Document:

Exhibit
10.3

 

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER
SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO DIGITAL ANGEL
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

 

	
   

  	
  Right to Purchase
  115,000 Shares of Common

  Stock of Digital Angel Corporation (subject to

  adjustment as provided herein)

  

 

COMMON STOCK PURCHASE
WARRANT

 

	
  No. 2003-1

  	
  Issue Date:  August 28, 2003

  

 

DIGITAL ANGEL CORPORATION, a corporation organized
under the laws of the State of Delaware (the “Company”), hereby certifies that,
for value received, LAURUS MASTER FUND, LTD., or its assigns (the “Holder”), is
entitled, subject to the terms set forth below, to purchase from the Company
from and after the Issue Date of this Warrant and at any time or from time to
time before 5:00 p.m., New York time, through five (5) years after such date
(the “Expiration Date”), up to 115,000 fully paid and nonassessable shares of
Common Stock (as hereinafter defined), $.005 par value, of the Company, at the
Exercise Price (as defined below). The number and character of such shares of
Common Stock and the Exercise Price are subject to adjustment as provided
herein.

 

As used herein the following terms, unless the context
otherwise requires, have the following respective meanings:

 

(a)                                  The
term “Company” shall include Digital Angel Corporation and any corporation
which shall succeed or assume the obligations of Digital Angel Corporation
hereunder.

 

(b)                                 The
term “Common Stock” includes (a) the Company’s Common Stock, par value $.005
per share, and (b) any other securities into which or for which any of the
securities described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.

 

(c)                                  The
term “Other Securities” refers to any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which
the holder of the Warrant at any time shall be entitled to receive, or shall
have received, on the exercise of the Warrant, in lieu of or in addition to
Common Stock, or which at any time shall be issuable or shall have been issued
in exchange for or in replacement of Common Stock or Other Securities pursuant
to Section 4 or otherwise.

 

 

(d)                                 The
term “Exercise Price” shall be as follows:

 

a.                                       70,000
shares at $2.55 per share (130% of the average closing price of the Common
Stock for the three trading days immediately prior to the date hereof);

 

b.                                      35,000
shares at $2.75 per share (140% of the average closing price of the Common
Stock for the three trading days immediately prior to the date hereof); and

 

c.                                       10,000
shares at $2.95 per share (150% of the average closing price of the Common
Stock for the three trading days immediately prior to the date hereof.)

 

1.                                       Exercise of
Warrant.

 

1.1                                 Number
of Shares Issuable upon Exercise. 
From and after the date hereof and through and including the Expiration
Date, the Holder shall be entitled to receive, upon exercise of this Warrant in
whole or in part, by delivery of an original or fax copy of the exercise notice
attached hereto as Exhibit A (the “Exercise Notice”), shares of Common Stock of
the Company, subject to adjustment pursuant to Section 4.

 

1.2                                 Fair
Market Value.  Fair Market Value of
a share of Common Stock as of a particular date (the “Determination Date”)
shall mean:

 

(a)                                  If
the Company’s Common Stock is traded on an exchange or is quoted on the
National or SmallCap Market of The Nasdaq Stock Market, Inc.(“Nasdaq”), then
the closing or last sale price, respectively, reported for the last business
day immediately preceding the Determination Date.

 

(b)                                 If
the Company’s Common Stock is not traded on an exchange or on the Nasdaq but is
traded on the NASD OTC Bulletin Board or BBX Exchange, then the mean of the
average of the closing bid and asked prices reported for the last business day
immediately preceding the Determination Date.

 

(c)                                  Except
as provided in clause (d) below, if the Company’s Common Stock is not publicly
traded, then as the Holder and the Company agree or in the absence of agreement
by arbitration in accordance with the rules then in effect of the American
Arbitration Association, before a single arbitrator to be chosen from a panel
of persons qualified by education and training to pass on the matter to be
decided.

 

(d)                                 If
the Determination Date is the date of a liquidation, dissolution or winding up,
or any event deemed to be a liquidation, dissolution or winding up pursuant to
the Company’s charter, then all amounts to be payable per share to holders of
the Common Stock pursuant to the charter in the event of such liquidation,
dissolution or winding up, plus all other amounts to be payable per share in
respect of the Common Stock in liquidation under the charter, assuming for the
purposes of this clause (d) that all of the shares of Common Stock then
issuable upon exercise of the Warrant are outstanding at the Determination
Date.

 

2

 

2.                                       Procedure
for Exercise.

 

2.1                                 Delivery
of Stock Certificates, etc. on Exercise. The Company agrees that the shares
of Common Stock purchased upon exercise of this Warrant shall be deemed to be
issued to the Holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. As soon as practicable after the
exercise of this Warrant in whole or in part, and in any event within three (3)
trading  days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the Holder, or as such
Holder (upon payment by such holder of any applicable transfer taxes) may
direct in compliance with applicable securities laws, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of Common Stock (or Other Securities) to which such Holder
shall be entitled on such exercise, plus, in lieu of any fractional share to
which such holder would otherwise be entitled, cash equal to such fraction
multiplied by the then Fair Market Value of one full share, together with any
other stock or other securities and property (including cash, where applicable)
to which such Holder is entitled upon such exercise pursuant to Section 1 or
otherwise.

 

2.2                                 Exercise.

 

(a)                                  Payment
may be made either (i) in cash or by certified or official bank check payable
to the order of the Company equal to the applicable aggregate Exercise Price, (ii)
by delivery of the Warrant, Common Stock and/or Common Stock receivable upon
exercise of the Warrant in accordance with Section (b) below, or (iii) by a
combination of any of the foregoing methods, for the number of Common Shares
specified in such form (as such exercise number shall be adjusted to reflect
any adjustment in the total number of shares of Common Stock issuable to the
holder per the terms of this Warrant), and the Holder shall thereupon be
entitled to receive the number of duly authorized, validly issued, fully-paid
and non-assessable shares of Common Stock (or Other Securities) determined as
provided herein.

 

(b)                                 Notwithstanding
any provisions herein to the contrary, if the Fair Market Value of one share of
Common Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this
Warrant (or the portion thereof being exercised) by surrender of this Warrant
at the principal office of the Company together with the properly endorsed
Exercise Notice in which event the Company shall issue to the Holder a number
of shares of Common Stock computed using the following formula:

 

	
  X=Y (A-B)

  
	
  A

  	
   

  

 

	
  Where X =

  	
   

  	
  the number of shares of Common Stock to be issued to the Holder

  
	
   

  	
   

  	
   

  
	
  Y=

  	
   

  	
  the number of shares of
  Common Stock purchasable under the Warrant or, if only a portion of the
  Warrant is being exercised, the portion of the Warrant being exercised (at
  the date of such calculation)

  
	
   

  	
   

  	
   

  
	
  A=

  	
   

  	
  the Fair Market Value of one share of the Company’s
  Common Stock (at the date of such calculation)

  
				

 

3

 

	
  B=

  	
   

  	
  Exercise Price (as adjusted to the date of such
  calculation)

  

 

3.                                       Effect of
Reorganization, etc.; Adjustment of Exercise Price.

 

3.1                                 Reorganization,
Consolidation, Merger, etc.  In case
at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition to the consummation of such a
transaction, proper and adequate provision shall be made by the Company whereby
the Holder of this Warrant, on the exercise hereof as provided in Section 1 at
any time after the consummation of such reorganization, consolidation or merger
or the effective date of such dissolution, as the case may be, shall receive,
in lieu of the Common Stock (or Other Securities) issuable on such exercise
prior to such consummation or such effective date, the stock and other
securities and property (including cash) to which such Holder would have been
entitled upon such consummation or in connection with such dissolution, as the
case may be, if such Holder had so exercised this Warrant immediately prior
thereto, all subject to further adjustment thereafter as provided in Section 4.

 

3.2                                 Dissolution.  In the event of any dissolution of the
Company following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its expense deliver or
cause to be delivered the stock and other securities and property (including
cash, where applicable) receivable by the Holder of the Warrant after the
effective date of such dissolution pursuant to Section 3.1 to a bank or trust
company having its principal office in New York, NY, as trustee for the Holder
of the Warrant.

 

3.3                                 Continuation
of Terms.  Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the shares of stock and
other securities and property receivable on the exercise of this Warrant after
the consummation of such reorganization, consolidation or merger or the
effective date of dissolution following any such transfer, as the case may be,
and shall be binding upon the issuer of any such stock or other securities,
including, in the case of any such transfer, the person acquiring all or
substantially all of the properties or assets of the Company, whether or not
such person shall have expressly assumed the terms of this Warrant as provided
in Section 4.  In the event this Warrant
does not continue in full force and effect after the consummation of the
transactions described in this Section 3, then only in such event will the
Company’s securities and property (including cash, where applicable) receivable
by the holders of the Warrant be delivered to the Trustee as contemplated by
Section 3.2.

 

4.                                       Extraordinary
Events Regarding Common Stock. 
In the event that the Company shall (a) issue additional shares of the
Common Stock as a dividend or other distribution on outstanding Common Stock,
(b) subdivide its outstanding shares of Common Stock, or (c) combine its
outstanding shares of the Common Stock into a smaller number of shares of the
Common Stock, then, in each such event, the Exercise Price shall,
simultaneously with the happening of such event, be adjusted by multiplying the
then current Exercise Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such event
and the denominator of which shall be the number of shares of

 

4

 

Common Stock outstanding immediately after such event,
and the product so obtained shall thereafter be the Exercise Price then in
effect. The Exercise Price, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive event or events described herein in
this Section 4. The number of shares of Common Stock that the holder of this
Warrant shall thereafter, on the exercise hereof as provided in Section 1, be
entitled to receive shall be increased to a number determined by multiplying
the number of shares of Common Stock that would otherwise (but for the provisions
of this Section 4) be issuable on such exercise by a fraction of which (a) the
numerator is the Exercise Price that would otherwise (but for the provisions of
this Section 4) be in effect, and (b) the denominator is the Exercise Price in
effect on the date of such exercise.

 

5.                                       Certificate
as to Adjustments.  In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrant, the Company at its expense
will promptly cause its Chief Financial Officer or other appropriate designee
to compute such adjustment or readjustment in accordance with the terms of the
Warrant and prepare a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (a) the consideration received or receivable by
the Company for any additional shares of Common Stock (or Other Securities)
issued or sold or deemed to have been issued or sold, (b) the number of shares
of Common Stock (or Other Securities) outstanding or deemed to be outstanding,
and (c) the Exercise Price and the number of shares of Common Stock to be
received upon exercise of this Warrant, in effect immediately prior to such
adjustment or readjustment and as adjusted or readjusted as provided in this
Warrant. The Company will forthwith mail a copy of each such certificate to the
holder of the Warrant and any Warrant agent of the Company (appointed pursuant
to Section 11 hereof).

 

6.                                       Reservation
of Stock, etc. Issuable on Exercise of Warrant.  The Company will at all times reserve and
keep available, solely for issuance and delivery on the exercise of the
Warrant, shares of Common Stock (or Other Securities) from time to time
issuable on the exercise of the Warrant.

 

7.                                       Assignment;
Exchange of Warrant.  Subject
to compliance with applicable securities laws, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
“Transferor”) with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor’s endorsement in the form of
Exhibit B attached hereto (the “Transferor Endorsement Form”) and together with
evidence reasonably satisfactory to the Company demonstrating compliance with
applicable securities laws, which shall include, without limitation, a legal
opinion from the Transferor’s counsel that such transfer is exempt from the
registration requirements of applicable securities laws, the Company at its
expense (but with payment by the Transferor of any applicable transfer taxes)
will issue and deliver to or on the order of the Transferor thereof a new
Warrant of like tenor, in the name of the Transferor and/or the transferee(s)
specified in such Transferor Endorsement Form (each a “Transferee”), calling in
the aggregate on the face or faces thereof for the number of shares of Common
Stock called for on the face or faces of the Warrant so surrendered by the
Transferor.

 

8.                                       Replacement
of Warrant.  On receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such

 

5

 

loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.

 

9.                                       Registration
Rights.  The Holder of this
Warrant has been granted certain registration rights by the Company.  These registration rights are set forth in a
Registration Rights Agreement entered into by the Company and Purchaser at or
prior to the issue date of this Warrant.

 

10.                                 Maximum
Exercise.  The Holder shall
not be entitled to exercise this Warrant on an exercise date, in connection
with that number of shares of Common Stock which would be in excess of the sum
of (i) the number of shares of Common Stock beneficially owned by the Holder
and its affiliates on an exercise date, and (ii) the number of shares of Common
Stock issuable upon the exercise of this Warrant with respect to which the
determination of this proviso is being made on an exercise date, which would
result in beneficial ownership by the Holder and its affiliates of more than
4.99% of the outstanding shares of Common Stock of the Company on such
date.  For the purposes of the proviso
to the immediately preceding sentence, beneficial ownership shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended, and Regulation 13d-3 thereunder. 
Notwithstanding the foregoing, the restriction described in this
paragraph may be revoked upon seventy -five (75) calendar days’ prior
notice from the Holder to the Company and is automatically null and void upon
an Event of Default under the Note.

