not paid when due for any reason shall, to the extent permitted by applicable law, be cumulated and accrue interest at the Default Rate. SECTION 3. PREPAYMENT AND REDEMPTION. The principal amount of this Note may be prepaid, in whole or in part, at any time or from time to time without any penalty to Maker;. SECTION 4. TRANSFER, EXCHANGE AND REPLACEMENT OF NOTE. Subject to the provisions of Section 5.2 hereof, Holder may transfer this Note in whole or in part. This Note shall be transferable on the note register of Maker maintained at the office of Maker's transfer agent or at the principal executive office of Maker, upon delivery thereof duly endorsed by Holder, or accompanied (as reasonably required by Maker) by proper evidence of succession, assignment or authority to transfer executed by Holder. In addition, Holder and, if applicable, any transferee shall comply with the terms of Section 5.2 hereof. Upon any registration of transfer, Maker shall execute a new Note or Notes to the persons entitled thereto. Each transferee and subsequent transferee shall accept this Note subject to all of the terms and conditions set forth herein, as if such transferee or subsequent transferee were deemed the Holder. Maker may deem and treat the person in whose name this Note is registered as the absolute, true and lawful owner of this Note for all purposes. Upon receipt by Maker of evidence reasonably satisfactory to it of loss, theft, destruction or mutilation of this Note, Maker shall make and deliver a new Note of like tenor in lieu of this Note, if (i) in case of loss, theft or destruction, Maker receives indemnity reasonably satisfactory to it, (ii) Maker is reimbursed for all reasonable expenses incidental to such replacement, and (iii) this Note is surrendered and canceled, if mutilated. For purposes of clause (i) above, Maker agrees that an unsecured indemnity from the original Holder of this Note shall be reasonably satisfactory to Maker. SECTION 5. INVESTMENT ACQUISITION AND RESTRICTIONS ON TRANSFER. SECTION 5.1 INVESTMENT REPRESENTATIONS. By acceptance of this Note, Holder represents and warrants to Maker as follows: 2 (a) Holder understands that the Note has not been registered under federal or state securities laws and has been or will be issued, as the case may be, pursuant to exemptions from registration contained in such laws; and (b) Holder has acquired the Note solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution of the Note in violation of applicable securities laws. SECTION 5.2 RESTRICTIONS ON TRANSFER. Holder, by the acceptance of this Note, agrees that Holder will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of this Note or any interest in the same in violation of the Securities Act of 1933, as amended, or any applicable state securities laws. SECTION 6. DEFAULTS AND REMEDIES. SECTION 6.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) Maker fails to pay any amount due under this Note when due and is unable to cure such failure within three (3) business days of receipt of written notice from Holder that it is in default; (b) Maker fails to observe, perform or comply with any covenant, agreement or term contained in this Note or the Security Agreement and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (c) Any representation, warranty or certification made by Maker pursuant to this Note, the Settlement Agreement of even date, or the Security Agreement having been false or misleading in any material respect as of the date made, and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (d) Maker or any Subsidiary thereof applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property; Maker or any Subsidiary admits in writing its inability, or is generally unable, to pay its debts as they become due for a period of ninety (90) consecutive days; Maker or any Subsidiary thereof makes a general assignment for the benefit of creditors; any proceeding is instituted by or against Maker or any Subsidiary thereof seeking to adjudicate it a bankrupt or insolvent, seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debts, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property, provided that, in any such case, if the same is dismissed or vacated within ninety (90) days of being instituted, then any such default shall be deemed cured; or Maker or any Subsidiary thereof takes any corporate action to authorize any of the actions set forth above; 3 (e) a material part of the operations or business of Maker and its Subsidiaries, considered as a whole, shall be suspended or cease for a period exceeding thirty (30) days; (f) Maker purports or attempts to assign or delegate any of its rights or obligations hereunder or the Security Agreement; (g) Maker fails to (i) ship in any calendar month at least ten thousand (10,000) cases of NicoWater and (ii) generate gross sales of at least $280,000 from the sale of NicoWater in any month; or (h) the Security Agreement or this Note shall, at any time after its execution and delivery, for any reason cease to be in full force and effect (unless such occurrence is in accordance with its terms or after payment hereof) or shall be declared null and void or the validity or enforceability thereof shall be contested by Maker, or Maker denies that it has further liability or obligation thereunder. SECTION 6.2 REMEDIES. During the continuance of any Event of Default, Holder may, at its sole option, declare the entire unpaid principal balance and accrued, unpaid interest on this Note (if any) immediately due and payable, by written notice to Maker, in which event Maker immediately shall pay to Holder the entire unpaid principal balance of this Note together with accrued, unpaid interest thereon to the date of such payment. No delay or omission of Holder to exercise any right or power occurring upon any Event of Default hereunder shall impair any such right or power or shall be construed as a waiver of any such Event of Default or an acquiescence therein. To the fullest extent permitted by law, Holder's rights and remedies under this Note shall be cumulative, and Holder shall have all other rights and remedies not inconsistent herewith as are provided under the Uniform Commercial Code as in effect in the relevant jurisdictions, by law or in equity. No exercise by Holder of one right or remedy shall be deemed an election, no waiver by Holder of any default on the part of the Maker shall be deemed a continuing waiver (unless expressly so provided therein), and no delay by Holder shall constitute a waiver, election or acquiescence by it. SECTION 6.3 WAIVERS BY MAKER. Maker waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of interest on interest and delinquence in taking any action to collect any sums owing under this Note or in a proceeding against any of the rights or interests in or to properties securing payment of this Note, except as otherwise expressly provided herein. SECTION 7. COLLATERAL. The amounts due under this Secured Convertible Note are secured by a pledge of all of the tangible and intangible assets of Maker pursuant to that certain Security Agreement, dated as of June 5, 2003, by and among Maker and Holder. 4 SECTION 8. MISCELLANEOUS. SECTION 8.1 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and may be delivered by personal service, or sent by registered or certified mail, return receipt requested, with postage thereon fully prepaid. All such communications shall be addressed to the Holder of record at its address appearing on the books of Maker. SECTION 8.2 SUCCESSORS. 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 subsequent Holders of this Note. SECTION 8.3 ASSIGNMENT; PARTICIPATIONS. Maker and Holder shall include the successors and assigns thereof; provided, however, that Maker may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Holder. Holder may, without the consent of Maker, at any time assign or grant participations in all or any portion of this Note or its rights hereunder; provided, however, that any such assignment or participation shall be in accordance with applicable law, including without limitation all applicable federal and state securities laws, and subject to the provisions of Section 5.2. SECTION 8.4 NO ORAL MODIFICATION. The provisions, terms and conditions of this Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. SECTION 8.5 GOVERNING LAW. MAKER ACKNOWLEDGES THAT THE TRANSACTIONS CONTEMPLATED BY THIS NOTE BEAR A REASONABLE RELATION TO THE STATE OF CALIFORNIA IN THAT, INTER ALIA, MAKER'S PRINCIPAL PLACE OF BUSINESS IS IN THE STATE OF CALIFORNIA AND THE PROCEEDS OF THE SALE OF THIS NOTE ARE TO BE PAID IN CALIFORNIA, AND A SUBSTANTIAL PART OF THE NEGOTIATIONS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS NOTE HAVE OCCURRED IN THE STATE OF CALIFORNIA. THIS NOTE IS DELIVERED IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF CALIFORNIA WITHOUT GIVING ANY EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. IT IS THE INTENT OF MAKER THAT THE LAWS OF CALIFORNIA REGARDING USURY AND THE CHARGING OF INTEREST APPLY TO THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 8.6 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Maker hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Secured Note or the subject matter hereof brought by any party hereto or their respective successors or assigns; 5 (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Secured Note or the subject matter hereof may not be enforced in or by such court; (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. SECTION 8.7 HEADINGS. The Section headings in this Secured Note are inserted for purposes of convenience only, and shall not affect in any way the meaning or interpretation hereof. Section 8.8 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Secured Note or the rights and duties of the parties in relation hereto, the prevailing party will be entitled, in addition to any other relief granted, to all costs and expenses incurred by such prevailing party, including, without limitation, all reasonable attorneys' fees. SECTION 8.9 TIME OF THE ESSENCE. Time is of the essence with respect to every provision hereof. SECTION 8.10 USURY. Notwithstanding any other provision of this Secured Note to the contrary, all agreements among the Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the delivery of the proceeds of this Secured Note, acceleration of maturity of the unpaid principal balance, the addition of accrued interest to principal or otherwise, shall the amount paid, charged for, contracted for, received or agreed to be paid to Holder for the use, forbearance or detention of the money to be delivered under this Note exceed the highest lawful rate permissible under applicable usury laws as prescribed by a court of competent jurisdiction ("Applicable Law"). If, from any circumstances whatsoever, interest would otherwise be payable to Holder in excess of the maximum amount permissible under Applicable Law, the interest payable to Holder shall be reduced to the maximum amount permissible under Applicable Law, and if from any circumstances Holder shall ever receive anything deemed interest by Applicable Law in excess of the maximum amount permissible under Applicable Law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid principal balance hereof, such excess shall be refunded to Maker. All interest paid or agreed to be paid to Holder shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest 6 hereon for such full period shall not exceed the maximum amount permissible under Applicable Law. Holder, by its acceptance hereof, expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under Applicable Law. This Section 8.10 shall control agreements between Maker and Holder. This covenant shall survive the payment in full of this Secured Note. 7 IN WITNESS WHEREOF, Maker has executed this Secured Note as of the date first above written. "MAKER" QT-5, Inc., a Delaware corporation By: /s/ Steve Reder --------------------------------- Steve Reder President, Director By: /s/ Timothy Owens --------------------------------- Tim Owens Chief Executive Officer, Director 8 EX-4.4 6 doc5.txt Exhibit 4.4 THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE APPLICABLE SECURITIES UNDER THE ACT AND ANY STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH AN ACCOMPANYING OPINION OF COUNSEL WITH RESPECT TO THE AVAILABILITY OF ANY SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (AS DEFINED HEREIN). SECURED NOTE $165,000 JUNE 10, 2003 LOS ANGELES, CALIFORNIA WHEREAS, NDMS Investments, L.P., a Nevada limited partnership ("NDMS" or "Holder"), previously loaned an aggregate of Three Hundred Thirty Five Thousand Dollars ($337,500) to Quick Test 5, Inc., a Delaware corporation and predecessor in interest to QT-5, Inc., a Delaware corporation ("QT-5, Inc." or "Maker"), pursuant to those certain Promissory Notes dated, September 30, 2002, December 31, 2002 and January 24, 2003 (collectively, the "Previous Notes"); WHEREAS, QT-5, Inc., as successor in interest to Quick Test 5, Inc. is in default under the Previous Notes; WHEREAS, NDMS and QT-5, Inc. have entered into an agreement to, among other things, extend the maturity of the Previous Notes, reduce the aggregate principal amount of the Previous Notes and provide security for amounts owed to Holder by Maker; and WHEREAS, NDMS and QT-5, Inc. intend that this Secured Note supercede the Previous Notes, and govern the rights and obligations of the parties hereto with respect to the amounts hereunder. 1 FOR VALUE RECEIVED, subject to the terms and conditions herein set forth, the undersigned, Maker, hereby promises to pay to the order of Holder, at NDMS, 5885 Via Manigua, Las Vegas, NV 89120, or such other address or account as Holder may from time to time specify in writing to Maker, in lawful money of the United States and in immediately available funds, the principal amount of One Hundred Sixty-Five Thousand Dollars ($165,000), together with interest at the rate specified below. The due payment and performance of Maker's obligations under this Note are secured by that certain Security Agreement dated June 5, 2003, by Maker in favor of Holder. SECTION 1. INTEREST. The unpaid principal balance of this Note outstanding shall accrue interest from the date above first written at the rate of twelve percent (12%) per annum, and such interest shall be payable on the Maturity Date (as defined below). Interest hereon shall be calculated on the basis of a 365-day year until all accrued and unpaid interest is paid in full. If this Note is not paid when due, the unpaid balance shall bear interest at the lesser of: (1) the rate of twenty percent (20%) per annum; or (2) the maximum rate permitted by law (the "Default Rate"), payable in cash monthly in arrears. SECTION 2. PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The entire amount due hereunder, including principal and accrued interest, shall be due and payable on December 1, 2003 (the "Maturity Date"). All payments shall be applied first to accrued but unpaid interest on the unpaid principal balance and the remainder to principal. All interest due and payable hereunder which is not paid when due for any reason shall, to the extent permitted by applicable law, be cumulated and accrue interest at the Default Rate. SECTION 3. PREPAYMENT AND REDEMPTION. The principal amount of this Note may be prepaid, in whole or in part, at any time or from time to time without any penalty to Maker;. SECTION 4. TRANSFER, EXCHANGE AND REPLACEMENT OF NOTE. Subject to the provisions of Section 5.2 hereof, Holder may transfer this Note in whole or in part. This Note shall be transferable on the note register of Maker maintained at the office of Maker's transfer agent or at the principal executive office of Maker, upon delivery thereof duly endorsed by Holder, or accompanied (as reasonably required by Maker) by proper evidence of succession, assignment or authority to transfer executed by Holder. In addition, Holder and, if applicable, any transferee shall comply with the terms of Section 5.2 hereof. Upon any registration of transfer, Maker shall execute a new Note or Notes to the persons entitled thereto. Each transferee and subsequent transferee shall accept this Note subject to all of the terms and 2 conditions set forth herein, as if such transferee or subsequent transferee were deemed the Holder. Maker may deem and treat the person in whose name this Note is registered as the absolute, true and lawful owner of this Note for all purposes. Upon receipt by Maker of evidence reasonably satisfactory to it of loss, theft, destruction or mutilation of this Note, Maker shall make and deliver a new Note of like tenor in lieu of this Note, if (i) in case of loss, theft or destruction, Maker receives indemnity reasonably satisfactory to it, (ii) Maker is reimbursed for all reasonable expenses incidental to such replacement, and (iii) this Note is surrendered and canceled, if mutilated. For purposes of clause (i) above, Maker agrees that an unsecured indemnity from the original Holder of this Note shall be reasonably satisfactory to Maker. SECTION 5. INVESTMENT ACQUISITION AND RESTRICTIONS ON TRANSFER. Section 5.1 INVESTMENT REPRESENTATIONS. By acceptance of this Note, Holder represents and warrants to Maker as follows: (a) Holder understands that the Note has not been registered under federal or state securities laws and has been or will be issued, as the case may be, pursuant to exemptions from registration contained in such laws; and (b) Holder has acquired the Note solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution of the Note in violation of applicable securities laws. SECTION 5.2 RESTRICTIONS ON TRANSFER. Holder, by the acceptance of this Note, agrees that Holder will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of this Note or any interest in the same in violation of the Securities Act of 1933, as amended, or any applicable state securities laws. SECTION 6. DEFAULTS AND REMEDIES. SECTION 6.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) Maker fails to pay any amount due under this Note when due and is unable to cure such failure within three (3) business days of receipt of written notice from Holder that it is in default; 3 (b) Maker fails to observe, perform or comply with any covenant, agreement or term contained in this Note or the Security Agreement and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (c) Any representation, warranty or certification made by Maker pursuant to this Note, the Settlement Agreement of even date, or the Security Agreement having been false or misleading in any material respect as of the date made, and, if subject to remedy, the same is not remedied within thirty (30) days after notice from Holder; (d) Maker or any Subsidiary thereof applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property; Maker or any Subsidiary admits in writing its inability, or is generally unable, to pay its debts as they become due for a period of ninety (90) consecutive days; Maker or any Subsidiary thereof makes a general assignment for the benefit of creditors; any proceeding is instituted by or against Maker or any Subsidiary thereof seeking to adjudicate it a bankrupt or insolvent, seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debts, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property, provided that, in any such case, if the same is dismissed or vacated within ninety (90) days of being instituted, then any such default shall be deemed cured; or Maker or any Subsidiary thereof takes any corporate action to authorize any of the actions set forth above; (e) a material part of the operations or business of Maker and its Subsidiaries, considered as a whole, shall be suspended or cease for a period exceeding thirty (30) days; (f) Maker purports or attempts to assign or delegate any of its rights or obligations hereunder or the Security Agreement; (g) Maker fails to (i) ship in any calendar month at least ten thousand (10,000) cases of NicoWater and (ii) generate gross sales of at least $280,000 from the sale of NicoWater in any month; or (h) the Security Agreement or this Note shall, at any time after its execution and delivery, for any reason cease to be in full force and effect (unless such occurrence is in accordance with its terms or after payment hereof) or shall be declared null and void or the 4 validity or enforceability thereof shall be contested by Maker, or Maker denies that it has further liability or obligation thereunder. SECTION 6.2 REMEDIES. During the continuance of any Event of Default, Holder may, at its sole option, declare the entire unpaid principal balance and accrued, unpaid interest on this Note (if any) immediately due and payable, by written notice to Maker, in which event Maker immediately shall pay to Holder the entire unpaid principal balance of this Note together with accrued, unpaid interest thereon to the date of such payment. No delay or omission of Holder to exercise any right or power occurring upon any Event of Default hereunder shall impair any such right or power or shall be construed as a waiver of any such Event of Default or an acquiescence therein. To the fullest extent permitted by law, Holder's rights and remedies under this Note shall be cumulative, and Holder shall have all other rights and remedies not inconsistent herewith as are provided under the Uniform Commercial Code as in effect in the relevant jurisdictions, by law or in equity. No exercise by Holder of one right or remedy shall be deemed an election, no waiver by Holder of any default on the part of the Maker shall be deemed a continuing waiver (unless expressly so provided therein), and no delay by Holder shall constitute a waiver, election or acquiescence by it. SECTION 6.3 WAIVERS BY MAKER. Maker waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of interest on interest and delinquence in taking any action to collect any sums owing under this Note or in a proceeding against any of the rights or interests in or to properties securing payment of this Note, except as otherwise expressly provided herein. Section 7. COLLATERAL. The amounts due under this Secured Convertible Note are secured by a pledge of all of the tangible and intangible assets of Maker pursuant to that certain Security Agreement, dated as of June 5, 2003, by and among Maker and Holder. SECTION 8. MISCELLANEOUS. SECTION 8.1 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and may be delivered by personal service, or sent by registered or certified mail, return receipt requested, with postage thereon fully prepaid. All such communications shall be addressed to the Holder of record at its address appearing on the books of Maker. 5 SECTION 8.2 SUCCESSORS. 