Document:

EXHIBIT
      10.3

     

     

    SECURITY
      AGREEMENT FOR TRADEMARKS AND TRADENAMES

     

    SECURITY
      AGREEMENT FOR TRADEMARKS AND TRADENAMES dated
      as
      of August 25, 2006 by and among N21 ACQUISITION I LLC., a New York limited
      liability company having an office at 4 Manhattanville Road, Purchase, NY
      10577-2197 (“NewCo”),
      and
      MARK H. STENBERG (“Stenberg”)
      and
      ARNOLD BLAIR (“Blair”),
      each
      having an office at 477 Congress Street, 5th
      Floor,
      Portland, Maine 04101 (Stenberg and Blair are sometimes hereinafter referred
      to
      collectively as the “Stockholders”)
      (capitalized terms used herein and not otherwise defined herein, shall have
      the
      meanings ascribed thereto in the Merger Agreement, as hereinafter
      defined).

     

    Background.
      Pursuant to the execution of an Amended and Restated Merger Agreement by and
      among Iceland Health, Inc., a New York corporation (“Iceland”),
      its
      sole Stockholders, Nutrition 21, Inc., a New York corporation, and its wholly
      owned acquisition subsidiary, NewCo, dated as of August 25, 2006 (the
“Merger
      Agreement”),
      according to which Iceland shall merge with and into NewCo (the “Merger”),
      whereby it shall transfer to NewCo, among other assets, all of its right, title
      and interest in and to the trademarks, trademark applications, servicemarks,
      and
      tradenames owned by Iceland prior to the consummation of the Merger, free and
      clear of any and all liens and encumbrances Of Record. As a part of the total
      consideration to be delivered to Stockholders under the Merger Agreement, N21
      has executed Promissory Notes in the aggregate principal amount of $2,500,000
      to
      the benefit of the Stockholders dated the date hereof (the “Secured
      Promissory Notes”),
      and
      the payment of such principal amount thereof and interest accruing thereon
      when
      due in accordance with the terms thereof is to be secured by a security interest
      in all of Iceland’s trademarks, trademark applications, servicemarks,
      tradenames, and goodwill in respect thereof, owned by Iceland prior to the
      effective date of the Merger as set forth in Schedule
      A
      hereto
      and transferred in their entirety to NewCo effective upon the consummation
      of
      the Merger (collectively, the “Collateral”
or
      “Iceland’s
      Trademarks”),
      such
      security interest is being granted by NewCo to the benefit of N21, for purposes
      of securing the Notes issued by N21, in exchange for good, valuable and adequate
      consideration, the receipt and sufficiency of which are hereby acknowledged
      and
      is deemed to be in NewCo’s best interest. To confirm and perfect the
      Stockholder’s security interest in the Collateral,
      NewCo
      has
      agreed to grant a security interest and lien upon Iceland’s trademarks,
      trademark applications, servicemarks, and tradenames to and for the benefit
      of
      the Stockholders as hereinafter provided.

     

    Additional
      Definitions.
      The
      following terms shall be defined as follows:

     

    “Event
      of Default”
shall
      have the meaning assigned thereto by the Secured Promissory Note.

     

    “Obligations”
means
      all obligations, liabilities and indebtedness due and to become due from N21
      to
      the Stockholders, and each of them, at any time and from time to time from
      the
      date hereof, of every kind and description, whether now existing or hereafter
      incurred, which are evidenced by or incurred pursuant to that certain Secured
      Promissory Note of N21 of even date herewith issued to the Stockholders in
      the
      principal amount of Two Million and Five Hundred Thousand Dollars
      ($2,500,000.00) with interest accruing thereon as set forth therein (as may
      be
      amended, modified, restated or supplemented from time to time, together with
      any
      instrument, document or agreement which may hereafter be substituted
      therefor).

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    “Of
      Record”
means
      recorded, registered or pending registration, as of the date hereof or in the
      future, in the U.S. Patent and Trademark Office or in any other foreign patent
      and trademark office or governmental agency, or the respective foreign
      equivalent thereof in such foreign jurisdiction.

     

    NOW,
      THEREFORE, in consideration of the premises, NewCo hereby agrees with the
      Stockholders as follows:

     

    Security
      Interest 

     

    1. To
      secure
      the complete and timely payment and satisfaction of the Obligations, NewCo
      hereby grants, assigns and conveys to the Stockholders, a security interest
      in
      and lien upon (a) the trademark and servicemark applications, trademarks,
      servicemarks, and tradenames listed in Schedule
      A
      hereto
      (the “Marks”),
      as
      held and owned solely and exclusively by Iceland prior to the effective date
      of
      the Merger, and (b) the goodwill in respect thereof, including without
      limitation the right to sue for past, present and future infringements, and
      all
      rights corresponding thereto throughout the world (the “Rights”).

