SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "AGREEMENT"), dated as of September 8, 2005, is
made between Rapidtron, Inc., a Nevada corporation, of 3151 Airway Ave., Bldg.
Q, Costa Mesa, CA 92626 (the "COMPANY"); and Ceres Financial Limited, a BVI
company, of Walkers Chambers, P.O. Box 92, Mill Mall, Road Town, Tortola,
British Virgin Islands (the "SECURED PARTY"). THIS AGREEMENT SUPERSEDES AND
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REPLACES THE SECURITY AGREEMENT BETWEEN THE COMPANY AND THE SECURED PARTY DATED
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AS OF JUNE 21, 2005.
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WHEREAS, the Company is indebted to the Secured Party pursuant to certain
Convertible Note and Warrant Purchase Agreements dated on or about June 21,
2005, July 29, 2005, and September 8, 2005 (the "NOTE PURCHASE AGREEMENTS") and
Convertible Notes issued thereunder in the aggregate amount of $397,566.29,
$60,000.00, and $60,000.00, respectively (the "CONVERTIBLE NOTES"); and
WHEREAS, the Secured Party has required the Company to grant to the Secured
Party a security interest in certain of the Company's assets to secure the full
and timely repayment of the Convertible Notes and any other indebtedness of the
Company to the Secured Party (the "SECURED OBLIGATIONS");
NOW, THEREFORE, in consideration of the premises, the mutual agreements set
forth herein and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties agree as follows:
1. Grant of Security Interest. The Company hereby grants to the
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Secured Party a security interest in the property described in Section 2 of this
Agreement (the "COLLATERAL") to secure payment to the Secured Party of all
liabilities and indebtedness of the Company to the Secured Party under the
Secured Obligations, whether such liabilities or indebtedness is due or to
become due, absolute or contingent, joint or several, now existing or hereafter
arising; provided however, that such security interest shall be subordinate to
the senior liens listed on Exhibit A attached hereto. The Company and the
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Secured Party will use commercially reasonable efforts to cause to be executed
and delivered subordination agreements with the holders of senior liens.
2. Description of Collateral. The collateral shall consist of all
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assets and properties now owned or hereafter acquired by the Company, including,
without limitation, the following:
(a) All equipment (consisting of machinery, furniture, fixtures
and vehicles) now owned or hereafter at any time acquired by the Company or
in which the Company has or obtains rights, together with all repairs,
improvements, attachments, renewals, additions and accessions thereto,
substitutions and replacements therefor at any time hereafter made or
acquired and all guaranties, claims, rights, remedies and privileges
relating to any of the foregoing;
(b) All inventory and other personal property owned or hereafter
at any time acquired by the Company, which is held for sale in the ordinary
course of business, or is
furnished or to be furnished under contracts for service, or is held as raw
materials, work in process or materials used or consumed or to be used or
consumed in the Company's business;
(c) All accounts receivable of the Company;
(d) All customer contracts and other contract rights;
(e) All patents, trademarks, tradenames, copyrights, computer
programs, data bases, know-how and other intangible property rights; and
(f) All proceeds of all of the Collateral.
3. Warranties of the Company. The Company hereby represents and
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warrants to the Secured Party as follows:
(a) Ownership. The Company is the owner of the Collateral, free
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of all encumbrances and security interests (except Secured Party's
interest);
(b) Authority. The Company has full power and authority to
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execute this Agreement, to perform the Company's obligations hereunder and
to subject the Collateral to the security interest created hereby; and
(c) Location of Collateral. The inventory will be maintained at
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the Company's principal offices and production facilities at 3151 Airway
Ave., Bldg. Q, Costa Mesa, CA 92626, and the books and records concerning
the Company's accounts receivable will be kept at the same address. The
equipment, inventory and books and records concerning the Company's
accounts receivable will not be removed from such location without the
prior written consent of the Secured Party.
