Filed by Bowne Pure Compliance



 




Exhibit 10.40




DIGITAL ANGEL CORPORATION

SECURITY AGREEMENT





			
	To:	 	Applied Digital Solutions, Inc.

1690 South Congress Avenue

Suite 200

Delray Beach, FL 33445






Date: August 31, 2007




To Whom It May Concern:



Grant of Security Interest. To secure the payment of all Obligations (as hereafter
defined), DIGITAL ANGEL CORPORATION, a Delaware corporation (the “Digital Angel”), and each party
listed on Exhibit A attached hereto (the “Subsidiaries”) Digital Angel and each Subsidiary,
each a “Assignor” and collectively, the “Assignors”), and APPLIED DIGITAL SOLUTIONS, INC., a
Delaware corporation (“Assignee”) hereby assigns and grants to Assignee a continuing security
interest in all of the following property now owned or at any time hereafter acquired by Assignors,
or in which Assignors now have or at any time in the future may acquire any right, title or
interest (the “Collateral”): all cash, cash equivalents, accounts, accounts receivable, deposit
accounts, inventory, equipment, goods, fixtures, documents, instruments (including, without
limitation, promissory notes), contract rights, general intangibles (including, without limitation,
payment intangibles and an absolute right to license on terms no less favorable than those current
in effect among Assignors’ affiliates), chattel paper, supporting obligations, investment property
(including, without limitation, all partnership interests, limited liability company membership
interests and all other equity interests owned by Assignors (other than interests owned by
Assignors in non-domestic subsidiaries), letter-of-credit rights, trademarks, trademark
applications, tradestyles, patents, patent applications, copyrights, copyright applications and
other intellectual property in which Assignors now have or hereafter may acquire any right, title
or interest, all proceeds and products thereof (including, without limitation, proceeds of
insurance) and all additions, accessions and substitutions thereto or therefore, subject to
Permitted Liens. Except as otherwise defined herein, all capitalized terms used herein shall have
the meanings provided such terms in the Note referred to below. All items of Collateral which are
defined in the UCC shall have the meanings set forth in the UCC. For purposes hereof, the term
"UCC” means the Uniform Commercial Code as the same may, from time to time, be in effect in the
State of Florida; provided, that in the event that, by reason of mandatory provisions of law, any
or all of the attachment, perfection or priority of, or remedies with respect to, Assignee’s
security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of Florida, the term “UCC” shall mean the Uniform Commercial Code
as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating
to such attachment, perfection, priority or
remedies and for purposes of definitions related to such provisions; provided further, that to
the extent that the UCC is used to define any term herein and such term is defined differently in
different Articles of the UCC, the definition of such term contained in Article 9 shall govern.



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1. Definitions.




(a) The term “Obligations” as used herein shall mean and include all debts, liabilities
and obligations owing by Assignors to Assignee arising under, out of, or in connection with:
(i) that certain Secured Term Note dated as of the date hereof in favor of Assignee (the
“Note”) as it may be amended, modified, restated or supplemented from time to time, and in
connection with any documents, instruments or agreements relating to or executed in
connection with the Note or any documents, instruments or agreements referred to therein or
otherwise, and in connection with any other indebtedness, obligations or liabilities of
Assignors to Assignee, whether now existing or hereafter arising, direct or indirect,
liquidated or unliquidated, absolute or contingent, due or not due and whether under,
pursuant to or evidenced by a note, agreement, guaranty, instrument or otherwise, including,
without limitation, obligations and liabilities of Assignors for post-petition interest,
fees, costs and charges that accrue after the commencement of any case by or against
Assignors under any bankruptcy, insolvency, reorganization or like proceeding (collectively,
the “Debtor Relief Laws”) in each case, irrespective of the genuineness, validity,
regularity or enforceability of such Obligations, or of any instrument evidencing any of the
Obligations or of any collateral therefor or of the existence or extent of such collateral,
and irrespective of the allowability, allowance or disallowance of any or all of the
Obligations in any case commenced by or against Assignors under any Debtor Relief Law.
Notwithstanding anything to the contrary contained herein, upon payment of the Obligations
under the Note in full in immediately available funds, this Agreement shall automatically
terminate and be without further force or effect.




