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Exhibit 10.7
 
FUNDS ESCROW AGREEMENT
 
This Agreement (this “Agreement”) is dated as of the 24th day of August 2006,
among APPLIED DIGITAL SOLUTIONS, INC., a Missouri corporation (the “Company”),
LAURUS MASTER FUND, LTD. (the “Purchaser”), and LOEB & LOEB LLP (the “Escrow
Agent”):
 
W I T N E S S E T H:
 
WHEREAS, the Purchaser has advised the Escrow Agent that (a) the Company and the
Purchaser have entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”) for the sale by the Company to the Purchaser of a secured
term note (the “Term Note”), (b) the Company has issued to the Purchaser a
common stock purchase warrant (the “Warrant”) in connection with the issuance of
the Term Note, and (c) the Company and the Purchaser have entered into a
Registration Rights Agreement covering the registration of the Company’s common
stock underlying the Warrant (the “Registration Rights Agreement”);
 
WHEREAS, the Company and the Purchaser wish to deliver to the Escrow Agent
copies of the Documents (as hereafter defined) and, following the satisfaction
of all closing conditions relating to the Documents, the Purchaser to deliver
the Escrowed Payment (as hereafter defined), in each case, to be held and
released by Escrow Agent in accordance with the terms and conditions of this
Agreement; and
 
WHEREAS, the Escrow Agent is willing to serve as escrow agent pursuant to the
terms and conditions of this Agreement;
 
NOW THEREFORE, the parties agree as follows:
 
ARTICLE I
 
INTERPRETATION
 
1.1. Definitions. Whenever used in this Agreement, the following terms shall
have the meanings set forth below.
 
(a) “Agreement” means this Agreement, as amended, modified and/or supplemented
from time to time by written agreement among the parties hereto.
 
(b) “Disbursement Letter” means that certain letter delivered to the Escrow
Agent by the Company, acceptable in form and substance to the Purchaser, setting
forth wire instructions and amounts to be funded at the Closing.
 
(c) “Documents” means copies of the Disbursement Letter, the Securities Purchase
Agreement, the Term Note, the Warrant and the Registration Rights Agreement.
 
(d) “Escrowed Payment” means $13,500,000.
 

     

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(e) “LCM Payment” means the payment to be paid to Laurus Capital Management,
LLC, the fund manager, as set forth on Schedule A hereto.
 
1.2. Entire Agreement. This Agreement constitutes the entire agreement among the
parties hereto with respect to the arrangement with the Escrow Agent and
supersedes all prior agreements, understandings, negotiations and discussions of
the parties, whether oral or written with respect to the arrangement with the
Escrow Agent. There are no warranties, representations and other agreements made
by the parties in connection with the arrangement with the Escrow Agent except
as specifically set forth in this Agreement.
 
1.3. Extended Meanings. In this Agreement words importing the singular number
include the plural and vice versa; words importing the masculine gender include
the feminine and neuter genders. The word “person” includes an individual, body
corporate, partnership, trustee or trust or unincorporated association,
executor, administrator or legal representative.
 
1.4. Waivers and Amendments. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, in each case only by a written instrument signed by all parties
hereto, or, in the case of a waiver, by the party waiving compliance. Except as
expressly stated herein, no delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any right, power or privilege hereunder
preclude any other or future exercise of any other right, power or privilege
hereunder.
 
1.5. Headings. The division of this Agreement into articles, sections,
subsections and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
 
1.6. Law Governing this Agreement; Consent to Jurisdiction. THIS AGREEMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. With respect to any
suit, action or proceeding relating to this Agreement or to the transactions
contemplated hereby (“Proceedings”), each party hereto irrevocably submits to
the exclusive jurisdiction of the courts of the County of New York, State of New
York and the United States District court located in the county of New York in
the State of New York. Each party hereto hereby irrevocably and unconditionally
(a) waives trial by jury in any Proceeding relating to this Agreement and for
any related counterclaim and (b) waives any objection which it may have at any
time to the laying of venue of any Proceeding brought in any such court, waives
any claim that such Proceedings have been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceedings, that such
court does not have jurisdiction over such party. As between the Company and the
Purchaser, the prevailing party shall be entitled to recover from the other
party its reasonable attorneys’ fees and costs. In the event that any provision
of this Agreement is determined by a court of competent jurisdiction to be
invalid or unenforceable, then the remainder of this Agreement shall not be
affected and shall remain in full force and effect.
 