4. Obligations of the Company. During the term of this Agreement, the
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Company will comply with each of the following covenants and commitments:
(a) Maintenance of Collateral. The Company will keep the
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Collateral and all inventory and other property now or hereafter at any
time owned or used by the Company in connection with the storage, sale or
lease of the Collateral in good condition and insured against such risks
and in such amounts as the Secured Party may request, with an insurance
company or companies satisfactory to Secured Party, the policies to protect
the Secured Party as Secured Party's interests may appear and to be
delivered to the Secured Party at Secured Party's request;
(b) Disposition of Collateral. The Company will not sell, lease
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or otherwise dispose of the Collateral consisting of accounts receivable
except with the prior written consent of the Secured Party and will not
sell, lease or otherwise dispose of the Collateral consisting of inventory
other than in the ordinary course of its business at prices constituting
the then fair market value thereof. The Company will not grant to any
account debtor any rebate, refund, allowance or credit on any account
without the prior written consent of the Secured Parties other than in the
ordinary course of business;
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(c) Collection of Accounts. The Company will collect all accounts
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receivable until receipt of notice from Secured Party to notify any or all
account debtors (as that term is defined in the Uniform Commercial Code) of
the existence of the Secured Party's security interest and upon receipt of
such notice the Company shall so notify such account debtors. The Company
will hold all of the proceeds of such collections and all return and
repossessed goods in trust for the Secured Party, and will not commingle
the same with any other funds or property of the Company, and will deliver
the same forthwith to the Secured Party at Secured Party's request;
provided, however, that with respect to returned and repossessed goods, the
Company will on demand pay to the Secured Party the full invoice price
thereof. All proceeds of Collateral received by the Secured Party shall be
applied against the Secured Obligations in such order and at such times as
the Secured Party shall determine whether or not due;
(d) Records and Inspections. The Company will keep accurate
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books, records and accounts with respect to the Collateral and will make
the same available to Secured Party at Secured Party's request for
examination. The Company will permit any authorized representative of the
Secured Party from time to time to examine and inspect, during normal
business hours, any and all premises where the Collateral is or may be kept
or located and the Company shall assist the Secured Party in making such
inspections; and
(e) Maintenance of Security Interest. The Company will at any
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time or times hereafter execute such financing statements and other
instruments and perform such acts as the Secured Party may request to
establish and maintain a valid security interest in the Collateral, and
will pay all costs of filing and recording.
5. Rights of Secured Party.
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(a) Authority to Perform for the Company. Upon default by the Company
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in the performance of the Company's obligations hereunder, the Secured Party at
Secured Party's option may (i) effect such insurance and repairs and pay the
premiums therefor and the costs thereof and (ii) pay and discharge any taxes,
liens and encumbrances on the Collateral. All sums so advanced or paid by the
Secured Party shall be payable by the Company on demand with interest at the
highest rate allowed by law and shall be a part of the Secured Obligations.
(b) Rights with Respect to Collateral. The Secured Party shall have
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the authority, but shall not be obligated: (i) to notify any or all account
debtors of the existence of the Secured Party's security interest and to pay or
remit all sums due or to become due directly to the Secured Party or Secured
Party's respective nominees; (ii) to place on any chattel paper (as that term is
defined in the Uniform Commercial Code) received as proceeds a notation or
legend showing the Secured Party's security interest; (iii) to place upon the
Company's books and records relating to accounts receivable covered by the
security interest granted hereby a notation or legend stating that such account
is subject to a security interest held by the Secured Party; (iv) in the name of
the Company, or otherwise, to demand, collect, receive and receipt for,
compound, compromise, settle and give acquittance for, and prosecute and
discontinue any suits or proceedings in respect of any or all of the accounts in
which the Secured Party have a security interest; (v) to take any action which
Secured Party may deem necessary or desirable in order to realize on the
Collateral,
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including, the power to perform any contract, to endorse in the name of the
Company any checks, drafts, notes or other instruments or documents received in
payment of or on account of the Collateral; and (vi) after any Event of Default,
to enter upon and into and take possession of all or such part or parts of the
properties of the Company as may be necessary or appropriate in the judgment of
the Secured Party to permit or enable the Secured Party to process, store, and
sell all or any part of the inventory, as the Secured Party may elect, and to
use and operate said properties for such purposes and for such length of time as
the Secured Party may deem necessary or appropriate for such purposes without
the payment of any compensation to the Company therefor.