(b) The term “Kallina Security Agreement” means that certain Security Agreement, dated
as of August 31, 2007, by and among Kallina Corporation, the Company and certain of the
Company’s domestic subsidiaries.




(c) The term “Lien” means any mortgage, security deed, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or otherwise), charge,
claim or encumbrance, or preference, priority or other security agreement or preferential
arrangement held or asserted in respect of any asset of any kind or nature whatsoever
including any conditional sale or other title retention agreement, any lease having
substantially the same economic effect as any of the foregoing, and the filing of, or
agreement to give, any financing statement under the UCC or comparable law of any
jurisdiction.




(d) The term “Permitted Liens” means (a) Liens of carriers, warehousemen, artisans,
bailees, mechanics and materialmen incurred in the ordinary course of business securing sums
not overdue; (b) Liens incurred in the ordinary course of business in connection with
worker’s compensation, unemployment insurance or other forms of governmental insurance or
benefits, relating to employees, securing sums (i) not overdue



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or (ii) being diligently contested in good faith provided that adequate reserves with
respect thereto are maintained on the books of the Assignors, as applicable, in conformity
with generally accepted accounting principles; (c) Liens in favor of Assignee; (d) Liens for
taxes (i) not yet due or (ii) being diligently contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are maintained on the
books of the Assignors, as applicable, in conformity with GAAP; and which have no effect on
the priority of Liens in favor of Assignee or the value of the assets in which Assignee has
a Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the extent
permitted in this Security Agreement and (f) Liens specified on Schedule 1 hereto or any
replacement of such Lien associated with any refinancing.




(e) The term “Purchase Money Indebtedness” means (a) any indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, including indebtedness
under capitalized leases, (b) any indebtedness incurred for the sole purpose of financing or
refinancing all or any part of the purchase price of any fixed asset, and (c) any renewals,
extensions or refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).




(f) The term “Purchase Money Lien” means any Lien upon any fixed assets that secures
the Purchase Money Indebtedness related thereto but only if such Lien shall at all times be
confined solely to the asset the purchase price of which was financed or refinanced through
the incurrence of the Purchase Money Indebtedness secured by such Lien and only if such Lien
secures only such Purchase Money Indebtedness.



2. Representations, Warranties and Covenants in favor of Assignee. Each Assignor
hereby represents, warrants and covenants to Assignee that:




(a) it is a corporation validly existing, in good standing and formed under the laws of
the state of its formation and it will provide Assignee thirty (30) days’ prior written
notice of any change in any its jurisdiction of formation;




(b) it is the lawful owner of its Collateral and it has the sole right to grant a
security interest therein and will defend the Collateral against all claims and demands of
all persons and entities, subject to Permitted Liens;




(c) it will keep its Collateral free and clear of all attachments, levies, taxes,
liens, security interests and encumbrances of every kind and nature (“Encumbrances”), except
(i) Permitted Liens, (ii) Encumbrances securing the Obligations, (iii) Encumbrances securing
indebtedness of each Assignor not to exceed $250,000 in the aggregate, (iv) Encumbrances
related to intercompany liabilities, (v) Encumbrances outstanding as of the Closing Date,
and (vi) Encumbrances that are expressly subordinated to the Obligations to the reasonable
satisfaction of Assignee;




(d) it will, at its cost and expense keep the Collateral in good state of repair
(ordinary wear and tear excepted) and will not waste or destroy the same or any part thereof
other than ordinary course discarding of items no longer used or useful in its business;



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(e) it will not, without Assignee’s prior written consent, sell, exchange, lease or
otherwise dispose of any Collateral, whether by sale, lease or otherwise (unless the
proceeds of such sale, exchange, lease or disposal shall be used to repay then outstanding
Obligations), except for (A) assignments, transfers or conveyances of intellectual property
or interests therein in the ordinary course of business, (B) the payment of obligations of
Assignors in the ordinary course of business, and (C) the sale of inventory in the ordinary
course of business and for the disposition or transfer in the ordinary course of business
during any fiscal year of obsolete and worn-out equipment or equipment no longer necessary
for its ongoing needs, having an aggregate fair market value of not more than $250,000 and
only to the extent that:




(i) the proceeds of each such disposition are used to acquire replacement
Collateral which is subject to Assignee’s perfected security interest (subject to
Permitted Liens, to repay obligations outstanding under the Kallina Security
Agreement), to repay then outstanding Obligations, or to pay general corporate
expenses; or




(ii) following the occurrence of an Event of Default which continues to exist
the proceeds of which are remitted to Assignee to be held as cash collateral for
obligations outstanding under the Kallina Security Agreement and/or the Obligations;




(f) it will insure or cause the Collateral to be insured in Assignee’s name (as an
additional insured and lender loss payee) against loss or damage by fire, theft, burglary,
pilferage, loss in transit and such other hazards as Assignee shall specify in amounts and
under policies by insurers acceptable to Assignee and all premiums thereon shall be paid by
Assignors and the policies delivered to Assignee. If Assignors fail to do so, Assignee may
procure such insurance and the cost thereof shall be promptly reimbursed by the Assignors
and shall constitute Obligations;




(g) it will at all reasonable times allow Assignee or Assignee’s representatives
reasonable access to and the right of inspection of the Collateral; and




(h) it hereby indemnifies and saves Assignee harmless from all loss, costs, damage,
liability and/or expense, including reasonable attorneys’ fees, that Assignee may sustain or
incur to enforce payment, performance or fulfillment of any of the Obligations and/or in the
enforcement of this Security Agreement or in the prosecution or defense of any action or
proceeding either against Assignee or Assignors concerning any matter growing out of or in
connection with this Security Agreement, and/or any of the Obligations and/or any of the
Collateral except to the extent caused by Assignee’s own negligence or willful misconduct
(as determined by a court of competent jurisdiction in a final and nonappealable decision).



3. Events of Default. The occurrence of either of the following events shall
constitute an event of default under this Security Agreement (each, an “Event of Default”): (a)
(i) the occurrence of an Event of Default (as defined in the Note); or (b) any material portion of
the Collateral shall be damaged, destroyed or otherwise lost and such damage, destruction or
loss is not covered by insurance.



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4. Remedies. In case an Event of Default shall have occurred and is continuing,
Assignee may: (i) transfer any or all of the Collateral into its name, or into the name of its
nominee or nominees; (ii) exercise all corporate rights with respect to the Collateral including,
without limitation, all rights of conversion, exchange, subscription or any other rights,
privileges or options pertaining to any shares of the Collateral as if it were the absolute owner
thereof, including, but without limitation, the right to exchange, at its discretion, any or all of
the Collateral upon the merger, consolidation, reorganization, recapitalization or other
readjustment of Assignors, or upon the exercise by Assignors of any right, privilege or option
pertaining to any of the Collateral, and, in connection therewith, to deposit and deliver any and
all of the Collateral with any committee, depository, transfer agent, registrar or other designated
agent upon such terms and conditions as it may determine, all without liability except to account
for property actually received by it; and (iii) subject to any requirement of applicable law, sell,
assign and deliver the whole or, from time to time, any part of the Collateral at the time held by
Assignee, at any private sale or at public auction, with or without demand, advertisement or notice
of the time or place of sale or adjournment thereof or otherwise (all of which are hereby waived,
except such notice as is required by applicable law and cannot be waived), for cash or credit or
for other property for immediate or future delivery, and for such price or prices and on such terms
as Assignee in its sole discretion may determine, or as may be required by applicable law. Each
Assignor hereby waives and releases any and all right or equity of redemption, whether after sale
hereunder. At any such sale, unless prohibited by applicable law, Assignee may bid for and
purchase the whole or any part of the Collateral so sold free from any such right or equity of
redemption. All moneys received by Assignee hereunder, whether upon sale of the Collateral or any
part thereof or otherwise, shall be held by Assignee and applied by it in repayment of the
Obligations. No failure or delay on the part of Assignee in exercising any rights hereunder shall
operate as a waiver of any such rights nor shall any single or partial exercise of any such rights
preclude any other or future exercise thereof or the exercise of any other rights hereunder.
Assignee shall have no duty as to the collection or protection of the Collateral or any income
thereon nor any duty as to preservation of any rights pertaining thereto, except to apply the funds
in accordance with the requirements of Section 8 hereof. Assignee may exercise its rights with
respect to property held hereunder without resort to other security for or sources of reimbursement
for the Obligations. In addition to the foregoing, Assignee shall have all of the rights, remedies
and privileges of a secured party under the Uniform Commercial Code of Florida regardless of the
jurisdiction in which enforcement hereof is sought.



