Exhibit 10.4

 

Execution Copy

 

PLEDGE AGREEMENT

 

THIS PLEDGE AGREEMENT (this “Pledge Agreement”), dated as of December 28, 2005,
is by and between Applied Digital Solutions, Inc., a Missouri corporation
(“Pledgor”), and Satellite Asset Management, L.P., in its capacity as Collateral
Agent (the “Collateral Agent”), for the benefit of the Investors (as defined
below).

 

W I T N E S S E T H:

 

WHEREAS, pursuant to that certain Note Purchase Agreement, dated as of
December 28, 2005 (the “Note Purchase Agreement”), by and among Pledgor and the
Investors named therein (such Investors, collectively with their successors and
permitted assigns, the “Investors”), Pledgor issued an aggregate $12 million
principal amount of its Senior Secured Notes due 2007 (the “Notes”); and

 

WHEREAS, pursuant to the terms of the Note Purchase Agreement, the Notes will be
secured, in part, by a pledge of all of the capital stock and other equity
interests and participations held by the Pledgor in Digital Angel Corporation,
VeriChip Corporation, InfoTech, USA, Inc., the Digital Angel Share Trust (the
“Trust”) and all of its Subsidiaries (as defined in the Note Purchase Agreement)
other than the equity interests and participations set forth on
Schedule 2.1(ii) to this Agreement.

 

NOW, THEREFORE, in consideration of these premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:

 

1.                                      DEFINITIONS.

 

Unless otherwise defined herein, capitalized terms used herein shall have the
meanings ascribed to such terms in the Note Purchase Agreement, and the
following terms that are defined in the Uniform Commercial Code from time to
time in effect in the State of New York (the “UCC”) are used herein as so
defined: Certificated Security, Control, Entitlement Order, Financial Asset,
Investment Company Security, Securities Account, Security, Security Entitlement,
Securities Intermediary and Uncertificated Security.

 

2.                                      PLEDGE AND GRANT OF SECURITY INTEREST.

 

Subject to the terms and conditions of this Pledge Agreement and to secure the
performance of the Secured Obligations (as defined in Section 3 hereof), Pledgor
hereby pledges and grants to the Collateral Agent, for the benefit of the
Investors, a continuing first priority security interest in any and all right,
title and interest of Pledgor in and to the properties described in this
Section 2, whether now owned or existing or owned, acquired, or arising
hereafter (collectively, the “Pledged Collateral”):

 

2.1.                              Pledged Capital Stock. All of the issued and
outstanding Capital Stock (as defined below) directly owned by Pledgor in
Digital Angel Corporation, VeriChip Corporation, InfoTech, USA, Inc. and its
Subsidiaries (all of which are identified on Schedule 2.1(i) hereto) other than
the capital stock set forth on Schedule 2.1(ii) hereto (collectively, together
with the Capital Stock and other interests described in clauses (a) and
(b) below, the “Pledged Capital Stock”), including, but not limited to, the
following:

 

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(a)                                  all shares, securities, membership
interests or other equity interests representing a dividend on any of the
Pledged Capital Stock, or representing a distribution or return of capital upon
or in respect of the Pledged Capital Stock, or resulting from a stock split,
revision, reclassification or other exchange therefor, and any subscriptions,
warrants, rights or options issued to the holder of, or otherwise in respect of,
the Pledged Capital Stock; and

 

(b)                                 without affecting the obligations of Pledgor
under any provision prohibiting such action hereunder, in the event of any
consolidation or merger involving the issuer of any Pledged Capital Stock and in
which such issuer is not the surviving entity, all shares of each class of the
Capital Stock of the successor entity formed by or resulting from such
consolidation or merger.

 

As used herein, the term “Capital Stock” means:

 

(a)                                  in the case of a corporation, capital or
other corporate stock;

 

(b)                                 in the case of an association, trust or
business entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of capital or corporate stock;

 

(c)                                  in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited); and

 

(d)                                 any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.

 

2.2.                              Proceeds. All proceeds and products of the
foregoing, however and whenever acquired and in whatever form, subject to
Section 8.2(e) hereof.

 

2.3.                              Trust Estate.  The Pledgor hereby represents,
warrants and covenants that the shares of Digital Angel Corporation held as the
trust estate in the Trust (the “Trust Estate”) is and shall remain with the
Trust, except as may be issued upon the exercise of the warrants set forth on
Schedule 3.5 of the Note Purchase Agreement and held by Elliot Associates, L.P.,
Elliot International, L.P., Omicron Master Trust, Portside Growth and
Opportunity Fund and Islandia, L.P.  In the event that the Trust is dissolved or
liquidated, the Pledgor shall directly pledge the remaining Trust Estate to the
Collateral Agent in accordance with this Agreement.