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 subsequent Holders of this Note. SECTION 8.3 ASSIGNMENT; PARTICIPATIONS. Maker and Holder shall include the successors and assigns thereof; provided, however, that Maker may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Holder. Holder may, without the consent of Maker, at any time assign or grant participations in all or any portion of this Note or its rights hereunder; provided, however, that any such assignment or participation shall be in accordance with applicable law, including without limitation all applicable federal and state securities laws, and subject to the provisions of Section 5.2. SECTION 8.4 NO ORAL MODIFICATION. The provisions, terms and conditions of this Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. SECTION 8.5 GOVERNING LAW. MAKER ACKNOWLEDGES THAT THE TRANSACTIONS CONTEMPLATED BY THIS NOTE BEAR A REASONABLE RELATION TO THE STATE OF CALIFORNIA IN THAT, INTER ALIA, MAKER'S PRINCIPAL PLACE OF BUSINESS IS IN THE STATE OF CALIFORNIA AND THE PROCEEDS OF THE SALE OF THIS NOTE ARE TO BE PAID IN CALIFORNIA, AND A SUBSTANTIAL PART OF THE NEGOTIATIONS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS NOTE HAVE OCCURRED IN THE STATE OF CALIFORNIA. THIS NOTE IS DELIVERED IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF CALIFORNIA WITHOUT GIVING ANY EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. IT IS THE INTENT OF MAKER THAT THE LAWS OF CALIFORNIA REGARDING USURY AND THE CHARGING OF INTEREST APPLY TO THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 8.6 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Maker hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Secured Note or the subject matter hereof brought by any party hereto or their respective successors or assigns; 6 (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Secured Note or the subject matter hereof may not be enforced in or by such court; (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. SECTION 8.7 HEADINGS. The Section headings in this Secured Note are inserted for purposes of convenience only, and shall not affect in any way the meaning or interpretation hereof. SECTION 8.8 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Secured Note or the rights and duties of the parties in relation hereto, the prevailing party will be entitled, in addition to any other relief granted, to all costs and expenses incurred by such prevailing party, including, without limitation, all reasonable attorneys' fees. SECTION 8.9 TIME OF THE ESSENCE. Time is of the essence with respect to every provision hereof. SECTION 8.10 USURY. Notwithstanding any other provision of this Secured Note to the contrary, all agreements among the Maker and Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the delivery of the proceeds of this Secured Note, acceleration of maturity of the unpaid principal balance, the addition of accrued interest to principal or otherwise, shall the amount paid, charged for, contracted for, received or agreed to be paid to Holder for the use, forbearance or detention of the money to be delivered under this Note exceed the highest lawful rate permissible under applicable usury laws as prescribed by a court of competent jurisdiction ("Applicable Law"). If, from any circumstances whatsoever, interest would otherwise be payable to Holder in excess of the maximum 7 amount permissible under Applicable Law, the interest payable to Holder shall be reduced to the maximum amount permissible under Applicable Law, and if from any circumstances Holder shall ever receive anything deemed interest by Applicable Law in excess of the maximum amount permissible under Applicable Law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid principal balance hereof, such excess shall be refunded to Maker. All interest paid or agreed to be paid to Holder shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under Applicable Law. Holder, by its acceptance hereof, expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under Applicable Law. This Section 8.10 shall control agreements between Maker and Holder. This covenant shall survive the payment in full of this Secured Note. 8 IN WITNESS WHEREOF, Maker has executed this Secured Note as of the date first above written. "MAKER" QT-5, Inc., a Delaware corporation By: /s/ Steve Reder --------------------------------- Steve Reder President, Director By: /s/ Timothy Owens --------------------------------- Tim Owens Chief Executive Officer, Director 9 EX-4.4 7 doc6.txt Exhibit 4.5 SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASES This SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASES ("Agreement") is made as of this 10th day of June, 2003, by and between Robert Moore ("Moore") and NDMS Investments, L.P., a Nevada limited partnership ("NDMS"), on the one hand, and QT-5, Inc., a Delaware corporation ("QT-5"), on the other hand, with reference to the following facts and definitions: R E C I T A L S: A. QT-5 is the successor to Quicktest-5, Inc. and Moneyzone.com, Inc. B. NDMS previously loaned One Hundred Fifty Thousand Dollars ($150,000) to QT-5 (as successor to Quick Test-5, Inc.), pursuant to that certain Promissory Note dated September 30, 2002 (the "September 2002 Note"). Pursuant to a February 28, 2003 Amendment to the September 2002 Note, the principal amount outstanding under the September 2002 Note is $152,500. C. NDMS previously loaned up to Three Hundred Thousand Dollars ($300,000) to QT-5 (as successor to Quick Test-5, Inc.), pursuant to that certain Promissory Note dated December 31, 2002 (the "December 2002 Note"). D. NDMS previously loaned Thirty Five Thousand Dollars ($35,000) to QT-5 (as successor to Quick Test-5, Inc.), pursuant to that certain Promissory Note dated January 24, 2003. E. The principal amount outstanding under the September 2002 Note, the December 2002 Note and the January 2003 Note (collectively, the "NDMS Notes") is $337,500. 1 F. No payment has been made of any of the principal amount due under the NDMS Notes and QT-5 is in default under the NDMS Notes. G. Moore and QT-5 are parties to that certain Consulting Agreement dated as of January 1, 2003 (the "Moore Consulting Agreement"). H. At various times, Moore has received from QT-5 certain shares of QT-5's common stock (the "Moore Shares"). I. At various times, NDMS has received from QT-5 certain shares of QT-5's common stock (the "NDMS Shares"). J. Pursuant to agreements with QT-5, QT-5 is obligated to issue to NDMS certain additional shares of QT-5's common stock, and is obligated to issue additional shares in the future. K. NDMS and Moore contend that QT-5 has materially breached its obligations to them and that it and its directors, officers, agents, and/or representatives have engaged in wrongful acts that have caused harm to NDMS and Moore. L. QT-5 contends that NDMS and Moore have materially breached their obligation to it and that they engaged in wrongful acts that have caused harm to QT-5 and others. M. The contentions in Paragraphs K and L are disputed. N. QT-5 is presently unable to cure its default under the NDMS Notes and is desirous of obtaining a restructuring of the NDMS Notes on the terms set forth herein. O. QT-5 and Devenshire Management Corp ("Devenshire") are parties to that certain Bridge Loan Promissory Note dated as of September 29, 2002 (the "Devenshire Note"). The principal amount outstanding under the Devenshire Note is $25,000. No payment has been made 2 of any of the principal amount due under the Devenshire Note and QT-5 is in default under the Devenshire Note. QT-5 is presently unable to cure its default under the Devenshire Note and is desirous of obtaining a restructuring of the Devenshire Note on the terms set forth herein. P. QT-5 and Alliance Financial Network, Inc. a Nevada corporation ("Alliance") are parties to that certain Bridge Loan Promissory Note dated as of September 29, 2002 (the "Alliance Note"). The principal amount outstanding under the Alliance Note is $25,000. No payment has been made of any of the principal amount due under the Alliance Note and QT-5 is in default under the Alliance Note. QT-5 is presently unable to cure its default under the Alliance Note and is desirous of obtaining a restructuring of the Alliance Note on the terms set forth herein. Q. QT-5 and Dale Affonso ("Affonso") are parties to that certain Promissory Note dated as of January 24, 2003 (the "Affonso Note"). The principal amount outstanding under the Affonso Note is $50,000. No payment has been made of any of the principal amount due under the Affonso Note and QT-5 is in default under the Affonso Note. QT-5 is presently unable to cure its default under the Affonso Note and is desirous of obtaining a restructuring of the Affonso Note on the terms set forth herein. R. QT-5 and Sunset Holdings International Ltd. ("Sunset") are parties to that certain Consulting Agreement dated as of June 25, 2002 (the "Sunset Consulting Agreement"). S. QT-5 and Christopher Ewing ("Ewing") are parties to those certain Consulting Agreements dated as of December 1, 2002 and January 1, 2003 (the "Ewing Consulting Agreements"). T. QT-5 and Stephen Radusch ("Radusch") are parties to that certain Consulting Agreement dated as of January 23, 2003 (the "Radusch Consulting Agreement"). 3 U. At various times, Bossung, Alliance and Chess Management Group LLC ("Chess") have , directly or through related entities, (including family trusts) received from QT-5 shares of QT-5 common stock (collectively, the "Bossung Shares"). V. At various times, Affonso has, directly or through related entities, received from QT-5 shares of QT-5 common stock (the "Affonso Shares"). W. At various times, Sunset and Sanders have, directly or through related entities, received from QT-5 shares of QT-5 common stock (the "Sunset Shares"). X. At various times, Ewing has, directly or through related entities, received from QT-5 shares of, and options to purchase shares of, QT-5 common stock (said shares and options being collectively referred to herein as the "Ewing Shares"). Y. At various times, Radusch has, directly or through related entities, received from QT-5 shares of, and options to purchase shares of, QT-5 common stock (the "Radusch Shares"). Z. NDMS and Moore, on the one hand, and QT-5, on the other hand, (collectively, the "Parties") are each desirous of fully and forever amicably resolving and settling their Claims, disputes and differences, on the terms and conditions set forth herein. The Parties are also desirous of resolving Claims, disputes and differences between QT-5, on the one hand, and Devenshire, Alliance, Sunset, Affonso, Ewing, Radusch, Sanders, and Bossung (and related persons and entities), on the other hand. AA. As used herein, the term "Claims" shall have its broadest possible meaning and shall include, without limitation: any and all manner of action or actions, cause or causes of 4 action, suits, proceedings, debts, liabilities, claims, calls, accounts, accountings, demands, obligations, costs, expenses, sums of money, controversies, damages, reckonings, and liens of every kind and nature whatsoever, whether known or unknown, suspected or unsuspected, contingent or liquidated, in personam or in rem, legal or equitable, statutory or administrative, which the holder of such Claim has or at any time heretofore had or may have had, by reason of anything whatsoever occurring, done, omitted or suffered to be done prior to the date of this Agreement, whether accrued or accruing before, on or after the date of this Agreement. NOW, THEREFORE, in reliance upon and in consideration of the mutual covenants, releases, agreements and conditions contained herein, and subject to the provisions and terms of this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged by each and all of the Parties, the Parties each agree as follows: 1. EFFECTIVENESS. This Agreement shall become binding upon execution by all of the Parties ("Effective Date"), whether in counterpart or upon single instrument, and shall become fully effective immediately thereupon subject only to the terms and conditions set forth herein. 2. INTENTIONALLY OMITTED. 3. NEW NDMS PROMISSORY NOTE AND SECURITY AGREEMENT. On the Effective Date, QT-5 shall execute and deliver to NDMS: (a) a Secured Note in the form annexed hereto as Exhibit A-1 and made a part hereof and (b) a Security Agreement in the form annexed hereto as Exhibit A-2 and made a part hereof. 4. NEW AFFONSO NOTE AND SECURITY AGREEMENT. Immediately upon delivery of the consent attached as Exhibit B-1, QT-5 shall execute and deliver to Affonso: (a) a Secured Note 5 in the form annexed hereto as Exhibit B-2 and made a part hereof and (b) a Security Agreement in the form annexed hereto as Exhibit B-3 and made a part hereof. 5. NEW DEVENSHIRE NOTE AND SECURITY AGREEMENT. Immediately upon delivery of the consent attached as Exhibit C-1, QT-5 shall execute and deliver to Devenshire: (a) a Secured Note in the form annexed hereto as Exhibit C-2 and made a part hereof and (b) a Security Agreement in the form annexed hereto as Exhibit C-3 and made a part hereof. 6. NEW ALLIANCE NOTE AND SECURITY AGREEMENT. Immediately upon delivery of the consent attached as Exhibit D-1, QT-5 shall execute and deliver to Alliance: (a) a Secured Note in the form annexed hereto as Exhibit D-2 and made a part hereof and (b) a Security Agreement in the form annexed hereto as Exhibit D-3 and made a part hereof. 7. GENERAL RELEASES - PARTIES. (A) RELEASE OF NDMS AND MOORE BY QT-5. Except for the promises, covenants and obligations created by or under this Agreement, QT-5, on behalf of itself and its directors, officers, predecessors, successors, attorneys and assigns, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Moore and NDMS and their respective directors, officers, parents, subsidiaries, members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the NDMS Notes; (2) any and all Claims arising out of or related to the NDMS Shares; (3) any and all Claims arising out of or 6 related to the Moore Consulting Agreement; (4) any and all Claims relating to QT-5; (5) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (6) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) RELEASE OF QT-5 BY MOORE AND NDMS. Except for the promises, covenants and obligations created by or under this Agreement, NDMS and Moore do hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge QT-5 and its directors, officers, parents, subsidiaries, divisions, predecessors, successors, attorneys, and assigns, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the NDMS Notes; (2) any and all Claims arising out of or related to the NDMS Shares; (3) any and all Claims arising out of or related to the Moore Consulting Agreement; (4) any and all Claims relating to QT-5; (5) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (6) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the ownership rights of Moore and NDMS in and to the NDMS Shares (and their right to immediate and sole possession thereof); (2) the covenants, representations and warranties of QT-5 in connection with the issuance of the NDMS Shares and the Moore Shares; (3) the covenants, representations and warranties of QT-5 as to Moore's and NDMS's "piggyback" registration 7 rights; or (4) any and all rights of Moore to indemnification pursuant to the Moore Consulting Agreement. (c) The Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 7(a) or 7(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 7(a) or 7(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 7(a) or 7(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. 8. GENERAL RELEASES - AFFONSO. (a) RELEASE OF AFFONSO BY QT-5. Except for the promises, covenants and obligations created by or under this Agreement, QT-5, on behalf of itself and its directors, officers, predecessors, successors, attorneys and assigns, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Affonso and his partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Affonso Note; (2) any 8 and all Claims arising out of or related to the Affonso Shares; (3) any and all Claims relating to QT-5; (5) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (6) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) Release of QT-5 By Affonso. Except for the promises, covenants and obligations created by or under this Agreement, Affonso does hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge QT-5 and its directors, officers, parents, subsidiaries, divisions, predecessors, successors, attorneys, and assigns, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Affonso Note; (2) any and all Claims arising out of or related to the Affonso Shares; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the ownership rights of Affonso in and to the Affonso Shares; (2) the covenants, representations and warranties of QT-5 in connection with the issuance of the Affonso Shares; or (3) the covenants, representations and warranties of QT-5 as to Affonso's "piggyback" registration rights. 9 (c) The Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 8(a) or 8(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 8(a) or 8(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 8(a) or 8(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. (d) The provisions of this Paragraph 8 are conditioned upon Affonso's execution and delivery to QT-5, within ten (10) business days of the Effective Date, of the consent attached as exhibit B-1 to this Agreement. 9. GENERAL RELEASE - SUNSET, SANDERS AND DEVENSHIRE. (a) RELEASE OF SUNSET, SANDERS AND DEVENSHIRE BY QT-5. Except for the promises, covenants and obligations created by or under this Agreement, QT-5, on behalf of itself and its directors, officers, predecessors, successors, and assigns, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Sunset, Sanders, Devenshire, and any entity in which Sunset, Sanders or Devenshire owns a 10% or greater interest, and their respective directors, officers, parents, subsidiaries, members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been 10 asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Devenshire Note; (2) any and all Claims arising out of or related to the Sunset Shares; (3) any and all Claims arising out of or related to the Sunset Consulting Agreement; (4) any and all Claims relating to QT-5; (5) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (6) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) RELEASE OF QT-5 BY SUNSET, SANDERS AND DEVENSHIRE. Except for the promises, covenants and obligations created by or under this Agreement, Sunset, Sanders and Devenshire do hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge QT-5 and its directors, officers, parents, subsidiaries, divisions, predecessors, successors, and assigns, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Devenshire Note; (2) any and all Claims arising out of or related to the Sunset Shares; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of or related to the Sunset Consulting Agreement; (5) any and all claims arising out of any business relationship between QT-5 and any releasee; and (6) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the ownership rights of Sunset in and to the Sunset Shares; (2) the covenants, representations and 11 warranties of QT-5 in connection with the issuance of the Sunset Shares; or (3) the covenants, representations and warranties of QT-5 as to Sunset's, Sander's and/or Devenshire's "piggyback" registration rights; (4) any and all rights of Sunset to indemnification pursuant to the Sunset Consulting Agreement; (5) any and all rights of Sanders to indemnification under any consulting agreement; and (6) any right of Sanders or Sunset to reimbursement of expenses incurred for the benefit of QT-5. (c) The Parties hereby covenant that they shall not, purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 9(a) or 9(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 9(a) or 9(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 9(a) or 9(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. (d) The provisions of this Paragraph 9 are conditioned upon Sunset's, Sanders' and Devenshire's execution and delivery to QT-5, within ten (10) business days of the Effective Date, of the consent attached as exhibit C-1 to this Agreement. 10. RELEASES - BOSSUNG, ALLIANCE AND CHESS (a) RELEASE OF BOSSUNG, ALLIANCE AND CHESS BY QT-5. 12 Except for the promises, covenants and obligations created by or under this Agreement, QT-5, on behalf of itself and its directors, officers, predecessors, successors and assigns, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Bossung, Alliance, Chess and any entity in which Bossung, Alliance or Chess owns a 10% or greater interest, and their respective directors, officers, parents, subsidiaries, members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Alliance Note; (2) any and all Claims arising out of or related to the Bossung Shares; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) RELEASE OF QT-5 BY BOSSUNG, ALLIANCE AND CHESS. Except for the promises, covenants and obligations created by or under this Agreement, Bossung, Alliance and Chess do hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge QT-5 and its directors, officers, parents, subsidiaries, divisions, predecessors, successors and assigns, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Alliance Note; (2) any and all Claims arising out of or related to the Bossung Shares; (3) any and all Claims relating to QT-5; 13 (4) any and all claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the ownership rights of Bossung, Alliance and Chess in and to the Bossung Shares; (2) the covenants, representations and warranties of QT-5 in connection with the issuance of the Bossung Shares; (3) the covenants, representations and warranties of QT-5 as to Bossung's, Alliance's and/or Chess's "piggyback" registration rights; or (4) any and all rights of Bossung to indemnification under any consulting agreement. (c) The Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 10(a) or 10(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 10(a) or 10(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 10(a) or 10(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. (d) The provisions of this Paragraph 10 are conditioned upon Bossung's, Alliance's and Chess's execution and delivery to QT-5, within ten (10) business days of the Effective Date, of the consent attached as exhibit D-1 to this Agreement. 14 11. GENERAL RELEASE - EWING. (a) RELEASE OF EWING BY QT-5. Except for the promises, covenants and obligations created by or under this Agreement, QT-5, on behalf of itself and its directors, officers, predecessors, successors, attorneys and assigns, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Ewing and The Business Law Group, LLP and their respective directors, officers, parents, subsidiaries, members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Ewing Shares; (2) any and all Claims arising out of or related to the Ewing Consulting Agreements; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) RELEASE OF QT-5 BY EWING. Except for the promises, covenants and obligations created by or under this Agreement, Ewing does hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge QT-5 and its directors, officers, parents, subsidiaries, divisions, predecessors, 15 successors, attorneys, and assigns, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Ewing Shares; (2) any and all Claims arising out of or related to the Ewing Consulting Agreements; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the ownership rights of Ewing in and to the Ewing Shares; (2) the covenants, representations and warranties of QT-5 in connection with the issuance of the Ewing Shares; or (3) the covenants, representations and warranties of QT-5 as to Ewing's "piggyback" registration rights; or (4) any and all rights of Ewing to indemnification pursuant to the Ewing Consulting Agreements. (c) The Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 11(a) or 11(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 11(a) or 11(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 11(a) or 11(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. 16 (d) The provisions of this Paragraph 11 are conditioned upon Ewing's execution and delivery to QT-5, within ten (10) business days of the Effective Date, of the consent attached as exhibit E to this Agreement. 12. GENERAL RELEASE - RADUSCH. (a) RELEASE OF RADUSCH BY QT-5. Except for the promises, covenants and obligations created by or under this Agreement, QT-5, on behalf of itself and its directors, officers, predecessors, successors, attorneys and assigns, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Radusch and his directors, officers, parents, subsidiaries, members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Radusch Shares; (2) any and all Claims arising out of or related to the Radusch Consulting Agreement; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) RELEASE OF QT-5 BY RADUSCH. Except for the promises, covenants and obligations created by or under this Agreement, Radusch does hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge QT-5 and its directors, officers, parents, subsidiaries, divisions, predecessors, 17 successors, attorneys, and assigns, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation: (1) any and all Claims arising out of or related to the Radusch Shares; (2) any and all Claims arising out of or related to the Radusch Consulting Agreement; (3) any and all Claims relating to QT-5; (4) any and all Claims arising out of any business relationship between QT-5 and any releasee; and (5) any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the ownership rights of Radusch in and to the Radusch Shares; (2) the covenants, representations and warranties of QT-5 in connection with the issuance of the Radusch Shares; or (3) the covenants, representations and warranties of QT-5 as to Radusch's "piggyback" registration rights; or (4) any and all rights of Radusch to indemnification pursuant to the Radusch Consulting Agreement. (c) The Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 12(a) or 12(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 12(a) or 12(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 12(a) or 12(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive 18 relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. (d) The provisions of this Paragraph 12 are conditioned upon Radusch's execution and delivery to QT-5, within ten (10) business days of the Effective Date, of the consent attached as exhibit F to this Agreement. 13. WAIVER. In connection with the releases set forth in Paragraphs 7 through 12, the Parties each acknowledge that they are aware that they or their attorneys may hereafter discover facts different from or in addition to the facts which they now know or believe to be true with respect to the subject matter of this Agreement. Nonetheless, it is their intention hereby fully, finally, absolutely and forever to settle and release any and all matters described in the preceding paragraph hereof which exist, may exist or may heretofore have existed between them and, in furtherance of such intention, the Releases herein given shall be and will remain in effect notwithstanding the discovery of any additional or different facts relating to the subject matter of this Agreement. Therefore, the Parties each acknowledge that they have had the opportunity and ability to consult with and be informed by attorneys of their choosing regarding all aspects of this Agreement and that they are familiar with Section 1542 of the Civil Code of the State of California, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO HAVE EXISTED IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 19 The Parties each hereby waive and relinquish all rights and benefits it has or may have under Section 1542 of the Civil Code of the State of California or any like statute or law in any other jurisdiction to the full extent it may lawfully do so. 14. ATTORNEYS' FEES AND COSTS. As they relate to the negotiation and settlement of the dispute between the Parties, the Parties shall each bear his or its own attorneys' fees, costs and all other expenses incurred with respect to all aspects of the negotiation of this Agreement. 