Document:

Filed by Bowne Pure Compliance

 

Exhibit
10.2

SECURED TERM NOTE

FOR VALUE RECEIVED, APPLIED DIGITAL SOLUTIONS, INC., a Delaware corporation (the “Company”),
promises to pay to KALLINA CORPORATION, 874 Walker Road, Suite C, Dover, DE 19904, Fax:
914-949-9618 (the “Holder”) or its registered assigns or successors in interest, the sum of Seven
Million Dollars ($7,000,000), together with any accrued and unpaid interest hereon, on August 31,
2009 (the “Maturity Date”) if not sooner indefeasibly paid in full.

Capitalized terms used herein without definition shall have the meanings ascribed to such
terms in that certain Securities Purchase Agreement dated as of the date hereof between the Company
and the Holder (as amended, modified and/or supplemented from time to time, the “Purchase
Agreement”).

The following terms shall apply to this Secured Term Note (this “Note”):

ARTICLE I

CONTRACT RATE AND AMORTIZATION

1.1 Contract Rate. Subject to Sections 3.2 and 4.10, interest payable on the
outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum
equal to the “prime rate” published in The Wall Street Journal from time to time (the
“Prime Rate”), plus three percent (3.0%) (the “Contract Rate”). The Contract Rate shall be
increased or decreased as the case may be for each increase or decrease in the Prime Rate in an
amount equal to such increase or decrease in the Prime Rate; each change to be effective as of the
day of the change in the Prime Rate. The Contract Rate shall not at any time be less than eleven
percent (11.0%). Interest shall be (i) calculated on the basis of a 360 day year, and (ii) payable
monthly, in arrears, commencing on September 1, 2007, on the first business day of each consecutive
calendar month thereafter through and including the Maturity Date, and on the Maturity Date,
whether by acceleration or otherwise.

1.2 Contract Rate Payments. The Contract Rate shall be calculated on the last
business day of each calendar month hereafter (other than for increases or decreases in the Prime
Rate which shall be calculated and become effective in accordance with the terms of Section 1.1)
until the Maturity Date and shall be subject to adjustment as set forth herein.

1.3 Principal Payments. Amortizing payments of the Principal Amount shall be made by
the Company on March 1, 2008 and on the first business day of each succeeding month thereafter
through and including the Maturity Date (each, an “Amortization Date”). Commencing on the first
Amortization Date, the Company shall make monthly payments to the Holder on each Amortization Date,
each such payment in the amount of $166,666.67 of outstanding Principal Amount, together with any
accrued and unpaid interest on such portion of the Principal Amount plus any and all other unpaid
amounts which are then owing under this Note, the Purchase Agreement and/or any other Related
Agreement (collectively, the “Monthly Amount”). Any outstanding Principal Amount together with any
accrued and unpaid interest and any and all other unpaid amounts which are then owing by the
Company to the Holder under
this Note, the Purchase Agreement and/or any other Related Agreement shall be due and payable
on the Maturity Date.

 

 

 

ARTICLE II

REDEMPTION AND ADDITIONAL MANDATORY REPAYMENTS

2.1 Optional Redemption in Cash. The Company may prepay this Note at any time
(“Optional Redemption”) by paying to the Holder a sum of money equal to one hundred three percent
(103%) of the Principal Amount outstanding at such time together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder arising under this Note,
the Purchase Agreement or any other Related Agreement (the “Redemption Amount”) outstanding on the
Redemption Payment Date (as defined below). The Company shall deliver to the Holder a written
notice of redemption (the “Notice of Redemption”) specifying the date for such Optional Redemption
(the “Redemption Payment Date”), which date shall be no later than seven (7) business days after
the date of the Notice of Redemption (the “Redemption Period”). On the Redemption Payment Date,
the Redemption Amount must be paid in good funds to the Holder. In the event the Company fails to
pay the Redemption Amount on the Redemption Payment Date as set forth herein, then such Redemption
Notice will be null and void.