 

11.                                 Warrant
Agent.  The Company may, by
written notice to the each holder of the Warrant, appoint an agent for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7,
and replacing this Warrant pursuant to Section 8, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.

 

12.                                 Transfer on
the Company’s Books.  Until
this Warrant is transferred on the books of the Company, the Company may treat
the registered holder hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.

 

13.                                 Notices, etc.  All notices and other communications from
the Company to the Holder of this Warrant shall be mailed by first class
registered or certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by such holder or, until any such Holder
furnishes to the Company an address, then to, and at the address of, the last
Holder of this Warrant who has so furnished an address to the Company.

 

14.                                 Voluntary
Adjustment by the Company. 
The Company may at any time during the term of this Warrant reduce the
then current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.

 

15.                                 Governing Law.  THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE

6

 

OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED
IN SUCH STATE WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
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 COMPANY AND HOLDER PERTAINING
TO THIS WARRANT OR AS TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
WARRANT; PROVIDED, THAT HOLDER AND COMPANY ACKNOWLEDGE 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 AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE 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
HOLDER.  COMPANY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED
UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS.  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 COMPANY, AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY’S ACTUAL RECEIPT THEREOF
OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.  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, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN HOLDER AND
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS WARRANT OR THE TRANSACTIONS
RELATED THERETO. THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER FROM THE
OTHER PARTY ITS REASONABLE ATTORNEY’S FEES AND COSTS.  IN THE EVENT THAT ANY PROVISION OF THIS WARRANT 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
UNENFORCEABILITY OF ANY OTHER PROVISION OF THIS NOTE.  NOTHING CONTAINED HEREIN SHALL BE DEEMED OR OPERATE TO PRECLUDE HOLDER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION AGAINST THE COMPANY IN ANY
OTHER JURISDICTION TO COLLECT ON THE COMPANY’S

7

 

OBLIGATIONS TO HOLDER OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF HOLDER.

 

16.                                 Miscellaneous.  This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant shall be governed by and construed in
accordance with the laws of State of New York without regard to principles of
conflicts of laws.  Any action brought
concerning the transactions contemplated by this Warrant shall be brought only
in the state courts of New York or in the federal courts located in the state
of New York; provided, however, that the Holder may choose to waive this
provision and bring an action outside the state of New York.  The individuals executing this Warrant on
behalf of the Company agree to submit to the jurisdiction of such courts and
waive trial by jury.  The prevailing
party shall be entitled to recover from the other party its reasonable
attorney’s fees and costs.  In the event
that any provision of this Warrant 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 Warrant. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof.  The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.  The Company
acknowledges that legal counsel participated in the preparation of this Warrant
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 Warrant to favor any party against the other party.

 

IN WITNESS WHEREOF, the Company has executed this
Warrant under seal as of the date first written above.

 

	
   

  	
  DIGITAL ANGEL
  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
  Witness:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

8

 

Exhibit A

 

FORM OF SUBSCRIPTION

 

(To be signed only on exercise of Warrant)

 

TO:                            Digital
Angel Corporation

 

The undersigned, pursuant to the provisions set forth in the attached
Warrant (No.          ),
hereby irrevocably elects to purchase (check applicable box):

 

                                                   shares
of the Common Stock covered by such Warrant; or

 

                                  the maximum number of shares
of Common Stock covered by such Warrant pursuant to the cashless exercise
procedure set forth in Section 2.

 

The undersigned herewith makes payment of the full Exercise Price for
such shares at the price per share provided for in such Warrant, which is
$                     .  Such payment takes the form of (check
applicable box or boxes):

 

                                  $                in
lawful money of the United States; and/or

 

                                  the cancellation of such
portion of the attached Warrant as is exercisable for a total of
                  
shares of Common Stock (using a Fair Market Value of
$            per
share for purposes of this calculation); and/or

 

                                  the cancellation of such
number of shares of Common Stock as is necessary, in accordance with the formula
set forth in Section 2, to exercise this Warrant with respect to the maximum
number of shares of Common Stock purchaseable pursuant to the cashless exercise
procedure set forth in Section 2.

 

The undersigned requests that the certificates for such shares be
issued in the name of, and delivered to 
                                                whose
address is
                                                         

 

                                                                        .

 

The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable upon exercise of the within Warrant
shall be made pursuant to registration of the Common Stock under the Securities
Act of 1933, as amended (the “Securities Act”) or pursuant to an exemption from
registration under the Securities Act.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
  (Signature must conform to name of holder as

  specified on the face of the Warrant)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Address)

  

 

 

Exhibit B

 

FORM OF TRANSFEROR ENDORSEMENT

(To be signed only on transfer of Warrant)

 

For value received, the undersigned hereby sells,
assigns, and transfers unto the person(s) named below under the heading
“Transferees” the right represented by the within Warrant to purchase the
percentage and number of shares of Common Stock of Digital Angel Corporation to
which the within Warrant relates specified under the headings “Percentage
Transferred” and “Number Transferred,” respectively, opposite the name(s) of
such person(s) and appoints each such person Attorney to transfer its
respective right on the books of Digital Angel Corporation with full power of
substitution in the premises.

 

	
  Transferees

  	
   

  	
  Percentage
  Transferred

  	
   

  	
  Number
  Transferrred

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Signature must conform to name of holder as

  specified on the face of the Warrant)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signed in the presence of:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (Name)

  	
   

  	
  (address)

  
	
   

  	
   

  	
   

  
	
  ACCEPTED AND AGREED:

  [TRANSFEREE]

  	
   

  	
   

  
	
   

  	
   

  	
  (address)

  
	
   

  	
   

  	
   

  
	
  (Name)Exhibit
10.4

 

SECURITY
AGREEMENT

 

This Security
Agreement is made as of August 28, 2003 by and between LAURUS MASTER FUND,
LTD., a Cayman Islands corporation (“Laurus”) and DIGITAL ANGEL CORPORATION, a
Delaware corporation (the “Company”).

 

BACKGROUND

 

Company has
requested that Laurus make advances available to Company; and

 

Laurus has agreed
to make such advances to Company on the terms and conditions set forth in this
Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in
consideration of the mutual covenants and undertakings and the terms and
conditions contained herein, the parties hereto agree as follows:

 

1.     (a) 
General Definitions.  Capitalized terms used in this Agreement
shall have the meanings assigned to them in Annex A.

 

(b)  Accounting
Terms.  Any accounting terms
used in this Agreement which are not specifically defined shall have the
meanings customarily given them in accordance with GAAP and all financial
computations shall be computed, unless specifically provided herein, in
accordance with GAAP consistently applied.

 

(c)  Other Terms.  All other terms used in this Agreement and
defined in the UCC, shall have the meaning given therein unless otherwise
defined herein.

 

(d)  Rules of
Construction.  All Schedules,
Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement
are incorporated herein by reference and taken together with this Agreement
constitute but a single agreement.  The
words “herein”, hereof” and “hereunder” or other words of similar import refer
to this Agreement as a whole, including the Exhibits, Addenda, Annexes and
Schedules thereto, as the same may be from time to time amended, modified,
restated or supplemented, and not to any particular section, subsection or
clause contained in this Agreement. 
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. 
The term “or” is not exclusive. 
The term “including” (or any form thereof) shall not be limiting or
exclusive.  All references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations.  All
references in this Agreement or in the Schedules, Addenda, Annexes and Exhibits
to this Agreement to sections, schedules, disclosure schedules, exhibits, and
attachments shall refer to the corresponding sections, schedules, disclosure
schedules, exhibits, and attachments of or to this Agreement.  All references to any instruments or
agreements, including references to any of this Agreement or

 

 

the Ancillary Agreements
shall include any and all modifications or amendments thereto and any and all
extensions or renewals thereof.

 

2.     Loans.

 

(a)   (i) Subject to the terms and
conditions set forth herein and in the Ancillary Agreements, Laurus agrees to
make loans (the “Loans”) to Company from time to time during the Term which, in
the aggregate at any time outstanding, will not exceed the lesser of (x) (I)
the Capital Availability Amount minus (II) such reserves as Laurus may
reasonably in its good faith judgment deem proper and necessary from time to
time (the “Reserves”) or (y) an amount equal to (I) the Borrowing Availability
minus (II) the Reserves.  The amount
derived at any time from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall be
referred to as the “Formula Amount”. 
Company shall execute and deliver to Laurus on the Closing Date a
Minimum Borrowing Note and a Revolving Note evidencing the Loans funded on the
Closing Date.  From time to time
thereafter, Company shall execute and deliver to Laurus immediately prior to
the final funding of each additional $1,000,000 tranche of Loans (calculated on
a cumulative basis for each such tranche) an additional Minimum Borrowing Note
evidencing such tranche, in the form of Note delivered by Company to Laurus on
the Closing Date.

 

(ii)           Notwithstanding the
limitations set forth above, if requested by the Company, Laurus retains the
right to lend to Company from time to time such amounts in excess of such
limitations as Laurus may determine in its sole discretion.

 

(iii)          Company
acknowledges that the exercise of Laurus’ discretionary rights hereunder may
result during the Term in one or more increases or decreases in the advance
percentages used in determining Accounts Availability and Company hereby
consents to any such increases or decreases which may limit or restrict
advances requested by Company.

 

(iv)          If Company does not
pay any interest, fees, costs or charges to Laurus when due, Company shall
thereby be deemed to have requested, and Laurus is hereby authorized at its
discretion to make and charge to Company’s account, a Loan to Company as of
such date in an amount equal to such unpaid interest, fees, costs or charges.

 

(v)           If the Company at
any time fails to perform or observe any of the covenants contained in this
Agreement or any Ancillary Agreement, after any applicable notice and
opportunity to cure, Laurus may, but need not, perform or observe such covenant
on behalf and in the name, place and stead of Company (or, at Laurus’ option,
in Laurus’ name) and may, but need not, take any and all other actions which
Laurus may deem necessary to cure or correct such failure (including the
payment of taxes, the satisfaction of Liens, the performance of obligations
owed to Account Debtors, lessors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments).  The amount of all monies expended and all
costs and expenses (including attorneys’ fees and legal expenses) incurred by
Laurus in connection with or as a result of the performance or observance of
such agreements or the taking of such action by Laurus shall be charged to
Company’s account as a Loan and added to the Obligations.  To facilitate Laurus’ performance or
observance of such covenants of Company, upon the occurrence and continuance of
an Event of Default beyond any applicable notice and

 

2

 

cure period, the Company
hereby irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as
Company’s attorney in fact (which appointment is coupled with an interest) with
the right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file in the name and on behalf of Company any and
all instruments, documents, assignments, security agreements, financing
statements, applications for insurance and other agreements and writings
required to be obtained, executed delivered or endorsed by Company, but only
until such Event of Default shall have been cured or waived by Laurus.

 

(vi)          Laurus will account
to Company monthly with a statement of all Loans and other advances, charges
and payments made pursuant to this Agreement, and such account rendered by
Laurus shall be deemed final, binding and conclusive unless Laurus is notified
by Company in writing to the contrary within fifteen (15) days of the date each
account was rendered specifying the item or items to which objection is made.

 

(vii)         During the Term,
Company may borrow, pay and re-borrow Loans in excess of the Minimum Borrowing
Amount, all in accordance with the terms and conditions hereof.

 

(viii)        If any Eligible
Account is not paid by the Account Debtor within one hundred twenty (120) days
after the date that such Eligible Account was invoiced or if any Account Debtor
asserts a deduction, dispute, contingency, set-off, or counterclaim with
respect to any Eligible Account, Company shall immediately replace such
ineligible account with an Eligible Account or reimburse Laurus for the amount
of the Loan made with respect to such Eligible Account.

 

(b)           Minimum Borrowing Amount.  After a registration statement registering
the Registrable Securities has been declared effective by the SEC, conversions
of the Minimum Borrowing Amount into the Common Stock of the Company may be
initiated as set forth in the Note. From and after the date upon which any
outstanding principal of the Minimum Borrowing Amount (as evidenced by the
first Minimum Borrowing Note) is converted into Common Stock (the “First
Conversion Date”), (i) corresponding amounts of all outstanding Loans (not
attributable to the then outstanding Minimum Borrowing Amount) existing on or
made after the First Conversion Date will be aggregated until they reach the
sum of $1,000,000 and (ii) the Company will issue a new (serialized) Minimum
Borrowing Note to Laurus in respect of such $1,000,000 aggregation, and (iii)
the Company shall prepare and file a subsequent registration statement with the
SEC to register such subsequent Minimum Borrowing Note as set forth in the
Registration Rights Agreement.