15. REPRESENTATIONS AND WARRANTIES. (a) QT-5 represents and warrants that it is the sole owner of and has not assigned or transferred (voluntarily, involuntarily or by operation of law), or purported to assign or transfer, to any person, entity or institution, any Claim released in Paragraphs 7(a), 8(a), 9(a), 10(a), 11(a) or 12(a) hereof. (b) NDMS and Moore represent and warrant that they are the sole owners of and have not assigned or transferred (voluntarily, involuntarily or by operation of law), or purported to assign or transfer, to any person, entity or institution, any Claim released in Paragraph 7(b) hereof. (c) The Parties represent and warrant that there are no Claims against the other(s) which are not released by Paragraph 7 hereof, or expressly carved-out therein. (d) QT-5 represents and warrants that the Moore Shares, the NDMS shares, the Affonso shares, the Alliance shares, the Bossung shares, the Chess Shares, the Ewing Shares, and the Radusch Shares have been duly authorized, validly issued, are nonassessable, are not subject to any preemptive or other similar rights and have not been issued in violation of any applicable laws, the QT-5 Articles of Incorporation, the QT-5 Bylaws or the terms of any contract to which 20 QT-5 is a party or bound. There are no obligations, contingent or otherwise, to repurchase, redeem or otherwise acquire such shares. (e) QT-5 represents and warrants that: (i) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) it is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its business or properties; (iii) it has taken all corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the notes and security agreements contemplated by Paragraphs 3, 4, 5, and 6 hereof and the performance of all obligations of the Company hereunder and thereunder; (iv) this Agreement, and the notes and security agreements contemplated by Paragraphs 3, 4, 5, and 6 hereof, when executed and delivered by the Company, shall constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms; (v) the Company is not in violation or default of any term of its Articles of Incorporation or Bylaws, or in any material respect, any contract, agreement, instrument, judgment, decree, order, statute, rule or regulation (collectively, "Instrument or Law") to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company, except that QT-5 discloses and represents that there is an existing dispute between QT-5 and Marshall Thompson, the inventor and proprietary owner of that certain United States Patent No. 6,268,386 dated July 31 2002 for Nicotine Beverage and QT-5 is in the process of demanding arbitration to resolve the dispute. 21 (f) QT-5 represents and warrants that (i) the execution, delivery and performance of this Agreement, and the consummation of the transactions pursuant hereto and thereto, will not result in a violation of or be in conflict with or constitute, with or without the passage of time and giving of notice, a material default under any such Instrument or Law, require any consent or waiver (which has not been obtained) under any such Instrument or Law, or result in the creation of any other lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such Instrument or Law; and (ii) no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement (g) Each of the undersigned executing this Agreement in a representative capacity represents and warrants, for the reliance of the Parties: (i) that the entity on whose behalf he signs is validly existing under the laws of the several States; (ii) that the entity on whose behalf he signs has the requisite power and authority to enter into this Agreement and deliver any release hereunder on his behalf; and (iii) that he has the requisite power and authority to execute this Agreement on behalf of such entity and to bind such entity to the covenants, conditions, representations and warranties herein. (h) Each Party to this Agreement, and the undersigned, agree to defend, indemnify and hold harmless the other Party(ies) (and the parties executing consents in connection herewith) from any Claims arising out of or in connection with his or its breach of the representations and warranties in this Agreement. 22 16. CONFIDENTIALITY. The Parties each agree that the terms of this Agreement shall remain confidential and shall not be disclosed to any third party other than: (1) to their respective attorneys, accountants, financial advisors and business partners; (2) as required by applicable federal or state law; (3) pursuant to a valid subpoena or other compulsory process of a court or other administrative or governmental entity; or (4) as may be required to enforce the terms of this Agreement or to perfect any security interest granted pursuant hereto. In the event that any subpoena or process seeking disclosure of this Agreement or confidential information concerning its subject matter is received or expected to be received by any Party (or any officer, director, employee, attorney or agent of any Party), such Party shall promptly provide notice to the other Party. 17. ANTI-DEFAMATION. The Parties each agree not to make any statement to any third party concerning the other(s) which is false, slanderous or defamatory. 18. SUCCESSORS; THIRD PARTY BENEFICIARIES. This Agreement, and the covenants and conditions herein, shall be binding upon each of the Parties and also shall be binding upon and inure to the benefit of their respective predecessors, successors and assigns. Non-Parties receiving releases hereunder are intended third-party beneficiaries of this Agreement. 19. INTEGRATION; RELIANCE; FRAUD OR MISTAKE. This Agreement contains and constitutes the entire Agreement and understanding of the Parties concerning the subject matter hereof, and supersedes and replaces all prior discussions and negotiations, proposed agreements or agreements, written or oral, pertaining to such subject matters. Each of the Parties acknowledges that the other Party has not made any promise, representation, or warranty not contained herein to induce it to execute this Agreement and each of the undersigned represents and warrants that it 23 has not executed this Agreement in reliance on (1) any promise, representation or warranty not contained herein; or (2) any fact or state of facts not expressly recited herein. This Agreement settles and releases Claims for fraud, including Claims of fraudulent concealment, prior to full discovery of all facts, and by its nature is based upon incomplete knowledge of all Parties; the Parties acknowledge that they are entering into this Agreement notwithstanding that fact. Each of the Parties hereto has conducted such investigation as it deemed necessary prior to executing this Agreement, waives and deems unnecessary any further investigation, inquiry or knowledge, and expressly assumes the risk of any mistake of fact with regard to the making of this Agreement. The Parties hereby irrevocably waive any right to request or obtain rescission of this Agreement, and hereby irrevocably elect damages in an action at law as their sole remedy for any claim of fraud or mistake in entering into this Agreement. In the event that any claim of fraud or mistake is made by any Party with respect to this Agreement, this Agreement shall remain in full force and effect until entry of a final judgment sustaining such claim of fraud or mistake, and the Party claiming fraud or mistake must pay all legal fees, costs and expenses (including expert fees) of the defendants on a monthly basis, pending such final judgment. 20. MODIFICATION. This Agreement may not be supplemented, modified, amended, waived, released or terminated except (a) by a writing executed by the Party to be bound thereby and (b) with the written consent of all other Parties. Any delegation by any Party to this Agreement shall be ineffective to release that Party from its obligation(s) to perform any delegated covenants, duties, or agreements under this Agreement unless such delegation has been approved or ratified in writing by the Party to whom such performance is due. 24 16. CONSTRUCTION. This Agreement in all respects shall be interpreted, construed, enforced and governed by and under the laws of the State of California without regard to any internal conflicts of law principles in such jurisdiction. The Parties each waive any right, express or implied, to request or to receive the application of the law of any jurisdiction other than the State of California. This Agreement was and shall be deemed to have been prepared in the State of California by all of the Parties jointly, and any uncertainty or ambiguity existing in this Agreement shall not be interpreted against any Party by reason of such Party having been responsible in any fashion for the drafting hereof. Accordingly, any rule of law, statutory or decisional, that would require interpretation of any ambiguities in this Agreement against the Party that has drafted it shall be of no application and hereby is expressly waived to the fullest extent possible. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intentions of the Parties and of this Agreement. If any non-material part of this Agreement is ruled enforceable or invalid, such ruling shall not affect the enforceability or validity of the remaining portions of this Agreement. 21. EXECUTION. This Agreement may be executed as a single original or in any number of counterparts, each of which shall be deemed to be an original and which, taken together, shall be deemed to be one and the same instrument. Signatures delivered by facsimile shall be effective as original signatures. 22. BREACH. In the event that any proceeding, suit or action is brought to enforce any provision of this Agreement, or in connection with any breach of or default under this Agreement, the prevailing Party shall be entitled to recovery of its reasonable costs and expenses, including actual attorneys' fees, in addition to any other relief to which that Party may be entitled. 25 23. NOTICES. All notices required by this Agreement shall be deemed to have been made (a) on the date of actual delivery thereof, if sent by facsimile (with confirmation report) or personally delivered to the below address, or (b) on the date which is two days after deposit with United States Express Mail or overnight courier, addressed as follows: (a) If to QT-5: 5655 Lindero Canyon Road, Suite 120 Westlake Village Attention: Timothy Owens Facsimile: 916-313-3565 (b) If to NDMS or Moore: 5855 Via Manigua Las Vegas, NV 89120 Attention: Robert Moore Facsimile: 702-547-4559 - with a copy to - CHRISTENSEN, MILLER, FINK, JACOBS, GLASER, WEIL & SHAPIRO, LLP 2121 Avenue of the Stars, 18th Floor Los Angeles, California 90067-5010 Attention: Kevin J. Leichter, Esq. Facsimile: 310-556-2920 24. ASSISTANCE OF COUNSEL. The Parties each acknowledge that it has been represented by independent counsel of its own choice throughout all negotiations proceeding the execution of this Agreement and in the execution of this Agreement and that each of the Parties has / / / executed this Agreement after consultation with counsel and after careful consideration of each of its terms and with full understanding of the legal effect of such terms. 26 THE UNDERSIGNED HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO ITS TERMS AS OF THE DATE SET FORTH AT THE BEGINNING OF THIS AGREEMENT. Dated: June 10, 2003 QT-5: By /s/ Timothy Owens --------------------------------- Timothy Owens, CEO/Director By /s/ Steve Reder --------------------------------- Steve Reder, President/Director Dated: June 10, 2003 NDMS INVESTMENTS, L.P. By /s/ Robert Moore --------------------------------- Robert Moore, General Partner By /s/ Robert Moore --------------------------------- Robert Moore, Personally 27 EXHIBIT A-1 [NEW NDMS NOTE] 28 EXHIBIT A-2 [NDMS SECURITY AGREEMENT] 29 EXHIBIT A-3 [PATENT MORTGAGE] 30 EXHIBIT B-1 [AFFONSO CONSENT] 31 EXHIBIT B-2 [AFFONSO NOTE] 32 EXHIBIT B-3 [AFFONSO SECURITY AGREEMENT] 33 EXHIBIT C-1 [DEVENSHIRE/SANDERS/SUNSET CONSENT] 34 EXHIBIT C-2 [DEVENSHIRE NOTE] 35 EXHIBIT C-3 [DEVENSHIRE SECURITY AGREEMENT] 36 EXHIBIT D-1 [ALLIANCE/BOSSUNG/CHESS CONSENT] 37 EXHIBIT D-2 [ALLIANCE NOTE] 38 EXHIBIT D-2 [ALLIANCE SECURITY AGREEMENT] 39 EXHIBIT E [EWING CONSENT] 40 EXHIBIT F [RADUSCH CONSENT] 41 EX-4.6 8 doc7.txt Exhibit 4.6 SETTLEMENT AGREEMENT AND GENERAL RELEASES This SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASES ("Agreement") is made as of this 10th day of June, 2003, by and between Robert Moore ("Moore") and NDMS Investments, L.P., a Nevada limited partnership ("NDMS"), on the one hand, and QT-5, Inc., a Delaware corporation ("QT-5"), SBI-USA, LLC ("SBI-USA") and Shelly Singhal ("Singhal")(Singhal and SBI-USA being collectively referred to herein as "SBI"), on the other hand, with reference to the following facts and definitions: R E C I T A L S: A. QT-5 is the successor to Quicktest-5, Inc. and Moneyzone.com, Inc. B. SBI is an investor in QT-5, and is desirous of entering into this Agreement in furtherance of its interests as an investor and in order to obtain the releases herein. C. Devenshire Management Corp ("Devenshire"), Sunset Holdings International Ltd. ("Sunset"), Alliance Financial Network, Inc. a Nevada corporation ("Alliance"), Chess Management Group LLC ("Chess"), Dale Affonso ("Affonso"), Christopher Ewing ("Ewing"), and Stephen Radusch ("Radusch") are collectively referred to herein as the "Consenting Parties"). D. QT-5, on the one hand, and NDMS and Moore, on the one hand, are entering into a Settlement Agreement and General Releases of even date herewith (the "Other Agreement"), which the Consenting Parties have the power to accept pursuant to and under the terms and conditions set forth therein. E. NDMS has loaned funds to QT-5 pursuant to various promissory notes (the NDMS Notes"). 1 F. Moore and QT-5 are parties to that certain Consulting Agreement dated as of January 1, 2003 (the "Moore Consulting Agreement"). G. At various times, Moore has received from QT-5 certain shares of QT-5's common stock (the "Moore Shares"). H. At various times, NDMS has received from QT-5 certain shares of QT-5's common stock (the "NDMS Shares"). I. QT-5 and Devenshire are parties to that certain Bridge Loan Promissory Note dated as of September 29, 2002 (the "Devenshire Note"). J. QT-5 and Alliance are parties to that certain Bridge Loan Promissory Note dated as of September 29, 2002 (the "Alliance Note"). K. QT-5 and Affonso are parties to that certain Promissory Note dated as of January 24, 2003 (the "Affonso Note"). L. QT-5 and Sunset are parties to that certain Consulting Agreement dated as of June 25, 2002 (the "Sunset Consulting Agreement"). M. QT-5 and Ewing are parties to those certain Consulting Agreements dated as of December 1, 2002 and January 1, 2003 (the "Ewing Consulting Agreements"). N. QT-5 and Radusch are parties to that certain Consulting Agreement dated as of January 23, 2003 (the "Radusch Consulting Agreement"). O. At various times, Bossung, Alliance and Chess have, directly or through related entities, (including family trusts) received from QT-5 shares of QT-5 common stock (collectively, the "Bossung Shares"). 2 P. At various times, Affonso has, directly or through related entities, received from QT-5 shares of QT-5 common stock (the "Affonso Shares"). Q. At various times, Sunset and Sanders have, directly or through related entities, received from QT-5 shares of QT-5 common stock (the "Sunset Shares"). R. At various times, Ewing has, directly or through related entities, received from QT-5 shares of, and options to purchase shares of, QT-5 common stock (the "Ewing Shares"). S. At various times, Radusch has, directly or through related entities, received from QT-5 shares of, and options to purchase shares of, QT-5 common stock (the "Radusch Shares"). T. Moore, NDMS and the Consenting Parties contend that QT-5 has materially breached its obligations to them and that SBI and their respective directors, officers, agents, and/or representatives have engaged in wrongful acts that have caused harm to Moore, NDMS and the Consenting Parties. U. QT-5 and SBI contend that NDMS, Moore and the Consenting Parties have materially breached their obligations to QT-5 and that they engaged in wrongful acts that have caused harm to SBI. V. The contentions in Paragraphs T and U are disputed. W. NDMS and Moore, on the one hand, and QT-5 and SBI, on the other hand, (collectively, the "Parties") are each desirous of fully and forever amicably resolving and settling their Claims, disputes and differences, on the terms and conditions set forth herein. The Parties are also desirous of resolving Claims, disputes and differences between SBI, on the one hand, and the Consenting Parties (and related persons and entities) on the other hand. 3 X. As used herein, the term "Claims" shall have its broadest possible meaning and shall include, without limitation: any and all manner of action or actions, cause or causes of action, suits, proceedings, debts, liabilities, claims, calls, accounts, accountings, demands, obligations, costs, expenses, sums of money, controversies, damages, reckonings, and liens of every kind and nature whatsoever, whether known or unknown, suspected or unsuspected, contingent or liquidated, in personam or in rem, legal or equitable, statutory or administrative, which the holder of such Claim has or at any time heretofore had or may have had, by reason of anything whatsoever occurring, done, omitted or suffered to be done prior to the date of this Agreement, whether accrued or accruing before, on or after the date of this Agreement. NOW, THEREFORE, in reliance upon and in consideration of the mutual covenants, releases, agreements and conditions contained herein, and subject to the provisions and terms of this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged by each and all of the Parties, the Parties each agree as follows: 1. EFFECTIVENESS. This Agreement shall become binding upon execution by all of the Parties ("Effective Date"), whether in counterpart or upon single instrument, and shall become fully effective immediately thereupon subject only to the terms and conditions set forth herein. The provisions of Paragraph 4 hereof shall be binding upon Consenting Parties and inure to the benefit of the Consenting Parties (and their respective releasees) upon their delivery of notice to SBI and QT-5 that they consent to be bound by the provisions of Paragraph 4 hereof. 2. PAYMENT. Immediately upon execution of this Agreement, SBI shall pay to NDMS the total sum of One Hundred Sixty Eight Thousand Dollars ($168,000) free and clear of all liens, claims, encumbrances, security interests or equities. The payment will be made by two 4 Cashier's Check(s) payable to "Christensen Miller Client Trust Account" and delivered to NDMS' counsel at the address set forth below. The first Cashier's Check shall be in the amount of $122,000, and shall be delivered immediately upon execution, but no later than 5:00 p.m on Tuesday, June 10, 2003; the second Cashier's Check shall be in the amount of $46,000 and shall be delivered no later than 11:00 a.m on Wednesday, June 11, 2003. If the Cashier's Checks are not delivered timely (time being of the essence), or if they are not paid upon presentment, this Agreement and the Other Agreement shall be null and void and of no further effect. The payment contemplated hereunder is being made (a) in consideration of the releases granted hereunder, and the mutual promises between NDMS and Moore, on the one hand, and SBI, on the other hand, contained herein, and (b) in order to induce NDMS and Moore to enter into the Other Agreement. 3. GENERAL RELEASES - PARTIES. (a) RELEASE OF NDMS AND MOORE BY SBI. Except for the promises, covenants and obligations created by or under this Agreement, SBI, on behalf of themselves and their respective parents, subsidiaries, affiliates, directors, officers, members, managers, predecessors, successors, assigns, heirs, executors and administrators, do hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Moore and NDMS and their respective directors, officers, parents, subsidiaries, members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, 5 including, without limitation: (1) any and all Claims arising out of or related to the NDMS Notes; (2) any and all Claims arising out of or related to the NDMS Shares; (3) any and all Claims arising out of or related to the Moore Consulting Agreement; (4) any and all Claims relating to QT-5; (5) any and all claims arising out of any business relationship between QT-5 and any releasee; and (6) any and all Claims for fraud, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. (b) RELEASE OF SBI BY MOORE AND NDMS. Except for the promises, covenants and obligations created by or under this Agreement, NDMS and Moore do hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge SBI and their respective members, managers, predecessors in interest, divisions, agents, attorneys, assigns, heirs, executors and administrators, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present, including, without limitation any and all Claims for fraud, usury, misfeasance, malfeasance, negligence, breach of duty, wrongful interference, securities violations, advice given or not given. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the Other Agreement; or (2) any Claims carved out from the releases given in the Other Agreement (c) The Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 3(a) or 3(b) above. The Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 3(a) or 3(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, 6 suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 3(a) or 3(b) above. A breach of these covenants may be specifically enforced, and the parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. 4. GENERAL RELEASES - CONSENTING PARTIES. (a) RELEASE OF CONSENTING PARTIES BY SBI. Except for the promises, covenants and obligations created by or under this Agreement, SBI, on behalf of itself and its parents, subsidiaries, affiliates, members, managers, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators, does hereby absolutely fully and forever release, relieve, waive, relinquish and discharge Consenting Parties and their respective directors, officers, parents, subsidiaries, members, managers, partners, successors, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators from any and all Claims which have been, will be or could have been asserted, directly or indirectly, against them or any of them arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the present. (b) RELEASE OF SBI BY CONSENTING PARTIES. Except for the promises, covenants and obligations created by or under this Agreement, Consenting Parties hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge SBI and its members, managers, partners, predecessors in interest, divisions, affiliates, agents, attorneys, assigns, heirs, executors and administrators, from any and all Claims arising out of or related to any fact, matter or thing whatsoever, from the beginning of time to the 7 present. Notwithstanding the foregoing, nothing in the foregoing or in this Agreement shall release, relinquish or waive: (1) the Other Agreement; or (2) any Claims carved out from the releases given in the Other Agreement. (c) The Parties and Consenting Parties hereby covenant that they shall not purport to assign or transfer or hypothecate, expressly, impliedly, or by operation of law, any Claim released in Subparagraphs 4(a) or 4(b) above. The Parties and Consenting Parties further covenant not to commence, maintain or suffer to be maintained, against any releasee, any Claim released in Subparagraphs 4(a) or 4(b) above, and the Parties represent and warrant that they shall take all necessary action to dismiss any action, suit or proceeding against any releasee based upon or constituting a Claim released in Subparagraphs 4(a) or 4(b) above. A breach of these covenants may be specifically enforced, and the Parties agree that, in the event of such breach, the wronged party may obtain injunctive relief in any court of competent jurisdiction to enforce these covenants, in addition to any other remedy to which he or it may be entitled. (d) The provisions of this Paragraph 4 are conditioned upon Consenting Parties' execution and delivery to QT-5 and SBI, within ten (10) business days of the Effective Date, of the consent attached as exhibit A to this Agreement. As each Consenting Party executes and delivers its or his consent, such consent shall be effective as to such Consenting Party and shall inure to the benefit of such Consenting Party and his or its respective releasees. 