2.2 Additional Mandatory Repayments. On each date on or after the date hereof upon
which the Company receives any cash proceeds from any Intercompany Debt Payment (as defined below),
an amount equal to 100% of the Net Debt Proceeds (as defined below) therefrom shall be applied on
such date as a mandatory repayment of the Principal Amount outstanding under this Note. The term
“Intercompany Debt” shall mean the indebtedness under that certain Commercial Loan Agreement
between the Company and VeriChip Corporation, dated December 27, 2005, as amended, and the notes
and other agreements and instruments entered into in connection therewith (the “Commercial Loan
Agreement”). The term “Intercompany Debt Payment” shall mean each payment of principal, interest
and/or fees to the Company in respect of Intercompany Debt. The term “Net Debt Proceeds” means the
cash payments received by the Company from VeriChip Corporation in connection with payments on
Intercompany Debt. Notwithstanding anything herein to the contrary, the prepayment penalty set
forth in Section 2.1 shall not apply to payments made by the Company to Holder relating to
Intercompany Debt.

ARTICLE III

EVENTS OF DEFAULT

3.1 Events of Default. The occurrence of any of the following events set forth in
this Section 3.1 shall constitute an event of default (“Event of Default”) hereunder:

(a) The Company fails to pay when due any installment of principal, interest or other invoiced
fees hereon in accordance herewith, or the Company fails to pay any of the other Obligations (under
and as defined in the Master Security Agreement) when due, and, in any such case, such failure
shall continue for a period of five (5) business days following the date
upon which such payment was due. For purposes herein, “invoiced fees” shall mean fees set
forth on those regularly scheduled monthly invoices received by the Company from the Holder;

 

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(b) The Company breaches any covenant or any other term or condition of this Note in any
material respect and such breach, if subject to cure, continues for a period of twenty (20) days
following the occurrence thereof;

(c) Any material representation or warranty made by the Company in this Note, the Purchase
Agreement or any other Related Agreement (other than the Registration Rights Agreement) shall at
any time be false or misleading in any material respect on the date as of which made or deemed
made;

(d) The occurrence of any material default (or similar term) in the observance or performance
of any other agreement relating to any indebtedness or contingent obligation of the Company or any
of its Subsidiaries beyond the period of grace (if any) or that is not waived, the effect of which
default is to cause, or permit the holder or holders of such indebtedness or beneficiary or
beneficiaries of such contingent obligation to cause, such indebtedness to become due prior to its
stated maturity or such contingent obligation to become payable;

(e) The Company breaches any of their material agreements (other than this Note, the Purchase
Agreement, the Related Agreements, and the agreements described in clause (d) of this definition),
and such breach could reasonably be expected to have a Material Adverse Effect;

(f) The Company or any of its Subsidiaries shall (i) apply for, consent to or suffer to exist
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, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to
take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, without
challenge within ten (10) days of the filing thereof, or failure to have dismissed, within thirty
(30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;

(g) (i) Attachments or levies in excess of $500,000 in the aggregate are made upon the Company
or any of its Subsidiary’s assets or (ii) a judgment is rendered against the Company’s property
involving a liability of more than $500,000 which shall not have been paid, vacated, discharged,
stayed or bonded within thirty (30) days from the entry thereof;

(h) The Company shall admit in writing its inability, or be generally unable, to pay its debts
as they become due or cease operations of its present business;

 

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(i) A Change of Control (as defined below) shall occur with respect to the Company, unless
Holder shall have expressly consented to such Change of Control in writing. A “Change of Control”
shall mean any event or circumstance as a result of which (i) any “Person” or “group” (as such
terms are defined in Sections 13(d) and 14(d) of the Exchange Act, as in effect on the date
hereof), other than the Holder, is or becomes the “beneficial owner”
(as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of
more than 50% on a fully diluted basis of the then outstanding voting equity interest of the
Company, or (ii) the consolidation, merger or other business combination of the Company with or
into any other entity, immediately following which the prior stockholders of the Company fail to
own, directly or indirectly, at least fifty one percent (51%) of the surviving entity; provided
however, that a Change of Control shall not be deemed to have occurred if (i) the Company enters
into a consolidation, merger, share exchange or other business combination with an affiliate or
subsidiary of the Company reasonably acceptable to Holder, (ii) the surviving entity assumes all of
the obligations of the Company under the Purchase Agreement and the Related Agreements and (iii)
after assuming all of the obligations under the Purchase Agreement and the Related Agreements, the
surviving entity is and would be Solvent until such obligations are paid in full or otherwise
discharged;