1.7. Construction. Each party acknowledges that its legal counsel participated
in the preparation of this Agreement and, therefore, stipulates that the rule of
construction that
 

 
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ambiguities are to be resolved against the drafting party shall not be applied
in the interpretation of this Agreement to favor any party against the other.
 
ARTICLE II
 
APPOINTMENT OF AND DELIVERIES TO THE ESCROW AGENT
 
2.1. Appointment. The Company and the Purchaser hereby irrevocably designate and
appoint the Escrow Agent as their escrow agent for the purposes set forth
herein, and the Escrow Agent by its execution and delivery of this Agreement
hereby accepts such appointment under the terms and conditions set forth herein.
 
2.2. Copies of Documents to Escrow Agent. On or about the date hereof, the
Purchaser and the Company shall deliver to the Escrow Agent copies of the
Documents executed by such parties.
 
2.3. Delivery of Escrowed Payment to Escrow Agent. Following the satisfaction of
all closing conditions relating to the Documents (other than the funding of the
Escrowed Payment), the Purchaser shall deliver to the Escrow Agent the Escrowed
Payment. At such time, the Escrow Agent shall hold the Escrowed Payment as agent
for the Company, subject to the terms and conditions of this Agreement.
 
2.4. Intention to Create Escrow Over the Escrowed Payment. The Purchaser and the
Company intend that the Escrowed Payment shall be held in escrow by the Escrow
Agent and released from escrow by the Escrow Agent only in accordance with the
terms and conditions of this Agreement.
 
ARTICLE III
 
RELEASE OF ESCROW
 
3.1. Release of Escrow. Subject to the provisions of Section 4.2, the Escrow
Agent shall release the Escrowed Payment from escrow as follows:
 
(a) Upon receipt by the Escrow Agent of (i) oral instructions from David Grin
and/or Eugene Grin (each of whom is a director of the Purchaser) consenting to
the release of the Escrowed Payment from escrow in accordance with the
Disbursement Letter following the Escrow Agent’s receipt of the Escrowed
Payment, (ii) the Disbursement Letter, and (iii) the Escrowed Payment, the
Escrowed Payment shall promptly be disbursed in accordance with the Disbursement
Letter. The Disbursement Letter shall include, without limitation, Escrow
Agent’s authorization to retain from the Escrowed Payment Escrow Agent’s fee for
acting as Escrow Agent hereunder and the LCM Payment for delivery to Laurus
Capital Management, LLC in accordance with the Disbursement Letter.
 
(b) Upon receipt by the Escrow Agent of a final and non-appealable judgment,
order, decree or award of a court of competent jurisdiction (a “Court Order”)
relating to the Escrowed Payment, the Escrow Agent shall remit the Escrowed
Payment
 
 

 
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in accordance with the Court Order. Any Court Order shall be accompanied by an
opinion of counsel for the party presenting the Court Order to the Escrow Agent
(which opinion shall be satisfactory to the Escrow Agent) to the effect that the
court issuing the Court Order is a court of competent jurisdiction and that the
Court Order is final and non-appealable.
 
3.2. Acknowledgement of Company and Purchaser; Disputes. The Company and the
Purchaser acknowledge that the only terms and conditions upon which the Escrowed
Payment are to be released from escrow are as set forth in Sections 3 and 4 of
this Agreement. The Company and the Purchaser reaffirm their agreement to abide
by the terms and conditions of this Agreement with respect to the release of the
Escrowed Payment. Any dispute with respect to the release of the Escrowed
Payment shall be resolved pursuant to Section 4.2 or by written agreement
between the Company and Purchaser.
 