5. WAIVER. In connection with the releases set forth in Paragraphs 3 and 4, the Parties each acknowledge that they are aware that they or their attorneys may hereafter discover facts different from or in addition to the facts which they now know or believe to be true with respect to the subject matter of this Agreement. Nonetheless, it is their intention hereby fully, 8 finally, absolutely and forever to settle and release any and all matters described in the preceding paragraph hereof which exist, may exist or may heretofore have existed between them and, in furtherance of such intention, the Releases herein given shall be and will remain in effect notwithstanding the discovery of any additional or different facts relating to the subject matter of this Agreement. Therefore, the Parties each acknowledge that they have had the opportunity and ability to consult with and be informed by attorneys of their choosing regarding all aspects of this Agreement and that they are familiar with Section 1542 of the Civil Code of the State of California, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO HAVE EXISTED IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. The Parties each hereby waive and relinquish all rights and benefits it has or may have under Section 1542 of the Civil Code of the State of California or any like statute or law in any other jurisdiction to the full extent it may lawfully do so. 6. ATTORNEYS' FEES AND COSTS. As they relate to the negotiation and settlement of the dispute between the Parties, the Parties shall each bear his or its own attorneys' fees, costs and all other expenses incurred with respect to all aspects of the negotiation of this Agreement. 7. REPRESENTATIONS AND WARRANTIES (a) SBI represents and warrants that they are the sole owners of and have not assigned or transferred (voluntarily, involuntarily or by operation of law), or purported to assign or transfer, to any person, entity or institution, any Claim released in Paragraphs 3(a) and/or 4(a) hereof. 9 (b) NDMS and Moore represent and warrant that they are the sole owners of and have not assigned or transferred (voluntarily, involuntarily or by operation of law), or purported to assign or transfer, to any person, entity or institution, any Claim released in Paragraph 3(b) hereof. (c) NDMS and Moore, on the one hand, and Soft Bank, on the other hand, represent and warrant that there are no Claims against the other(s) which are not released by Paragraph 3 hereof, or expressly carved-out therein. (d) SBI represents and warrants that, to the best of their knowledge, the Moore Shares, the NDMS shares, the Affonso Shares, the Bossung Shares, the Sunset Shares, the Ewing Shares, and the Radusch Shares have been duly authorized, validly issued, are nonassessable, are not subject to any preemptive or other similar rights and have not been issued in violation of any applicable laws, the QT-5 Articles of Incorporation, the QT-5 Bylaws or the terms of any contract to which QT-5 is a party or bound. There are no obligations, contingent or otherwise, to repurchase, redeem or otherwise acquire such shares. (e) QT-5 and SBI represent and warrant that: (i) SBI-USA is a Limited Liability Company duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) it is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its business or properties; (iii) it has taken all action on the part of the Company, its members and managers necessary for the authorization, execution and delivery of this Agreement and the performance of all obligations hereunder; (iv) this Agreement, when executed and delivered, shall constitute valid and binding obligations of the Company, enforceable in accordance with its terms; and (v) 10 no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement (g) Each of the undersigned executing this Agreement in a representative capacity represents and warrants, for the reliance of the Parties: (i) that the entity on whose behalf he signs is validly existing under the laws of the several States; (ii) that the entity on whose behalf he signs has the requisite power and authority to enter into this Agreement; and (iii) that he has the requisite power and authority to execute this Agreement on behalf of such entity and to bind such entity to the covenants, conditions, representations and warranties herein. (h) Each Party to this Agreement, and the undersigned, agree to defend, indemnify and hold harmless the other Party(ies) and the Consenting Parties from any Claims arising out of or in connection with his or its breach of the representations and warranties in this Agreement. 8. CONFIDENTIALITY. The Parties each agree that the terms of this Agreement shall remain confidential and shall not be disclosed to any third party other than: (1) to their respective attorneys, accountants, financial advisors and business partners; (2) as required by applicable federal or state law; (3) pursuant to a valid subpoena or other compulsory process of a court or other administrative or governmental entity; or (4) as may be required to enforce the terms of this Agreement or to perfect any security interest granted pursuant hereto. In the event that any subpoena or process seeking disclosure of this Agreement or confidential information concerning its subject matter is received or expected to be received by any Party (or any officer, director, 11 employee, attorney or agent of any Party), such Party shall promptly provide notice to the other Party. 9. ANTI-DEFAMATION. The Parties each agree not to make any statement to any third party concerning the other(s) which is false, slanderous or defamatory. 10. SUCCESSORS; BENEFICIARIES. This Agreement, and the covenants and conditions herein, shall be binding upon each of the Parties and also shall be binding upon and inure to the benefit of their respective predecessors, successors and assigns. The Consenting Parties (and their respective releasees) are intended third party beneficiaries of this Agreement. 11. INTEGRATION; RELIANCE; FRAUD OR MISTAKE. This Agreement and the Other Agreement contains and constitutes the entire agreement and understanding of the Parties concerning the subject matter hereof and thereof, and supersedes and replaces all prior discussions and negotiations, proposed agreements or agreements, written or oral, pertaining to such subject matters; it is the intention of the Parties that the Other Agreement fully survive the execution of this Agreement and that this Agreement survive the Execution of the Other Agreement. Each of the Parties acknowledges that the other Party has not made any promise, representation, or warranty not contained herein to induce it to execute this Agreement and each of the undersigned represents and warrants that it has not executed this Agreement in reliance on (1) any promise, representation or warranty not contained herein; or (2) any fact or state of facts not expressly recited herein. This Agreement settles and releases Claims for fraud, including Claims of fraudulent concealment, prior to full discovery of all facts, and by its nature is based upon incomplete knowledge of all Parties; the Parties acknowledge that they are entering into this Agreement notwithstanding that fact. Each of the Parties hereto has conducted such 12 investigation as it deemed necessary prior to executing this Agreement, waives and deems unnecessary any further investigation, inquiry or knowledge, and expressly assumes the risk of any mistake of fact with regard to the making of this Agreement. The Parties hereby irrevocably waive any right to request or obtain rescission of this Agreement, and hereby irrevocably elect damages in an action at law as their sole remedy for any claim of fraud or mistake in entering into this Agreement. In the event that any claim of fraud or mistake is made by any Party with respect to this Agreement, this Agreement shall remain in full force and effect until entry of a final judgment sustaining such claim of fraud or mistake, and the Party claiming fraud or mistake must pay all legal fees, costs and expenses (including expert fees) of the defendants on a monthly basis, pending such final judgment. 12. MODIFICATION. This Agreement may not be supplemented, modified, amended, waived, released or terminated except (a) by a writing executed by the Party to be bound thereby and (b) with the written consent of all other Parties. Any delegation by any Party to this Agreement shall be ineffective to release that Party from its obligation(s) to perform any delegated covenants, duties, or agreements under this Agreement unless such delegation has been approved or ratified in writing by the Party to whom such performance is due. 16. CONSTRUCTION. This Agreement in all respects shall be interpreted, construed, enforced and governed by and under the laws of the State of California without regard to any internal conflicts of law principles in such jurisdiction. The Parties each waive any right, express or implied, to request or to receive the application of the law of any jurisdiction other than the State of California. This Agreement was and shall be deemed to have been prepared in the State of California by all of the Parties jointly, and any uncertainty or ambiguity existing in this 13 Agreement shall not be interpreted against any Party by reason of such Party having been responsible in any fashion for the drafting hereof. Accordingly, any rule of law, statutory or decisional, that would require interpretation of any ambiguities in this Agreement against the Party that has drafted it shall be of no application and hereby is expressly waived to the fullest extent possible. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intentions of the Parties and of this Agreement. If any non-material part of this Agreement is ruled enforceable or invalid, such ruling shall not affect the enforceability or validity of the remaining portions of this Agreement. 13. EXECUTION. This Agreement may be executed as a single original or in any number of counterparts, each of which shall be deemed to be an original and which, taken together, shall be deemed to be one and the same instrument. Signatures delivered by facsimile shall be effective as original signatures. 14. BREACH. In the event that any proceeding, suit or action is brought to enforce any provision of this Agreement, or in connection with any breach of or default under this Agreement, the prevailing Party shall be entitled to recovery of its reasonable costs and expenses, including actual attorneys' fees, in addition to any other relief to which that Party may be entitled. 15. NOTICES. All notices required by this Agreement shall be deemed to have been made (a) on the date of actual delivery thereof, if sent by facsimile (with confirmation report) or personally delivered to the below address, or (b) on the date which is two days after deposit with United States Express Mail or overnight courier, addressed as follows: 14 (a) If to QT-5: 5655 Lindero Canyon Road, Suite 120 Westlake Village Attention: Timothy Owens Facsimile: 916-313-3565 (b) If to SBI: 2361 Campus Drive, Suite 210 Irvine, CA 92612 Attn: Shelly Singhal, Managing Director Facsimile: 949-679-7280 (c) If to NDMS or Moore: 5855 Via Manigua Las Vegas, NV 89120 Attention: Robert Moore Facsimile: 702-547-4559 - with a copy to - CHRISTENSEN, MILLER, FINK, JACOBS, GLASER, WEIL & SHAPIRO, LLP 2121 Avenue of the Stars, 18th Floor Los Angeles, California 90067-5010 Attention: Kevin J. Leichter, Esq. Facsimile: 310-556-2920 16. ASSISTANCE OF COUNSEL. The Parties each acknowledge that it has been represented by independent counsel of its own choice throughout all negotiations proceeding the execution of this Agreement and in the execution of this Agreement and that each of the Parties has / / / / / / / / / / / / 15 executed this Agreement after consultation with counsel and after careful consideration of each of its terms and with full understanding of the legal effect of such terms. THE UNDERSIGNED HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO ITS TERMS AS OF THE DATE SET FORTH AT THE BEGINNING OF THIS AGREEMENT. Dated: June 10, 2003 QT-5: By /s/ Timothy Owens --------------------------------------- Timothy Owens, CEO/Director By /s/ Steve Reder --------------------------------------- Steve Reder, President/Director Dated: June 10, 2003 SBI-USA LLC By /s/ Shelly Singhal --------------------------------------- Shelly Singhal Dated: June 10, 2003 NDMS INVESTMENTS, L.P. By /s/ Robert Moore --------------------------------------- Robert Moore, General Partner /s/ Shelly Singhal --------------------------------------- Shelly Singhal, Personally /s/ Robert Moore --------------------------------------- Robert Moore, Personally 16 EXHIBIT A CONSENT Reference is made to that certain Settlement Agreement and General Releases dated as of June 10, 2003. The undersigned hereby consents to the provisions of Paragraph 4 and agrees to be bound thereby. Dated: June __, 2003 ALLIANCE FINANCIAL NETWORK By ------------------------------- Dated: June __, 2003 DEVENSHIRE MANAGEMENT CORP By ------------------------------- Dated: June __, 2003 CHESS MANAGEMENT GROUP By ------------------------------- Dated: June __, 2003 SUNSET HOLDINGS INTERNATIONAL By ------------------------------- Dated: June __, 2003 DALE AFFONSO --------------------------------- Dated: June __, 2003 CHRIS EWING --------------------------------- Dated: June __, 2003 TODD SANDERS --------------------------------- Dated: June __, 2003 BILL BOSSUNG --------------------------------- 17 Exhibit B-1 CONSENT Reference is made to that certain Settlement Agreement and Mutual General Releases dated as of June 10, 2003. Dale Affonso hereby consents to the provisions of Paragraphs 4 and 8 and agrees to be bound thereby. DALE AFFONSO, an individual Dated: June __, 2003 --------------------------- 1 Exhibit C-1 CONSENT Reference is made to that certain Settlement Agreement and Mutual General Releases dated as of June 10, 2003. Devenshire Management Corp, Todd Sanders and Sunset Holdings International Ltd. each hereby consents to the provisions of Paragraphs 5 and 9 and agrees to be bound thereby. Dated: June __, 2003 DEVENSHIRE MANAGEMENT CORP ---------------------------------- By: Its: TODD SANDERS, an individual ---------------------------------- SUNSET HOLDINGS INTERNATIONAL LTD. ---------------------------------- By: Its: 1 Exhibit D-1 CONSENT Reference is made to that certain Settlement Agreement and Mutual General Releases dated as of June 10, 2003. Alliance Financial Network, Inc., Bill Bossung and Chess Management Group, LLC each hereby consents to the provisions of Paragraphs 6 and 10 and agrees to be bound thereby. Dated: June __, 2003 ALLIANCE FINANCIAL NETWORK, INC. ---------------------------------- By: Its: BILL BOSSUNG, an individual ----------------------------------- CHESS MANAGEMENT GROUP, LLC ----------------------------------- By: Its: 1 Exhibit E CONSENT Reference is made to that certain Settlement Agreement and Mutual General Releases dated as of June 10, 2003. Christopher Ewing hereby consents to the provisions of Paragraph 11 and agrees to be bound thereby. CHRISTOPHER EWING, an individual Dated: June __, 2003 -------------------------------- 1 Exhibit F CONSENT Reference is made to that certain Settlement Agreement and Mutual General Releases dated as of June 10, 2003. Stephen Radusch hereby consents to the provisions of Paragraph 12 and agrees to be bound thereby. STEPHEN RADUSCH, an individual Dated: June __, 2003 --------------------------------- 1 EX-4.7 9 doc8.txt Exhibit 4.7 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as of June 10, 2003 by and among QT-5, Inc., a Delaware corporation ("Debtor"), in favor of Dale Affonso ("Secured Party"), with reference to the following facts and circumstances. A. Debtor is delivering a promissory note to Secured Party in the principal amount of $50,000 (the "Secured Amount"). B. In order to secure its obligations to repay the Secured Amount, Debtor has agreed to grant Secured Party a security interest in certain collateral, as described herein. NOW, THEREFORE, IN CONSIDERATION of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. GRANT OF SECURITY INTEREST. As security for Debtor's due and punctual performance of the Obligations (as hereinafter defined), Debtor hereby pledges with Secured Party the Collateral (as hereinafter defined), and grants, assigns, transfers and conveys to Secured Party a continuing security interest in any and all of Debtor's right, title and interest in and to the Collateral. Such security interest shall be second in priority to (and in certain circumstances, pari passu with) the security interest granted in favor of NDMS Investments, L.P. and pari passu in priority with the security interests granted in favor of Devenshire Management Corp. and Alliance Financial Network, Inc. 2. OBLIGATIONS. This Agreement, and Debtor's pledge of and grant to Secured Party of a security interest in and to the Collateral, is made to secure: (i) due and punctual performance of Debtor's obligation to repay the Secured Amount pursuant to a Secured Note of even date herewith and any other note or instrument executed by Debtor and payable to Secured Party which recites that it is secured hereby, including any and all amendments, modifications, renewals, extensions, substitutions or replacements hereof or thereof; (ii) due performance of each and every material obligation, covenant and agreement of Debtor contained herein or in any other note or instrument executed by Debtor for the purpose of further securing the Secured Amount (collectively, the "Obligations"). 3. COLLATERAL. As used herein, the term "Collateral" shall collectively and severally mean all assets of Debtor, including but not limited to the following: (a) EQUIPMENT. All equipment (as defined in the California Uniform Commercial Code (the "Code")), machinery, tools, furniture, furnishings, plant fixtures, business fixtures and other storage and office equipment, now owned or held, or hereafter acquired by the Debtor, wherever located, and all parts thereof and all additions and accessions thereto and replacements thereof and documents therefor, including any documents of title representing any of the above (any and all of the foregoing being the "Equipment"); 1 (b) INVENTORY. All inventory (as defined in the Code) in all of its forms, now owned or held, or hereafter acquired by the Debtor, wherever located, including, but not limited to (i) all goods (wherever located and whether in the possession of the Company or a bailee or other person for storage, transit, or otherwise) manufactured or assembled or held for sale or lease or furnished, and raw materials and work in process, finished and unfinished goods, and materials used or consumed in the Debtor's business, (ii) all goods which are returned to or repossessed by the Debtor, and (iii) all additions and accessions thereto and replacements and products thereof, including, without limitation, any documents of title representing any of the above (any and all of the foregoing being the "Inventory"); (c) ACCOUNTS. All accounts, chattel paper, instruments (each as defined in the Code), and other obligations of any kind, now owned or held or hereafter acquired by the Debtor, including, without limitation, insurance claims insurance settlement proceeds, tax refund claims and tax refunds arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights in and to all security agreements, leases, and other contracts securing or otherwise relating to any such accounts, general intangibles, chattel paper, instruments or obligations, and all books and records relating to any of the foregoing (any and all of the foregoing being the "Accounts"); (d) INSTRUMENTS. All notes and other instruments (as defined in the Code) and any instrument which constitutes a part of chattel paper, and other evidences of indebtedness in which the Debtor now or hereafter has any interest, to the extent of that interest; (e) DOCUMENTS. All documents (as defined in the Code) in which the Debtor now or hereafter has any interest, to the extent of that interest; (f) CHATTEL PAPER. All chattel paper (as defined in the Code) in which the Debtor now or hereafter has any interest; (g) GENERAL INTANGIBLES. All General Intangibles (as hereinafter defined) in which the Debtor now or hereafter has any interest, to the extent of that interest, including, without limitation, the Debtor's interest in the Patent Assignment between Debtor and Marshall Thompson and the subject Patent No. 6,268,386 (the "Patent"). "General Intangibles" means any "general intangibles" (as such term is defined in the Code), and shall include, without limitation, (i) all patents, patent applications, trademarks, trademark registrations, trade names and trademark applications; (ii) license agreements with any other Parties, whether the Debtor is a licensor or licenses under any such license agreement, and the right to prepare for sale, sell and advertise for sale all inventory now or hereafter covered by such licenses; (iii) all of the Debtor's books, records and files, including computer software and tapes and all other forms of electronic information storage; (iv) copyrights and other rights in intellectual property; (v) interests in partnerships, joints ventures and other business associations; (vi) licenses and permits; (vii) trade secrets, propriety or confidential information, customer lists, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, and goodwill; (viii) claims in or under insurance 2 policies, including unearned premiums; (ix) deposit accounts; (x) rights to receive tax refunds and other payments; (xi) rights of indemnification; and (xii) all of the Debtor's rights under any warranties or guaranties of any kind, including equipment, machinery or services; (h) CONTRACTS. All of the Debtor's rights under all contracts, undertakings or agreements (other than rights evidenced by chattel paper, documents or instruments) in or under which the Debtor may now or hereafter have any right, title or interest, including, without limitation, with respect to an account, any agreement relating to the terms of payment or the terms of performance thereof; (i) INVESTMENT PROPERTY. All investment property (as defined in the Code), in which Debtor now or hereafter has an interest or entitlement; (j) OTHER PERSONAL PROPERTY. All other goods and personal property in which the Debtor has any interest, to the extent of that interest, whether now or hereafter owned or existing, leased, consigned by or to or acquired by the Debtor and wherever located; and (k) PROCEEDS AND PRODUCTS. All proceeds and products of the foregoing (including, without limitation, cash proceeds and non-cash proceeds resulting from the sale or other voluntary or involuntary disposition thereof or any other realization in respect thereof) and including, but not limited to, all property of any type that is acquired with any cash proceeds, and all guarantees, insurance and rights against sureties the Debtor may have in connection therewith and all proceeds and products relating thereto or therefrom, and all the Debtor's right, title and interest in and to additions, accessions, replacements and substitutions to and for the foregoing, and all documents, ledger sheets and files of the Debtor relating thereto. The term "proceeds" as used herein shall include, without limitation, all accounts, chattel paper, deposit accounts, instruments, equipment, inventory, documents, general intangibles and other proceeds that arise from the sale, lease, transfer or other use or disposition of any kind of any of the Collateral described in the foregoing paragraphs (a) through (j), inclusive, or proceeds, and all proceeds of any type described above acquired with cash proceeds. 4. POWERS OF SECURED PARTY. Debtor appoints Secured Party its true attorney-in-fact, effective upon any Event of Default, to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Secured Party' officers, employees or agents, or any of them: (i) to liquidate any certificate of deposit pledged to Secured Party hereunder prior to its maturity date and to apply the proceeds thereof to payment of the Obligations or hold such proceeds as part of the Collateral, notwithstanding the fact that such liquidation may give rise to penalties for early withdrawals of funds; (ii) to sell, exchange or otherwise dispose of any portion of the Collateral and to apply the proceeds thereof to payment of the Obligations; (iii) to notify any person obligated on any security, instrument or other document subject to this Agreement of Secured Party' rights hereunder; (iv) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral; (v) to enter into any extension, reorganization, deposit, merger or consolidation agreement, 3 or any other agreement relating to or affecting the Collateral or proceeds, and in connection therewith to deposit or surrender control of the Collateral, accept other property in exchange for the Collateral, and do and perform such acts and things as Secured Party may deem proper, and any money or property received in exchange for the Collateral shall be applied to the Obligations; (vi) to make any compromise or settlement Secured Party deem necessary, desirable or proper in respect of the Collateral; (vii) to insure, process and preserve the Collateral; and (viii) to perform any obligation of Debtor under this Agreement, in Debtor's name or otherwise. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Secured Party as follows: (a) Debtor is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Debtor has all requisite capacity and power to execute, deliver and perform its obligations under this Agreement, except that Debtor discloses and represents that there is an existing dispute between Debtor and Marshall Thompson, the inventor and proprietary owner of that certain United States Patent No. 6,268,386 dated July 31, 2001 for Nicotine Beverage and Debtor is in the process of demanding arbitration to resolve the dispute. This Agreement has been duly authorized by all necessary corporate action, has been validly executed and delivered by Debtor, constitutes the legal, valid and binding obligation of Debtor, enforceable in accordance with its terms, and creates a legal, valid and enforceable security interest in and to the Collateral. (c) Except as otherwise set forth on Schedule 5(c), Debtor owns the Collateral free and clear of all liens, claims, encumbrances, security interests or equities, other than the security interest created hereby. (d) Debtor's principal place of business is at the location set forth in Section 14, and, except as otherwise set forth on Schedule 5(d), all of the Collateral is physically located in the County of Los Angeles, State of California. (e) Debtor has not sold, transferred, assigned or conveyed the Collateral, or any portion thereof, to any person other than Secured Party. 6. COVENANTS AND AGREEMENTS OF DEBTOR. Debtor covenants and agrees with Secured Party that from the date hereof and until payment and satisfaction in full of each and all of the Obligations, unless Secured Party shall otherwise consent in writing, which consent shall be granted or withheld in Secured Party' sole and absolute discretion, Debtor will: (a) Duly observe and perform each and every material term and condition of any and all agreements, instruments and documents relating to the Collateral, and diligently protect and enforce its rights under all such agreements. (b) Pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of the income and profits 4 therefrom, except where nonpayment does not involve any danger of sale, forfeiture or loss of any of the Collateral or any interest therein. (c) Insure the Collateral with financially sound and reputable insurers against loss or damage by fire, theft, bodily injury and such other casualties, as are usually insured against by companies engaged in the same or similar businesses as Debtor. (d) Keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including without limitation a record of all payments received and all credits granted with respect to the Collateral and all other dealings in the Collateral. Upon the occurrence of any Event of Default, Debtor will deliver and turn over any such books and records to the Secured Party at any time on demand of the Secured Party. Prior to the occurrence of an Event of Default and upon reasonable written notice of no less than five (5) business days from Secured Party, Debtor shall permit any representative of Secured Party to inspect such books and records and will provide photocopies thereof to Secured Party at Secured Party's expense. Upon reasonable written notice of no less than five (5) business days to Debtor, with the consent of the Debtor, as to the time of entry, which consent shall not be unreasonably withheld, Secured Party shall also have the right to enter into and upon the premises where any of the Equipment or Inventory is located for the purpose of inspecting the same, observing its use and otherwise protecting Secured Party's interests therein. (e) Give Secured Party ten (10) days prior written notice before (i) changing its principal place of business or moving its books and records to a location other than that set forth in Section 14 hereof; (ii) changing the location of any Equipment or Inventory, or (iii) changing the location of any other Collateral to a place outside the State of California; and in any such event taking such action as is necessary to cause the security interest in the Collateral to continue to be perfected. (f) Not change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection with this Agreement misleading within the meaning of Section 9-402 of the Code, unless Debtor shall have taken all action necessary or reasonably requested by Secured Party to amend such financing or continuation statement so that it is not seriously misleading and shall have notified Secured Party of such action. (g) Not sell, lease, assign, transfer, convey, pledge, hypothecate, mortgage or further encumber any of the Collateral, provided that Debtor, so long as no Event of Default shall have occurred and be continuing, may in the ordinary course of business (i) sell Inventory and goods, (ii) collect and settle Accounts and (iii) dispose of obsolete or non-serviceable Equipment. In addition, Debtor may grant security interests in favor of NDMS Investments, L.P., Devenshire Management Corp. and Alliance Financial Network, Inc. (h) Promptly pay or otherwise cause to be discharged any lien, charge, security interest or other encumbrance that may attach to the Collateral, or any portion thereof, other than pursuant to this Agreement. 5 (i) Promptly notify Secured Party of any attachment or other legal process levied against any of the Collateral and of any filed claims or proceedings, that might in any way affect or impair Secured Party' security interest in the Collateral or the rights and remedies of Secured Party with respect thereto as noted in paragraph 5(b) above. (j) Defend the Collateral against all claims, liens, security interests, demands and other encumbrances of third parties at any time claiming an interest in the Collateral that is adverse to Secured Party' interest in the Collateral hereunder. (k) At the written request of Secured Party and at Secured Party's expense, execute and permit to be filed one or more financing statements, and amendments thereto, under the Code, any other applicable state's Uniform Commercial Code naming Debtor as debtor and Secured Party as secured Parties and indicating therein the types or describing the Collateral. (l) Not, without the prior written consent of Secured Party, which consent shall not be unreasonably withheld, execute, file or authorize or permit to be filed in any jurisdiction or with any governmental authority any financing or similar statement relating to the Collateral, or any portion thereof, in which any person other than Secured Party is named as a secured Parties thereunder. (m) Reimburse Secured Party upon demand for any costs and fees, including reasonable attorneys' fees and accountants' fees and other expenses, incurred in collecting any sums payable by Debtor under any of the Obligations secured hereby, enforcing any term or provision of this Agreement or otherwise in the collection of the Collateral and the preparation and enforcement of any agreement relating thereto. (n) Take any and all actions reasonably requested in writing by Secured Party to payoff those certain obligations set forth on Schedule 5(c) hereto, if any, including, but not limited to, the filing of one or more Uniform Commercial Code termination statements or other applicable documents. (o) Execute and deliver to Secured Party any and all further agreements, instruments, or documents and take any and all such further action as Secured Party, in its sole discretion, may deem necessary or advisable in order to evidence, effectuate, perfect, protect, maintain, or realize upon Secured Party' security interest in the Collateral or the priority thereof including, without limitation, any documents required to be filed with the United States Patent and Trademark Office. 7. EVENTS OF DEFAULT. The occurrence of an "Event of Default" under the Secured Note (after expiration of any applicable cure periods) shall constitute an "Event of Default" hereunder. 8. SECURED PARTY' REMEDIES. If an Event of Default occurs hereunder, then, Secured Party may, at its option, but is not required to, do any one or more of the following without demand or notice to Debtor: (a) Declare all of the Obligations immediately due and payable in full, notwithstanding the terms of any other writing or evidence of debt; 6 (b) Transfer the Collateral into Secured Party' s name or that of its nominee; (c) From time to time, proceed with the foreclosure of Secured Party's security interest and sale of the Collateral, or any portion of it, in any manner permitted by law or provided for herein; (d) Take possession of and retain the Collateral in satisfaction of the Obligations upon compliance with the provisions of the Code; or (e) Exercise any and all remedies of a secured Parties under the Code or as otherwise provided by law. 9. APPLICATION OF PROCEEDS. After the occurrence of an Event of Default, all income and distributions with respect to the Collateral and all proceeds from any sale of the Collateral pursuant hereto shall be applied as follows: (a) First, in such order as Secured Party shall in its sole discretion determine, (i) to the payment of all costs and expenses incurred by Secured Party in connection with any sale of the Collateral, including, without limitation, all court costs and the reasonable fees and expenses of counsel for Secured Party in connection therewith; (ii) to the repayment of all advances made by Secured Party hereunder for the account of Debtor; and (iii) the payment of any and all other costs and expenses paid or incurred by Secured Party in connection with this Agreement or otherwise in connection with the Obligations or the exercise of any right or remedy hereunder; (b) Second, to the payment of interest on the Obligations; (c) Third, to the payment or satisfaction of the Obligations; and (d) Fourth, any amounts remaining after the foregoing applications shall be remitted to Debtor or as a court of competent jurisdiction may otherwise direct. 10. power of attorney. (a) Debtor does hereby irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of Secured Party or Debtor effective upon an Event of Default to endorse any notes, checks, drafts, money orders or other evidence of payment relating to the Collateral that may come into the possession of Secured Party, and to do any and all other acts necessary or proper to carry out the intent of this Agreement; (b) Debtor does hereby further irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact in the name of Secured Party or Debtor effective upon an Event of Default, (i) to enforce all Debtor's rights under and pursuant to all agreements with respect to the Collateral and to enter into such other agreements as may be necessary to protect Secured Party' rights and interest in and to the Collateral; (ii) to execute such other and further mortgages, pledges and assignments of the Collateral as Secured Party may reasonably require for the 7 purpose of protecting, maintaining or enforcing the security interest granted to the Secured Party herein; and (iii) to do any and all other things necessary or proper to carry out the intention of this Agreement; and (c) Each of the foregoing appointments shall be deemed coupled with an interest and irrevocable. 11. PRIVATE SALE AUTHORIZED. (a) Debtor recognizes that Secured Party may be unable to effect a public sale of all or part of the Collateral. Debtor consents to a private sale even though such sale may be at prices and upon terms less favorable than if the Collateral were sold at public sales. (b) Debtor recognizes that a sale, public or private, of the Collateral may not be able to be effected and Secured Party or its assignee are hereby expressly authorized at their election to retain the Collateral until a sale can be effected. Until such sale, Secured Party or its assignee may elect to hold the Collateral and be treated as the owner thereof, and shall be entitled to collect all income thereon. (c) The purchaser or purchasers at any public or private sale of the Collateral shall take the Collateral free of any right or equity of redemption in Debtor, which rights and equities Debtor hereby expressly waives. (d) Debtor agrees that written notice mailed to Debtor twenty (20) business days prior to the date of public or private sale of the Collateral shall constitute reasonable notice for such sales. 12. FINANCING STATEMENTS AND PAYMENT DIRECTIONS. To the extent permitted by law, Debtor hereby authorizes Secured Party to file any amendments to or continuations of any financing statement filed with regard to the Collateral without the signature of Debtor. Debtor further authorizes Secured Party upon an Event of Default to notify any account debtors that all sums payable to Debtor relating to the Collateral shall be paid directly to Secured Party. 13. TERMINATION. UPON SATISFACTION in full of each and all of the Obligations, and the payment of all additional costs and expenses of Secured Party provided for herein, this Agreement shall terminate and Secured Party shall deliver to Debtor, at Debtor's expense, such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to this Agreement; provided that if Secured Party is required to return any amounts received by Secured Party on account of the Obligations, the first priority security interests provided hereunder shall reattach. 14. NOTICES.Any notice or other communication required or permitted to be given under this Agreement shall be in writing and sent by United States Overnight Express Mail or priority Federal Express delivery, postage prepaid, and addressed as follows: 8 If to Debtor: QT-5, Inc. ------------ 5655 Lindero Canyon Road , Suite 120 Westlake Village, CA 91362 Attention: Timothy J. Owens If to Secured Party: Dale Affonso 355 South Grand Ave. Suite 2000 Los Angeles, CA 90071 or such other address as either Parties may from time to time specify in writing to the other in the manner aforesaid. If personally delivered, such notices or other communications shall be deemed delivered upon delivery. If sent by United States mail or Federal Express delivery, such notices or other communications shall be deemed delivered upon delivery or refusal to accept delivery as indicated on the delivery receipt. 15. SURVIVAL OF REPRESENTATIONS. All covenants, agreements or representations and warranties made herein and in any documents delivered pursuant hereto shall survive the execution hereof. 16. ASSIGNMENTS. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such Parties, and all covenants, promises and agreements by or on behalf of Debtor contained in this Agreement shall bind and inure to the benefit of the successors and assigns of Secured Party and Debtor. 17. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to conflict of laws principles. 18. NO IMPLIED WAIVERS BY SECURED PARTY. Neither any failure nor any delay on the part of Secured Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights, remedies and benefits of Secured Party herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits that Secured Party may have at law, in equity, by statute or otherwise. Without limiting the generality of the foregoing, Secured Party shall have all rights and remedies of a secured Party under Division 9 of the Code, as it may be amended or superseded from time to time. 19. MODIFICATIONS AND WAIVERS. (a) No modification, amendment or waiver of any provision of this Agreement, nor consent to any departure of Debtor herefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. 9 (b) No notice or demand on Debtor in any case shall entitle Debtor to any other or further notice or demand in the same, similar or other circumstances. (c) Debtor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the liability of Debtor in respect of the Obligations or the Collateral and any and all other notices and demands whatsoever, whether or not relating to such instruments. (d) The Obligations shall not be affected by (i) the failure of Secured Party to assert any claim or demand or to enforce any right or remedy against Debtor; (ii) any extension or renewal thereof; (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or of any other agreement; or (iv) the release of any collateral held by Secured Party for the Obligations or any of them. 20. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be determined by a court of law to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 21. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Debtor hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Agreement or the subject matter hereof brought by any party hereto or their respective successors or assigns; and (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. 22. CAPTIONS. The captions in this Agreement are inserted only as a matter of convenience and for reference and shall not be deemed to define, limit, enlarge, or describe the scope of this Agreement or the relationship of the parties, and shall not affect this Agreement or the construction of any provisions herein. 23. PRONOUNS. Whenever the context so requires, the masculine shall include the feminine and the neuter, and the singular shall include the plural, and conversely. 24. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. The facsimile of the executed counterpart shall have the same force and effect as if it was an originally executed counterpart. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. QT-5, INC., a Delaware corporation By: /s/ Steve Reder ---------------------------------- Steve Reder President, Director By: /s/ Timothy Owens ---------------------------------- Tim Owens Chief Executive Officer, Director Acknowledged and agreed by Secured Party: By /s/ Dale Affonso ------------------------------- Dale Affonso 11 Schedule 5(c) NONE 12 Schedule 5(d) NONE 13 EXHIBIT A PATENT MORTGAGE 14 EX-4.8 10 doc9.txt Exhibit 4.8 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as of June 10, 2003 by and among QT-5, Inc., a Delaware corporation ("Debtor"), in favor of Alliance Financial Network, Inc. ("Secured Party"), with reference to the following facts and circumstances. A. Debtor is delivering a promissory note to Secured Party in the principal amount of $25,000 (the "Secured Amount"). B. In order to secure its obligations to repay the Secured Amount, Debtor has agreed to grant Secured Party a security interest in certain collateral, as described herein. NOW, THEREFORE, IN CONSIDERATION of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. GRANT OF SECURITY INTEREST. As security for Debtor's due and punctual performance of the Obligations (as hereinafter defined), Debtor hereby pledges with Secured Party the Collateral (as hereinafter defined), and grants, assigns, transfers and conveys to Secured Party a continuing security interest in any and all of Debtor's right, title and interest in and to the Collateral. Such security interest shall be second in priority to (and in certain circumstances, pari passu with) the security interest granted in favor of NDMS Investments, L.P. and pari passu in priority with the security interests granted in favor of Devenshire Management Corp. and Dale Affonso. 2. OBLIGATIONS. This Agreement, and Debtor's pledge of and grant to Secured Party of a security interest in and to the Collateral, is made to secure: (i) due and punctual performance of Debtor's obligation to repay the Secured Amount pursuant to a Secured Note of even date herewith and any other note or instrument executed by Debtor and payable to Secured Party which recites that it is secured hereby, including any and all amendments, modifications, renewals, extensions, substitutions or replacements hereof or thereof; (ii) due performance of each and every material obligation, covenant and agreement of Debtor contained herein or in any other note or instrument executed by Debtor for the purpose of further securing the Secured Amount (collectively, the "Obligations"). 3. COLLATERAL. As used herein, the term "Collateral" shall collectively and severally mean all assets of Debtor, including but not limited to the following: (a) EQUIPMENT. All equipment (as defined in the California Uniform Commercial Code (the "Code")), machinery, tools, furniture, furnishings, plant fixtures, business fixtures and other storage and office equipment, now owned or held, or hereafter acquired by the Debtor, wherever located, and all parts thereof and all additions and accessions thereto and replacements thereof and documents therefor, including any documents of title representing any of the above (any and all of the foregoing being the "Equipment"); 1 (b) INVENTORY. All inventory (as defined in the Code) in all of its forms, now owned or held, or hereafter acquired by the Debtor, wherever located, including, but not limited to (i) all goods (wherever located and whether in the possession of the Company or a bailee or other person for storage, transit, or otherwise) manufactured or assembled or held for sale or lease or furnished, and raw materials and work in process, finished and unfinished goods, and materials used or consumed in the Debtor's business, (ii) all goods which are returned to or repossessed by the Debtor, and (iii) all additions and accessions thereto and replacements and products thereof, including, without limitation, any documents of title representing any of the above (any and all of the foregoing being the "Inventory"); (c) ACCOUNTS. All accounts, chattel paper, instruments (each as defined in the Code), and other obligations of any kind, now owned or held or hereafter acquired by the Debtor, including, without limitation, insurance claims insurance settlement proceeds, tax refund claims and tax refunds arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights in and to all security agreements, leases, and other contracts securing or otherwise relating to any such accounts, general intangibles, chattel paper, instruments or obligations, and all books and records relating to any of the foregoing (any and all of the foregoing being the "Accounts"); (d) INSTRUMENTS. All notes and other instruments (as defined in the Code) and any instrument which constitutes a part of chattel paper, and other evidences of indebtedness in which the Debtor now or hereafter has any interest, to the extent of that interest; (e) DOCUMENTS. All documents (as defined in the Code) in which the Debtor now or hereafter has any interest, to the extent of that interest; (f) CHATTEL PAPER. All chattel paper (as defined in the Code) in which the Debtor now or hereafter has any interest; (g) GENERAL INTANGIBLES. All General Intangibles (as hereinafter defined) in which the Debtor now or hereafter has any interest, to the extent of that interest, including, without limitation, the Debtor's interest in the Patent Assignment between Debtor and Marshall Thompson and the subject Patent No. 6,268,386 (the "Patent"). "General Intangibles" means any "general intangibles" (as such term is defined in the Code), and shall include, without limitation, (i) all patents, patent applications, trademarks, trademark registrations, trade names and trademark applications; (ii) license agreements with any other Parties, whether the Debtor is a licensor or licenses under any such license agreement, and the right to prepare for sale, sell and advertise for sale all inventory now or hereafter covered by such licenses; (iii) all of the Debtor's books, records and files, including computer software and tapes and all other forms of electronic information storage; (iv) copyrights and other rights in intellectual property; (v) interests in partnerships, joints ventures and other business associations; (vi) licenses and permits; (vii) trade secrets, propriety or confidential information, customer lists, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, and goodwill; (viii) claims in or under insurance 2 policies, including unearned premiums; (ix) deposit accounts; (x) rights to receive tax refunds and other payments; (xi) rights of indemnification; and (xii) all of the Debtor's rights under any warranties or guaranties of any kind, including equipment, machinery or services; (h) CONTRACTS. All of the Debtor's rights under all contracts, undertakings or agreements (other than rights evidenced by chattel paper, documents or instruments) in or under which the Debtor may now or hereafter have any right, title or interest, including, without limitation, with respect to an account, any agreement relating to the terms of payment or the terms of performance thereof; (i) INVESTMENT PROPERTY. All investment property (as defined in the Code), in which Debtor now or hereafter has an interest or entitlement; (j) other personal property. All other goods and personal property in which the Debtor has any interest, to the extent of that interest, whether now or hereafter owned or existing, leased, consigned by or to or acquired by the Debtor and wherever located; and (k) PROCEEDS AND PRODUCTS. All proceeds and products of the foregoing (including, without limitation, cash proceeds and non-cash proceeds resulting from the sale or other voluntary or involuntary disposition thereof or any other realization in respect thereof) and including, but not limited to, all property of any type that is acquired with any cash proceeds, and all guarantees, insurance and rights against sureties the Debtor may have in connection therewith and all proceeds and products relating thereto or therefrom, and all the Debtor's right, title and interest in and to additions, accessions, replacements and substitutions to and for the foregoing, and all documents, ledger sheets and files of the Debtor relating thereto. The term "proceeds" as used herein shall include, without limitation, all accounts, chattel paper, deposit accounts, instruments, equipment, inventory, documents, general intangibles and other proceeds that arise from the sale, lease, transfer or other use or disposition of any kind of any of the Collateral described in the foregoing paragraphs (a) through (j), inclusive, or proceeds, and all proceeds of any type described above acquired with cash proceeds. 