(j) (i) The indictment of the Company or any of its Subsidiaries or any executive officer of
the Company for a felony under any criminal statute, (ii) the conviction of the Company or any of
its Subsidiaries or any executive officer of the Company for a misdemeanor under any criminal
statute, or (iii) the commencement of a criminal or civil proceeding against the Company or any of
its Subsidiaries or any executive officer of the Company or any of its Subsidiaries pursuant to
which statute or proceeding penalties or remedies reasonably available include forfeiture of a
material portion of the property of the Company or any of its Subsidiaries;

(k) (i) An Event of Default shall occur under and as defined in the Purchase Agreement or any
other Related Agreement, (ii) the Company or any of its Subsidiaries or Pledged Subsidiaries shall
breach any term or provision of the Purchase Agreement or any other Related Agreement (other than
the Registration Rights Agreement), in any respect material to the Company and such breach, if
capable of cure, continues unremedied for a period of fifteen (15) days after the occurrence
thereof, or (iii) any proceeding shall be brought by the Company to challenge the validity, binding
effect of the Purchase Agreement or any Related Agreement. For purposes of this paragraph the term
Related Agreement shall exclude the Grant Shares as defined in the Securities Purchase Agreement;
and

(l) An Event of Default shall occur under and as defined in the that certain Security
Agreement, dated as of the date hereof, by and among Digital Angel Corporation (“DOC”), certain
direct and indirect Subsidiaries of DOC and the Holder and/or any ancillary agreement referred to
therein, and such Event of Default, if capable of cure, continues unremedied for a period of five
(5) days after the occurrence thereof.

3.2 Default Interest. Following the occurrence and during the continuance of an Event
of Default, the Company shall pay additional interest on the outstanding principal balance of this
Note in an amount equal to one percent (1%) per month, and all outstanding obligations under this
Note, the Purchase Agreement and each other Related Agreement, including unpaid interest, shall
continue to accrue interest at such additional interest rate from the date of such Event of Default
until the date such Event of Default is cured or waived.

 

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ARTICLE IV

MISCELLANEOUS

4.1 Issuance of New Note. Upon any partial redemption of this Note, a new Note
containing the same date and provisions of this Note shall, at the request of the Holder, be issued
by the Company to the Holder for the principal balance of this Note and interest which shall not
have been paid as of such date. Subject to the provisions of Article III of this Note, the Company
shall not pay any costs, fees or any other consideration to the Holder for the production and
issuance of a new Note.

4.2 Cumulative Remedies. The remedies under this Note shall be cumulative.

4.3 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder
hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.

4.4 Notices. Any notice herein required or permitted to be given shall be in writing
and shall be deemed effectively given: (a) upon personal delivery to the party notified, (b) when
sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not,
then on the next business day, (c) five days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written verification of receipt.
All communications shall be sent to the Company at the address provided in the Purchase Agreement
executed in connection herewith, and to the Holder at the address provided in the Purchase
Agreement for the Holder, with a copy to Portfolio Services, c/o Laurus Capital Management, LLC,
335 Madison Avenue, 10th Floor, New York, New York 10017, facsimile number (212)
581-5037, or at such other address as the Company or the Holder may designate by ten days advance
written notice to the other parties hereto.

4.5 Amendment Provision. The term “Note” and all references thereto, as used
throughout this instrument, shall mean this instrument as originally executed, or if later amended
or supplemented, then as so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.

4.6 Assignability. This Note shall be binding upon the Company and its successors and
assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be
assigned by the Holder in accordance with the requirements of the Purchase Agreement. The Company
may not assign any of its obligations under this Note without the prior written consent of the
Holder, any such purported assignment without such consent being null and void.