     

    Representations
      and Warranties; Covenants

     

    2. NewCo
      covenants and warrants that:

     

    
      	 	
              (a)

            	
              Upon
                consummation of the Merger, NewCo shall become the transferee and
                sole
                owner of the entire and unencumbered right, title and interest, to
                the
                extent so owned by Iceland prior to, and transferred thereby to NewCo
                upon, the consummation of the Merger, in and to each of the Marks
                and the
                Rights Of Record; and

            

    

     

    
      	 	
              (b)

            	
              NewCo
                has the unqualified right to enter into this Agreement and perform
                its
                terms.

            

    

     

    3. NewCo
      agrees that, until all of the Obligations shall have been satisfied in full,
      it
      will not enter into any agreement which is inconsistent with NewCo’s obligations
      under this Agreement, without Stockholders’ prior written consent.

     

    4. NewCo
      hereby covenants and agrees with the Stockholders that NewCo (a) shall promptly
      pay any and all taxes, assessments and governmental fees upon the Marks prior
      to
      the date penalties are attached thereto; and (b) shall immediately notify the
      Stockholders of any event causing a substantial loss or diminution in the value
      of all or any material part of the Marks and the amount or an estimate of the
      amount of such loss or diminution, provided,
      however,
      that
      NewCo shall permit the Stockholders, at their option and cost and in their
      sole
      discretion, to take such action as is reasonably necessary to protect the Marks
      and the Rights against any and all claims and demands of all persons at any
      time
      claiming interest therein and shall further reasonably cooperate with the
      Stockholders and reasonably authorize them to act on its behalf in respect
      of
      the foregoing as owner of the Marks and Rights. 

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    5. Unless
      and until there shall have occurred an Event of Default, NewCo shall have the
      right to use the Marks and Rights for NewCo’s own benefit, but it may not make
      or grant assignments or sublicenses of the Rights in a manner which may impair
      the rights of NewCo or the Stockholders to sell or dispose of the Collateral
      in
      the United States or elsewhere in accordance with the terms of this Agreement
      or
      otherwise. NewCo shall permit the Stockholders access to NewCo’s facilities at
      all reasonable times for the purpose of verifying NewCo’s compliance with the
      foregoing and following covenants. 

     

    6. NewCo
      shall, until foreclosure on the Marks and Rights by the Stockholders, be
      responsible for maintaining any and all registrations of the Marks and shall
      bear all costs pertaining thereto, provided,
      however,
      that
      N21 shall permit the Stockholders, at their option and cost and in their sole
      discretion, to maintain any and all applications for registration and
      re-registration of the Marks and shall further reasonably cooperate with the
      Stockholders and reasonably authorize them to act on its behalf in respect
      of
      the foregoing as the owner of the Marks and Rights. 

     

    7. NewCo
      agrees
      that until the Obligations have been satisfied in full, NewCo
      will, if
      and to the extent required, execute further security agreements for the benefit
      of the Stockholders of like tenor to this Agreement, granting a security
      interest in and lien upon any and all trademarks and trademark applications
      and
      any licenses of any trademarks that NewCo
      shall
      effect, acquire or make application for which are in any way derivative from
      the
      Marks and Rights set forth on Schedule A and
      which
      shall be Of Record, so as to confirm and perfect the Stockholders’ interest in
      and to all of the Collateral.

     

    Event
      of Default; Rights and Remedies; Maintenance of Rights and Marks; Termination
      of
      Security Interest, etc.

     