6. Default.
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(a) Events of Default. The occurrence of any of the following events
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shall constitute a default ("EVENT OF DEFAULT") under this Agreement:
(i) The Company shall fail to observe or perform any of the other
covenants or agreements binding on the Company under this Agreement and
such default shall have continued uncured for a period of 20 days after
written notice thereof is delivered to the Company;
(ii) An event of default shall have occurred under any of the Note
Purchase Agreements, the Convertible Notes or that certain Registration
Rights Agreement dated June 21, 2005 and the related Agreement Regarding
Registration Rights dated September 8, 2005 (together, the "REGISTRATION
RIGHTS AGREEMENTS") between the Secured Party and the Company; or
(iii) The Company shall be in default in the payment to the
Secured Party of any indebtedness evidenced by the Secured Obligations.
(b) Remedies. Upon the occurrence of an Event of Default, the Secured
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Party shall have all of the rights and remedies of a secured party under the
provisions of the Uniform Commercial Code.
7. Miscellaneous.
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(a) Entire Agreement. This Agreement and the Note Purchase Agreements,
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the Convertible Notes, the Registration Rights Agreements and certain Warrants
exercisable to acquire shares of common stock of the Company contain the entire
understanding between the parties hereto with respect to the subject matter
hereof and thereof and supersede any prior understandings, agreements or
representations, written or oral, relating to the subject matter hereof and
thereof.
(b) Counterparts. This Agreement may be executed in separate
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counterparts, each of which will be an original and all of which taken together
shall constitute one and the same agreement, and any party hereto may execute
this Agreement by signing any such counterpart.
(c) Severability. Whenever possible, each provision of this Agreement
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shall be interpreted in such a manner as to be effective and valid under
applicable law but if any
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provision of this Agreement is held to be invalid, illegal or unenforceable
under any applicable law or rule, the validity, legality and enforceability of
the other provisions of this Agreement will not be affected or impaired thereby.
(d) Successors and Assigns. This Agreement shall be binding upon and
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inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
(e) Modification, Amendment, Waiver or Termination. No provision of
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this Agreement may be modified, amended, waived or terminated except by an
instrument in writing signed by the parties to this Agreement. No course of
dealing between the parties will modify, amend, waive or terminate any provision
of this Agreement or any rights or obligations of any party under or by reason
of this Agreement. No delay on the part of the Secured Party in the exercise
of any right or remedy under this Agreement shall operate as a waiver thereof,
and no single or partial exercise by the Secured Party of any right or remedy
under this Agreement shall preclude other or further exercise thereof or the
exercise of any other right or remedy. No waiver by the Secured Party of any
right or remedy under this Agreement shall be deemed to be or construed as a
further or continuing waiver of such right or remedy or as a waiver of any other
right or remedy.
(f) Notices. All notices, consents, requests, instructions, approvals
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or other communications provided for herein shall be in writing and delivered by
personal delivery, overnight courier, mail, electronic facsimile or e-mail
addressed to the receiving party at the address set forth above. All such
communications shall be effective when received.
Any party may change the address set forth above by notice to each other party
given as provided herein.
(g) Headings. The headings and any table of contents contained in this
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Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
(h) Governing Law. ALL MATTERS RELATING TO THE INTERPRETATION,
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CONSTRUCTION, VALIDITY AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW PROVISIONS THEREOF.
(i) Third-Party Benefit. Nothing in this Agreement, express or
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implied, is intended to confer upon any other person any rights, remedies,
obligations or liabilities of any nature whatsoever.
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IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date set forth in the first paragraph.
RAPIDTRON, INC.
By
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Its
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CERES FINANCIAL LIMITED
By
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Its
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EXHIBIT A
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SENIOR LIENS
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