4.7 Cost of Collection. In case of any Event of Default under this Note, the Company
shall pay the Holder the Holder’s reasonable costs of collection, including reasonable attorneys’
fees.

 

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4.8 Governing Law, Jurisdiction and Waiver of Jury Trial.

(a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

(b) THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE
COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND,
PERTAINING TO THIS NOTE OR ANY OF THE OTHER RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS NOTE OR ANY OF THE RELATED AGREEMENTS; PROVIDED, THAT THE COMPANY
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN
THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER 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
THE HOLDER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT
MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS.
THE COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED 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 THE COMPANY AT THE ADDRESS SET FORTH IN THE
PURCHASE AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE COMPANY’S ACTUAL
RECEIPT THEREOF.

(c) THE COMPANY DESIRES THAT ITS 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 COMPANY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
THE HOLDER AND/OR THE COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, ANY OTHER RELATED AGREEMENT OR
THE TRANSACTIONS RELATED HERETO OR THERETO.

4.9 Severability. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other provision of this Note.

 

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4.10 Maximum Payments. Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum rate permitted by such law, any payments in excess of such maximum
rate shall be credited against amounts owed by the Company to the Holder and thus refunded to the
Company.

4.11 Security Interest. The Holder has been granted a security interest (i) in
certain assets of the Company as more fully described in the Master Security Agreement dated as of
the date hereof and (ii) in the equity interests of the Company’s Subsidiaries pursuant to the
Stock Pledge Agreement dated as of the date hereof.

4.12 Construction. Each party acknowledges that its legal counsel participated in the
preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities
are to be resolved against the drafting party shall not be applied in the interpretation of this
Note to favor any party against the other.

5.13 Registered Obligation. This Note is intended to be a registered obligation within
the meaning of Treasury Regulation Section 1.871-14(c)(1)(i) and the Company (or its agent) shall
register this Note (and thereafter shall maintain such registration) as to both principal and any
stated interest. Notwithstanding any document, instrument or agreement relating to this Note to
the contrary, transfer of this Note (or the right to any payments of principal or stated interest
thereunder) may only be effected by (i) surrender of this Note and either the reissuance by the
Company of this Note to the new holder or the issuance by the Company of a new instrument to the
new holder, or (ii) transfer through a book entry system maintained by the Company (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

[Balance of page intentionally left blank; signature page follows]

 

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IN WITNESS WHEREOF, the Company has caused this Secured Term Note to be signed in its name
effective as of this 31 day of August, 2007.

	 	 	 	 	 
	 	APPLIED DIGITAL SOLUTIONS, INC.

 	 
	 	By: 	/s/ Lorraine M. Breece	 
	 	 	Name: 	Lorraine M. Breece	 
	 	 	Title: 	SVP, ACFO	 
	 

	 	 	 
	WITNESS:

	 	 
	/s/ Carol E. Olson
	 	 
	 	 	 

 

8Filed by Bowne Pure Compliance

 

Exhibit
10.3

APPLIED DIGITAL SOLUTIONS, INC.

MASTER SECURITY AGREEMENT

			
	To: 	 	Kallina Corporation

874 Walker Road

Suite C

Dover, DE 19904

Date: August 31, 2007

To Whom It May Concern:

1. To secure the payment of all Obligations (as hereafter defined), APPLIED DIGITAL SOLUTIONS,
INC., a Delaware corporation (the “Company”), each of the other undersigned parties (other than
Kallina Corporation, (“Assignee”)) (if any) and each other entity that is required to enter into
this Master Security Agreement (if any) (each an “Assignor” and, collectively, the “Assignors”)
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 such Assignor, or in which such Assignor
now has 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 such Assignor’s
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 any Assignor except for investment property otherwise covered in the
Stock Pledge Agreement dated as of the date hereof among the Company, Computer Equity Corporation,
and Assignee and investment property set forth on Schedule 1 hereto), letter-of-credit rights,
trademarks, trademark applications, tradestyles, patents, patent applications, copyrights,
copyright applications and other intellectual property in which such Assignor now has 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
therefor. Except as otherwise defined herein, all capitalized terms used herein shall have the
meanings provided such terms in the Securities Purchase Agreement 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 New York; 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 New York, 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 or
Divisions of the UCC, the definition of such term contained in Article or Division 9 shall govern.