 

3

 

3.     Repayment of
the Loans.  Company (a) may pay
the Obligations in excess of the Minimum Borrowing Amount  from time to time in accordance with the
terms and provisions of the Notes (and Section 16 hereof if such prepayment is
due to a termination of this Agreement); and (b) shall repay on the expiration
of the Term (i) the then aggregate outstanding principal balance of the Loans
made by Laurus to Company hereunder together with accrued and unpaid interest,
fees and charges and (ii) all other amounts owed Laurus under this Agreement
and the Ancillary Agreements.  Any
payments of principal, interest, fees or any other amounts payable hereunder or
under any Ancillary Agreement shall be made prior to 12:00 noon (New York time)
on the due date thereof in immediately available funds.

 

4.     Procedure
for Loans.  Company may by
written notice request a borrowing of Loans prior to 9:30 a.m. (New York time)
on the Business Day of its request to incur, on that day, a Loan.  Together with each request for a Loan (or at
such other intervals as Laurus may request), Company shall deliver to Laurus a
Borrowing Base Certificate in the form of Exhibit A, which shall be certified
as true and correct by the President or Chief Financial  Officer of Company together with all
supporting documentation relating thereto. 
All Loans shall be disbursed from whichever office or other place Laurus
may designate from time to time and shall be charged to Company’s account on
Laurus’ books.  The proceeds of each
Loan made by Laurus shall be made available to Company on the Business Day so
requested in accordance with the terms of this Section 4 by way of credit to
Company’s operating account maintained with such bank as Company designated to
Laurus.  Any and all Obligations due and
owing hereunder may be charged to Company’s account and shall constitute Loans.

 

5.     Interest and
Payments.

 

(a)   Interest.

 

(i)            Except as modified by Section
5(a)(iii) below, from and after the date hereof, the Company shall pay interest
at the Contract Rate on the unpaid principal balance of each Loan until such
time as such Loan is collected in full in good funds in dollars of the United
States of America; such interest payments shall be due and payable on the first
Business Day of each month during the Term and each Renewal Term, if any

 

(ii)           Interest and payments shall be
computed on the basis of actual days elapsed in a year of 360 days.  At Laurus’ option, if not otherwise paid by
the Company, Laurus may charge Company account for  interest payments due hereunder.

 

(iii)          Effective upon the occurrence of any
Event of Default and for so long as any Event of Default shall be continuing,
the Contract Rate shall automatically be increased by five percent (5%) per
annum (such increased rate, the “Default Rate”), and all outstanding
Obligations, including unpaid interest, shall continue to accrue interest from
the date of such Event of Default at the Default Rate applicable to such
Obligations.

 

(iv)          In no event shall the aggregate
interest payable hereunder exceed the maximum rate permitted under any
applicable law or regulation, as in effect from time to time (the “Maximum
Legal Rate”) and if any provision of this Agreement or Ancillary Agreement is

 

4

 

in contravention of any
such law or regulation, interest payable under this Agreement and each
Ancillary Agreement shall be computed on the basis of the Maximum Legal Rate
(so that such interest will not exceed the Maximum Legal Rate).

 

(v)           Company shall pay principal, interest
and all other amounts payable hereunder, or under any Ancillary Agreement,
without any deduction whatsoever, including any deduction for any set-off or
counterclaim.

 

(b)   Payments.

 

(i)            Closing/Annual Payments.  Upon execution of this Agreement by Company
and Laurus, Company shall pay to Laurus Capital Management, LLC a closing
payment in an amount equal to three and one half percent (3.5%) of the Capital
Availability Amount.  On each
anniversary of the Closing Date, Company shall pay to Laurus Capital
Management, LLC an annual payment equal to one quarter percent (.25%) of the
Capital Availability Amount.  Such
payments shall be deemed fully earned on the Closing Date and shall not be
subject to rebate or proration for any reason.

 

(ii)           Overadvance Payment.  Without affecting Laurus’ rights hereunder
in the event the Loans exceed the amounts permitted by Section 2
(“Overadvances”), in the event an Overadvance occurs all such Overadvances
shall bear interest at an annual  rate
equal to five  percent (5%) in excess of
the then applicable Contract Amount for each month or portion thereof as such
amounts shall be outstanding.

 

(iii)          Unused Line Payment.  If, for any month, the average outstanding
Revolving Credit Advances (the “Average Revolving Amount”) are less than the
Capital Availability Amount, the Company shall pay to Laurus at the end of such
month a payment (calculated on a per annum basis) in an amount equal to one
half percent (0.50%) per annum of the amount by which the Capital Availability
Amount exceeds the Average Revolving Amount. 
Notwithstanding the foregoing, any unpaid fees shall be immediately due
and payable upon termination of this Agreement.

 

(iv)          Financial Information Default.  Without affecting Laurus’ other rights and
remedies, in the event Company fails to deliver the financial information
required by Section 11 on or before the date required by this Agreement,
Company shall pay Laurus a fee in the amount of $500.00 per week (or portion
thereof) for each such failure until such failure is cured to Laurus’
satisfaction or waived in writing by Laurus. 
Such fee shall be charged to Company’s account upon the occurrence of
each such failure.

 

6.     Security
Interest.

 

(a)   To secure the prompt payment to Laurus of the
Obligations, Company hereby assigns, pledges and grants to Laurus a continuing
security interest in and Lien upon all of the Collateral.  All of Company’s Books and Records relating
to the Collateral shall, until delivered to or removed by Laurus, be kept by
Company in trust for Laurus until all Obligations have been paid in full.  Each confirmatory assignment schedule or
other form of assignment hereafter executed by Company shall be deemed to
include the foregoing grant, whether or not the same appears therein.

 

5

 

(b)   Company hereby (i) authorizes Laurus to file
any financing statements, continuation statements or amendments thereto that
(x) indicate the Collateral (1) as all assets of Company (or any portion of Company’s
assets) or words of similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of the UCC of
such jurisdiction, or (2) as being of an equal or lesser scope or with greater
detail, and (y) contain any other information required by Part 5 of Article 9
of the UCC for the sufficiency or filing office acceptance of any financing
statement, continuation statement or amendment and (ii) ratifies its
authorization for Laurus to have filed any initial financial statements, or
amendments thereto if filed prior to the date hereof.  Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any
financing statement without the prior written consent of Laurus and agrees that
it will not do so without the prior written consent of Laurus, subject to
Company’s rights under Section 9-509(d)(2) of the UCC.

 

(c)   Company hereby grants to Laurus an
irrevocable, non-exclusive license (exercisable upon the termination of this
Agreement due to an occurrence and during the continuance of an Event of
Default without payment of royalty or other compensation to Company) to use,
transfer, license or sublicense any Intellectual Property now owned, licensed
to, or hereafter acquired by Company, and wherever the same may be located, and
including in such license access to all media in which any of the licensed
items may be recorded or stored and to all computer and automatic machinery
software and programs used for the compilation or printout thereof, and
represents, promises and agrees that any such license or sublicense is not and
will not be in conflict with the contractual or commercial rights of any third
Person; provided, that such license will terminate on the termination of this
agreement and the payment in full of all Obligations.

 

7.     Representations, Warranties and Covenants Concerning
the Collateral.  Company represents, warrants (each of which
such representations and warranties shall be deemed repeated upon the making of
each request for a Loan and made as of the time of each and every Loan
hereunder) and covenants as follows:

 

(a)   All of the Collateral (i) is owned by Company
free and clear of all Liens (including any claims of infringement) except those
in Laurus’ favor and Permitted Liens and (ii) is not subject to any agreement
prohibiting the granting of a Lien or requiring notice of or consent to the
granting of a Lien.

 

(b)   Company shall not encumber, mortgage, pledge,
assign or grant any Lien in any Collateral of Company or any of Company’s other
assets to anyone other than Laurus and except for Permitted Liens.

 

(c)   The Liens granted pursuant to this Agreement,
upon completion of the filings and other actions listed on Exhibit 7(c)
(which, in the case of all filings and other documents referred to in said
Exhibit, have been delivered to Laurus in duly executed form) constitute valid
perfected security interests in all of the Collateral in favor of Laurus as
security for the prompt and complete payment and performance of the
Obligations, enforceable in accordance with the terms hereof against any and
all creditors of and any purchasers from Company and such security interest is
prior to all other Liens in existence on the date hereof.

 

6

 

(d)   No effective security agreement, mortgage,
deed of trust, financing statement, equivalent security or Lien instrument or
continuation statement covering all or any part of the Collateral is or will be
on file or of record in any public office, except those relating to Permitted
Liens.

 

(e)   Company shall not dispose of any of the
Collateral whether by sale, lease or otherwise except for 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 having an aggregate fair market value of not more than $25,000 and
only to the extent that (i) the proceeds of any such disposition are used to
acquire replacement Equipment which is subject to Laurus’ first priority
security interest or (ii) following the occurrence of an Event of Default the
proceeds of which are remitted to Laurus to be held as cash collateral for the
Obligations.

 

(f)    Company shall defend the right, title and
interest of Laurus in and to the Collateral against the claims and demands of
all Persons whomsoever, and take such actions, including (i) all actions
necessary to grant Laurus “control” of any Investment Property, Deposit
Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by Company,
with any agreements establishing control to be in form and substance
satisfactory to Laurus, (ii) the prompt (but in no event later than two
Business Days following Laurus’ request therefor) delivery to Laurus of all
original Instruments, Chattel Paper, negotiable Documents and certificated
Stock owned by a Company (in each case, accompanied by stock powers, allonges
or other instruments of transfer executed in blank), (iii) notification of
Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution of
litigation against third parties as shall be prudent in order to protect and
preserve Company’s and Laurus’ respective and several interests in the Collateral.

 

(g)   Company shall promptly, and in any event
within two (2) Business Days after the same is acquired by it, notify Laurus of
any commercial tort claim (as defined in the UCC) acquired by it and unless
otherwise consented by Laurus, Company shall enter into a supplement to this
Agreement granting to Laurus a Lien in such commercial tort claim.

 

(h)   Company shall place notations upon its Books
and Records and any financial statement of Company to disclose Laurus’ Lien in
the Collateral.

 

(i)    If Company retains possession of any Chattel
Paper or Instrument with Laurus’ consent, such Chattel Paper and Instruments
shall be marked with the following legend: 
“This writing and obligations evidenced or secured hereby are subject to
the security interest of Laurus Master Fund, Ltd.”

 

(j)    Company shall perform in a reasonable time
all other steps requested by Laurus to create and maintain in Laurus’ favor a
valid perfected first Lien in all Collateral subject only to Permitted Liens.

 

(k)   Company shall notify Laurus promptly and in
any event within two (2) Business Days after obtaining knowledge thereof (i) of
any event or circumstance that to Company’s knowledge would cause Laurus to
consider any then existing Account as no longer

 

7

 

constituting an Eligible
Account and/or any then existing Inventory as no longer constituting Eligible
Inventory; (ii) of any material delay in Company’s performance of any of its
obligations to any Account Debtor; (iii) of any assertion by any Account Debtor
of any material claims, offsets or counterclaims; (iv) of any allowances,
credits and/or monies granted by Company to any Account Debtor; (v) of all
material adverse information relating to the financial condition of an Account
Debtor; (vi) of any material return of goods; and (vii) of any loss, damage or
destruction of any of the Collateral.

 

(l)    All Accounts (i) represent complete bona
fide transactions which require no further act under any circumstances on
Company’s part to make such Accounts payable by the Account Debtors, (ii) are
not subject to any present, future contingent offsets or counterclaims, and
(iii) do not represent bill and hold sales, consignment sales, guaranteed
sales, sale or return or other similar understandings or obligations of any
Affiliate or Subsidiary of Company. Company has not made, and will not make any
agreement with any Account Debtor for any extension of time for the payment of
any Account, any compromise or settlement for less than the full amount thereof,
any release of any Account Debtor from liability therefor, or any deduction
therefrom except a discount or allowance for prompt or early payment allowed by
Company in the ordinary course of its business consistent with historical
practice and as previously disclosed to Laurus in writing.

 

(m)  Company shall keep and maintain its Equipment
in good operating condition, except for ordinary wear and tear, and shall make
all necessary repairs and replacements thereof so that the value and operating
efficiency shall at all times be maintained and preserved.  Company shall not permit any such items to
become a Fixture to real estate or accessions to other personal property.

 

(n)   Company shall maintain and keep all of its
Books and Records concerning the Collateral at Company’s executive offices
listed in Exhibit 12(d).

 

(o)   Company shall maintain and keep the tangible
Collateral at the addresses listed in Exhibit 12(d), provided, that
Company may change such locations or open a new location, provided that Company
provides Laurus at least thirty (30) days prior written notice of such changes
or new location and (ii) prior to such change or opening of a new location it
executes and delivers to Laurus such agreements as Laurus may request,
including landlord agreements, mortgagee agreements and warehouse agreements,
each in form and substance satisfactory to Laurus.

 

(p)   Exhibit 7(p) lists all banks and other
financial institutions at which Company maintains deposits and/or other
accounts, and such Exhibit correctly identifies the name, address and telephone
number of each such depository, the name in which the account is held, a
description of the purpose of the account, and the complete account
number.  The  Company shall not establish any depository or other bank account
of any with any financial institution (other than the accounts set forth on Exhibit
7(p) without Laurus’ prior written consent.