4. POWERS OF SECURED PARTY. Debtor appoints Secured Party its true attorney-in-fact, effective upon any Event of Default, to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Secured Party' officers, employees or agents, or any of them: (i) to liquidate any certificate of deposit pledged to Secured Party hereunder prior to its maturity date and to apply the proceeds thereof to payment of the Obligations or hold such proceeds as part of the Collateral, notwithstanding the fact that such liquidation may give rise to penalties for early withdrawals of funds; (ii) to sell, exchange or otherwise dispose of any portion of the Collateral and to apply the proceeds thereof to payment of the Obligations; (iii) to notify any person obligated on any security, instrument or other document subject to this Agreement of Secured Party' rights hereunder; (iv) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral; (v) to enter into any extension, reorganization, deposit, merger or consolidation agreement, 3 or any other agreement relating to or affecting the Collateral or proceeds, and in connection therewith to deposit or surrender control of the Collateral, accept other property in exchange for the Collateral, and do and perform such acts and things as Secured Party may deem proper, and any money or property received in exchange for the Collateral shall be applied to the Obligations; (vi) to make any compromise or settlement Secured Party deem necessary, desirable or proper in respect of the Collateral; (vii) to insure, process and preserve the Collateral; and (viii) to perform any obligation of Debtor under this Agreement, in Debtor's name or otherwise. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Secured Party as follows: (a) Debtor is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Debtor has all requisite capacity and power to execute, deliver and perform its obligations under this Agreement, except that Debtor discloses and represents that there is an existing dispute between Debtor and Marshall Thompson, the inventor and proprietary owner of that certain United States Patent No. 6,268,386 dated July 31, 2001 for Nicotine Beverage and Debtor is in the process of demanding arbitration to resolve the dispute. This Agreement has been duly authorized by all necessary corporate action, has been validly executed and delivered by Debtor, constitutes the legal, valid and binding obligation of Debtor, enforceable in accordance with its terms, and creates a legal, valid and enforceable security interest in and to the Collateral. (c) Except as otherwise set forth on Schedule 5(c), Debtor owns the Collateral free and clear of all liens, claims, encumbrances, security interests or equities, other than the security interest created hereby. (d) Debtor's principal place of business is at the location set forth in Section 14, and, except as otherwise set forth on Schedule 5(d), all of the Collateral is physically located in the County of Los Angeles, State of California. (e) Debtor has not sold, transferred, assigned or conveyed the Collateral, or any portion thereof, to any person other than Secured Party. 6. COVENANTS AND AGREEMENTS OF DEBTOR. Debtor covenants and agrees with Secured Party that from the date hereof and until payment and satisfaction in full of each and all of the Obligations, unless Secured Party shall otherwise consent in writing, which consent shall be granted or withheld in Secured Party' sole and absolute discretion, Debtor will: (a) Duly observe and perform each and every material term and condition of any and all agreements, instruments and documents relating to the Collateral, and diligently protect and enforce its rights under all such agreements. (b) Pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of the income 4 and profits therefrom, except where nonpayment does not involve any danger of sale, forfeiture or loss of any of the Collateral or any interest therein. (c) Insure the Collateral with financially sound and reputable insurers against loss or damage by fire, theft, bodily injury and such other casualties, as are usually insured against by companies engaged in the same or similar businesses as Debtor. (d) Keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including without limitation a record of all payments received and all credits granted with respect to the Collateral and all other dealings in the Collateral. Upon the occurrence of any Event of Default, Debtor will deliver and turn over any such books and records to the Secured Party at any time on demand of the Secured Party. Prior to the occurrence of an Event of Default and upon reasonable written notice of no less than five (5) business days from Secured Party, Debtor shall permit any representative of Secured Party to inspect such books and records and will provide photocopies thereof to Secured Party at Secured Party's expense. Upon reasonable written notice of no less than five (5) business days to Debtor, with the consent of the Debtor, as to the time of entry, which consent shall not be unreasonably withheld, Secured Party shall also have the right to enter into and upon the premises where any of the Equipment or Inventory is located for the purpose of inspecting the same, observing its use and otherwise protecting Secured Party's interests therein. (e) Give Secured Party ten (10) days prior written notice before (i) changing its principal place of business or moving its books and records to a location other than that set forth in Section 14 hereof; (ii) changing the location of any Equipment or Inventory, or (iii) changing the location of any other Collateral to a place outside the State of California; and in any such event taking such action as is necessary to cause the security interest in the Collateral to continue to be perfected. (f) Not change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection with this Agreement misleading within the meaning of Section 9-402 of the Code, unless Debtor shall have taken all action necessary or reasonably requested by Secured Party to amend such financing or continuation statement so that it is not seriously misleading and shall have notified Secured Party of such action. (g) Not sell, lease, assign, transfer, convey, pledge, hypothecate, mortgage or further encumber any of the Collateral, provided that Debtor, so long as no Event of Default shall have occurred and be continuing, may in the ordinary course of business (i) sell Inventory and goods, (ii) collect and settle Accounts and (iii) dispose of obsolete or non-serviceable Equipment. In addition, Debtor may grant security interests in favor of NDMS Investments, L.P., Devenshire Management Corp. and Dale Affonso. (h) Promptly pay or otherwise cause to be discharged any lien, charge, security interest or other encumbrance that may attach to the Collateral, or any portion thereof, other than pursuant to this Agreement. 5 (i) Promptly notify Secured Party of any attachment or other legal process levied against any of the Collateral and of any filed claims or proceedings, that might in any way affect or impair Secured Party' security interest in the Collateral or the rights and remedies of Secured Party with respect thereto as noted in paragraph 5(b) above. (j) Defend the Collateral against all claims, liens, security interests, demands and other encumbrances of third parties at any time claiming an interest in the Collateral that is adverse to Secured Party' interest in the Collateral hereunder. (k) At the written request of Secured Party and at Secured Party's expense, execute and permit to be filed one or more financing statements, and amendments thereto, under the Code, any other applicable state's Uniform Commercial Code naming Debtor as debtor and Secured Party as secured Parties and indicating therein the types or describing the Collateral. (l) Not, without the prior written consent of Secured Party, which consent shall not be unreasonably withheld, execute, file or authorize or permit to be filed in any jurisdiction or with any governmental authority any financing or similar statement relating to the Collateral, or any portion thereof, in which any person other than Secured Party is named as a secured Parties thereunder. (m) Reimburse Secured Party upon demand for any costs and fees, including reasonable attorneys' fees and accountants' fees and other expenses, incurred in collecting any sums payable by Debtor under any of the Obligations secured hereby, enforcing any term or provision of this Agreement or otherwise in the collection of the Collateral and the preparation and enforcement of any agreement relating thereto. (n) Take any and all actions reasonably requested in writing by Secured Party to payoff those certain obligations set forth on Schedule 5(c) hereto, if any, including, but not limited to, the filing of one or more Uniform Commercial Code termination statements or other applicable documents. (o) Execute and deliver to Secured Party any and all further agreements, instruments, or documents and take any and all such further action as Secured Party, in its sole discretion, may deem necessary or advisable in order to evidence, effectuate, perfect, protect, maintain, or realize upon Secured Party' security interest in the Collateral or the priority thereof including, without limitation, any documents required to be filed with the United States Patent and Trademark Office. 7. EVENTS OF DEFAULT. The occurrence of an "Event of Default" under the Secured Note (after expiration of any applicable cure periods) shall constitute an "Event of Default" hereunder. 8. SECURED PARTY' REMEDIES. If an Event of Default occurs hereunder, then, Secured Party may, at its option, but is not required to, do any one or more of the following without demand or notice to Debtor: 6 (a) Declare all of the Obligations immediately due and payable in full, notwithstanding the terms of any other writing or evidence of debt; (b) Transfer the Collateral into Secured Party' s name or that of its nominee; (c) From time to time, proceed with the foreclosure of Secured Party's security interest and sale of the Collateral, or any portion of it, in any manner permitted by law or provided for herein; (d) Take possession of and retain the Collateral in satisfaction of the Obligations upon compliance with the provisions of the Code; or (e) Exercise any and all remedies of a secured Parties under the Code or as otherwise provided by law. 9. APPLICATION OF PROCEEDS. After the occurrence of an Event of Default, all income and distributions with respect to the Collateral and all proceeds from any sale of the Collateral pursuant hereto shall be applied as follows: (a) First, in such order as Secured Party shall in its sole discretion determine, (i) to the payment of all costs and expenses incurred by Secured Party in connection with any sale of the Collateral, including, without limitation, all court costs and the reasonable fees and expenses of counsel for Secured Party in connection therewith; (ii) to the repayment of all advances made by Secured Party hereunder for the account of Debtor; and (iii) the payment of any and all other costs and expenses paid or incurred by Secured Party in connection with this Agreement or otherwise in connection with the Obligations or the exercise of any right or remedy hereunder; (b) Second, to the payment of interest on the Obligations; (c) Third, to the payment or satisfaction of the Obligations; and (d) Fourth, any amounts remaining after the foregoing applications shall be remitted to Debtor or as a court of competent jurisdiction may otherwise direct. 10. POWER OF ATTORNEY. (a) Debtor does hereby irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of Secured Party or Debtor effective upon an Event of Default to endorse any notes, checks, drafts, money orders or other evidence of payment relating to the Collateral that may come into the possession of Secured Party, and to do any and all other acts necessary or proper to carry out the intent of this Agreement; (b) Debtor does hereby further irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact in the name of Secured Party or Debtor effective upon an Event of Default, (i) to enforce all Debtor's rights under and pursuant to all agreements with respect to the 7 Collateral and to enter into such other agreements as may be necessary to protect Secured Party' rights and interest in and to the Collateral; (ii) to execute such other and further mortgages, pledges and assignments of the Collateral as Secured Party may reasonably require for the purpose of protecting, maintaining or enforcing the security interest granted to the Secured Party herein; and (iii) to do any and all other things necessary or proper to carry out the intention of this Agreement; and (c) Each of the foregoing appointments shall be deemed coupled with an interest and irrevocable. 11. PRIVATE SALE AUTHORIZED. (a) Debtor recognizes that Secured Party may be unable to effect a public sale of all or part of the Collateral. Debtor consents to a private sale even though such sale may be at prices and upon terms less favorable than if the Collateral were sold at public sales. (b) Debtor recognizes that a sale, public or private, of the Collateral may not be able to be effected and Secured Party or its assignee are hereby expressly authorized at their election to retain the Collateral until a sale can be effected. Until such sale, Secured Party or its assignee may elect to hold the Collateral and be treated as the owner thereof, and shall be entitled to collect all income thereon. (c) The purchaser or purchasers at any public or private sale of the Collateral shall take the Collateral free of any right or equity of redemption in Debtor, which rights and equities Debtor hereby expressly waives. (d) Debtor agrees that written notice mailed to Debtor twenty (20) business days prior to the date of public or private sale of the Collateral shall constitute reasonable notice for such sales. 12. FINANCING STATEMENTS AND PAYMENT DIRECTIONS. To the extent permitted by law, Debtor hereby authorizes Secured Party to file any amendments to or continuations of any financing statement filed with regard to the Collateral without the signature of Debtor. Debtor further authorizes Secured Party upon an Event of Default to notify any account debtors that all sums payable to Debtor relating to the Collateral shall be paid directly to Secured Party. 13. TERMINATION. Upon satisfaction in full of each and all of the Obligations, and the payment of all additional costs and expenses of Secured Party provided for herein, this Agreement shall terminate and Secured Party shall deliver to Debtor, at Debtor's expense, such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to this Agreement; provided that if Secured Party is required to return any amounts received by Secured Party on account of the Obligations, the first priority security interests provided hereunder shall reattach. 14. NOTICES. Any notice or other communication required or permitted to be given under this Agreement shall be in writing and sent by United States Overnight Express Mail or priority Federal Express delivery, postage prepaid, and addressed as follows: 8 If to Debtor: QT-5, Inc. ------------ 5655 Lindero Canyon Road, Suite 120 Westlake Village, CA 91362 Attention: Timothy J. Owens If to Secured Party: Alliance Financial Network, Inc. ------------------- 2436 West Coast Highway Suite 2A Newport Beach, CA 92663 Attention: Bill Bossung or such other address as either Parties may from time to time specify in writing to the other in the manner aforesaid. If personally delivered, such notices or other communications shall be deemed delivered upon delivery. If sent by United States mail or Federal Express delivery, such notices or other communications shall be deemed delivered upon delivery or refusal to accept delivery as indicated on the delivery receipt. 15. SURVIVAL OF REPRESENTATIONS. All covenants, agreements or representations and warranties made herein and in any documents delivered pursuant hereto shall survive the execution hereof. 16. ASSIGNMENTS. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such Parties, and all covenants, promises and agreements by or on behalf of Debtor contained in this Agreement shall bind and inure to the benefit of the successors and assigns of Secured Party and Debtor. 17. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to conflict of laws principles. 18. NO IMPLIED WAIVERS BY SECURED PARTY. Neither any failure nor any delay on the part of Secured Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights, remedies and benefits of Secured Party herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits that Secured Party may have at law, in equity, by statute or otherwise. Without limiting the generality of the foregoing, Secured Party shall have all rights and remedies of a secured Party under Division 9 of the Code, as it may be amended or superseded from time to time. 19. MODIFICATIONS AND WAIVERS. (a) No modification, amendment or waiver of any provision of this Agreement, nor consent to any departure of Debtor herefrom, shall in any event be 9 effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (b) No notice or demand on Debtor in any case shall entitle Debtor to any other or further notice or demand in the same, similar or other circumstances. (c) Debtor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the liability of Debtor in respect of the Obligations or the Collateral and any and all other notices and demands whatsoever, whether or not relating to such instruments. (d) The Obligations shall not be affected by (i) the failure of Secured Party to assert any claim or demand or to enforce any right or remedy against Debtor; (ii) any extension or renewal thereof; (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or of any other agreement; or (iv) the release of any collateral held by Secured Party for the Obligations or any of them. 20. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be determined by a court of law to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 21. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Debtor hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Agreement or the subject matter hereof brought by any party hereto or their respective successors or assigns; and (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. 10 22. CAPTIONS. The captions in this Agreement are inserted only as a matter of convenience and for reference and shall not be deemed to define, limit, enlarge, or describe the scope of this Agreement or the relationship of the parties, and shall not affect this Agreement or the construction of any provisions herein. 23. PRONOUNS. Whenever the context so requires, the masculine shall include the feminine and the neuter, and the singular shall include the plural, and conversely. 24. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. The facsimile of the executed counterpart shall have the same force and effect as if it was an originally executed counterpart. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. QT-5, INC., a Delaware corporation By: /s/ Steve Reder ----------------------------------- Steve Reder President, Director By: /s/ Timothy Owens ----------------------------------- Tim Owens Chief Executive Officer, Director Acknowledged and agreed by Secured Party: ALLIANCE FINANCIAL NETWORK, INC. a Nevada limited partnership By /s/ William Bossung - ----------------------------------------- 12 Schedule 5(c) NONE 13 Schedule 5(d) NONE 14 EXHIBIT A PATENT MORTGAGE 15 EX-4.9 11 doc10.txt Exhibit 4.9 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as of June 10, 2003 by and among QT-5, Inc., a Delaware corporation ("Debtor"), in favor of Devenshire Management Corp. ("Secured Party"), with reference to the following facts and circumstances. A. Debtor is delivering a promissory note to Secured Party in the principal amount of $25,000 (the "Secured Amount"). B. In order to secure its obligations to repay the Secured Amount, Debtor has agreed to grant Secured Party a security interest in certain collateral, as described herein. NOW, THEREFORE, IN CONSIDERATION of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. GRANT OF SECURITY INTEREST. As security for Debtor's due and punctual performance of the Obligations (as hereinafter defined), Debtor hereby pledges with Secured Party the Collateral (as hereinafter defined), and grants, assigns, transfers and conveys to Secured Party a continuing security interest in any and all of Debtor's right, title and interest in and to the Collateral. Such security interest shall be second in priority to (and in certain circumstances, pari passu with) the security interest granted in favor of NDMS Investments, L.P. and pari passu in priority with the security interests granted in favor of Alliance Financial Network, Inc. and Dale Affonso. 2. OBLIGATIONS. This Agreement, and Debtor's pledge of and grant to Secured Party of a security interest in and to the Collateral, is made to secure: (i) due and punctual performance of Debtor's obligation to repay the Secured Amount pursuant to a Secured Note of even date herewith and any other note or instrument executed by Debtor and payable to Secured Party which recites that it is secured hereby, including any and all amendments, modifications, renewals, extensions, substitutions or replacements hereof or thereof; (ii) due performance of each and every material obligation, covenant and agreement of Debtor contained herein or in any other note or instrument executed by Debtor for the purpose of further securing the Secured Amount (collectively, the "Obligations"). 3. COLLATERAL. As used herein, the term "Collateral" shall collectively and severally mean all assets of Debtor, including but not limited to the following: (a) EQUIPMENT. All equipment (as defined in the California Uniform Commercial Code (the "Code")), machinery, tools, furniture, furnishings, plant fixtures, business fixtures and other storage and office equipment, now owned or held, or hereafter acquired by the Debtor, wherever located, and all parts thereof and all additions 1 and accessions thereto and replacements thereof and documents therefor, including any documents of title representing any of the above (any and all of the foregoing being the "Equipment"); (b) INVENTORY. All inventory (as defined in the Code) in all of its forms, now owned or held, or hereafter acquired by the Debtor, wherever located, including, but not limited to (i) all goods (wherever located and whether in the possession of the Company or a bailee or other person for storage, transit, or otherwise) manufactured or assembled or held for sale or lease or furnished, and raw materials and work in process, finished and unfinished goods, and materials used or consumed in the Debtor's business, (ii) all goods which are returned to or repossessed by the Debtor, and (iii) all additions and accessions thereto and replacements and products thereof, including, without limitation, any documents of title representing any of the above (any and all of the foregoing being the "Inventory"); (c) ACCOUNTS. All accounts, chattel paper, instruments (each as defined in the Code), and other obligations of any kind, now owned or held or hereafter acquired by the Debtor, including, without limitation, insurance claims insurance settlement proceeds, tax refund claims and tax refunds arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights in and to all security agreements, leases, and other contracts securing or otherwise relating to any such accounts, general intangibles, chattel paper, instruments or obligations, and all books and records relating to any of the foregoing (any and all of the foregoing being the "Accounts"); (d) INSTRUMENTS. All notes and other instruments (as defined in the Code) and any instrument which constitutes a part of chattel paper, and other evidences of indebtedness in which the Debtor now or hereafter has any interest, to the extent of that interest; (e) DOCUMENTS. All documents (as defined in the Code) in which the Debtor now or hereafter has any interest, to the extent of that interest; (f) CHATTEL PAPER. All chattel paper (as defined in the Code) in which the Debtor now or hereafter has any interest; (G) GENERAL INTANGIBLES. All General Intangibles (as hereinafter defined) in which the Debtor now or hereafter has any interest, to the extent of that interest, including, without limitation, the Debtor's interest in the Patent Assignment between Debtor and Marshall Thompson and the subject Patent No. 6,268,386 (the "Patent"). "General Intangibles" means any "general intangibles" (as such term is defined in the Code), and shall include, without limitation, (i) all patents, patent applications, trademarks, trademark registrations, trade names and trademark applications; (ii) license agreements with any other Parties, whether the Debtor is a licensor or licenses under any such license agreement, and the right to prepare for sale, sell and advertise for sale all inventory now or hereafter covered by such licenses; (iii) all of the Debtor's books, records and files, including computer software and tapes and all other forms of electronic information storage; (iv) copyrights and other rights in 2 intellectual property; (v) interests in partnerships, joints ventures and other business associations; (vi) licenses and permits; (vii) trade secrets, propriety or confidential information, customer lists, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, and goodwill; (viii) claims in or under insurance policies, including unearned premiums; (ix) deposit accounts; (x) rights to receive tax refunds and other payments; (xi) rights of indemnification; and (xii) all of the Debtor's rights under any warranties or guaranties of any kind, including equipment, machinery or services; (h) CONTRACTS. All of the Debtor's rights under all contracts, undertakings or agreements (other than rights evidenced by chattel paper, documents or instruments) in or under which the Debtor may now or hereafter have any right, title or interest, including, without limitation, with respect to an account, any agreement relating to the terms of payment or the terms of performance thereof; (i) INVESTMENT PROPERTY. All investment property (as defined in the Code), in which Debtor now or hereafter has an interest or entitlement; (j) OTHER PERSONAL PROPERTY. All other goods and personal property in which the Debtor has any interest, to the extent of that interest, whether now or hereafter owned or existing, leased, consigned by or to or acquired by the Debtor and wherever located; and (k) PROCEEDS AND PRODUCTS. All proceeds and products of the foregoing (including, without limitation, cash proceeds and non-cash proceeds resulting from the sale or other voluntary or involuntary disposition thereof or any other realization in respect thereof) and including, but not limited to, all property of any type that is acquired with any cash proceeds, and all guarantees, insurance and rights against sureties the Debtor may have in connection therewith and all proceeds and products relating thereto or therefrom, and all the Debtor's right, title and interest in and to additions, accessions, replacements and substitutions to and for the foregoing, and all documents, ledger sheets and files of the Debtor relating thereto. The term "proceeds" as used herein shall include, without limitation, all accounts, chattel paper, deposit accounts, instruments, equipment, inventory, documents, general intangibles and other proceeds that arise from the sale, lease, transfer or other use or disposition of any kind of any of the Collateral described in the foregoing paragraphs (a) through (j), inclusive, or proceeds, and all proceeds of any type described above acquired with cash proceeds. 