 

 

 

2. The term “Obligations” as used herein shall mean and include all debts, liabilities and
obligations owing by each Assignor to Assignee arising under, out of, or in connection with: (i)
that certain Securities Purchase Agreement dated as of the date hereof by and between the Company
and Assignee (the “Securities Purchase Agreement”) and (ii) the Related Agreements referred to in
the Securities Purchase Agreement (the Securities Purchase Agreement and Related Agreements , as
each may be amended, modified, restated or supplemented from time to time, excluding the Common
Stock Purchase Warrant and the Warrant Shares as defined in the Securities Purchase Agreement,
collectively, the “Documents”), and in connection with any documents, instruments or agreements
relating to or executed in connection with the Documents or any documents, instruments or
agreements referred to therein or otherwise, and in connection with any other indebtedness,
obligations or liabilities of each such Assignor 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 each Assignor for post-petition
interest, fees, costs and charges that accrue after the commencement of any case by or against such
Assignor 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 any Assignor 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.

3. Except as set forth in the Assignor Disclosure Schedules to the Securities Purchase
Agreement or in the Exchange Act Filings with respect to those representations and warranties set
forth below that have parallel representations and warranties set forth in the Securities Purchase
Agreement which permit exceptions as set forth in the Assignor Disclosure Schedules and/or the
Exchange Act Filings, each Assignor hereby jointly and severally represents, warrants and covenants
to Assignee that:

(a) it is a corporation, partnership or limited liability company, as the case may be,
validly existing, in good standing and formed under the respective laws of its jurisdiction
of formation set forth on Schedule A, and each Assignor will provide Assignee thirty (30)
days’ prior written notice of any change in any of its respective jurisdiction of formation;

(b) its legal name is as set forth in its Articles of Incorporation or other
organizational document (as applicable) as amended through the date hereof and as set forth
on Schedule A, and it will provide Assignee thirty (30) days’ prior written notice of any
change in its legal name;

 

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(c) its organizational identification number (if applicable) is as set forth on
Schedule A hereto, and it will provide Assignee thirty (30) days’ prior written notice of
any change in its organizational identification number;

(d) 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;

(e) 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) Encumbrances securing the Obligations, (ii) Encumbrances securing indebtedness of each
such Assignor not to exceed $250,000 in the aggregate for all such Assignors, (iii)
Encumbrances related to intercompany liabilities, (iv) Encumbrances outstanding as of the
Closing Date and disclosed to Assignee on the Schedules attached to the Securities Purchase
Agreement, and (v) Encumbrances that are expressly subordinated to the Obligations to the
reasonable satisfaction of Assignee;

(f) it will, at its and the other Assignors’ joint and several 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 or such other Assignors’ business;

(g) 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) the payment of obligations of the Company in the ordinary
course of business and (B) 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 first priority perfected security
interest, 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 the
Obligations;

(h) 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
such Assignor and the policies delivered to Assignee. If any such Assignor fails to do so,
Assignee may procure such insurance and the cost thereof shall
be promptly reimbursed by the Assignors, jointly and severally, and shall constitute
Obligations;

 

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(i) it will expressly agree that if additional loss payees and/or lender loss payees,
other than Assignee, are named to the Collateral, Assignee will always be assigned to first
lien position until all Assignee obligations have been met;

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

(k) such Assignor (jointly and severally with each other Assignor) 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
Master Security Agreement or in the prosecution or defense of any action or proceeding
either against Assignee or any Assignor concerning any matter growing out of or in
connection with this Master 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).

4. The occurrence of either of the following events shall constitute an event of default under
this Master 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.

5. 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 the Company thereof, or upon the exercise by the Company 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. The Company 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

 

4

 

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 10 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 New York
(the “UCC”) regardless of the jurisdiction in which enforcement hereof is sought.