 

8

 

8.     Payment of
Accounts.

 

(a)   Company will irrevocably direct all of its
present and future Account Debtors and other Persons obligated to make payments
constituting Collateral to make such payments directly to the lockbox
maintained by Company (the “Lockbox”) with Wells Fargo pursuant to the terms of
the Clearing Account  Agreement dated
August      , 2003
among the Company, Laurus and Wells Fargo Bank, (the “Lockbox Agreement”)or
such other financial institution accepted by Laurus in writing as may be
selected by Company (the “Lockbox Bank”). 
On or prior to the Closing Date, Company shall and shall cause the
Lockbox Bank to enter into all such documentation acceptable to Laurus pursuant
to which, among other things, the Lockbox Bank agrees to:  (a) sweep the Lockbox on a daily basis and
deposit all checks received therein to an account designated by Laurus in
writing and (b) comply only with the instructions or other directions of Laurus
concerning the Lockbox.  All of
Company’s invoices, account statements and other written or oral communications
directing, instructing, demanding or requesting payment of any Account of
Company or any other amount constituting Collateral shall conspicuously direct
that all payments be made to the Lockbox or such other address as Laurus may
direct in writing.  If, notwithstanding
the instructions to Account Debtors, Company receives any payments, Company
shall immediately remit such payments to Laurus in their original form with all
necessary endorsements.  Until so
remitted, Company shall hold all such payments in trust for and as the property
of Laurus and shall not commingle such payments with any of its other funds or
property.  Company shall pay Laurus five
percent (5%) of the amount of any payment so received by Company and not
delivered in kind to Laurus within five (5) Business Days following Company’s
receipt thereof.

 

(b)   At Laurus’ election, following the occurrence
of an Event of Default, Laurus may notify Company’s Account Debtors of Laurus’
security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company’s account.

 

9.     Collection and Maintenance of
Collateral.

 

(a)   Laurus may verify Company’s Accounts
utilizing an audit control company or any other agent of Laurus.

 

(b)   Proceeds of Accounts received by Laurus will
be deemed received upon Laurus’ receipt of such proceeds in good funds in
dollars of the United States of America in Laurus’ account.  Any amount received by Laurus after 12:00
noon (New York time) on any Business Day shall be deemed received on the next
Business Day.

 

(c)   As Laurus receives the proceeds of Accounts,
it shall apply all such proceeds to repay the then outstanding Loans to the
extent they exceed the Minimum Borrowing Amount and then shall remit all such
remaining proceeds (net of interest, fees and other amounts then due and owing
to Laurus hereunder), if any, to Company by the next succeeding Business Day
..  Notwithstanding the foregoing,
following the occurrence and during the continuance of an Event of Default,
Laurus, at its option, may (a) apply such proceeds to the Obligations in such
order as Laurus shall elect, (b) hold such proceeds as cash collateral for the
Obligations and Company hereby grants to Laurus a security interest in such
cash collateral amounts as security for the Obligations and/or (c) do any
combination of the foregoing.

 

9

 

10.   Inspections
and Appraisals.  At all times
during normal business hours, Laurus, and/or any agent of Laurus shall have the
right upon reasonable notice to the Company to (a) have access to, visit,
inspect, review, evaluate and make physical verification and appraisals of
Company’s properties and the Collateral, (b) inspect, audit and copy (or take
originals if necessary) and make extracts from Company’s Books and Records,
including management letters prepared by independent accountants, and (c)
discuss with Company’s principal officers, and independent accountants,
Company’s business, assets, liabilities, financial condition, results of
operations and business prospects. 
Company will deliver to Laurus any instrument necessary for Laurus to
obtain records from any service bureau maintaining records for Company.  If any internally prepared financial
information, including that required under this Section is unsatisfactory in
any manner to Laurus, Laurus may request that the Accountants review the same.

 

11.   Financial
Reporting.  Company will
deliver, or cause to be delivered, to Laurus each of the following, which shall
be in form and detail acceptable to Laurus:

 

(a)   As soon as available, and in any event within
one hundred twenty (120) days after the end of each fiscal year of Company,
Company’s audited financial statements with a report of independent certified
public accountants of recognized standing selected by Company and acceptable to
Laurus (the “Accountants”), which annual financial statements shall include
Company’s balance sheet as at the end of such fiscal year and the related
statements of Company’s income, retained earnings and cash flows for the fiscal
year then ended, prepared, if Laurus so requests, on a consolidating and
consolidated basis to include all Subsidiaries and Affiliates, all in
reasonable detail and prepared in accordance with GAAP, together with (i)
copies of any management letters prepared by such accountants; (ii) a report
signed by the Accountants stating that in making the investigations necessary
for said opinion they obtained no knowledge, except as specifically stated, of
any Default or Event of Default; and (iii) a certificate of Company’s
President, Chief Executive Officer or Chief Financial Officer stating that such
financial statements have been prepared in accordance with GAAP and whether or
not such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;

 

(b)   As soon as available and in any event within
forty five (45) days after the end of each quarter, an unaudited/internal
balance sheet and statements of income, retained earnings and cash flows of
Company as at the end of and for such quarter and for the year to date period
then ended, prepared, if Laurus so requests, on a consolidating and
consolidated basis to include all Subsidiaries and Affiliates, in reasonable
detail and stating in comparative form the figures for the corresponding date
and periods in the previous year, all prepared in accordance with GAAP, subject
to year-end adjustments and accompanied by a certificate of Company’s
President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, subject
to year-end audit adjustments, and (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto;

 

(c)   Within twenty (20) days after the end of each
month (or more frequently if Laurus so requests), agings of Company’s Accounts,
unaudited trial balances and their accounts

 

10

 

payable and a calculation
of Company’s Accounts, Eligible Accounts, Eligible Inventory and Inventory as
at the end of such month or shorter time period; and

 

(d)   Promptly after (i) the filing thereof, copies
of Company’s most recent registration statements and annual, quarterly, monthly
or other regular reports which Company files with the Securities and Exchange
Commission (the “SEC”), and (ii) the issuance thereof, copies of such financial
statements, reports and proxy statements as Company shall send to its
stockholders.

 

12.   Additional Representations and
Warranties.  Company represents
and warrants (each of which such representations and warranties shall be deemed
repeated upon the making of a request for a Loan and made as of the time of
each Loan made hereunder), as follows:

 

(a)   Company is a corporation duly incorporated
and validly existing under the laws of the jurisdiction of its incorporation
and duly qualified and in good standing in every other state or jurisdiction in
which the nature of Company’s business requires such qualification.

 

(b)   The execution, delivery and performance of
this Agreement and the Ancillary Agreements (i) have been duly authorized, (ii)
are not in contravention of Company’s certificate of incorporation, by-laws or
of any indenture, agreement or undertaking to which Company is a party or by
which Company is bound and (iii) are within Company’s corporate powers.

 

(c)   This Agreement and the Ancillary Agreements
executed and delivered by Company are Company’s legal, valid and binding
obligations, enforceable in accordance with their terms except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and similar law relating to or affecting the rights
or remedies of creditors generally, principles of equity and the qualification
of the availability of the remedies of specific performance or injunctive
relief, or any other equitable remedy, is subject to the discretion of the
court before which a proceeding therefore may be brought and application of the
general principles of equity. .

 

(d)   Exhibit 12(d) sets forth Company’s
name as it appears in official filing in the state of its incorporation, the
type of entity of Company, the organizational identification number issued by
Company’s state of incorporation or a statement that no such number has been
issued, Company’s state of incorporation, and the location of Company’s chief
executive office, corporate offices, warehouses, other locations of Collateral
and locations where records with respect to Collateral are kept (including in
each case the county of such locations) and, except as set forth in such Exhibit
12(d), such locations have not changed during the preceding twelve
months.  As of the Closing Date, during
the prior five years, except as set forth in Exhibit 12(d), Company has
not been known as or conducted business in any other name (including trade
names).  Company has only one state of
incorporation.

 

(e)   Based upon the Employee Retirement Income
Security Act of 1974 (“ERISA”), and the regulations and published
interpretations thereunder: (i) Company has not engaged in any Prohibited
Transactions as defined in Section 406 of ERISA and Section 4975 of the
Internal Revenue Code, as amended; (ii) Company has met all applicable minimum
funding

 

11

 

requirements under
Section 302 of ERISA in respect of its plans; (iii) Company has no knowledge of
any event or occurrence which would cause the Pension Benefit Guaranty
Corporation to institute proceedings under Title IV of ERISA to terminate any
employee benefit plan(s); (iv) Company has no fiduciary responsibility for
investments with respect to any plan existing for the benefit of persons other
than Company’s employees; and (v) Company has not withdrawn, completely or
partially, from any multi-employer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980.

 

(f)    Company is solvent, able to pay its debts as
they mature, has capital sufficient to carry on its business and all businesses
in which Company is about to engage and the fair saleable value of its assets
(calculated on a going concern basis) is in excess of the amount of its
liabilities.

 

(g)   There is no pending or threatened litigation,
court order, judgment, writ, suit, action or proceeding which involves the
possibility of having a Material Adverse Effect.

 

(h)   All balance sheets and income statements
which have been delivered to Laurus fairly, accurately and properly state
Company’s financial condition on a basis consistent with that of previous
financial statements and there has been no material adverse change in Company’s
financial condition as reflected in such statements since the balance sheet
date of the statements last delivered to Laurus and such statements do not fail
to disclose any fact or facts which might have a Material Adverse Effect on
Company’s financial condition.

 

(i)    Company possesses all of the licenses and
Intellectual Property necessary to conduct its business.  There has been no assertion or claim of
violation or infringement with respect to any Intellectual Property.  Exhibit 12(i) sets forth all
Intellectual Property of Company.

 

(j)    Neither this Agreement, the exhibits and
schedules hereto, the Ancillary Agreements nor any other document delivered by
Company to Laurus or its attorneys or agents in connection herewith or
therewith or with the transactions contemplated hereby or thereby, contain any
untrue statement of a material fact nor omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.  The issuance of the Notes and the Warrants and the shares of
common stock issued upon conversion of the Notes and exercise of the Warrants
will be exempt from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”), and will have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.  Neither Company nor
any of its Affiliates, nor any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with the offer
or sale of the Securities.

 

(k)   The common stock of Company is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act and since January 1,
2002, and except for the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, the Company has timely filed all proxy
statements, reports, schedules, forms, statements and other documents required
to be filed by it under the Exchange Act. 
Company has furnished Laurus with copies of (i) its Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 and (ii) its Quarterly
Reports

 

12

 

on Form 10-Q for the
fiscal quarters ended March 31, 2003 and June 30, 2003, (the “SEC
Reports”).  Each SEC Report was, at the
time of its filing, in substantial compliance with the requirements of its
respective form, and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.  The financial statements of
Company included in the SEC Reports comply as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC or other applicable rules and regulations with respect thereto.  Such financial statements have been prepared
in accordance with GAAP applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed) and fairly
present in all material respects the financial position of Company and its
subsidiaries on a consolidated basis as of the dates thereof and the results of
operations and cash flows of the Company and its subsidiaries on a consolidated
basis for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).

 

(l)    Company’s common stock is listed on the
American Stock Exchange and satisfies all requirements for the continuation of
such listing.  Company has not received
any notice that its common stock will be delisted from the American Stock
Exchange or that its common stock does not meet all requirements for the
continuation of such listing.

 

(m)  Neither Company, nor any of its affiliates,
nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities under the
Ancillary Agreements (the “Securities”) to be integrated with prior offerings
by Company for purposes of the Securities Act which would prevent Company from
selling the Securities pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions;nor will Company or
any of its affiliates or subsidiaries take any action or steps that would cause
the offering of the Securities to be integrated with other offerings.

 

(n)   The Securities are restricted securities
under the Securities Act as of the date of this Agreement.  Company will not issue any stop transfer
order or other order impeding the sale and delivery of any of the Securities at
such time as the Securities are registered for public sale or an exemption from
registration is available, except as required by federal or state securities laws.

 

(o)   Company understands the nature of the
Securities issuable under the Ancillary Agreements and recognizes that they may
have a potential dilutive effect. 
Company specifically acknowledges that its obligation to issue the
shares of Common Stock upon conversion of the Notes and exercise of the
Warrants is binding upon Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of
Company.

 

(p)   Except for agreements made in the ordinary
course of business which the Company is not required to file with the SEC,
there is no agreement that has not been filed with

 

13

 

the SEC as an exhibit to
a registration statement or other applicable form that the Company is required
to file with the SEC, the breach of which duty could have a material and
adverse effect on the  Company
and/or  its Subsidiaries, or would
prohibit or otherwise interfere with the ability of the Company to enter into
and perform any of its obligations under this Agreement or the Registration
Rights Agreement executed by Company in favor of Laurus in any material
respect.