    8. If
      an
      Event of Default shall have occurred, the Stockholders shall have, in addition
      to all other rights and remedies given to the Stockholders by this Agreement,
      those allowed by law and the rights and remedies of a secured party under the
      Uniform Commercial Code as enacted in any jurisdiction in which the Rights
      may
      be located and, without demand of performance and without other notice (except
      as set forth below) or demand whatsoever to NewCo, all of which are hereby
      expressly waived, and without advertisement (i) the right and entitlement to
      regain ownership and title in and to any and all of the rights and interests
      in
      the Marks and Rights, including without limitation by becoming the assignees,
      whether individually or through an entity formed and owned by the Stockholders,
      of the Marks and Rights Of Record subsequent to the filing of an Assignment
      of
      Trademarks and Tradenames, substantially in the form attached hereto as
Exhibit
      A
      (“Assignment”),
      with
      the U.S. Patent and Trademark Office or with any other foreign patent and
      trademark office or governmental agency, or the respective foreign equivalent
      thereof in such foreign jurisdiction, such Assignment may be executed by the
      Stockholders, whether individually or by an entity formed and owned by the
      Stockholders, in their or its capacity as attorney-in-fact of NewCo pursuant
      to
      the rights and privileges granted thereto by NewCo in Paragraph 9
      below or
      otherwise by NewCo immediately upon the demand of the Stockholders, and (ii)
      the
      right and entitlement to sell at public or private sale or otherwise realize
      upon the whole or from time to time any part of the Rights, or any interest
      which NewCo may have therein, and after deducting from the proceeds of sale
      or
      other disposition of the Rights all expenses (including all reasonable expenses
      for brokers’ fees and legal services), shall apply the residue of such proceeds
      toward the payment of the Obligations in such order as the Stockholders may
      determine in their sole and absolute discretion. Notice of any sale or other
      disposition of the Rights shall be given to NewCo at least ten (10) days before
      the time of any intended public or private sale or other disposition of the
      Rights is to be made, which NewCo hereby agrees shall be reasonable notice
      of
      such sale or other disposition. At any such sale or other disposition, the
      Stockholders may purchase the whole or any part of the Rights sold, free from
      any right of redemption on the part of NewCo, which right is hereby waived
      and
      released.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    9. Notwithstanding
      anything to the contrary herein or in any agreement between NewCo and the
      Stockholders, if any Event of Default shall have occurred and be continuing,
      in
      addition to any and all other rights and remedies that the Stockholders may
      have
      under any other agreements or at law, NewCo hereby irrevocably constitutes
      and
      appoints Stockholders, or alternatively an entity formed and owned by the
      Stockholders, with full power of substitution, as its true and lawful
      attorney-in-fact, with full irrevocable power and authority in the place and
      stead of NewCo and in the name of NewCo, all acts of said attorney being hereby
      ratified and confirmed, except
      to the
      extent any of the same constitute gross negligence or willful misconduct, such
      power being coupled with an interest is irrevocable, upon the occurrence of
      an
      Event of Default and the continuance thereof: (a) to convey to the Stockholders,
      or to an entity formed and owned by the Stockholders, or any purchaser of any
      or
      all of the Marks or Rights, together with the goodwill in respect thereof,
      and
      to execute and file or cause to be filed any and all assignments, releases
      and
      other documents and instruments that may be necessary or desirable to accomplish
      the purposes of such conveyance; (b) to collect proceeds from the Rights; (c)
      to
      convey in any bona fide transactions to a purchaser goods utilizing any of
      the
      Marks; and (d) to make payment or discharge taxes or liens levied or placed
      upon
      or threatened against any goods utilizing the Rights, the legality or validity
      thereof and the amounts necessary to discharge the same to be determined by
      the
      Stockholders, in their sole discretion, and such payments made by the
      Stockholders to become the obligations of NewCo to the Stockholders, due and
      payable immediately, without demand.

     

    10. At
      such
      time as NewCo shall completely satisfy all the Obligations, the Stockholders
      shall execute and deliver to NewCo all releases, assignments and other
      instruments as may be necessary or proper to discharge the Stockholders’
security interest in and lien upon the Marks and Rights, subject to any
      disposition thereof which may have been made by the Stockholders pursuant
      hereto.

     

    11. At
      such
      time as the Stockholders, whether individually or through an entity formed
      and
      owned by the Stockholders, become the owner of the Marks and/or the Rights,
      as
      provided in this Agreement, the Stockholders, or an entity formed and owned
      thereby, shall have the right but shall in no way be obligated to bring suit
      in
      their own name to enforce the Marks and/or Rights and any license thereunder,
      in
      which event NewCo shall, at the request of the Stockholders and at their cost,
      do any and all lawful acts, including to assign them the right to sue for past
      infringements, , misappropriation, or dilution of the Trademarks, but other
      than
      to resort to litigation in NewCo’s name, and execute any and all proper
      documents required by the Stockholders in aid of such enforcement, provided,
      however,
      that if
      the Stockholders shall not bring suit hereunder, then NewCo, upon prior written
      consent of the Stockholders, shall have the right, with counsel of its own
      selection, to bring such suit, prosecute and settle the same, at its own cost
      and expense.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    Miscellaneous
      

     

    12. No
      course
      of dealing between NewCo and the Stockholders nor any failure to exercise,
      nor
      any delay in exercising, on the part of the Stockholders, any right, power
      or
      privilege hereunder shall operate as a waiver thereof; nor shall any single
      or
      partial exercise of any right, power or privilege hereunder or thereunder
      preclude any other further exercise thereof or the exercise of any other right,
      power or privilege.

     

    13. All
      of
      the Stockholder’s rights and remedies with respect to the Rights whether
      established hereby or by any other agreements or by law shall be cumulative
      and
      may be exercised singularly or concurrently.