5. Additional Remedies. If any Assignor defaults in the performance or fulfillment of
any of the terms, conditions, promises, covenants, provisions or warranties on such Assignor’s part
to be performed or fulfilled under or pursuant to this Security Agreement, Assignee may, at its
option without waiving its right to enforce this Security Agreement according to its terms,
immediately or at any time thereafter and without notice to such Assignor, perform or fulfill the
same or cause the performance or fulfillment of the same for such Assignor’s account and at such
Assignor’s cost and expense, and the cost and expense thereof (including reasonable attorneys’
fees) shall be added to the Obligations and shall be payable on demand with interest
thereon at the highest rate permitted by law, or, at Assignee’s option, debited by Assignee
from any other deposit accounts in the name of such Assignor and controlled by Assignee.



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6. Power of Attorney. Upon the occurrence and during the continuance of an Event of
Default, each Assignor hereby appoints Assignee, or any other Person whom Assignee may designate as
such Assignor’s attorney, with power to: (a)(i) execute any security related documentation on such
Assignor’s behalf and to supply any omitted information and correct patent errors in any documents
executed by such Assignor or on such Assignor’s behalf; (ii) to file financing statements against
such Assignor covering the Collateral (and, in connection with the filing of any such financing
statements, describe the Collateral as “all assets and all personal property, whether now owned
and/or hereafter acquired” (or any substantially similar variation thereof)); (iii) sign such
Assignor’s name on any invoice or bill of lading relating to any accounts receivable, drafts
against account debtors, schedules and assignments of accounts receivable, notices of assignment,
financing statements and other public records, verifications of accounts receivable and notices to
or from account debtors; and (iv) to do all other things Assignee deems necessary to reasonably
carry out the terms of Section 1 of this Security Agreement; and (b) upon the occurrence and during
the continuance of an Event of Default; (v) endorse such Assignor’s name on any checks, notes,
acceptances, money orders, drafts or other forms of payment or security that may come into
Assignee’s possession; (vi) sign such Assignor’s name on any invoice or bill of lading relating to
any accounts receivable, drafts against account debtors, schedules and assignments of accounts
receivable, notices of assignment, financing statements and other public records, verifications of
accounts receivable and notices to or from account debtors; (vii) verify the validity, amount or
any other matter relating to any accounts receivable by mail, telephone, telegraph or otherwise
with account debtors; (viii) do all other things necessary to carry out this Agreement and all
other related documents; and (ix) notify the post office authorities to change the address for
delivery of such Assignor’s mail to an address designated by Assignee, and to receive, open and
dispose of all mail addressed to such Assignor. Each Assignor hereby ratifies and approves all
acts of the attorney and neither Assignee nor the attorney will be liable for any acts of
commission or omission, nor for any error of judgment or mistake of fact or law other than gross
negligence or willful misconduct (as determined by a court of competent jurisdiction in a final and
non-appealable decision). This power being coupled with an interest, is irrevocable so long as any
Obligations remains unpaid.



7. Proceeds of Sale. The proceeds of any collection, recovery, receipt,
appropriation, realization or sale of the Collateral shall be applied by the Assignee as follows:




(a) First, to the payment of all costs, reasonable expenses and charges of the Assignee
and to the reimbursement of the Assignee for the prior payment of such costs, reasonable
expenses and charges incurred in connection with the care and safekeeping of the Collateral
(including, without limitation, the reasonable expenses of any sale or any other disposition
of any of the Collateral), attorneys’ fees and reasonable expenses, court costs, any other
fees or expenses incurred or expenditures or advances made by Assignee in the protection,
enforcement or exercise of its rights, powers or remedies hereunder;




(b) Second, to the payment of the Obligations, in whole or in part, in such order as
the Assignee may elect, whether or not such Obligations is then due;



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(c) Third, to such persons, firms, corporations or other entities as required by
applicable law including, without limitation, Section 679.615(1)(c) of the UCC; and




(d) Fourth, to the extent of any surplus, to the applicable Assignor or as a court of
competent jurisdiction may direct.