 

13.   Covenants.  Company covenants as follows:

 

(a)   Company will not, without the prior written
consent of Laurus, change (i) its name as it appears in the official filings in
the state of its incorporation or formation, (ii) the type of legal entity it
is, (iii) its organization identification number, if any, issued by its state
of incorporation, (iv) its state of incorporation or (v) amend its certificate
of incorporation, by-laws or other organizational document.

 

(b)   The operation of Company’s business is and
will continue to be in compliance in all material respects with all applicable
federal, state and local laws, rules and ordinances, including to all laws,
rules, regulations and orders relating to taxes, payment and withholding of
payroll taxes, employer and employee contributions and similar items,
securities, employee retirement and welfare benefits, employee health safety
and environmental matters.

 

(c)   Company will pay or discharge when due all
taxes, assessments and governmental charges or levies imposed upon Company or
any of the Collateral unless such amounts are being diligently contested in
good faith by appropriate proceedings provided that (i) adequate reserves with
respect thereto are maintained on the books of Company in conformity with GAAP
and (ii) the related Lien shall have no effect on the priority of the Liens in
favor of Laurus or the value of the assets in which Laurus has a Lien.

 

(d)   Company will promptly inform Laurus in
writing of: (i) the commencement of all proceedings and investigations by or
before and/or the receipt of any notices from, any governmental or
nongovernmental body and all actions and proceedings in any court or before any
arbitrator against or in any way concerning any event which might singly or in
the aggregate, have a Material Adverse Effect; (ii) any amendment of Company’s
certificate of incorporation, by-laws or other organizational document; (iii)
any change which has had or might have a Material Adverse Effect; (iv) any
Event of Default or Default; (v) any default or any event which with the
passage of time or giving of notice or both would constitute a default under
any agreement for the payment of money to which Company is a party or by which
Company or any of Company’s properties may be bound which would have a Material
Adverse Effect and (vi) any change in Company’s name or any other name used in
its business.

 

(e)   Company will not (i) create, incur, assume or
suffer to exist any indebtedness (exclusive of trade debt) whether secured or
unsecured other than Company’s indebtedness to Laurus and as set forth on Exhibit
13(e)(i) attached hereto and made a part hereof; (ii) cancel any debt owing
to it in excess of $250,000 in the aggregate during any 12 month period; (iii)
assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligations of any other Person, except the endorsement
of negotiable instruments by a Company for deposit or collection or similar
transactions in the ordinary course of business; (iv) directly or indirectly
declare, pay or make any dividend or distribution on any class of its Stock or
apply any

 

14

 

of its funds, property or
assets to the purchase, redemption or other retirement of any Stock of a
Company; (v), other than as described on Exhibit 13(e)(v) hereto, purchase or
hold beneficially any Stock or other securities or evidences of indebtedness
of, make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any partnership
or joint venture, except (x) travel advances and (y) loans to Company’s
officers and employees not exceeding at any one time an aggregate of $10,000;
(vi), create or permit to exist any Subsidiary, other than any Subsidiary in
existence on the date hereof and listed in Exhibit 13(e)(ii) unless such
new Subsidiary is designated by Laurus as either a co-borrower or guarantor
hereunder and such Subsidiary shall have entered into all such documentation
required by Laurus to grant to Laurus a first priority perfected security
interest in such Subsidiary’s assets to secure the Obligations; (vii) directly
or indirectly, prepay any indebtedness (other than to Laurus), or repurchase,
redeem, retire or otherwise acquire any indebtedness; (viii) enter into any
merger, consolidation or other reorganization with or into any other Person or
acquire all or a portion of the assets or Stock of any Person or permit any
other Person to consolidate with or merge with it, unless (1) Company is the
surviving entity of such merger or consolidation, (2) no Event of Default shall
exist immediately prior to and after giving effect to such merger or
consolidation, (3) Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) Company shall
have provided Laurus with at least thirty (30) days prior written notice of
such merger or consolidation; (ix) materially change the nature of the business
in which it is presently engaged; (x) change its fiscal year or make any
changes in accounting treatment and reporting practices without prior written
notice to Laurus except as required by GAAP or in the tax reporting treatment
or except as required by law; (xi) enter into any transaction with any
employee, director or Affiliate, except in the ordinary course on arm’s-length
terms; or (xii) bill Accounts under any name except the present name of
Company.

 

(f)    None of the proceeds of the Loans hereunder
will be used directly or indirectly to “purchase” or “carry” “margin stock” or
to repay indebtedness incurred to “purchase” or “carry” “margin stock” within
the respective meanings of each of the quoted terms under Regulation U of the
Board of Governors of the Federal Reserve System as now and from time to time
hereafter in effect.

 

(g)   Company will bear the full risk of loss from
any loss of any nature whatsoever with respect to the Collateral.  At Company’s own cost and expense in amounts
and with carriers acceptable to Laurus, Company shall (i) keep all its
insurable properties and properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to Company’s
including business interruption insurance; (ii) maintain a bond in such amounts
as is customary in the case of companies engaged in businesses similar to
Company’s insuring against larceny, embezzlement or other criminal
misappropriation of insured’s officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of Company
either directly or through Governmental Authority to draw upon such funds or to
direct generally the disposition of such assets; (iii) maintain public and
product liability insurance against claims for personal injury, death or
property damage suffered by others; (iv) maintain all such worker’s
compensation or similar insurance as may be required under the laws of any
state or jurisdiction in which Company is engaged in business; and (v) furnish
Laurus with (x) copies of all policies

 

15

 

and evidence of the
maintenance of such policies at least thirty (30) days before any expiration
date, (y) endorsements to such policies naming Laurus as “co-insured” or
“additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to Laurus, naming Laurus as loss payee, and (z) evidence
that as to Laurus the insurance coverage shall not be impaired or invalidated
by any act or neglect of Company and the insurer will provide Laurus with at
least thirty (30) days notice prior to cancellation.  Company shall instruct the insurance carriers that in the event
of any loss thereunder in excess of fifty thousand dollars ($50,000), the
carriers shall make payment for such loss to Laurus and not to Company and
Laurus jointly.  If any insurance losses
are paid by check, draft or other instrument payable to Company and Laurus jointly,
Laurus may endorse Company’s name thereon and do such other things as Laurus
may deem advisable to reduce the same to cash. 
Laurus is hereby authorized to adjust and compromise claims.  All loss recoveries received by Laurus upon
any such insurance may be applied to the Obligations, in such order as Laurus
in its sole discretion shall determine or shall otherwise be held by Laurus as
cash collateral for the Obligations. 
Any surplus shall be paid by Laurus to Company or applied as may be
otherwise required by law.  Any
deficiency thereon shall be paid by Company to Laurus, on demand.

 

(h)    Company will at all times have authorized
and reserved a sufficient number of shares of Common Stock to provide for the
conversion of the Notes and exercise of the Warrants.

 

14.   Further
Assurances.  At any time and
from time to time, upon the written request of Laurus and at the sole expense
of Company, Company shall promptly and duly execute and deliver any and all
such further instruments and documents and take such further action as Laurus
may request (a) to obtain the full benefits of this Agreement and the Ancillary
Agreements, (b) to protect, preserve and maintain Laurus’ rights in the
Collateral and under this Agreement or any Ancillary Agreement, or (c) to
enable Laurus to exercise all or any of the rights and powers herein granted or
any Ancillary Agreement.

 

15.   Power of Attorney.  Company hereby appoints Laurus, or any other
Person whom Laurus may designate as Company’s attorney, with power to:  (i) endorse Company’s name on any checks,
notes, acceptances, money orders, drafts or other forms of payment or security
that may come into Laurus’ possession; (ii) sign Company’s name on any invoice
or bill of lading relating to any Accounts, drafts against Account Debtors,
schedules and assignments of Accounts, notices of assignment, financing
statements and other public records, verifications of Account and notices to or
from Account Debtors; (iii) verify the validity, amount or any other matter
relating to any Account by mail, telephone, telegraph or otherwise with Account
Debtors; (iv) do all things necessary to carry out this Agreement, any
Ancillary Agreement and all related documents; and (v) on or after the
occurrence and continuation of an Event of Default, notify the post office
authorities to change the address for delivery of Company’s mail to an address
designated by Laurus, and to receive, open and dispose of all mail addressed to
Company: provided, however, that Laurus shall forward all such mail not
pertaining to Accounts to the Company within two Business Days of Laurus’
receipt of such mail.  Company hereby
ratifies and approves all acts of the attorney.  Neither Laurus, nor the attorney will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law.  This power, being coupled

 

16

 

with an interest, is
irrevocable so long as Laurus has a security interest and until the Obligations
have been fully satisfied.

 

16.   Term of Agreement.  Laurus’ agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Initial Term. 
At the expiration of the Initial Term, this Agreement shall be deemed to
be automatically renewed for an additional period of one year  and thereafter to be automatically renewed
by succeeding terms of equal length at the end of the first and each succeeding
renewal term (each, a “Renewal Term”), unless (i) Company shall (a) deliver
written notice of cancellation to Laurus not earlier than 90 days and not later
than 30 days prior to the expiration date of the Initial Term or any succeeding
Renewal Term and (b) has paid in full in cash all Obligations on or prior to
the expiration date of the Initial Term or any Renewal Term, as applicable, or
(ii) Laurus shall deliver written notice of cancellation to Company not earlier
than 90 days and not later than 30 days prior to the expiration date of the
Initial Term or any succeeding Renewal Term. 
At Laurus’ election following the occurrence of an Event of Default,
Laurus may terminate this Agreement. 
The termination of the Agreement shall not affect any of Laurus’ rights
hereunder or any Ancillary Agreement and the provisions hereof and thereof
shall continue to be fully operative until all transactions entered into,
rights or interests created and the Obligations have been disposed of,
concluded or liquidated.  Notwithstanding
the foregoing, Laurus shall release its security interests pursuant to Section
17 hereof within three Business Days 
after the Company shall have paid to Laurus an early payment fee in an
amount equal to (1) three percent (3%) of the Capital Availability Amount if
such payment occurs prior to the first anniversary of the Initial Term , (2)
two percent (2%) of the Capital Availability Amount if such payment occurs on
or after the first anniversary and prior to the second anniversary of the
Initial Term  and (3) one percent (1%)
of the Capital Availability Amount if such payment occurs on or after the
second anniversary of the Initial Term; such fee being intended to compensate
Laurus for its costs and expenses incurred in initially approving this
Agreement.  Such early payment fee shall
also be due and payable by Company to Laurus upon termination of this Agreement
by Laurus after the occurrence of an Event of Default.

 

17.   Termination of
Lien.  The Liens and rights
granted to Laurus hereunder and any Ancillary Agreements and the financing
statements filed in connection herewith or therewith shall continue in full
force and effect, notwithstanding the termination of this Agreement or the fact
that Company’s account may from time to time be temporarily in a zero or credit
position, until (a) all of the Obligations of Company have been paid or
performed in full after the termination of this Agreement.  Laurus shall not be required to send
termination statements to Company, or to file them with any filing office,
unless and until this Agreement and the Ancillary Agreements shall have been
terminated in accordance with their terms and all Obligations paid in full in
immediately available funds.