     

    14. The
      provisions of this Agreement are severable, and if any clause or provision
      shall
      be held invalid and unenforceable in whole or in part in any jurisdiction,
      then
      such invalidity or unenforceability shall affect only such clause or provision,
      or part thereof, in such jurisdiction, and shall not in any manner affect such
      clause or provision in any other jurisdiction, or any other clause or provision
      of this Agreement in any jurisdiction.

     

    15. The
      headlines or captions contained herein are for purposes of convenience only
      and
      are not intended to define or limit the contents of said paragraph or
      paragraphs. 

     

    16. This
      Agreement is subject to modification only by a writing signed by the
      parties.

     

    17. The
      benefits and burdens of this Agreement shall inure to the benefit of and be
      binding upon the respective successors and permitted assigns of the
      parties.

     

    18. The
      validity and interpretation of this Agreement and the rights and obligations
      of
      the parties shall be governed exclusively by the laws of the State of New York,
      without regard to its rules regarding conflict of laws.

     

    19. All
      notices, communications and distributions hereunder shall be given or made
      to
      the parties at their respective addresses set forth on the first page hereof,
      or
      at such other address as the addressee may hereafter specify for this purpose
      by
      written notice to the other parties hereto in accordance with the requirements
      of the Merger Agreement.

     

    20. EACH
      PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A
      TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR
      IN
      CONNECTION WITH THIS AGREEMENT, THE SECURED PROMISSORY NOTE OR ANY OTHER
      DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE
      OF
      CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS
      OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE STOCKHOLDERS
      TO ACCEPT THIS AGREEMENT.

     

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      page]

     

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
      by
      their respective officers as of the date first above written.

     

    
      	WITNESS:	 	N21
              ACQUISITION
              I LLC	 
	 	 	 	 	 
	 	 	By:	 	 
	 	 	Title:	 	 

    

    STATE
      OF
      NEW YORK     )

                                                   
      )

    COUNTY
      OF
      NEW YORK )

    

    On
      the
      ____ day of _______________, 2006, before me, the undersigned, personally
      appeared ________________________, the _____________________ of N21 ACQUISITION
      I LLC, personally known to me or proved to me on the basis of satisfactory
      evidence to be the individual whose name is subscribed to the within instrument
      and acknowledged to me that he/she executed the same in his/her capacity and
      that by his/her signature on the instrument, the individual on behalf of N21
      ACQUISITION I LLC, executed the instrument.

     

    
      	 	 	
              _____________________________

              Notary
                Public

              My
                commission expires:

            

    

     

    
      	 	 	 
	 	 	STOCKHOLDERS:
	 	 	 	 
	 	 	By:
              	 
	 	 	 	
              
                

              

              Mark H. Stenberg

            

    

     

    
      STATE
        OF
        NEW YORK     )

                                                     
        )

      COUNTY
        OF
        NEW YORK )

    

    

    

    

    On
      the
      ____ day of ____________, 2006, before me, the undersigned, personally appeared
      MARK
      H.
      STENBERG,
      personally known to me or proved to me on the basis of satisfactory evidence
      to
      be the individual whose name is subscribed to the within instrument and
      acknowledged to me that he executed the same in his personal capacity and that
      by his signature on the instrument, the individual executed the
      instrument.

    
       

      
        	 	 	
                _____________________________

                Notary
                  Public

                My
                  commission expires:

              

      

       

    

    

      
        	 	 	 
	 	 	By:
                	 
	 	 	 	
                
                  

                

                Arnold Blair

              

      

      

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

     

    
      STATE
        OF
        NEW YORK     )

                                                     
        )

      COUNTY
        OF
        NEW YORK )

    

      

    

    On
      the
      ____ day of ____________, 2006, before me, the undersigned, personally appeared
      ARNOLD
      BLAIR,
      personally known to me or proved to me on the basis of satisfactory evidence
      to
      be the individual whose name is subscribed to the within instrument and
      acknowledged to me that he executed the same in his personal capacity and that
      by his signature on the instrument, the individual executed the
      instrument.

     

    
      
         

        
          	 	 	
                  _____________________________

                  Notary
                    Public

                  My
                    commission expires:

                

        

         

      

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    
      SCHEDULE
        A

    

    

    List
      of Trademark Applications, Trademarks, Servicemarks, and
      Tradenames

    

    
      	
              Trademark:

            	
              ICELANDHEALTH

            
	
              Jurisdiction:

            	
              U.S.A.

            
	
              Application
                Number:

            	
              78/199,893

            
	
              Registration
                Number:

            	
              2,784,439

            
	
              Registration
                Date:

            	
              November
                18, 2003

            
	 	 
	
              Trademark:

            	
              IMMUNITY
                

              +
                PLUS

            
	
              Jurisdiction:

            	
              U.S.A.