ARTICLE IV
 
CONCERNING THE ESCROW AGENT
 
4.1. Duties and Responsibilities of the Escrow Agent. The Escrow Agent’s duties
and responsibilities shall be subject to the following terms and conditions:
 
(a) The Purchaser and the Company acknowledge and agree that the Escrow Agent
(i) shall not be required to inquire into whether the Purchaser, the Company or
any other party is entitled to receipt of any Document or all or any portion of
the Escrowed Payment; (ii) shall not be called upon to construe or review any
Document or any other document, instrument or agreement entered into in
connection therewith; (iii) shall be obligated only for the performance of such
duties as are specifically assumed by the Escrow Agent pursuant to this
Agreement; (iv) may rely on and shall be protected in acting or refraining from
acting upon any written notice, instruction, instrument, statement, request or
document furnished to it hereunder and believed by the Escrow Agent in good
faith to be genuine and to have been signed or presented by the proper person or
party, without being required to determine the authenticity or correctness of
any fact stated therein or the propriety or validity or the service thereof; (v)
may assume that any person purporting to give notice or make any statement or
execute any document in connection with the provisions hereof has been duly
authorized to do so; (vi) shall not be responsible for the identity, authority
or rights of any person, firm or company executing or delivering or purporting
to execute or deliver this Agreement or any Document or any funds deposited
hereunder or any endorsement thereon or assignment thereof; (vii) shall not be
under any duty to give the property held by Escrow Agent hereunder any greater
degree of care than Escrow Agent gives its own similar property; and (viii) may
consult counsel satisfactory to Escrow Agent (including, without limitation,
Loeb & Loeb, LLP or such other counsel of Escrow Agent’s choosing), the opinion
of such counsel to be full and complete authorization and protection in respect
of any action taken, suffered or omitted by Escrow Agent hereunder in good faith
and in accordance with the opinion of such counsel.
 
 

 
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(b) The Purchaser and the Company acknowledge that the Escrow Agent is acting
solely as a stakeholder at their request and that the Escrow Agent shall not be
liable for any action taken by Escrow Agent in good faith and believed by Escrow
Agent to be authorized or within the rights or powers conferred upon Escrow
Agent by this Agreement. The Purchaser and the Company hereby, jointly and
severally, indemnify and hold harmless the Escrow Agent and any of Escrow
Agent’s partners, employees, agents and representatives from and against any and
all actions taken or omitted to be taken by Escrow Agent or any of them
hereunder and any and all claims, losses, liabilities, costs, damages and
expenses suffered and/or incurred by the Escrow Agent arising in any manner
whatsoever out of the transactions contemplated by this Agreement and/or any
transaction related in any way hereto, including the fees of outside counsel and
other costs and expenses of defending itself against any claims, losses,
liabilities, costs, damages and expenses arising in any manner whatsoever out of
the transactions contemplated by this Agreement and/or any transaction related
in any way hereto, except for such claims, losses, liabilities, costs, damages
and expenses incurred by reason of the Escrow Agent’s gross negligence or
willful misconduct. The Escrow Agent shall owe a duty only to the Purchaser and
the Company under this Agreement and to no other person.
 
(c) The Purchaser and the Company shall jointly and severally reimburse the
Escrow Agent for its reasonable out-of-pocket expenses (including counsel fees
(which counsel may be Loeb & Loeb LLP or such other counsel of the Escrow
Agent’s choosing) incurred in connection with the performance of its duties and
responsibilities hereunder, which shall not (subject to Section 4.1(b)) exceed
$3,000.
 