 

18.   Events of Default.  The occurrence of any of the following shall
constitute an Event of Default:

 

(a)   failure to make payment of any of the
Obligations when required hereunder;

 

17

 

(b)   failure to pay any taxes when due unless such
taxes are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been provided on Company’s books;

 

(c)   failure to perform under and/or committing
any breach of this Agreement or any Ancillary Agreement or any other agreement
between Company and Laurus which shall continue for a period of ten (10) days
after the occurrence thereof unless approved by Laurus;

 

(d)   the occurrence of a default (beyond any
applicable grace, notice or cure periods) under any agreement to which Company
is a party with third parties which could reasonably be expected to have a
Material Adverse Effect;

 

(e)   any representation, warranty or statement
made by Company hereunder, in any Ancillary Agreement, any certificate,
statement or document delivered pursuant to the terms hereof, or in connection
with the transactions contemplated by this Agreement should at any time be
false or misleading in any material respect;

 

(f)    an attachment or levy is made upon Company’s
assets having an aggregate value in excess of $250,000 or a judgment is
rendered against Company or Company’s property involving a liability of more
than $250,000 which shall not have been vacated, discharged, stayed or bonded
pending appeal within thirty (30) days from the entry thereof;

 

(g)   any change in Company’s condition or affairs
(financial or otherwise) which in Laurus’ reasonable, good faith opinion, would
have a Material Adverse Effect;

 

(h)   any Lien created hereunder or under any
Ancillary Agreement for any reason ceases to be or is not a valid and perfected
Lien having a first priority interest;

 

(i)    if Company 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, or fail to have dismissed, within
forty-five (45) 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;

 

(j)    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;

 

(k)   any Affiliate or Subsidiary, shall (i) apply
for, consent to or suffer to exist the appointment of, or the taking possession
by, a receiver, custodian, trustee or liquidator of itself or of all or a
substantial part of its property, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business, (iii) make a general assignment for the benefit of
creditors, (iv) commence a voluntary case under the federal bankruptcy laws (as
now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vii) acquiesce to, or fail to have dismissed, within
forty-five (45) days, any petition filed against it in

 

18

 

any involuntary case
under such bankruptcy laws or (viii) take any action for the purpose of
effecting any of the foregoing;

 

(l)    Company directly or indirectly sells,
assigns, transfers, conveys, or suffers or permits to occur any sale,
assignment, transfer or conveyance of any assets of Company or any interest
therein, except as permitted herein;

 

(m)  a default by Company in the payment, when due,
of any principal of or interest on any other indebtedness for money borrowed in
an amount greater than $25,000, which is not cured within any applicable cure
or grace period;

 

(n)   the occurrence of a change in controlling
ownership of the Company;

 

(o)   the indictment of Company, any officer of
Company under any criminal statute, or commencement of criminal or civil
proceeding against Company or any officer of Company pursuant to which statute
or proceeding penalties or remedies sought or available include forfeiture of
any of the property of Company;

 

(p)   if an Event of Default shall occur under and
as defined in any Note; or

 

(q)   Company shall breach any term or provision of
any Ancillary Agreement which is not cured within any applicable cure or grace
period;

 

19.   Remedies.  Following the occurrence of an Event of
Default, Laurus shall have the right to demand repayment in full of all Obligations,
whether or not otherwise due.  Until all
Obligations have been fully satisfied, Laurus shall retain its Lien in all
Collateral.  Laurus shall have, in
addition to all other rights provided herein and in each Ancillary Agreement,
the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be
entitled, including the right to take immediate possession of the Collateral,
to require Company to assemble the Collateral, at Company’s expense, and to
make it available to Laurus at a place designated by Laurus which is reasonably
convenient to both parties and to enter any of the premises of Company or
wherever the Collateral shall be located, with or without force or process of
law, and to keep and store the same on said premises until sold (and if said
premises be the property of Company, Company agrees not to charge Laurus for
storage thereof), and the right to apply for the appointment of a receiver for
Company’s property.  Further, Laurus
may, at any time or times after the occurrence of an Event of Default, sell and
deliver all Collateral held by or for Laurus at public or private sale for
cash, upon credit or otherwise, at such prices and upon such terms as Laurus,
in Laurus’ sole discretion, deems advisable or Laurus may otherwise recover
upon the Collateral in any commercially reasonable manner as Laurus, in its
sole discretion, deems advisable.  The
requirement of reasonable notice shall be met if such notice is mailed postage
prepaid to Company at Company’s address as shown in Laurus’ records, at least
ten (10) days before the time of the event of which notice is being given.  Laurus may be the purchaser at any sale, if
it is public.  In connection with the
exercise of the foregoing remedies, Laurus is granted permission to use all of
Company’s trademarks, tradenames, tradestyles, patents, patent applications,
licenses, franchises and other proprietary rights.  The proceeds of sale shall be applied first to all costs and
expenses of sale, including attorneys’ fees, and second to the payment (in
whatever

 

19

 

order Laurus elects) of
all Obligations.  After the indefeasible
payment and satisfaction in full in cash of all of the Obligations, and after
the payment by Laurus of any other amount required by any provision of law,
including Section 608(a)(1) of the Code (but only after Laurus has received
what Laurus considers reasonable proof of a subordinate party’s security interest),
the surplus, if any, shall be paid to Company or its representatives or to
whosoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct. 
Company shall remain liable to Laurus for any deficiency.  In addition, Company shall pay Laurus a
liquidation fee (“Liquidation Fee”) in the amount of five percent (5%) of the
face amount of each Account outstanding at any time during a “liquidation
period”, but in no event shall the aggregate 
Liquidation Fee payable hereunder be more than fifteen percent (15%) of
all Accounts outstanding on the first day of the liquidation period.  For purposes hereof, “liquidation period”
means a period:  (i) beginning on the
earliest date of (x) an event referred to in Section 18(i) or 18(j), or (y) the
cessation of Company’s business; and (ii) ending on the date on which Laurus
has actually received all Obligations due and owing it under this Agreement and
the Ancillary Agreements.  The Liquidation
Fee shall be paid on the earlier to occur of: 
(i) the date on which Laurus collects the applicable Account; and (ii)
the 90th day from the invoice of such Account by deduction from any amount
otherwise due from Laurus to Company directly, at the option of Laurus.  Company and Laurus acknowledge that the
actual damages that would be incurred by Laurus after the occurrence of an
Event of Default would be difficult to quantity and that Company and Laurus
have agreed that the fees and obligations set forth in this Section and in this
Agreement would constitute fair and appropriate liquidated damages in the event
of any such termination.

 

20.   Waivers.  To the full extent permitted by applicable
law, Company waives (a) presentment, demand and protest, and notice of
presentment, dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all of this Agreement and the Ancillary Agreements or any other notes,
commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper
and guaranties at any time held by Laurus on which Company may in any way be
liable, and hereby ratifies and confirms whatever Laurus may do in this regard;
(b) all rights to notice and a hearing prior to Laurus’ taking possession or
control of, or to Laurus’ replevy, attachment or levy upon, any Collateral or
any bond or security that might be required by any court prior to allowing
Laurus to exercise any of its remedies; and (c) the benefit of all valuation,
appraisal and exemption laws.  Company
acknowledges that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the Ancillary Agreements and the transactions
evidenced hereby and thereby.

 

21.   Expenses.  Company shall pay all of Laurus’ reasonable
out-of-pocket costs and expenses, including reasonable fees and disbursements
of in-house or outside counsel in an aggregate amount not to exceed $22,000 and
due diligence examiners and appraisers in an aggregate amount not to exceed
$17,500, in connection with the preparation, execution and delivery of this
Agreement and the Ancillary Agreements, 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 this Agreement
or any Ancillary Agreement.  Company
shall also pay all of Laurus’ 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

 

20

 

proposed or executed in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements, (b) Laurus’ obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not limited
to, the enforcement or defense of Laurus’ 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 Laurus by Company as Collateral for, or any other
Person as security for, Company’s Obligations hereunder and (e) any
consultations in connection with any of the foregoing.  Company shall also pay Laurus’ customary
bank charges for all bank services (including wire transfers) performed or
caused to be performed by Laurus for Company at Company’s request or in
connection with Company’s loan account with Laurus.  All such costs and expenses together with all filing, recording
and search fees, taxes and interest payable by Company to Laurus shall be
payable on demand and shall be secured by the Collateral.  If any tax by any Governmental Authority is
or may be imposed on or as a result of any transaction between Company and
Laurus which Laurus is or may be required to withhold or pay, Company agrees to
indemnify and hold Laurus harmless in respect of such taxes, and Company will
repay to Laurus the amount of any such taxes which shall be charged to
Company’s account; and until Company shall furnish Laurus with indemnity
therefor (or supply Laurus with evidence satisfactory to it that due provision
for the payment thereof has been made), Laurus may hold without interest any
balance standing to Company’s credit and Laurus shall retain its Liens in any
and all Collateral.

 

22.   No Shorting.  Neither Laurus nor any of its Affiliates nor
investment partners shall cause any Person or entity to directly or indirectly
engage in “short sales” or other hedging strategies of the Company’s Common
Stock as long as any Note is outstanding.

 

23.   Assignment By
Laurus.  Laurus may assign any
or all of the Obligations together with any or all of the security therefor and
any transferee shall succeed to all of Laurus’ rights with respect
thereto.  Upon such transfer and
assumption in full by transferee of all of Laurus’ responsibilities hereunder,
Laurus shall be released from all responsibility for the Collateral to the
extent same is assigned to and assumed by any transferee.  Laurus may from time to time sell or
otherwise grant participations in any of the Obligations and the holder of any
such participation shall, subject to the terms of any agreement between Laurus
and such holder, be entitled to the same benefits as Laurus with respect to any
security for the Obligations in which such holder is a participant.  Company agrees that each such holder may
exercise any and all rights of banker’s lien, set-off and counterclaim with
respect to its participation in the Obligations as fully as though Company were
directly indebted to such holder in the amount of such participation.

 

24.   No
Waiver; Cumulative Remedies. 
Failure by Laurus to exercise any right, remedy or option under this
Agreement, any Ancillary Agreement or any supplement hereto or thereto or any
other agreement between Company and Laurus or delay by Laurus in exercising the
same, will not operate as a waiver; no waiver by Laurus will be effective
unless it is in writing and then only to the extent specifically stated.  Laurus’ rights and remedies under this
Agreement and the Ancillary Agreements will be cumulative and not exclusive of
any other right or remedy which Laurus may have.

 

21

 

25.   Application
of Payments.  Company
irrevocably waives the right to direct the application of any and all payments
at any time or times hereafter received by Laurus from or on Company’s behalf
and Company hereby irrevocably agrees that Laurus shall have the continuing
exclusive right to apply and reapply any and all payments received at any time
or times hereafter against the Obligations hereunder in such manner as Laurus
may deem advisable notwithstanding any entry by Laurus upon any of Laurus’
books and records.

 

26.   Indemnity.  Company agrees to indemnify and hold Laurus,
and its respective affiliates, employees, attorneys and agents (each, an
“Indemnified Person”), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or
nature whatsoever (including attorneys’ fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which
may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated
under this Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement, the Ancillary
Agreements or any other documents or transactions contemplated by or referred
to herein or therein and any actions or failures to act with respect to any of
the foregoing, except to the extent that any such indemnified liability is
finally determined by a court of competent jurisdiction to have resulted from
such Indemnified Person’s gross negligence or willful misconduct. NO
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO COMPANY OR TO ANY OTHER
PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT,
PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT
OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR
ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER
OR THEREUNDER.

 

27.   Revival.  Company further agrees that to the extent
Company makes a payment or payments to Laurus, which payment or payments or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if said payment had not been made.

 

28.   Notices.  Any notice or request hereunder may be given
to Company or Laurus at the respective addresses set forth below or as may
hereafter be specified in a notice designated as a change of address under this
Section.  Any notice or request
hereunder shall be given by registered or certified mail, return receipt
requested, hand delivery, overnight mail or telecopy (confirmed by mail).  Notices and requests shall be, in the case
of those by hand delivery, deemed to have been given when delivered to any
officer of the party to whom it is addressed, in the case of those by mail or
overnight mail, deemed to have been given when deposited in the mail or with
the overnight mail carrier, and, in the case of a telecopy, when confirmed.

 

22

 

Notices shall be provided
as follows:

 

	
   

  	
  If to Laurus:

  	
  Laurus Master Fund,
  Ltd.

  c/o Laurus Capital Management, LLC

  152 West 57th Street

  New York, New York 10019

  Attention:  David Grin

  Telephone: (212) 541-4434

  Telecopier:  (212) 541-5800

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  	
  Loeb & Loeb LLP

  345 Park Avenue

  New York, New York  10154

  Attention:  Scott J. Giordano, Esq.

  Telephone:  (212) 407-4000

  Telecopier: (212) 407-4990

  
	
   

  	
   

  	
   

  
	
   

  	
  If to Company:

  	
  Digital Angel
  Corporation

  490 Villaume Ave.

  South St. Paul, MN  55075

  Attention: Mr. James P. Santelli

  Telephone (651) 552-6325

  Telecopier: (651)  455-0413

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  	
  Winthrop &
  Weinstine, P.A.

  Suite 3500

  225 South Sixth Street

  Minneapolis, MN 55402

  Attention:  Michele D. Vaillancourt,
  Esq.,

  Telephone: (612) 604-6400

  Telecopier: (612) 604-6800

  

 

(a)   Governing Law,
Jurisdiction and Waiver of Jury Trial. 
THIS 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 THE CONFLICT OF LAWS PROVISIONS
THEREOF. 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 COMPANY AND
LAURUS PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR AS
TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND COMPANY ACKNOWLEDGE THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE

 

23

 

HEARD BY A COURT LOCATED
OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED,
THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS
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
LAURUS.  COMPANY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED
UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS.  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 COMPANY AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID. 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, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN
CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS AND COMPANY ARISING OUT OF,
CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN
THEM IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR THE
TRANSACTIONS RELATED THERETO. THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER
FROM THE OTHER PARTY ITS REASONABLE ATTORNEY’S FEES AND COSTS.  IN THE EVENT THAT ANY PROVISION OF THIS
AGREEMENT 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 UNENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT.  NOTHING CONTAINED HEREIN SHALL BE DEEMED OR
OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION
AGAINST THE BORROWER IN ANY OTHER JURISDICTION TO COLLECT ON THE COMPANY’S
OBLIGATIONS TO LAURUS, TO REALIZE ON ANY COLLATERAL OR ANY OTHER SECURITY FOR
SUCH OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
LAURUS.