            
	
              Application
                Number:

            	
              78/706,915

            
	
              Registration
                Number:

            	
              N/A

            
	
              Registration
                Date/Status:

            	
              Pending

            
	 	 
	
              Trademark:

            	
              ICELANDHEALTH

            
	
              Jurisdiction:

            	
              Canada

            
	
              Application
                Number:

            	
              1265447

            
	
              Filing
                Date:

            	
              July
                19, 2005

            
	
              Approval
                Date:

            	
              May
                10, 20061 

            
	 	 
	
              Trademark:

            	
              ICELANDHEALTH

            
	
              Jurisdiction:

            	
              Japan

            
	
              Application
                Number:

            	
              2005-63629

            
	
              Application
                Date:

            	
              July
                11, 2005

            
	
              Registration
                Date:

            	
              July
                14, 2006

            
	
              Registration
                Number:

            	
              4970102

            
	 	 
	
              Trademark:

            	
              ICELANDHEALTH

            
	
              Jurisdiction:

            	
              Europe
                Union

            
	
              Application
                Number:

            	
              0045352172 

            
	
              Registration
                Number

            	
              Pending

            

    

    

      

    

    
      
        
          	1	
                  This
                    is the date on which the application was accepted for publication
                    in the
                    Trademarks Journal. If the trademark is not opposed, it will
                    likely
                    proceed to registration within six to seven months as of this
                    date.

                

        

      

      
        
          	 	 

          	
                  2

                	
                  Please
                    note that there is an opposition proceeding B983645 filed by
                    Iceland Foods
                    Limited UK in opposition to Iceland Health’s trademark application applied
                    for the goods “dietary application”. According to applicable law, there is
                    a cooling-off period, during which both parties may negotiate
                    about
                    concluding a pre-rights-agreement in an effort to settle this
                    matter
                    amicably. Such period will expire on October 21, 2006, and if
                    no
                    settlement agreement is reached, Iceland Health must submit its
                    arguments
                    on or before February 21, 2007. According to Iceland Health’s European
                    Counsel, the outcome of the opposition proceeding is hard to
                    predict.

                

        

      

    

     

    
      
         

      

      
        
          Schedule
            A- 1

        

        
          

        

      

      
         

      

    

    EXHIBIT
      A

    

    ASSIGNMENT
      OF TRADEMARKS AND TRADENAMES

    

    This
      Assignment (the “Assignment”)
      is
      made by and between NUTRITION 21 INC., a New York corporation having an office
      at 4 Manhattanville Road, Purchase, NY 10577-2197 (“N21”),
      (the
“Assignor”)
      and
      MARK H. STENBERG (“Stenberg”)
      and
      ARNOLD BLAIR (“Blair”),
      each
      having an office at 477 Congress Street, 5th
      floor,
      Portland, Maine 04101 (collectively, the “Assignees”).
      

     

    WHEREAS,
      pursuant to a Security Agreement dated August __, 2006, by and between the
      Assignor and the Assignees (the “Security
      Agreement”),
      the
      Assignor transferred, granted, assigned and conveyed to the Assignees a security
      interest in and lien upon certain trademarks, trademark and servicemark
      applications, servicemarks, and tradenames as listed in Schedule
      A
      hereto
      (the “Trademarks”)
      and
      the goodwill in respect thereof, including without limitation the right to
      sue
      for past, present and future infringements, all rights corresponding thereto
      throughout the world; and

     

    WHEREAS,
      an Event of Default, as such term is defined and referred to in the Security
      Agreement, has occurred and is continuing in a manner which entitles the
      Assignees to certain rights and remedies as set forth in Paragraphs 8 and 9
      of
      the Security Agreement, including without limitation the assignment of any
      and
      all right, title, interest and ownership in the Trademarks and the goodwill
      in
      respect thereof as held by the Assignor as of the date hereof to the Assignees,
      or to such entity which was formed and is owned by the Assignees, including
      but
      not limited to the right to sue for past infringements, misappropriation, or
      dilution of the Trademarks; and 

     

    WHEREAS,
      the Assignor and the Assignees wish to confirm such transfer and assignment
      for
      purposes of recording the transfer in the United States Patent and Trademark
      Office, or in any other foreign patent and trademark office or governmental
      agency, or the respective foreign equivalent thereof in such foreign
      jurisdiction, and to confirm Assignee’s ownership, whether individually or
      through an entity which was formed and is owned by the Assignees, of the
      Trademarks and the goodwill in respect thereof;

     

    NOW,
      THEREFORE, for good and valuable consideration, the receipt and sufficiency
      of
      which is hereby acknowledged, the Assignor hereby and effective as of ________
      __, 200_ assigns, conveys and transfers to the Assignees, or to such entity
      which was formed and is owned by the Assignees, its successors and assigns
      all
      of its right, title, interest, ownership and subsidiary rights, if any, to
      the
      Trademarks, together with the goodwill of the business connected with the use
      of
      and symbolized by the Trademarks and the right to sue, counterclaim, and recover
      for past, present, and future infringement, misappropriation, or dilution of
      the
      rights assigned to the Assignee hereunder pursuant to and to the extent set
      forth in the terms and conditions of the Security Agreement.