4. POWERS OF SECURED PARTY. Debtor appoints Secured Party its true attorney-in-fact, effective upon any Event of Default, to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Secured Party' officers, employees or agents, or any of them: (i) to liquidate any certificate of deposit pledged to Secured Party hereunder prior to its maturity date and to apply the proceeds thereof to payment of the Obligations or hold such proceeds as part of the Collateral, notwithstanding the fact that such liquidation may give rise to penalties for early withdrawals of funds; (ii) to sell, exchange or otherwise dispose of any portion of the Collateral and to apply the proceeds 3 thereof to payment of the Obligations; (iii) to notify any person obligated on any security, instrument or other document subject to this Agreement of Secured Party' rights hereunder; (iv) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral; (v) to enter into any extension, reorganization, deposit, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral or proceeds, and in connection therewith to deposit or surrender control of the Collateral, accept other property in exchange for the Collateral, and do and perform such acts and things as Secured Party may deem proper, and any money or property received in exchange for the Collateral shall be applied to the Obligations; (vi) to make any compromise or settlement Secured Party deem necessary, desirable or proper in respect of the Collateral; (vii) to insure, process and preserve the Collateral; and (viii) to perform any obligation of Debtor under this Agreement, in Debtor's name or otherwise. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Secured Party as follows: (a) Debtor is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Debtor has all requisite capacity and power to execute, deliver and perform its obligations under this Agreement, except that Debtor discloses and represents that there is an existing dispute between Debtor and Marshall Thompson, the inventor and proprietary owner of that certain United States Patent No. 6,268,386 dated July 31, 2001 for Nicotine Beverage and Debtor is in the process of demanding arbitration to resolve the dispute. This Agreement has been duly authorized by all necessary corporate action, has been validly executed and delivered by Debtor, constitutes the legal, valid and binding obligation of Debtor, enforceable in accordance with its terms, and creates a legal, valid and enforceable security interest in and to the Collateral. (c) Except as otherwise set forth on Schedule 5(c), Debtor owns the Collateral free and clear of all liens, claims, encumbrances, security interests or equities, other than the security interest created hereby. (d) Debtor's principal place of business is at the location set forth in Section 14, and, except as otherwise set forth on Schedule 5(d), all of the Collateral is physically located in the County of Los Angeles, State of California. (e) Debtor has not sold, transferred, assigned or conveyed the Collateral, or any portion thereof, to any person other than Secured Party. 6. COVENANTS AND AGREEMENTS OF DEBTOR. Debtor covenants and agrees with Secured Party that from the date hereof and until payment and satisfaction in full of each and all of the Obligations, unless Secured Party shall otherwise consent in writing, which consent shall be granted or withheld in Secured Party' sole and absolute discretion, Debtor will: 4 (a) Duly observe and perform each and every material term and condition of any and all agreements, instruments and documents relating to the Collateral, and diligently protect and enforce its rights under all such agreements. (b) Pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of the income and profits therefrom, except where nonpayment does not involve any danger of sale, forfeiture or loss of any of the Collateral or any interest therein. (c) Insure the Collateral with financially sound and reputable insurers against loss or damage by fire, theft, bodily injury and such other casualties, as are usually insured against by companies engaged in the same or similar businesses as Debtor. (d) Keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including without limitation a record of all payments received and all credits granted with respect to the Collateral and all other dealings in the Collateral. Upon the occurrence of any Event of Default, Debtor will deliver and turn over any such books and records to the Secured Party at any time on demand of the Secured Party. Prior to the occurrence of an Event of Default and upon reasonable written notice of no less than five (5) business days from Secured Party, Debtor shall permit any representative of Secured Party to inspect such books and records and will provide photocopies thereof to Secured Party at Secured Party's expense. Upon reasonable written notice of no less than five (5) business days to Debtor, with the consent of the Debtor, as to the time of entry, which consent shall not be unreasonably withheld, Secured Party shall also have the right to enter into and upon the premises where any of the Equipment or Inventory is located for the purpose of inspecting the same, observing its use and otherwise protecting Secured Party's interests therein. (e) Give Secured Party ten (10) days prior written notice before (i) changing its principal place of business or moving its books and records to a location other than that set forth in Section 14 hereof; (ii) changing the location of any Equipment or Inventory, or (iii) changing the location of any other Collateral to a place outside the State of California; and in any such event taking such action as is necessary to cause the security interest in the Collateral to continue to be perfected. (f) Not change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection with this Agreement misleading within the meaning of Section 9-402 of the Code, unless Debtor shall have taken all action necessary or reasonably requested by Secured Party to amend such financing or continuation statement so that it is not seriously misleading and shall have notified Secured Party of such action. (g) Not sell, lease, assign, transfer, convey, pledge, hypothecate, mortgage or further encumber any of the Collateral, provided that Debtor, so long as no Event of Default shall have occurred and be continuing, may in the ordinary course of business (i) sell Inventory and goods, (ii) collect and settle Accounts and (iii) dispose of obsolete or non-serviceable Equipment. In addition, Debtor may grant security interests in favor of NDMS Investments, L.P., Devenshire Management Corp. and Dale Affonso. 5 (h) Promptly pay or otherwise cause to be discharged any lien, charge, security interest or other encumbrance that may attach to the Collateral, or any portion thereof, other than pursuant to this Agreement. (i) Promptly notify Secured Party of any attachment or other legal process levied against any of the Collateral and of any filed claims or proceedings, that might in any way affect or impair Secured Party' security interest in the Collateral or the rights and remedies of Secured Party with respect thereto as noted in paragraph 5(b) above. (j) Defend the Collateral against all claims, liens, security interests, demands and other encumbrances of third parties at any time claiming an interest in the Collateral that is adverse to Secured Party' interest in the Collateral hereunder. (k) At the written request of Secured Party and at Secured Party's expense, execute and permit to be filed one or more financing statements, and amendments thereto, under the Code, any other applicable state's Uniform Commercial Code naming Debtor as debtor and Secured Party as secured Parties and indicating therein the types or describing the Collateral. (l) Not, without the prior written consent of Secured Party, which consent shall not be unreasonably withheld, execute, file or authorize or permit to be filed in any jurisdiction or with any governmental authority any financing or similar statement relating to the Collateral, or any portion thereof, in which any person other than Secured Party is named as a secured Parties thereunder. (m) Reimburse Secured Party upon demand for any costs and fees, including reasonable attorneys' fees and accountants' fees and other expenses, incurred in collecting any sums payable by Debtor under any of the Obligations secured hereby, enforcing any term or provision of this Agreement or otherwise in the collection of the Collateral and the preparation and enforcement of any agreement relating thereto. (n) Take any and all actions reasonably requested in writing by Secured Party to payoff those certain obligations set forth on Schedule 5(c) hereto, if any, including, but not limited to, the filing of one or more Uniform Commercial Code termination statements or other applicable documents. (o) Execute and deliver to Secured Party any and all further agreements, instruments, or documents and take any and all such further action as Secured Party, in its sole discretion, may deem necessary or advisable in order to evidence, effectuate, perfect, protect, maintain, or realize upon Secured Party' security interest in the Collateral or the priority thereof including, without limitation, any documents required to be filed with the United States Patent and Trademark Office. 6 7. EVENTS OF DEFAULT. The occurrence of an "Event of Default" under the Secured Note (after expiration of any applicable cure periods) shall constitute an "Event of Default" hereunder. 8. SECURED PARTY' REMEDIES. If an Event of Default occurs hereunder, then, Secured Party may, at its option, but is not required to, do any one or more of the following without demand or notice to Debtor: (a) Declare all of the Obligations immediately due and payable in full, notwithstanding the terms of any other writing or evidence of debt; (b) Transfer the Collateral into Secured Party' s name or that of its nominee; (c) From time to time, proceed with the foreclosure of Secured Party's security interest and sale of the Collateral, or any portion of it, in any manner permitted by law or provided for herein; (d) Take possession of and retain the Collateral in satisfaction of the Obligations upon compliance with the provisions of the Code; or (e) Exercise any and all remedies of a secured Parties under the Code or as otherwise provided by law. 9. APPLICATION OF PROCEEDS. After the occurrence of an Event of Default, all income and distributions with respect to the Collateral and all proceeds from any sale of the Collateral pursuant hereto shall be applied as follows: (a) First, in such order as Secured Party shall in its sole discretion determine, (i) to the payment of all costs and expenses incurred by Secured Party in connection with any sale of the Collateral, including, without limitation, all court costs and the reasonable fees and expenses of counsel for Secured Party in connection therewith; (ii) to the repayment of all advances made by Secured Party hereunder for the account of Debtor; and (iii) the payment of any and all other costs and expenses paid or incurred by Secured Party in connection with this Agreement or otherwise in connection with the Obligations or the exercise of any right or remedy hereunder; (b) Second, to the payment of interest on the Obligations; (c) Third, to the payment or satisfaction of the Obligations; and (d) Fourth, any amounts remaining after the foregoing applications shall be remitted to Debtor or as a court of competent jurisdiction may otherwise direct. 10. POWER OF ATTORNEY. (a) Debtor does hereby irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of Secured Party or Debtor effective upon an Event of 7 Default to endorse any notes, checks, drafts, money orders or other evidence of payment relating to the Collateral that may come into the possession of Secured Party, and to do any and all other acts necessary or proper to carry out the intent of this Agreement; (b) Debtor does hereby further irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact in the name of Secured Party or Debtor effective upon an Event of Default, (i) to enforce all Debtor's rights under and pursuant to all agreements with respect to the Collateral and to enter into such other agreements as may be necessary to protect Secured Party' rights and interest in and to the Collateral; (ii) to execute such other and further mortgages, pledges and assignments of the Collateral as Secured Party may reasonably require for the purpose of protecting, maintaining or enforcing the security interest granted to the Secured Party herein; and (iii) to do any and all other things necessary or proper to carry out the intention of this Agreement; and (c) Each of the foregoing appointments shall be deemed coupled with an interest and irrevocable. 11. PRIVATE SALE AUTHORIZED. (a) Debtor recognizes that Secured Party may be unable to effect a public sale of all or part of the Collateral. Debtor consents to a private sale even though such sale may be at prices and upon terms less favorable than if the Collateral were sold at public sales. (b) Debtor recognizes that a sale, public or private, of the Collateral may not be able to be effected and Secured Party or its assignee are hereby expressly authorized at their election to retain the Collateral until a sale can be effected. Until such sale, Secured Party or its assignee may elect to hold the Collateral and be treated as the owner thereof, and shall be entitled to collect all income thereon. (c) The purchaser or purchasers at any public or private sale of the Collateral shall take the Collateral free of any right or equity of redemption in Debtor, which rights and equities Debtor hereby expressly waives. (d) Debtor agrees that written notice mailed to Debtor twenty (20) business days prior to the date of public or private sale of the Collateral shall constitute reasonable notice for such sales. 12. FINANCING STATEMENTS AND PAYMENT DIRECTIONS. To the extent permitted by law, Debtor hereby authorizes Secured Party to file any amendments to or continuations of any financing statement filed with regard to the Collateral without the signature of Debtor. Debtor further authorizes Secured Party upon an Event of Default to notify any account debtors that all sums payable to Debtor relating to the Collateral shall be paid directly to Secured Party. 13. TERMINATION. Upon satisfaction in full of each and all of the Obligations, and the payment of all additional costs and expenses of Secured Party provided for herein, this Agreement shall terminate and Secured Party shall deliver to Debtor, at 8 Debtor's expense, such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to this Agreement; provided that if Secured Party is required to return any amounts received by Secured Party on account of the Obligations, the first priority security interests provided hereunder shall reattach. 14. NOTICES. Any notice or other communication required or permitted to be given under this Agreement shall be in writing and sent by United States Overnight Express Mail or priority Federal Express delivery, postage prepaid, and addressed as follows: If to Debtor: QT-5, Inc. ------------ 5655 Lindero Canyon Road, Suite 120 Westlake Village, CA 91362 Attention: Timothy J. Owens If to Secured Party: Devenshire Management Corp. ------------------- 1925 Century Park East Suite 1880 Los Angeles, CA 90067 Attention: Todd Sanders or such other address as either Parties may from time to time specify in writing to the other in the manner aforesaid. If personally delivered, such notices or other communications shall be deemed delivered upon delivery. If sent by United States mail or Federal Express delivery, such notices or other communications shall be deemed delivered upon delivery or refusal to accept delivery as indicated on the delivery receipt. 15. SURVIVAL OF REPRESENTATIONS. All covenants, agreements or representations and warranties made herein and in any documents delivered pursuant hereto shall survive the execution hereof. 16. ASSIGNMENTS. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such Parties, and all covenants, promises and agreements by or on behalf of Debtor contained in this Agreement shall bind and inure to the benefit of the successors and assigns of Secured Party and Debtor. 17. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to conflict of laws principles. 18. NO IMPLIED WAIVERS BY SECURED PARTY. Neither any failure nor any delay on the part of Secured Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights, remedies and benefits of Secured Party herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits that Secured Party may have at law, in equity, by statute or otherwise. Without limiting the generality of the foregoing, Secured Party shall 9 have all rights and remedies of a secured Party under Division 9 of the Code, as it may be amended or superseded from time to time. 19. MODIFICATIONS AND WAIVERS. (a) No modification, amendment or waiver of any provision of this Agreement, nor consent to any departure of Debtor herefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (b) No notice or demand on Debtor in any case shall entitle Debtor to any other or further notice or demand in the same, similar or other circumstances. (c) Debtor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the liability of Debtor in respect of the Obligations or the Collateral and any and all other notices and demands whatsoever, whether or not relating to such instruments. (d) The Obligations shall not be affected by (i) the failure of Secured Party to assert any claim or demand or to enforce any right or remedy against Debtor; (ii) any extension or renewal thereof; (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or of any other agreement; or (iv) the release of any collateral held by Secured Party for the Obligations or any of them. 20. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be determined by a court of law to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 21. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Debtor hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Agreement or the subject matter hereof brought by any party hereto or their respective successors or assigns; and (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. 10 (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. 22. CAPTIONS. The captions in this Agreement are inserted only as a matter of convenience and for reference and shall not be deemed to define, limit, enlarge, or describe the scope of this Agreement or the relationship of the parties, and shall not affect this Agreement or the construction of any provisions herein. 23. PRONOUNS. Whenever the context so requires, the masculine shall include the feminine and the neuter, and the singular shall include the plural, and conversely. 24. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. The facsimile of the executed counterpart shall have the same force and effect as if it was an originally executed counterpart. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. QT-5, INC., a Delaware corporation By: /s/ Steve Reder ------------------------------------ Steve Reder President, Director By: /s/ Timothy Owens ----------------------------------- Tim Owens Chief Executive Officer, Director Acknowledged and agreed by Secured Party: DEVENSHIRE MANAGEMENT CORP a Nevada limited partnership By --------------------------------------- 12 Schedule 5(c) NONE 13 Schedule 5(d) NONE 14 EXHIBIT A PATENT MORTGAGE 15 EX-4.10 12 doc11.txt Exhibit 4.10 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as of June 10, 2003 by and among QT-5, Inc., a Delaware corporation ("Debtor"), in favor of NDMS Investments, L.P., a Nevada limited partnership ("Secured Party"), with reference to the following facts and circumstances. A. Debtor has delivered a Secured Promissory Note to Secured Party in the principal amount of One Hundred Sixty-Five Thousand Dollars ($165,000) (the "Secured Amount"). B. In order to secure its obligations to repay the Secured Amount, Debtor has agreed to grant Secured Party a first priority security interest in certain collateral, as described herein. NOW, THEREFORE, IN CONSIDERATION of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. GRANT OF FIRST PRIORITY SECURITY INTEREST. As security for Debtor's due and punctual performance of the Obligations (as hereinafter defined), Debtor hereby pledges with Secured Party the Collateral (as hereinafter defined), and grants, assigns, transfers and conveys to Secured Party a continuing first priority security interest in any and all of Debtor's right, title and interest in and to the Collateral; provided that if the security interest granted hereunder is not at any time held by Secured Party the security interest shall be pari passu with the security interests granted in favor of Devonshire Management Corp., Alliance Financial Network Inc. and Dale Affonso. 2. OBLIGATIONS. This Agreement, and Debtor's pledge of and grant to Secured Party of a first priority security interest in and to the Collateral, is made to secure: (i) due and punctual performance of Debtor's obligation to repay the Secured Amount pursuant to a Secured Note of even date herewith and any other note or instrument executed by Debtor and payable to Secured Party which recites that it is secured hereby, including any and all amendments, modifications, renewals, extensions, substitutions or replacements hereof or thereof; (ii) due performance of each and every material obligation, covenant and agreement of Debtor contained herein or in any other note or instrument executed by Debtor for the purpose of further securing the Secured Amount (collectively, the "Obligations"). 