 

29.   Limitation
of Liability.  Company
acknowledges and understands that in order to assure repayment of the
Obligations hereunder Laurus may be required to exercise any and all of Laurus’
rights and remedies hereunder and agrees that neither Laurus nor any of Laurus’
agents shall be liable for acts taken or omissions are taken or made in
connection herewith or

 

24

 

therewith except to the
extent that such actions or omissions are taken or made by such Person or
entity with gross negligence or willful misconduct .

 

30.   Entire
Understanding.  This Agreement
and the Ancillary Agreements contain the entire understanding between Company
and Laurus and any promises, representations, warranties or guarantees not
herein contained shall have no force and effect unless in writing, signed by
Company’s and Laurus’ respective officers. 
Neither this Agreement, the Ancillary Agreements, nor any portion or
provisions thereof may be changed, modified, amended, waived, supplemented,
discharged, cancelled or terminated orally or by any course of dealing, or in
any manner other than by an agreement in writing, signed by the party to be
charged.

 

31.   Severability.  Wherever possible each provision of this
Agreement or the Ancillary Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions thereof.

 

32.   Captions.  All captions are and shall be without
substantive meaning or content of any kind whatsoever.

 

33.   Counterparts;
Telecopier Signatures.  This
Agreement may be executed in one or more counterparts, each of which shall
constitute an original and all of which taken together shall constitute one and
the same agreement.  Any signature
delivered by a party via telecopier transmission shall be deemed to be any
original signature hereto.

 

34.   Construction.  The parties acknowledge that each party and
its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.

 

35.   Publicity.  Company hereby authorize Laurus to make
appropriate announcements of the financial arrangement entered into by and
between Company and Laurus, including, without limitation, announcements which
are commonly known as tombstones, in such publications and to such selected
parties as Laurus shall in its sole and absolute discretion deem appropriate.

 

25

 

IN WITNESS
WHEREOF, this Agreement has been duly executed as of the day and year first
above written.

 

	
   

  	
  DIGITAL ANGEL
  CORPORATION

  
	
   

  
	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name: James P.
  Santelli,

  
	
   

  	
  Title: Vice President
  Finance and CFO

  
	
   

  
	
   

  	
  LAURUS MASTER FUND,
  LTD.

  
	
   

  
	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name: David Grin

  
	
   

  	
  Title: Director

  

 

26

 

Annex A - Definitions

 

“Account Debtor”
means any Person who is or may be obligated with respect to, or on account of,
an Account.

 

“Accountants”
has the meaning given to such term in Section 11(a).

 

“Accounts”
means all “accounts”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including: 
(a) all accounts receivable, other receivables, book debts and other
forms of obligations (other than forms of obligations evidenced by Chattel
Paper or Instruments) (including any such obligations that may be characterized
as an account or contract right under the UCC); (b) all of such Person’s rights
in, to and under all purchase orders or receipts for goods or services; (c) all
of such Person’s rights to any goods represented by any of the foregoing
(including unpaid sellers’ rights of rescission, replevin, reclamation and
stoppage in transit and rights to returned, reclaimed or repossessed goods);
(d) all rights to payment due to such Person for Goods or other property sold,
leased, licensed, assigned or otherwise disposed of, for a policy of insurance
issued or to be issued, for a secondary obligation incurred or to be incurred,
for energy provided or to be provided, for the use or hire of a vessel under a
charter or other contract, arising out of the use of a credit card or charge
card, or for services rendered or to be rendered by such Person or in
connection with any other transaction (whether or not yet earned by performance
on the part of such Person); and (e) all collateral security of any kind given
by any Account Debtor or any other Person with respect to any of the foregoing.

 

“Accounts
Availability” means the amount of Loans against Eligible Accounts Laurus
from time to time makes available to the Company up to eighty five percent
(85%) of the net face amount of Eligible Accounts based on Accounts of Company.

 

“Affiliate”
of any Person means (a) any Person (other than a Subsidiary) which, directly or
indirectly, is in control of, is controlled by, or is under common control with
such Person, or (b) any Person who is a director or officer (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in
clause (a) above.  For purposes of this
definition, control of a Person shall mean the power, direct or indirect, (i)
to vote five percent (5.00%) or more of the securities having ordinary voting
power for the election of directors of such Person, or (ii) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.

 

“Ancillary
Agreements” means, the Notes, Warrants, Registration Rights Agreement, and
all other agreements, instruments, documents, mortgages, pledges, powers of
attorney, consents, assignments, contracts, notices, security agreements, trust
agreements and guarantees whether heretofore, concurrently, or hereafter
executed by or on behalf of Company or any other Person or delivered to Laurus,
relating to this Agreement or to the transactions contemplated by this
Agreement or otherwise relating to the relationship between the  Company and Laurus.

 

“Books and
Records” means all books, records, board minutes, contracts, licenses,
insurance policies, environmental audits, business plans, files, computer
files, computer

 

27

 

discs and other data and
software storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities and
any and all records and instruments relating to the Collateral or otherwise
necessary or helpful in the collection thereof or the realization thereupon.

 

“Borrowing
Availability” means Accounts Availability plus Inventory Availability.

 

“Business Day”
means a day on which Laurus is open for business and that is not a Saturday, a
Sunday or other day on which banks are required or permitted to be closed in
the State of New York.

 

“Capital
Availability Amount” means $5,000,000.

 

“Chattel Paper”
means all “chattel paper,” as such term is defined in the UCC, including
electronic chattel paper, now owned or hereafter acquired by any Person.

 

“Closing Date”
means the date on which Company shall first receive proceeds of the initial
Loans.

 

“Collateral”
means all of Company’s property and assets, whether real or personal, tangible
or intangible, and whether now owned or hereafter acquired, or in which it now
has or at any time in the future may acquire any right, title or interests
including all of the following property in which it now has or at any time in
the future may acquire any right, title or interest:

 

(a)           all Inventory;

 

(b)           all Equipment;

 

(c)           all Fixtures;

 

(d)           all General Intangibles;

 

(e)           all Accounts;

 

(f)            all Deposit Accounts, other bank
accounts and all funds on deposit therein;

 

(g)           all Investment Property;

 

(h)           all Stock;

 

(i)            all Chattel Paper;

 

(j)            all Letter-of-Credit Rights;

 

(k)           all Instruments;

 

(l)            all commercial tort claims set forth
on Exhibit 1(A);

 

28

 

(m)          all Books and Records;

 

(n)           all Supporting Obligations including
letters of credit and guarantees issued in support of Accounts, Chattel Paper,
General Intangibles and Investment Property;

 

(o)           (i) all money, cash and cash
equivalents and (ii) all cash held as cash collateral to the extent not
otherwise constituting Collateral, all other cash or property at any time on
deposit with or held by Laurus for the account of Company (whether for
safekeeping, custody, pledge, transmission or otherwise); and

 

(p)           all products and Proceeds of all or
any of the foregoing, tort claims and all claims and other rights to payment
including insurance claims against third parties for loss of, damage to, or
destruction of, and (ii) payments due or to become due under leases, rentals
and hires of any or all of the foregoing and Proceeds payable under, or
unearned premiums with respect to policies of insurance in whatever form.

 

“Contract Rate”
means an interest rate per annum equal to the Prime Rate plus two and one half
percent (2.5%) per annum.

 

“Default”
means any act or event which, with the giving of notice or passage of time or
both, would constitute an Event of Default.

 

“Default Rate”
has the meaning given to such term in Section 5(a)(iii).

 

“Deposit
Accounts” means all “deposit accounts” as such term is defined in the UCC,
now or hereafter held in the name of any Person, including, without limitation,
the Lockbox Account.

 

“Documents”
means all “documents”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all bills of
lading, dock warrants, dock receipts, warehouse receipts, and other documents
of title, whether negotiable or non-negotiable.

 

“Eligible
Accounts” means and includes each Account which conforms to the following
criteria:  (a) shipment of the
merchandise or the rendition of services has been completed; (b) no return,
rejection or repossession of the merchandise has occurred; (c) merchandise or
services shall not have been rejected or disputed by the Account Debtor and
there shall not have been asserted any offset, defense or counterclaim; (d)
continues to be in full conformity with the representations and warranties made
by Company to Laurus with respect thereto; (e) Laurus is, and continues to be,
satisfied with the credit standing of the Account Debtor in relation to the
amount of credit extended; (f) there are no facts existing or threatened which
are likely to result in any adverse change in an Account Debtor’s financial
condition; (g) is documented by an invoice in a form approved by Laurus and
shall not be unpaid more than one hundred twenty (120) days from invoice date;
(h) not more than twenty-five percent (25%) of the unpaid amount of invoices
due from such Account Debtor remains unpaid more than one hundred twenty (120)
days from invoice date; (i) is not evidenced by chattel paper or an instrument
of any kind with respect to or in payment of the Account unless such instrument
is duly endorsed to and in possession of Laurus or represents a check in
payment of a Account; (j)

 

29

 

the Account Debtor is
located in the United States; provided, however, Laurus may, from
time to time, in the exercise of its sole discretion and based upon
satisfaction of certain conditions to be determined at such time by Laurus,
deem certain Accounts as Eligible Accounts notwithstanding that such Account is
due from an Account Debtor located outside of the United States; (k) Laurus has
a first priority perfected Lien in such Account and such Account is not subject
to any Lien other than Permitted Liens; (l) does not arise out of transactions
with any employee, officer, agent, director, stockholder or Affiliate of
Company; (m) is payable to Company; (n) does not arise out of a bill and hold
sale prior to shipment and does not arise out of a sale to any Person to which
Company is indebted in excess of fifty thousand dollars ($50,000); (o) is net
of any returns, discounts, claims, credits and allowances; (p) if the Account
arises out of contracts between Company and the United States, any state, or
any department, agency or instrumentality of any of them, Company has so
notified Laurus, in writing, prior to the creation of such Account, and there
has been compliance with any governmental notice or approval requirements,
including compliance with the Federal Assignment of Claims Act; (q) is a good
and valid account representing an undisputed bona fide indebtedness incurred by
the Account Debtor therein named, for a fixed sum as set forth in the invoice
relating thereto with respect to an unconditional sale and delivery upon the
stated terms of goods sold by Company or work, labor and/or services rendered
by Company; (r) does not arise out of progress billings prior to completion of
the order; (s) the total unpaid Accounts from such Account Debtor  does not exceed twenty-five percent (25%) of
all Eligible Accounts (provided, however, that if such unpaid Accounts from any
Account Debtor exceed twenty-five percent (25%) of all Eligible Accounts, only
that portion of such Accounts which exceeds twenty-five percent (25%) of
Eligible Receivables will be excluded as ineligible); provided, however, that
the Accounts of each of Pacific States Marine, Schering Plough Animal Health,
Merial, BioMark and the United States Department of Energy (the Permitted
Accounts”), shall not be subject to such 25% limitation but instead any of such
Permitted Accounts  may constitute up to
forty-five percent (45%) of all Eligible Accounts, and only that portion of any
such Permitted Accounts which exceeds forty-five percent (45%) of Eligible
Accounts  will be excluded as ineligible;
(t) Company’s right to payment is absolute and not contingent upon the
fulfillment of any condition whatsoever; (u) Company is able to bring suit and
enforce its remedies against the Account Debtor through judicial process; (v)
does not represent interest payments, late or finance charges or service
charges owing to Company and (w) is otherwise satisfactory to Laurus as
determined by Laurus in the exercise of its sole discretion, exercised
reasonably.  In the event Company
requests that Laurus include within Eligible Accounts certain Accounts of one
or more of Company’s acquisition targets, Laurus shall at the time of such
request consider such inclusion, but any such inclusion shall be at the sole
option of Laurus and shall at all times be subject to the execution and
delivery to Laurus of all such documentation (including, without limitation,
guaranty and security documentation) as Laurus may require in its sole
discretion.

 

“Eligible Inventory”
means Inventory which Laurus, in its reasonable discretion, determines: (a) is
subject to the security interest of Laurus and is subject to no other liens or
encumbrances whatsoever (other than Permitted Liens); (b) is in good condition
and meets all standards imposed by any governmental agency, or department or
division thereof having regulatory authority over such Inventory, its use or
sale including but not limited to the Federal Fair Labor Standards Act of 1938
as amended, and all rules, regulations and orders thereunder,

 

30

 

(c) is currently either usable or salable in the
normal course of Company’s business; and (d) not to be ineligible for any other
reason.

 

“Equipment”
means all “equipment” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including any and all
machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles
and other tangible personal property (other than Inventory) of every kind and
description that may be now or hereafter used in such Person’s operations or
that are owned by such Person or in which such Person may have an interest, and
all parts, accessories and accessions thereto and substitutions and
replacements therefor.

 

“ERISA”
shall have the meaning given to such term in Section 12(g).

 

“Event of
Default” means the occurrence of any of the events set forth in Section 19.

 

“Fixtures”
means all “fixtures” as such term is defined in the UCC, now owned or hereafter
acquired by any Person.