     

     

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      page]

     

    
 

    
      
         

      

      
        Exhibit
          A-1

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, the Assignor, by its duly authorized officer, has executed
      this
      assignment, as an instrument under seal, 

     

    

    
      	 	 	
              NUTRITION
                21 INC.

              

              

              By:
                 __________________________     

              Name:

              Title:  

            

    

    

    

    SUBSCRIBED
      AND SWORN to before

    me
      this
      __ day of ______, 200_

    

    __________________________

     Notary
      Public

    

    My
      Commission Expires: _______________

     

      

    
      
         

      

      
        Exhibit
          A-2SEVERANCE PROTECTION AGREEMENT

SEVERANCE PROTECTION AGREEMENT

This Severance Protection Agreement ("Agreement") is made by and between FIRST BANK OF GEORGIA, a banking corporation chartered under the laws of the State of Georgia (the "Bank") and Bradley J. Gregory, an employee of the Bank (the "Employee").

W ITNESSETH:

WHEREAS, the Employee will be an officer of the Bank holding the title of Chief Financial Officer (CFO); and

WHEREAS, the Bank and the Employee desire to provide for the payment of severance pay to the Employee in the event of termination of Employee's employment with the Bank following a change in control of the Bank and/or the Bank's parent holding company, Georgia-Carolina Bancshares, Inc. (the "Company"), on the terms and conditions set forth in this Agreement;

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and conditions set forth herein, the Bank and the Employee agree herein as follows:

1.OPERATION OF AGREEMENT. This Agreement shall be effective immediately upon its execution, but its provisions shall not be operative, for any reason, unless and until a "Change in Control" (as such term is defined in paragraph 2 hereof) has occurred.

2.CHANGE IN CONTROL. 

A .Unless otherwise provided, the term "Change in Control" as used in this Agreement shall mean the first to occur of any of the following:

(i)The effective date of any transaction or series of transactions (other than a transaction to which only the Company and one or more of its subsidiaries are parties) pursuant to which (a) the Company merges into or becomes a subsidiary of another corporation or (b) one or more of the Company's subsidiaries (including but not limited to the Bank) becomes a subsidiary of or merges with another entity, or (c) substantially all of the assets of the Company are sold to or acquired by a person, corporation or group of associated persons acting in concert who are not members of the present Board of Directors of the Company;

(ii)The date upon which any person, corporation, or group of associated persons acting in concert becomes a direct or indirect beneficial owner of shares of stock of the Company representing an aggregate of more than twenty-five percent (25%) of the votes then entitled to be cast at an election of directors of the Company; or

(iii)The date upon which the persons who were members of the Board of Directors of the Company as of the date of this Agreement (the "Original Directors") cease to constitute a majority of the Board of Directors of the Company; provided, however, that any new director whose nomination or selection has been approved by the unanimous affirmative vote of the Original Directors then in office shall also be deemed an Original Director.

B.Notwithstanding the foregoing and for purposes of paragraph 3.B.(ii) below only, the term "Change in Control" shall mean the date upon which any person, corporation, or group of associated persons acting in concert becomes a direct or indirect beneficial owner of shares of stock of the Company representing an aggregate of fifty percent (50%) or more of the votes then entitled to be cast at an election of directors of the Company.

3.SEVERANCE PAYMENTS.

A. If, during the three (3) year period immediately following a Change in Control, the Employee's employment with the Bank is terminated either:

(i)by the Bank for no reason or for any reason other than as a result of:

(a)the gross negligence or willful misconduct by the Employee which is materially damaging to the business of the Bank or the Company;

(b)the conviction of the Employee of any crime involving breach of trust or moral turpitude;

(c)a consistent pattern of failure by the Employee to follow the reasonable written instructions or policies of the Employee's supervisor or the Board of Directors of the Bank or Company; or

(d)receipt by the Bank or the Company of any written notice from the Georgia Department of Banking and Finance, the Federal Deposit Insurance Corporation or the Board of Governors of the Federal Reserve System requiring the removal of the Employee; or

(ii)by the Employee as a result of, and within ninety (90) days following:

(a)a reduction in the Employee's rate of regular compensation from the Bank to an amount below the rate of the Employee's regular compensation as in effect immediately prior to the Change in Control; or

(b)a requirement that the Employee relocate to a county other than Columbia, McDuffie or Richmond County; or

(c)a reduction in the Employee's duties, title, and/or responsibilities, as were previously set prior to the Change in Control,

then the Bank shall pay the Employee an amount equal to two (2) times the rate of the Employee's annual base salary (not including bonuses, benefits, grant of options or any other compensation other than regular periodic salary payments) as in effect immediately prior to the Change in Control. Such compensation shall be paid in a lump sum within thirty (30) days after such termination, subject to such termination satisfying the definition of "separation from service" as set forth in Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") and guidance issued thereunder.