(d) The Escrow Agent may at any time resign as Escrow Agent hereunder by giving
ten (10) business days prior written notice of resignation to the Purchaser and
the Company. Prior to the effective date of resignation as specified in such
notice, the Purchaser and Company will issue to the Escrow Agent a joint
instruction authorizing delivery of the Documents and the Escrowed Payment to a
substitute Escrow Agent selected by the Purchaser and the Company. If no
successor Escrow Agent is named by the Purchaser and the Company, the Escrow
Agent may apply to a court of competent jurisdiction in the State of New York
for appointment of a successor Escrow Agent, and deposit the Documents and the
Escrowed Payment with the clerk of any such court, and/or otherwise commence an
interpleader or similar action for a determination of where to deposit the same.
 
(e) The Escrow Agent does not have and will not have any interest in the
Documents and the Escrowed Payment, but is serving only as escrow agent, having
only possession thereof.
 
(f) The Escrow Agent shall not be liable for any action taken or omitted by it
in good faith and reasonably believed by it to be authorized hereby or within
the rights or powers conferred upon it hereunder, nor for action taken or
omitted by it in good faith, and in accordance with advice of counsel (which
counsel may be Loeb & Loeb, LLP or such other counsel of the Escrow Agent’s
choosing), and shall not be liable for any
 
 

 
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mistake of fact or error of judgment or for any acts or omissions of any kind
except to the extent any such liability arose from its own willful misconduct or
gross negligence.
 
(g) This Agreement sets forth exclusively the duties of the Escrow Agent with
respect to any and all matters pertinent thereto and no implied duties or
obligations shall be read into this Agreement.
 
(h) The Escrow Agent shall be permitted to act as counsel for the Purchaser or
the Company, as the case may be, in any dispute as to the disposition of the
Documents and the Escrowed Payment, in any other dispute between the Purchaser
and the Company, whether or not the Escrow Agent is then holding the Documents
and/or the Escrowed Payment and continues to act as the Escrow Agent hereunder.
 
(i) The provisions of this Section 4.1 shall survive the resignation of the
Escrow Agent or the termination of this Agreement.
 
4.2. Dispute Resolution; Judgments. Resolution of disputes arising under this
Agreement shall be subject to the following terms and conditions:
 
(a) If any dispute shall arise with respect to the delivery, ownership, right of
possession or disposition of the Documents and/or the Escrowed Payment, or if
the Escrow Agent shall in good faith be uncertain as to its duties or rights
hereunder, the Escrow Agent shall be authorized, without liability to anyone, to
(i) refrain from taking any action other than to continue to hold the Documents
and the Escrowed Payment pending receipt of a joint instruction from the
Purchaser and the Company, (ii) commence an interpleader or similar action, suit
or proceeding for the resolution of any such dispute; and/or (iii) deposit the
Documents and the Escrowed Payment with any court of competent jurisdiction in
the State of New York, in which event the Escrow Agent shall give written notice
thereof to the Purchaser and the Company and shall thereupon be relieved and
discharged from all further obligations pursuant to this Agreement. The Escrow
Agent may, but shall be under no duty to, institute or defend any legal
proceedings which relate to the Documents and the Escrowed Payment. The Escrow
Agent shall have the right to retain counsel if it becomes involved in any
disagreement, dispute or litigation on account of this Agreement or otherwise
determines that it is necessary to consult counsel which such counsel may be
Loeb & Loeb LLP or such other counsel of the Escrow Agent’s choosing.
 
(b) The Escrow Agent is hereby expressly authorized to comply with and obey any
Court Order. In case the Escrow Agent obeys or complies with a Court Order, the
Escrow Agent shall not be liable to the Purchaser and the Company or to any
other person, firm, company or entity by reason of such compliance.
 
ARTICLE V
 
GENERAL MATTERS
 
5.1. Termination. This escrow shall terminate upon disbursement of the Escrowed
Payment in accordance with the terms of this Agreement or earlier upon the
agreement in writing
 
 

 
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of the Purchaser and the Company or resignation of the Escrow Agent in
accordance with the terms hereof.
 