 

“Formula Amount”
has the meaning set forth in Section 2(a)(i).

 

“GAAP”
means generally accepted accounting principles, practices and procedures in
effect from time to time in the United States of America.

 

“General
Intangibles” means all “general intangibles” as such term is defined in the
UCC, now owned or hereafter acquired by any Person including all right, title
and interest that such Person may now or hereafter have in or under any
contract, all Payment Intangibles, customer lists, Licenses, Intellectual
Property, interests in partnerships, joint ventures and other business
associations, permits, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, Software, data bases, data, skill, expertise,
experience, processes, models, drawings, materials, Books and Records, Goodwill
(including the Goodwill associated with any Intellectual Property), all rights
and claims in or under insurance policies (including insurance for fire,
damage, loss, and casualty, whether covering personal property, real property,
tangible rights or intangible rights, all liability, life, key-person, and
business interruption insurance, and all unearned premiums), uncertificated
securities, choses in action, deposit accounts, rights to receive tax refunds
and other payments, rights to received dividends, distributions, cash,
Instruments and other property in respect of or in exchange for pledged Stock
and Investment Property, and rights of indemnification.

 

“Goods” means
all “goods”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including embedded software to the
extent included in “goods” as defined in the UCC, manufactured homes, standing
timber that is cut and removed for sale and unborn young of animals.

 

“Goodwill”
means all goodwill, trade secrets, proprietary or confidential information,
technical information, procedures, formulae, quality control standards,
designs,

 

31

 

operating and training
manuals, customer lists, and distribution agreements now owned or hereafter
acquired by any Person.

 

.

 

“Governmental
Authority” means 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.

 

“Indemnified
Person” shall have the meaning given to such term in Section 25.

 

“Initial Term”
means the Closing Date through the close of business on the third anniversary
of the Closing Date, subject to acceleration at the option of Laurus upon the
occurrence of an Event of Default hereunder or other termination hereunder.

 

“Instruments”
means all “instruments”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all certificated
securities and all promissory notes and other evidences of indebtedness, other
than instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.

 

“Intellectual
Property” means any and all Licenses, patents, patent registrations,
copyrights, copyright registrations, trademarks, trademark registrations, trade
secrets and customer lists.

 

“Inventory”
means all “inventory”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all inventory,
merchandise, goods and other personal property that are held by or on behalf of
such Person for sale or lease or are furnished or are to be furnished under a
contract of service or that constitute raw materials, work in process, finished
goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person’s
business or in the processing, production, packaging, promotion, delivery or
shipping of the same, including all supplies and embedded software.

 

“Inventory
Availability” means the amount of Revolving Credit Advances against Eligible
Inventory Laurus may from time to time during the Term make available to the
Company up to the lesser of (a) $800,000, (b) up to forty percent (40%) of the
value of Eligible Inventory (calculated at its orderly liquidation value) and
(c)  fifty percent (50%) of the Accounts
Availability; provided, however, until such time as Laurus shall have
completed an appraisal of the Inventory, which appraisal shall be completed no
later than August 31, 2003, the Inventory Availability shall be zero ($0).

 

“Investment
Property” means all “investment property”, as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located.

 

“Letter-of-Credit
Rights” means “letter-of-credit rights” as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including rights to payment or
performance under a letter of credit, whether or not such Person, as
beneficiary, has demanded or is entitled to demand payment or performance.

 

32

 

“License”
means any rights under any written agreement now or hereafter acquired by any
Person to use any trademark, trademark registration, copyright, copyright
registration or invention for which a patent is in existence or other license
of rights or interests now held or hereafter acquired by any Person.

 

“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.

 

“Loans”
shall have the meaning set forth in Section 2(a)(i) and shall include all other
extensions of credit hereunder and under any Ancillary Agreement.

 

“Material
Adverse Effect” means a material adverse effect on (a) the condition,
operations, assets, business or prospects of Company, (b) Company’s ability to
pay or perform the Obligations in accordance with the terms hereof or any
Ancillary Agreement, (c) the value of the Collateral, the Liens on the
Collateral or the priority of any such Lien or (d) the practical realization of
the benefits of Laurus’ rights and remedies under this Agreement and the Ancillary
Agreements.

 

“Minimum
Borrowing Amount” means $1,500,000 which such aggregate amount shall be
evidenced by Minimum Borrowing Notes.

 

“Minimum Borrowing
Notes” shall mean each Secured Convertible Note, which shall be issued in a
series, made by the Company in favor of Laurus to evidence the Minimum
Borrowing Amount.

 

“Maximum Legal
Rate” shall have the meaning given to such term in Section 5(a)(iv).

 

“Notes”
means each Secured Convertible Note made by Company in favor of Laurus in
connection with the transactions contemplated hereby, as the same may be
amended, modified and supplemented from time to time.

 

“Obligations”
means all Loans, all advances, debts, liabilities, obligations, covenants and
duties owing by Company to Laurus (or any corporation that directly or
indirectly controls or is controlled by or is under common control with Laurus)
of every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether
existing by operation of law or otherwise now existing or hereafter arising
including any debt, liability or obligation owing from Company to others which
Laurus may have obtained by assignment or otherwise and further including all
interest (including interest accruing at the then applicable rate provided in
this Agreement after the maturity of the Loans and interest accruing at the
then applicable rate provided in this Agreement after the filing of any
petition in

 

33

 

bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, whether or not
a claim for post-filing or post-petition interest is allowed in such
proceeding), charges or any other payments Company is required to make by law
or otherwise arising under or as a result of this Agreement and the Ancillary
Agreements, together with all reasonable expenses and reasonable attorneys’
fees chargeable to Company’s account or incurred by Laurus in connection with
Company’s account whether provided for herein or in any Ancillary Agreement.

 

“Payment
Intangibles” means all “payment intangibles” as such term is defined in the
UCC, now owned or hereafter acquired by any Person, including, a General
Intangible under which the Account Debtor’s principal obligation is a monetary
obligation.

 

“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 workmen’s compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i)
not overdue or (ii) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of the
applicable Company in conformity with GAAP; (c) Liens in favor of Laurus; (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 applicable Company in conformity
with GAAP provided, that, the Lien shall have no effect on the priority of
Liens in favor of Laurus or the value of the assets in which Laurus has a Lien;
(e) Purchase Money Liens securing Purchase Money Indebtedness to the extent permitted
in this Agreement and (f) Liens specified on Exhibit 2 hereto.

 

“Person”
means any individual, sole proprietorship, partnership, limited liability
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body
or department thereof), and shall include such Person’s successors and assigns.

 

“Prime Rate”
means the “base rate” or “prime rate” published in the Wall Street Journal from
time to time.  The Prime 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 such rate.

 

“Proceeds”
means “proceeds”, as such term is defined in the UCC and, in any event, shall
include:  (a) any and all proceeds of
any insurance, indemnity, warranty or guaranty payable to Company or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to Company from time
to time in connection with any requisition, confiscation, condemnation, seizure
or forfeiture of any Collateral by any governmental body, governmental
authority, bureau or agency (or any person acting under color of governmental
authority); (c) any claim of Company against third parties (i) for past,
present or future infringement of any Intellectual Property or (ii) for past,
present or future infringement or dilution of any trademark or trademark
license or for injury to the goodwill associated with any trademark, trademark
registration or trademark licensed under any trademark License; (d) any
recoveries by Company against third parties with respect to any

 

34

 

litigation or dispute
concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts , rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.

 

“Purchase Money
Indebtedness” means (a) any indebtedness incurred for the payment of all or
any part of the purchase price of any fixed asset, (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).

 

“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.

 

“Registration
Rights Agreements” means those registration rights agreements from time to
time entered into between Company and Laurus, as amended, modified and
supplemented from time to time.

 

“Renewal Term”
has the meaning set forth in Section 16.

 

“Revolving Note”
shall means that secured revolving note of made by the Company in favor of
Laurus in the aggregate principal amount of three million five hundred thousand
dollars ($3,500,000)

 

“Securities”  has the meaning set forth in Section 12(n).

 

“Software”
means all “software” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including all computer programs and all supporting
information provided in connection with a transaction related to any program.

 

“Stock”
means all certificated and uncertificated shares, options, warrants, membership
interests, general or limited partnership interests, participation or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity whether voting or nonvoting,
including common stock, preferred stock, or any other “equity security” (as
such term is defined in Rule 3a11-1 of the General Rules and Regulations
promulgated by the SEC under the Securities Exchange Act of 1934).

 

“Subsidiary”
of any Person means a corporation or other entity whose shares of stock or
other ownership interests having ordinary voting power (other than stock or
other ownership interests having such power only by reason of the happening of
a contingency) to elect a majority of the directors of such corporation, or
other Persons performing similar functions for such entity, are owned, directly
or indirectly, by such Person.

 

35

 

“Supporting
Obligations” means all “supporting obligations” as such term is defined in
the UCC.

 

“Term”
means, as applicable, the Initial Term and any Renewal Term.

 

“UCC” means
the Uniform Commercial Code as the same may, from 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, Laurus’ Lien on 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 UCC is used to define any term herein or in any Ancillary Agreement 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.

 

“Warrants”
has the meaning set forth in the Registration Rights Agreements.

 

EXHIBITS

 

Exhibit 1(A) – Commercial
Tort Claims

Exhibit 2 - Permitted
Liens

Exhibit 7(c) - Actions
for Perfection

Exhibit 7(p) - Bank
Accounts

Exhibit 12(d) - Corporate
Information and Locations of Collateral

Exhibit 12(i) - Licenses,
Patents, Trademarks and Copyrights

Exhibit 13(e)(i) -
Permitted Indebtedness

Exhibit 13(e)(ii) -
Existing Subsidiaries

Exhibit 13(e)(v) – Stock
Held

Exhibit A - Form of
Borrowing Base Certificate

 

36

 

LAURUS MASTER FUND, LTD.

 

and

 

DIGITAL ANGEL CORPORATION

 

 

Dated: August 28, 2003

 

 

TABLE OF
CONTENTS

 

	
  1.

  	
  (a)
  General Definitions

  
	
   

  	
  (b)

  	
  Accounting
  Terms

  
	
   

  	
  (c)

  	
  Other Terms

  
	
   

  	
  (d)

  	
  Rules
  of Construction

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Credit Advances.

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Repayment
  of the Loans

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Procedure
  for Loans

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Interest
  and Payments.

  
	
   

  	
   

  	
   

  
	
   

  	
  (a)

  	
  Interest.

  
	
   

  	
  (b)

  	
  Payments.

  
	
   

  	
   

  
	
  6.

  	
  Security
  Interest.

  
	
   

  	
   

  
	
  7.

  	
  Representations,
  Warranties and Covenants Concerning the Collateral

  
	
   

  	
   

  
	
  8.

  	
  Payment
  of Accounts.

  
	
   

  	
   

  
	
  9.

  	
  Collection and
  Maintenance of Collateral.

  
	
   

  	
   

  
	
  10.

  	
  Inspections and Appraisals

  
	
   

  	
   

  
	
  11.

  	
  Financial
  Reporting

  
	
   

  	
   

  
	
  12.

  	
  Additional
  Representations and Warranties

  
	
   

  	
   

  
	
  13.

  	
  Covenants. 
  Company covenants as follows:

  
	
   

  	
   

  
	
  14.

  	
  Further
  Assurances

  
	
   

  	
   

  
	
  15.

  	
  Power of
  Attorney

  
	
   

  	
   

  
	
  16.

  	
  Term of
  Agreement

  
	
   

  	
   

  
	
  17.

  	
  Termination
  of Lien

  
	
   

  	
   

  
	
  18.

  	
  Events of
  Default

  
	
   

  	
   

  
	
  19.

  	
  Remedies

  

 

i

 

	
  20.

  	
  Waivers

  
	
   

  	
   

  
	
  21.

  	
  Expenses

  
	
   

  	
   

  
	
  22.

  	
  Assignment
  By Laurus

  
	
   

  	
   

  
	
  23.

  	
  No Waiver; Cumulative
  Remedies

  
	
   

  	
   

  
	
  24.

  	
  Application
  of Payments

  
	
   

  	
   

  
	
  25.

  	
  Indemnity

  
	
   

  	
   

  
	
  26.

  	
  Revival

  
	
   

  	
   

  
	
  27.

  	
  Notices

  
	
   

  	
   

  
	
  28.

  	
  Governing Law, Jurisdiction and Waiver of
  Jury

  
	
   

  	
   

  
	
  29.

  	
  Limitation
  of Liability

  
	
   

  	
   

  
	
  30.

  	
  Entire
  Understanding

  
	
   

  	
   

  
	
  31.

  	
  Severability

  
	
   

  	
   

  
	
  32.

  	
  Captions

  
	
   

  	
   

  
	
  33.

  	
  Counterparts; Telecopier Signatures

  
	
   

  	
   

  
	
  34.

  	
  Construction

  
	
   

  	
   

  
	
  35.

  	
  Publicity

  

 

ii

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