B.If, within ninety (90) days after the date upon which a Change in Control occurs as defined in:

(i)paragraphs 2.A. (i)-(iii) above, Employee may terminate his employment and the Bank shall pay Employee an amount equal to Employee's regular annual base salary (not including bonuses, benefits, grant of options, or any other compensation other than regular periodic salary payments) as in effect immediately prior to the Change in Control as set forth in paragraphs 2.A. (i)-(iii) hereof. Such compensation shall be paid in a lump sum within thirty (30) days of such termination, subject to such termination satisfying the definition of "separation from service" as set forth in Section 409A of the Code and guidance issued thereunder; or

(ii)paragraph 2.B. above, Employee may terminate his employment and the Bank shall pay Employee an amount equal to one and one half (1 1/2) times the rate of Employee's regular annual base salary (not including bonuses, benefits, grant of options, or any other compensation other than regular periodic salary payments) as in effect immediately prior to the Change in Control as set forth in paragraph 2.B. hereof. Such compensation shall be paid in a lump sum within thirty (30) days of such termination, subject to such termination satisfying the definition of "separation from service" as set forth in Section 409A of the Code and guidance issued thereunder.

C.        Any other provision in this Agreement notwithstanding,

(i)in the event that any payment or benefit, or any combination of payment or benefits, to Employee hereunder (hereinafter "Total Payments") is determined to be an "excess parachute payment" pursuant to Section 280G of the Code, Employee's right to the Total Payments shall automatically be reduced so that the aggregate of the applicable values thereof for purposes of Code Section 280(G) shall be equal to 299 percent of the Employee's "base amount" by first reducing, to the extent necessary (A) the cash portion of the Total Payments subject to this Paragraph (if necessary, to zero (0)), and then (B) all other non-cash Total Payments subject to this Paragraph (if necessary, to zero (0)). Any determination required by the preceding sentence shall be made by independent certified public accountants or tax counsel (hereinafter, such party shall sometimes be hereinafter referred to as the "Independent Adviser") selected by Bank.  In making any such determination as to the application and effect of this Paragraph on any Total Payments received or to be received by Employee, (i) no portion of the Total Payments shall be taken into account which in the opinion of the Independent Adviser does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, including by reason of Section 280G(b)(4)(A) of the Code; (ii) those Total Payments provided under this Paragraph shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clause (i)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the Independent Adviser; and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Independent Advisor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code.

(ii)if Employee is a "specified employee" within the meaning of Section 409A of the Code, any payments or installments which constitute "deferred compensation" under Code Section 409A and would otherwise become due under this Agreement during the first six (6) months (or such longer period as required by Section 409A of the Code and guidance issued thereunder) after the effective date of termination of Employee's employment for reasons other than death shall be delayed and all such delayed payments (or delayed installments) shall be paid in full in the seventh (7th) month after the date of termination, and all subsequent payments (or installments) shall be paid in accordance with their original payment schedule.  To the extent that during the first six (6) months after the effective date of termination, the payment of any premium amounts or other payments to third parties becomes due by the Bank, Employee shall be responsible for paying such amounts directly to the insurer or other third party and shall receive reimbursement from Bank for such amounts in the seventh (7th) month after the effective date of termination.

4.NO SEVERANCE PAY UPON OTHER TERMINATION. Upon any termination of Employee's employment with the Bank other than a termination specified in paragraph 3, the sole obligation of the Bank to the Employee shall be to pay Employee's regular compensation up to the effective date of the termination.

5.ENTIRE OBLIGATION. Payment to the Employee pursuant to paragraph 3 of this Agreement shall constitute the entire obligation of the Bank to the Employee in full settlement of any claim at law or in equity that the Employee may otherwise assert against the Bank or any of its employees, officers or directors on account of the Employee's termination of employment.  Employee's right to receive payment under paragraph 3 is conditioned upon Employee entering into an agreement for the written mutual release and waiver of any claims related to this Agreement or Employee's employment by the Bank, in a form and content mutually acceptable to the Bank and Employee.

6.NO OBLIGATION TO CONTINUE EMPLOYMENT. This Agreement does not create any obligation on the part of the Bank to continue to employ the Employee following a Change in Control or in the absence of a Change in Control.