3. COLLATERAL. As used herein, the term "Collateral" shall collectively and severally mean all assets of Debtor, including but not limited to the following: (a) EQUIPMENT. All equipment (as defined in the California Uniform Commercial Code (the "Code")), machinery, tools, furniture, furnishings, plant fixtures, business fixtures and other storage and office equipment, now owned or held, or hereafter acquired by the Debtor, wherever located, and all parts thereof and all additions and accessions thereto and replacements thereof and documents therefor, including any documents of title representing any of the above (any and all of the foregoing being the "Equipment"); 1 (b) INVENTORY. All inventory (as defined in the Code) in all of its forms, now owned or held, or hereafter acquired by the Debtor, wherever located, including, but not limited to (i) all goods (wherever located and whether in the possession of the Company or a bailee or other person for storage, transit, or otherwise) manufactured or assembled or held for sale or lease or furnished, and raw materials and work in process, finished and unfinished goods, and materials used or consumed in the Debtor's business, (ii) all goods which are returned to or repossessed by the Debtor, and (iii) all additions and accessions thereto and replacements and products thereof, including, without limitation, any documents of title representing any of the above (any and all of the foregoing being the "Inventory"); (c) ACCOUNTS. All accounts, chattel paper, instruments (each as defined in the Code), and other obligations of any kind, now owned or held or hereafter acquired by the Debtor, including, without limitation, insurance claims insurance settlement proceeds, tax refund claims and tax refunds arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights in and to all security agreements, leases, and other contracts securing or otherwise relating to any such accounts, general intangibles, chattel paper, instruments or obligations, and all books and records relating to any of the foregoing (any and all of the foregoing being the "Accounts"); (d) INSTRUMENTS. All notes and other instruments (as defined in the Code) and any instrument which constitutes a part of chattel paper, and other evidences of indebtedness in which the Debtor now or hereafter has any interest, to the extent of that interest; (e) DOCUMENTS. All documents (as defined in the Code) in which the Debtor now or hereafter has any interest, to the extent of that interest; (f) CHATTEL PAPER. All chattel paper (as defined in the Code) in which the Debtor now or hereafter has any interest; (g) GENERAL INTANGIBLES. All General Intangibles (as hereinafter defined) in which the Debtor now or hereafter has any interest, to the extent of that interest, including, without limitation, the Debtor's interest in the Patent Assignment between Debtor and Marshall Thompson and the subject Patent No. 6,268,386 (the "Patent"). "General Intangibles" means any "general intangibles" (as such term is defined in the Code), and shall include, without limitation, (i) all patents, patent applications, trademarks, trademark registrations, trade names and trademark applications; (ii) license agreements with any other Parties, whether the Debtor is a licensor or licenses under any such license agreement, and the right to prepare for sale, sell and advertise for sale all inventory now or hereafter covered by such licenses; (iii) all of the Debtor's books, records and files, including computer software and tapes and all other forms of electronic information storage; (iv) copyrights and other rights in intellectual property; (v) interests in partnerships, joints ventures and other business associations; (vi) licenses and permits; (vii) trade secrets, propriety or confidential information, customer lists, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, and goodwill; (viii) claims in or under insurance policies, including unearned premiums; (ix) deposit accounts; (x) rights to receive 2 tax refunds and other payments; (xi) rights of indemnification; and (xii) all of the Debtor's rights under any warranties or guaranties of any kind, including equipment, machinery or services; (h) contracts. All of the Debtor's rights under all contracts, undertakings or agreements (other than rights evidenced by chattel paper, documents or instruments) in or under which the Debtor may now or hereafter have any right, title or interest, including, without limitation, with respect to an account, any agreement relating to the terms of payment or the terms of performance thereof; (i) INVESTMENT PROPERTY. All investment property (as defined in the Code), in which Debtor now or hereafter has an interest or entitlement; (j) other personal property. All other goods and personal property in which the Debtor has any interest, to the extent of that interest, whether now or hereafter owned or existing, leased, consigned by or to or acquired by the Debtor and wherever located; and (k) PROCEEDS AND PRODUCTS. All proceeds and products of the foregoing (including, without limitation, cash proceeds and non-cash proceeds resulting from the sale or other voluntary or involuntary disposition thereof or any other realization in respect thereof) and including, but not limited to, all property of any type that is acquired with any cash proceeds, and all guarantees, insurance and rights against sureties the Debtor may have in connection therewith and all proceeds and products relating thereto or therefrom, and all the Debtor's right, title and interest in and to additions, accessions, replacements and substitutions to and for the foregoing, and all documents, ledger sheets and files of the Debtor relating thereto. The term "proceeds" as used herein shall include, without limitation, all accounts, chattel paper, deposit accounts, instruments, equipment, inventory, documents, general intangibles and other proceeds that arise from the sale, lease, transfer or other use or disposition of any kind of any of the Collateral described in the foregoing paragraphs (a) through (j), inclusive, or proceeds, and all proceeds of any type described above acquired with cash proceeds. 4. POWERS OF SECURED PARTY. Debtor appoints Secured Party its true attorney-in-fact, effective upon any Event of Default, to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Secured Party' officers, employees or agents, or any of them: (i) to liquidate any certificate of deposit pledged to Secured Party hereunder prior to its maturity date and to apply the proceeds thereof to payment of the Obligations or hold such proceeds as part of the Collateral, notwithstanding the fact that such liquidation may give rise to penalties for early withdrawals of funds; (ii) to sell, exchange or otherwise dispose of any portion of the Collateral and to apply the proceeds thereof to payment of the Obligations; (iii) to notify any person obligated on any security, instrument or other document subject to this Agreement of Secured Party' rights hereunder; (iv) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral; (v) to enter into any extension, reorganization, deposit, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral or proceeds, and in connection therewith to deposit or surrender control of the Collateral, accept other property in exchange for the Collateral, and do and perform such acts and things as Secured Party may deem proper, and any money or property received in exchange for the Collateral shall be applied to the 3 Obligations; (vi) to make any compromise or settlement Secured Party deem necessary, desirable or proper in respect of the Collateral; (vii) to insure, process and preserve the Collateral; and (viii) to perform any obligation of Debtor under this Agreement, in Debtor's name or otherwise. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Secured Party as follows: (a) Debtor is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Debtor has all requisite capacity and power to execute, deliver and perform its obligations under this Agreement, except that Debtor discloses and represents that there is an existing dispute between Debtor and Marshall Thompson, the inventor and proprietary owner of that certain United States Patent No. 6,268,386 dated July 31, 2001 for Nicotine Beverage and Debtor is in the process of demanding arbitration to resolve the dispute. This Agreement has been duly authorized by all necessary corporate action, has been validly executed and delivered by Debtor, constitutes the legal, valid and binding obligation of Debtor, enforceable in accordance with its terms, and creates a legal, valid and enforceable first priority security interest in and to the Collateral. (c) Except as otherwise set forth on Schedule 5(c), Debtor owns the Collateral free and clear of all liens, claims, encumbrances, security interests or equities, other than the security interest created hereby. (d) Debtor's principal place of business is at the location set forth in Section 14, and, except as otherwise set forth on Schedule 5(d), all of the Collateral is physically located in the County of Los Angeles, State of California. (e) Debtor has not sold, transferred, assigned or conveyed the Collateral, or any portion thereof, to any person other than Secured Party. 6. COVENANTS AND AGREEMENTS OF DEBTOR. Debtor covenants and agrees with Secured Party that from the date hereof and until payment and satisfaction in full of each and all of the Obligations, unless Secured Party shall otherwise consent in writing, which consent shall be granted or withheld in Secured Party' sole and absolute discretion, Debtor will: (a) Duly observe and perform each and every material term and condition of any and all agreements, instruments and documents relating to the Collateral, and diligently protect and enforce its rights under all such agreements. (b) Pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of the income and profits therefrom, except where nonpayment does not involve any danger of sale, forfeiture or loss of any of the Collateral or any interest therein. (c) Insure the Collateral with financially sound and reputable insurers against loss or damage by fire, theft, bodily injury and such other casualties, as are usually insured against by companies engaged in the same or similar businesses as Debtor. 4 (d) Keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including without limitation a record of all payments received and all credits granted with respect to the Collateral and all other dealings in the Collateral. Upon the occurrence of any Event of Default, Debtor will deliver and turn over any such books and records to the Secured Party at any time on demand of the Secured Party. Prior to the occurrence of an Event of Default and upon reasonable written notice of no less than five (5) business days from Secured Party, Debtor shall permit any representative of Secured Party to inspect such books and records and will provide photocopies thereof to Secured Party at Secured Party's expense. Upon reasonable written notice of no less than five (5) business days to Debtor, with the consent of the Debtor, as to the time of entry, which consent shall not be unreasonably withheld, Secured Party shall also have the right to enter into and upon the premises where any of the Equipment or Inventory is located for the purpose of inspecting the same, observing its use and otherwise protecting Secured Party's interests therein. (e) Give Secured Party ten (10) days prior written notice before (i) changing its principal place of business or moving its books and records to a location other than that set forth in Section 14 hereof; (ii) changing the location of any Equipment or Inventory, or (iii) changing the location of any other Collateral to a place outside the State of California; and in any such event taking such action as is necessary to cause the first priority security interest in the Collateral to continue to be perfected. (f) Not change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection with this Agreement misleading within the meaning of Section 9-402 of the Code, unless Debtor shall have taken all action necessary or reasonably requested by Secured Party to amend such financing or continuation statement so that it is not seriously misleading and shall have notified Secured Party of such action. (g) Not sell, lease, assign, transfer, convey, pledge, hypothecate, mortgage or further encumber any of the Collateral, provided that Debtor, so long as no Event of Default shall have occurred and be continuing, may in the ordinary course of business (i) sell Inventory and goods, (ii) collect and settle Accounts and (iii) dispose of obsolete or non-serviceable Equipment. In addition, Debtor may grant security interests in favor of Devenshire Management Corp., Alliance Financial Network, Inc. and Dale Affonso if such security interests are junior in priority to security interest granted to Debtor. (h) Promptly pay or otherwise cause to be discharged any lien, charge, security interest or other encumbrance that may attach to the Collateral, or any portion thereof, other than pursuant to this Agreement. (i) Promptly notify Secured Party of any attachment or other legal process levied against any of the Collateral and of any filed claims or proceedings, that might in any way affect or impair Secured Party' first priority security interest in the Collateral or the rights and remedies of Secured Party with respect thereto as noted in paragraph 5(b) above. (j) Defend the Collateral against all claims, liens, security interests, demands and other encumbrances of third parties at any time claiming an interest in the Collateral that is adverse to Secured Party' interest in the Collateral hereunder. 5 (k) At the written request of Secured Party and at Secured Party's expense, execute and permit to be filed one or more financing statements, and amendments thereto, under the Code, any other applicable state's Uniform Commercial Code naming Debtor as debtor and Secured Party as secured Parties and indicating therein the types or describing the Collateral. (l) Not, without the prior written consent of Secured Party, which consent shall not be unreasonably withheld, execute, file or authorize or permit to be filed in any jurisdiction or with any governmental authority any financing or similar statement relating to the Collateral, or any portion thereof, in which any person other than Secured Party is named as a secured Parties thereunder. (m) Reimburse Secured Party upon demand for any costs and fees, including reasonable attorneys' fees and accountants' fees and other expenses, incurred in collecting any sums payable by Debtor under any of the Obligations secured hereby, enforcing any term or provision of this Agreement or otherwise in the collection of the Collateral and the preparation and enforcement of any agreement relating thereto. (n) Take any and all actions reasonably requested in writing by Secured Party to payoff those certain obligations set forth on Schedule 5(c) hereto, if any, including, but not limited to, the filing of one or more Uniform Commercial Code termination statements or other applicable documents. (o) Execute and deliver to Secured Party any and all further agreements, instruments, or documents and take any and all such further action as Secured Party, in its sole discretion, may deem necessary or advisable in order to evidence, effectuate, perfect, protect, maintain, or realize upon Secured Party' first priority security interest in the Collateral or the priority thereof including, without limitation, any documents required to be filed with the United States Patent and Trademark Office. 7. EVENTS OF DEFAULT. The occurrence of an "Event of Default" under the Secured Note (after expiration of any applicable cure periods) shall constitute an "Event of Default" hereunder. 8. SECURED PARTY' REMEDIES. If an Event of Default occurs hereunder, then, Secured Party may, at its option, but is not required to, do any one or more of the following without demand or notice to Debtor: (a) Declare all of the Obligations immediately due and payable in full, notwithstanding the terms of any other writing or evidence of debt; (b) Transfer the Collateral into Secured Party' s name or that of its nominee; (c) From time to time, proceed with the foreclosure of Secured Party's first priority security interest and sale of the Collateral, or any portion of it, in any manner permitted by law or provided for herein; (d) Take possession of and retain the Collateral in satisfaction of the Obligations upon compliance with the provisions of the Code; or 6 (e) Exercise any and all remedies of a secured Parties under the Code or as otherwise provided by law. 9. APPLICATION OF PROCEEDS. After the occurrence of an Event of Default, all income and distributions with respect to the Collateral and all proceeds from any sale of the Collateral pursuant hereto shall be applied as follows: (a) First, in such order as Secured Party shall in its sole discretion determine, (i) to the payment of all costs and expenses incurred by Secured Party in connection with any sale of the Collateral, including, without limitation, all court costs and the reasonable fees and expenses of counsel for Secured Party in connection therewith; (ii) to the repayment of all advances made by Secured Party hereunder for the account of Debtor; and (iii) the payment of any and all other costs and expenses paid or incurred by Secured Party in connection with this Agreement or otherwise in connection with the Obligations or the exercise of any right or remedy hereunder; (b) Second, to the payment of interest on the Obligations; (c) Third, to the payment or satisfaction of the Obligations; and (d) Fourth, any amounts remaining after the foregoing applications shall be remitted to Debtor or as a court of competent jurisdiction may otherwise direct. 10. POWER OF ATTORNEY. (a) Debtor does hereby irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of Secured Party or Debtor effective upon an Event of Default to endorse any notes, checks, drafts, money orders or other evidence of payment relating to the Collateral that may come into the possession of Secured Party, and to do any and all other acts necessary or proper to carry out the intent of this Agreement; (b) Debtor does hereby further irrevocably make, constitute and appoint Secured Party or any of its officers or designees its true and lawful attorney-in-fact in the name of Secured Party or Debtor effective upon an Event of Default, (i) to enforce all Debtor's rights under and pursuant to all agreements with respect to the Collateral and to enter into such other agreements as may be necessary to protect Secured Party' rights and interest in and to the Collateral; (ii) to execute such other and further mortgages, pledges and assignments of the Collateral as Secured Party may reasonably require for the purpose of protecting, maintaining or enforcing the first priority security interest granted to the Secured Party herein; and (iii) to do any and all other things necessary or proper to carry out the intention of this Agreement; and (c) Each of the foregoing appointments shall be deemed coupled with an interest and irrevocable. 7 11. PRIVATE SALE AUTHORIZED. (a) Debtor recognizes that Secured Party may be unable to effect a public sale of all or part of the Collateral. Debtor consents to a private sale even though such sale may be at prices and upon terms less favorable than if the Collateral were sold at public sales. (b) Debtor recognizes that a sale, public or private, of the Collateral may not be able to be effected and Secured Party or its assignee are hereby expressly authorized at their election to retain the Collateral until a sale can be effected. Until such sale, Secured Party or its assignee may elect to hold the Collateral and be treated as the owner thereof, and shall be entitled to collect all income thereon. (c) The purchaser or purchasers at any public or private sale of the Collateral shall take the Collateral free of any right or equity of redemption in Debtor, which rights and equities Debtor hereby expressly waives. (d) Debtor agrees that written notice mailed to Debtor twenty (20) business days prior to the date of public or private sale of the Collateral shall constitute reasonable notice for such sales. 12. FINANCING STATEMENTS AND PAYMENT DIRECTIONS. To the extent permitted by law, Debtor hereby authorizes Secured Party to file any amendments to or continuations of any financing statement filed with regard to the Collateral without the signature of Debtor. Debtor further authorizes Secured Party upon an Event of Default to notify any account debtors that all sums payable to Debtor relating to the Collateral shall be paid directly to Secured Party. 13. TERMINATION. Upon satisfaction in full of each and all of the Obligations, and the payment of all additional costs and expenses of Secured Party provided for herein, this Agreement shall terminate and Secured Party shall deliver to Debtor, at Debtor's expense, such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to this Agreement; provided that if Secured Party is required to return any amounts received by Secured Party on account of the Obligations, the first priority security interests provided hereunder shall reattach. 14. NOTICES.Any notice or other communication required or permitted to be given under this Agreement shall be in writing and sent by United States Overnight Express Mail or priority Federal Express delivery, postage prepaid, and addressed as follows: If to Debtor: QT-5, Inc. ------------ 5655 Lindero Canyon Road , Suite 120 Westlake Village, CA 91362 Attention: Timothy J. Owens If to Secured Party: NDMS Investments, L.P. ------------------- 5885 Via Manigua Las Vegas, NV 89120 Attention: Robert Moore, General Partner 8 or such other address as either Parties may from time to time specify in writing to the other in the manner aforesaid. If personally delivered, such notices or other communications shall be deemed delivered upon delivery. If sent by United States mail or Federal Express delivery, such notices or other communications shall be deemed delivered upon delivery or refusal to accept delivery as indicated on the delivery receipt. 15. SURVIVAL OF REPRESENTATIONS. All covenants, agreements or representations and warranties made herein and in any documents delivered pursuant hereto shall survive the execution hereof. 16. ASSIGNMENTS. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such Parties, and all covenants, promises and agreements by or on behalf of Debtor contained in this Agreement shall bind and inure to the benefit of the successors and assigns of Secured Party and Debtor. 17. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to conflict of laws principles. 18. NO IMPLIED WAIVERS BY SECURED PARTY. Neither any failure nor any delay on the part of Secured Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights, remedies and benefits of Secured Party herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits that Secured Party may have at law, in equity, by statute or otherwise. Without limiting the generality of the foregoing, Secured Party shall have all rights and remedies of a secured Party under Division 9 of the Code, as it may be amended or superseded from time to time. 19. MODIFICATIONS AND WAIVERS. (a) No modification, amendment or waiver of any provision of this Agreement, nor consent to any departure of Debtor herefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (b) No notice or demand on Debtor in any case shall entitle Debtor to any other or further notice or demand in the same, similar or other circumstances. (c) Debtor hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the liability of Debtor in respect of the Obligations or the Collateral and any and all other notices and demands whatsoever, whether or not relating to such instruments. (d) The Obligations shall not be affected by (i) the failure of Secured Party to assert any claim or demand or to enforce any right or remedy against Debtor; (ii) any extension or renewal thereof; (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement or of any other agreement; or (iv) the release of any collateral held by Secured Party for the Obligations or any of them. 9 20. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be determined by a court of law to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 21. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. Debtor hereby: (a) irrevocably submits to the jurisdiction of the state and federal courts sitting in the City of Los Angeles, State of California for the purpose of any suit, action or other proceedings arising out of or based upon this Agreement or the subject matter hereof brought by any party hereto or their respective successors or assigns; and (b) waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. (c) waives any right to jury trial and any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims); and (d) consents to service of process by registered mail at the address to which notices are to be given. 22. CAPTIONS. The captions in this Agreement are inserted only as a matter of convenience and for reference and shall not be deemed to define, limit, enlarge, or describe the scope of this Agreement or the relationship of the parties, and shall not affect this Agreement or the construction of any provisions herein. 23. PRONOUNS. Whenever the context so requires, the masculine shall include the feminine and the neuter, and the singular shall include the plural, and conversely. 24. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. The facsimile of the executed counterpart shall have the same force and effect as if it was an originally executed counterpart. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. QT-5, INC., a Delaware corporation By: ------------------------------------- Steve Reder President, Director By: ------------------------------------- Tim Owens Chief Executive Officer, Director Acknowledged and agreed by Secured Party: NDMS INVESTMENTS, L.P.. a Nevada limited partnership By ---------------------------------------- Robert Moore General Partner 11 Schedule 5(c) NONE 12 Schedule 5(d) NONE 13 EXHIBIT A PATENT MORTGAGE 14 -----END PRIVACY-ENHANCED MESSAGE-----