In the event that the proceeds of any collection, recovery, receipt, appropriation, realization or
sale are insufficient to satisfy the Obligations, the Assignors shall be liable for the deficiency
plus the costs and fees of any attorneys employed by Assignee to collect such deficiency



8. No Waiver. No delay or failure on Assignee’s part in exercising any right,
privilege or option hereunder shall operate as a waiver of such or of any other right, privilege,
remedy or option, and no waiver whatever shall be valid unless in writing, signed by Assignee and
then only to the extent therein set forth, and no waiver by Assignee of any default shall operate
as a waiver of any other default or of the same default on a future occasion. Assignee’s books and
records containing entries with respect to the Obligations shall be admissible in evidence in any
action or proceeding. Assignee shall have the right to enforce any one or more of the remedies
available to Assignee, successively, alternately or concurrently. Each Assignor agrees to join
with Assignee in executing such documents or other instruments to the extent required by the UCC in
form satisfactory to Assignee and in executing such other documents or instruments as may be
required or deemed necessary by Assignee for purposes of affecting or continuing Assignee’s
security interest in the Collateral.



9. Expenses. Each Assignor shall pay all of Assignee’s out-of-pocket costs and
expenses, including reasonable fees and disbursements of in-house or outside counsel and
appraisers, in connection with the preparation, execution and delivery of the Loan Documents as set
forth in the Note, and in connection with the prosecution or defense of any action, contest,
dispute, suit or proceeding concerning any matter in any way arising out of, related to or
connected with any Loan Document. Each Assignor shall also pay all of Assignee’s reasonable fees,
charges, out-of-pocket costs and expenses, including fees and disbursements of counsel and
appraisers, in connection with (a) the preparation, execution and delivery of any waiver, any
amendment thereto or consent proposed or executed in connection with the transactions contemplated
by the Loan Documents, (b) Assignee’s obtaining performance of the Obligations under the Loan
Documents, including, but not limited to the enforcement or defense of Assignee’s security
interests, assignments of rights and liens hereunder as valid perfected security interests, (c) any
attempt to inspect, verify, protect, collect, sell, liquidate or otherwise dispose of any
Collateral, (d) any appraisals or re-appraisals of any property (real or personal) pledged to
Assignee by any Assignor as Collateral for, or any other Person as security for, the Obligations
hereunder and (e) any consultations in connection with any of the foregoing. Each Assignor shall
also pay Assignee’s customary bank charges for all bank services (including wire transfers)
performed or caused to be performed by Assignee for Assignor at such Assignor’s request or in
connection with such Assignor’s loan account (if any) with Assignee. All such costs and expenses
together with all filing, recording and search fees, taxes and interest payable by such Assignor to
Assignee shall be payable on demand and shall be secured by the Collateral. If any tax by any
nation or government, any state or other political subdivision thereof, and any agency, department
or other entity exercising executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government (each, a “Governmental Authority”) is



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or may be imposed on or as a result of any transaction between any Assignor, on the one hand,
and Assignee on the other hand, which Assignee is or may be required to withhold or pay, Each
Assignor hereby indemnifies and holds Assignee harmless in respect of such taxes, and each Assignor
will repay to Assignee the amount of any such taxes which shall be charged to such Assignor’s
account; and until such Assignor shall furnish Assignee with indemnity therefor (or supply Assignee
with evidence satisfactory to it that due provision for the payment thereof has been made),
Assignee may hold without interest any balance standing to such Assignor’s credit (if any) and
Assignee shall retain its liens in any and all Collateral.