7.TERM OF AGREEMENT. This Agreement shall remain in effect for a term of three (3) years from the date hereof and shall automatically renew for an additional three (3) years on each anniversary thereof, unless Employee is otherwise notified to the contrary thirty (30) days prior to such anniversary by the Bank, in which case this Agreement shall terminate two (2) years from such anniversary.

8.NOTICES.  For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

To the Company:Georgia-Carolina Banschares, Inc.
3527 Wheeler Road

Augusta, Georgia 30909

Attention:  Chief Executive Officer

To the Employee:Bradley J. ("Jack") Gregory

__________________________________

__________________________________

9.CLAIMS FOR COMPENSATION.  All claims by Employee for benefits under this Agreement shall be directed to, and determined by, the Board of Directors of the Bank ("Board") and shall be in writing.  Any denial by the Board of a claim for benefits under this Agreement shall be delivered to Employee in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon.  

10.ARBITRATION. Any controversy or claim arising out of or relating to Employee's employment by Bank, or the termination thereof, or this Agreement, or the breach thereof (including, without limitation, any claim that any provision of this Agreement or any obligation of Employee is illegal or otherwise unenforceable or voidable under law, ordinance or ruling or that Employee's employment by Bank was illegally terminated) shall be settled by arbitration before a neutral arbitrator through arbitration administered by the American Arbitration Association in Augusta, Georgia, in accordance with the United States Arbitration Act (9 USC, Section 1 et seq.) and the rules of the American Arbitration Association under its National Rules for the Resolution of Employment Disputes.  Bank and Employee each consent and submit to the personal jurisdiction and venue of the trial courts of Richmond County, Georgia, and also to the personal jurisdiction and venue of the United States District Court for the Northern District of Georgia, Atlanta Division, for purposes of enforcing this provision.  All awards of the arbitration shall be binding and non-appealable except as otherwise provided in the United States Arbitration Act; provided, however, that the arbitrator shall not be authorized to issue any ruling or award that is contrary to the laws of the State of Georgia or the United States, notwithstanding any provisions or lack of provisions in the United States Arbitration Act, the provisions of Official Code of Georgia Annotated Section 9-9-13(b), or any other applicable federal or state law.  In the event that either party appeals the award or decision of the arbitrator on the grounds that the arbitrator's award or decision is contrary to the laws of the State of Georgia or the United States, then the parties acknowledge and agree that they shall not seek to have the dispute re-tried in the courts, but rather will submit the record of the arbitration proceedings to the court for a decision solely on whether the arbitrator's judgment or award is contrary to the laws of the State of Georgia or the United States, and to either affirm or vacate the award or decision on that basis.  If the award or decision is vacated, then the parties shall re-submit the dispute to arbitration.   Subject to the foregoing, judgment upon the award of the arbitrator may be entered in any court having jurisdiction thereof.  The arbitration shall take place at a time noticed by the American Arbitration Association regardless of whether one of the parties fails or refuses to participate.  The arbitrator shall have authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, specific performance of any obligation created under this Agreement, the issuance of an injunction or other provisional relief, or the imposition of sanctions for abuse or frustration of the arbitration process.  The parties shall be entitled to engage in reasonable discovery, including a request for the production of relevant documents.  Depositions may be ordered by the arbitrator upon a showing of need.  The foregoing provisions shall not preclude Bank from bringing an action in any court of competent jurisdiction for injunctive or other provisional relief as Bank may determine is necessary or appropriate.  By way of non-exclusive examples, claims subject to arbitration under this Agreement shall include claims under federal, state and local statutory or common law, such as the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, including the amendments of the Civil Rights Act of 1991, the Americans with Disabilities Act, and contract and tort laws.  Both Bank and Employee have reviewed and specifically approve of the preceding arbitration provision and have acknowledged by placing their initials in the boxes.

11.SEVERABILITY.  Should any clause, portion or section of this Agreement be unenforceable or invalid for any reason, such unenforceability or invalidity shall not affect the enforceability or validity of the remainder of this Agreement.

12.ASSIGNMENT, SUCCESSOR AND INTEREST.  This Agreement being personal to the Employee, it may not be assigned by the Employee.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Bank and/or the Company and the heirs, executors and personal representatives of the Employee.

13.WAIVER.  Failure to insist upon strict compliance with any terms, covenants, and conditions of this Agreement shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.

IN WITNESS WHEREOF, this Agreement has been executed by the undersigned duly authorized on this _____ day of ____________________, 2006.

 

BANK:

FIRST BANK OF GEORGIA

 

By:_____________________________________

Chairman of the Board

 

 

EMPLOYEE:

 

 

____________________________________

Bradley J. Gregory

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