5.2. Notices. All notices, requests, demands and other communications required
or permitted hereunder shall be in writing and shall be deemed to have been duly
given one (1) day after being sent by telecopy (with copy delivered by overnight
courier, regular or certified mail):
 
 
(a)
If to the Company, to:
Applied Digital Solutions, Inc.       1690 Congress Avenue, Suite 200      
Delray Beach, FL 33445       Attention: Michael Krawitz       Facsimile:
561-805-0002                    
With a copy to:
Harvey Goldman, Esq.      
Holland & Knight LLP
      701 Brickell Avenue, Suite 3000       Miami, FL 33131       Facsimile:
305-789-7799                  
 (b)
If to the Purchaser, to:
Laurus Master Fund, Ltd.       M&C Corporate Services Limited,       P.O. Box
309 GT, Ugland House       South Church Street, George Town       Grand Cayman,
Cayman Islands       Fax: 345-949-8080       Attention: John Tucker, Esq.      
   
 (c)
If to the Escrow Agent, to:
Loeb & Loeb LLP        345 Park Avenue      
New York, New York 10154
      Fax: (212) 407-4990       Attention: Scott J. Giordano, Esq.  

  
or to such other address as any of them shall give to the others by notice made
pursuant to this Section 5.2.
 
5.3. Interest. The Escrowed Payment shall not be held in an interest bearing
account nor will interest be payable in connection therewith.
 
5.4. Assignment; Binding Agreement. Neither this Agreement nor any right or
obligation hereunder shall be assignable by any party without the prior written
consent of the other parties hereto. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective legal
representatives, successors and assigns.
 
5.5. Invalidity. In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal, or unenforceable in any
 
 

 
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respect for any reason, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be in any way impaired thereby, it being intended that all of
the rights and privileges of the parties hereto shall be enforceable to the
fullest extent permitted by law.
 
5.6. Counterparts/Execution. This Agreement may be executed in any number of
counterparts and by different signatories hereto on separate counterparts, each
of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same agreement. This Agreement may
be executed by facsimile transmission.
 

 
 
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date and year first above written.
 
COMPANY:

APPLIED DIGITAL SOLUTIONS, INC.
 
By: /s/ Evan C. McKeown                                 
  Name: Evan C. McKeown                           
  Title: SVP & CFO                                        

PURCHASER:

LAURUS MASTER FUND, LTD.

By: /s/ David Grin                                              
  Name: David Grin                                        
  Title: Director                                              

ESCROW AGENT:

LOEB & LOEB LLP

By: /s/ Scott J. Giordano                                  
  Name: Scott J. Giordano                            
  Title: Partner                                                
 
 

 
 

 
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SCHEDULE A TO FUNDS ESCROW AGREEMENT
 
PURCHASER
 
PRINCIPAL NOTE AMOUNT
 
LAURUS MASTER FUND, LTD.,
M&C Corporate Services Limited,
P.O. Box 309 GT,
Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands
Fax: 345-949-8080
 
Term Note in an aggregate principal amount of $13,500,000.
 
TOTAL
$13,500,000

 
FUND MANAGER
 
LCM PAYMENT
 
LAURUS CAPITAL MANAGEMENT, L.L.C.
825 Third Avenue, 14th Floor
New York, New York 10022
Fax: 212-541-4434
 
Payment payable in connection with investment by Laurus Master Fund, Ltd.
for which Laurus Capital Management, L.L.C. is the Manager.
 
TOTAL
$472,500

 
WARRANTS
 
WARRANT RECIPIENT
 
WARRANTS IN CONNECTION WITH OFFERING
 
LAURUS MASTER FUND, LTD.
M&C Corporate Services Limited,
P.O. Box 309 GT,
Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands
Fax: 345-949-8080
 
Warrant exercisable into 1,719,745 shares of common stock of the
Company issuable in connection with the Term Note.
 
TOTAL
 
Warrants exercisable into 1,719,745 shares of common stock of the
Company