10. Governing Law. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA APPLICABLE TO CONTRACTS MADE AND
PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. All of the rights,
remedies, options, privileges and elections given to Assignee hereunder shall inure to the benefit
of Assignee’s successors and assigns. The term “Assignee” as herein used shall include Assignee,
any parent of Assignee, any of Assignee’s subsidiaries and any co-subsidiaries of Assignee’s
parent, whether now existing or hereafter created or acquired, and all of the terms, conditions,
promises, covenants, provisions and warranties of this Agreement shall inure to the benefit of each
of the foregoing, and shall bind the representatives, successors and assigns of each Assignor.



11. Jurisdiction. Each Assignor hereby consents and agrees that the state or federal
courts located in the County of Palm Beach, State of Florida shall have exclusive jurisdiction to
hear and determine any claims or disputes between Assignors, on the one hand, and Assignee, on the
other hand, pertaining to this Security Agreement or to any matter arising out of or related to
this Security Agreement, provided, that Assignee and Assignors acknowledge that any appeals from
those courts may have to be heard by a court located outside of the County of Palm Beach, State of
Florida, and further provided, that nothing in this Security Agreement shall be deemed or operate
to preclude Assignee from bringing suit or taking other legal action in any other jurisdiction to
collect, the Obligations, to realize on the Collateral or any other security for the Obligations,
or to enforce a judgment or other court order in favor of Assignee. Each Assignor expressly
submits and consents in advance to such jurisdiction in any action or suit commenced in any such
court, and each Assignor hereby waives any objection which it may have based upon lack of personal
jurisdiction, improper venue or forum non conveniens. Each Assignor hereby
waives personal service of the summons, complaint and other process issues in any such action or
suit and agrees that service of such summons, complaint and other process may be made by registered
or certified mail addressed to such Assignor at the address set forth on the signature lines hereto
and that service so made shall be deemed completed upon such Assignor’s actual receipt thereof.



The parties desire that their disputes be resolved by a judge applying such applicable laws.
Therefore, to achieve the best combination of the benefits of the judicial system and of
arbitration, the parties hereto waive all rights to trial by jury in any action, suite, or
proceeding brought to resolve any dispute, whether arising in contract, tort, or otherwise between
Assignee, and/or Assignors arising out of, connected with, related or incidental to the
relationship
established between them in connection with this Security Agreement or the transactions
related hereto.



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12. Notices. All notices from Assignee to Assignors shall be sufficiently given if
mailed or delivered to Assignor’s address set forth below.



13. Counterparts. This Security Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which when taken together shall
constitute one and the same agreement. Any signature delivered by a party by facsimile
transmission shall be deemed an original signature hereto.



	 	 	 	 	 
	 	Very truly yours,


DIGITAL ANGEL CORPORATION

 	 
	 	By:  	/s/ Barry Edelstein
 	 
	 	 	Name:  	Barry Edelstein 	 
	 	 	Title:  	Pres. & CEO	 
	 	 	Address:

 

 
 	 
	 
	 	DIGITAL ANGEL TECHNOLOGY CORPORATION

 	 
	 	By:  	/s/ Barry Edelstein
 	 
	 	 	Name:  	Barry Edelstein 	 
	 	 	Title:  	Pres. & CEO 	 
	 
	 	FEARING MANUFACTURING CO., INC.

 	 
	 	By:  	/s/ Barry Edelstein
 	 
	 	 	Name:  	Barry Edelstein 	 
	 	 	Title:  	Pres. & CEO 	 
	 
	 	DIGITAL ANGEL INTERNATIONAL

 	 
	 	By:  	/s/ Barry Edelstein
 	 
	 	 	Name:  	Barry Edelstein 	 
	 	 	Title:  	Pres. & CEO 	 
	 




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	 	ACKNOWLEDGED:



APPLIED DIGITAL SOLUTIONS, INC.

 	 
	 	By:  	/s/ Michael Krawitz
 	 
	 	 	Name:  	Michael Krawitz 	 
	 	 	Title:  	CEO 	 
	 




 


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EXHIBIT A


Eligible Subsidiaries


Digital Angel Technology Corporation,
a Minnesota corporation


Fearing Manufacturing Co., Inc., a
Minnesota corporation


Digital Angel International, a
Minnesota corporation