6. 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 Master Security Agreement, Assignee may, at its option without waiving
its right to enforce this Master Security Agreement according to its terms, immediately or at any
time thereafter and without notice to any Assignor, perform or fulfill the same or cause the
performance or fulfillment of the same for each Assignor’s joint and several account and at each
Assignor’s joint and several 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 any Assignor and controlled by Assignee.

7. 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 Master 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

 

5

 

receivable by mail, telephone, telegraph or otherwise with account debtors; (viii) do all
other things necessary to carry out this Agreement, any other Related 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.

8. 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;

(c) Third, to such persons, firms, corporations or other entities as required by
applicable law including, without limitation, Section 9-615(a)(3) of the UCC; and

(d) Fourth, to the extent of any surplus, to the Assignors 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

9. 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.

 

6

 

10. The Assignors shall jointly and severally 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 Documents as set
forth in the Securities Purchase Agreement, 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 Document. The Assignors shall also jointly and severally 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 Documents, (b) Assignee’s obtaining performance of the
Obligations under the 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.
The Assignors shall also jointly and severally pay Assignee’s customary bank charges for all bank
services (including wire transfers) performed or caused to be performed by Assignee for any
Assignor at any Assignor’s request or in connection with any 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 the Assignors 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 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, the Assignors hereby jointly and severally indemnify and hold Assignee harmless in
respect of such taxes, and the Assignors will repay to Assignee the amount of any such taxes which
shall be charged to the Assignors’ account; and until the Assignors 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 each
Assignor’s credit (if any) and Assignee shall retain its liens in any and all Collateral

11. THIS MASTER SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK 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’s, 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.

 

7

 

12. Each Assignor hereby consents and agrees that the state or federal courts located in the
County of New York, State of New York shall have exclusive jurisdiction to hear and determine any
claims or disputes between Assignor, on the one hand, and Assignee, on the other hand, pertaining
to this Master Security Agreement or to any matter arising out of or related to this Master
Security Agreement, provided, that Assignee and each Assignor acknowledges that any appeals from
those courts may have to be heard by a court located outside of the County of New York, State of
New York, and further provided, that nothing in this Master 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 the 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 any Assignor arising out of, connected with, related or incidental to the
relationship established between them in connection with this Master Security Agreement or the
transactions related hereto.

13. It is understood and agreed that any person or entity that desires to become an Assignor
hereunder, or is required to execute a counterpart of this Master Security Agreement after the date
hereof pursuant to the requirements of any Document, shall become an Assignor hereunder by (x)
executing a Joinder Agreement in form and substance satisfactory to Assignee, (y) delivering
supplements to such exhibits and annexes to such Documents as Assignee shall reasonably request and
(z) taking all actions as specified in this Master Security Agreement as would have been taken by
such Assignor had it been an original party to this Master Security Agreement, in each case with
all documents required above to be delivered to Assignee and with all documents and actions
required above to be taken to the reasonable satisfaction of Assignee.

14. All notices from Assignee to any Assignor shall be sufficiently given if mailed or
delivered to such Assignor’s address set forth below.

15. This Master 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.

 

8

 

	 	 	 	 	 
	 	 	Very truly yours,
	 	 	APPLIED DIGITAL SOLUTIONS, INC.
	 
	 	 	 	 
	 
	 	By:	 	/s/ Lorraine M. Breece
	 
	 	 	 	 
	 
	 	Name:	 	Lorraine M. Breece
	 
	 	Title:	 	SVP, ACFO
	 
	 	Address:	 	 
	 
	 	 	 	 
	 	 	1690 South Congress Ave., Suite 200

	 	 	Delray Beach, Florida 33445
	 
	 	 	 	 
	 	 	ACKNOWLEDGED:
	 
	 	 	 	 
	 	 	KALLINA CORPORATION
	 
	 	 	 	 
	 
	 	By:	 	/s/ David Grin
	 
	 	 	 	 
	 
	 	Name:	 	David Grin
	 
	 	Title	 	Director

 

9

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