 

Without limiting the generality of the foregoing, it is hereby specifically
understood and agreed that the Pledgor may from time to time hereafter pledge
and deliver additional shares of Capital Stock or other equity interests to the
Collateral Agent as collateral security for the Secured Obligations. Upon such
pledge and delivery to the Collateral Agent, such additional shares of Capital
Stock or other equity interests shall be deemed to be part of the Pledged
Collateral and shall be subject to the terms of this Pledge Agreement whether or
not Schedule 2.1(i) is amended to refer to such additional shares or interests.

 

3.                                      SECURITY FOR SECURED OBLIGATIONS.

 

The security interest created hereby in the Pledged Collateral of Pledgor
constitutes continuing collateral security for all of the following, whether now
existing or hereafter incurred (the “Secured Obligations”): (a) the Pledgor’s
obligations under the Notes and the

 

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other Transaction Documents now existing or hereafter arising, whether direct,
indirect, related, unrelated, fixed, contingent, liquidated, unliquidated,
joint, several or joint and several, including, without limitation, the
obligations of the Pledgor to repay principal of and interest on the Notes
(including, without limitation, interest accruing after any bankruptcy,
insolvency, reorganization or other similar filing), and to pay all reasonable
fees, indemnities, costs and expenses (including attorneys’ fees) provided for
the Transaction Documents, and (b) all reasonable expenses and charges, legal
and otherwise, incurred by the Collateral Agent and/or the Investors in
enforcing the repayment of the Notes or the other terms and conditions of the
Transaction Documents or in realizing on or protecting any security therefor,
including, without limitation, the security granted hereunder.

 

4.                                      DELIVERY OF THE PLEDGED COLLATERAL;
PERFECTION OF SECURITY INTEREST.

 

Pledgor hereby agrees that:

 

4.1.                              Delivery of Certificates and Instruments.
Pledgor shall deliver as security to the Collateral Agent, (i) simultaneously
with or prior to the execution and delivery of this Pledge Agreement, all
certificates representing the Pledged Capital Stock owned by Pledgor and
(ii) promptly upon the receipt thereof by or on behalf of Pledgor, all other
certificates and instruments constituting Pledged Collateral owned by Pledgor.
Prior to delivery to the Collateral Agent, all such certificates and instruments
constituting Pledged Collateral of Pledgor shall be held in trust by Pledgor for
the benefit of the Collateral Agent pursuant hereto. All such certificates shall
be delivered in suitable form for transfer by delivery or shall be accompanied
by duly executed instruments of transfer or assignment in blank, in forms
reasonably acceptable to the Collateral Agent.

 

4.2.                              Additional Securities. If Pledgor shall
receive by virtue of its being or having been the owner of any Pledged
Collateral, any (i) certificate, including without limitation, any certificate
representing a dividend or distribution in connection with any increase or
reduction of capital, reclassification, merger, consolidation, sale of assets,
combination of shares of Capital Stock, stock splits, spin-off or split-off,
promissory notes or other instruments; (ii) option or right, whether as an
addition to, substitution for, or an exchange for, any Pledged Collateral or
otherwise; (iii) dividends payable in Capital Stock; or (iv) distributions of
Capital Stock or other equity interests in connection with a partial or total
liquidation, dissolution or reduction of capital, capital surplus or paid-in
surplus, then Pledgor shall receive such certificate, instrument, option, right
or distribution in trust for the benefit of the Collateral Agent, shall
segregate it from Pledgor’s other property and shall deliver it forthwith to the
Collateral Agent in the exact form received accompanied by duly executed
instruments of transfer or assignment in blank, in forms reasonably acceptable
to the Collateral Agent, to be held by the Collateral Agent as Pledged
Collateral and as further collateral security for the Secured Obligations.

 

4.3.                              Financing Statements; Other Perfection
Actions. Pledgor hereby authorizes the Collateral Agent to prepare and file such
financing statements (including continuation statements) or amendments thereof
or supplements thereto or other instruments as the Collateral Agent may from
time to time deem reasonably necessary or appropriate in order to perfect and
maintain the security interests granted hereunder in accordance with the UCC
that describes the Pledged Collateral in such manner as the Collateral Agent
deems necessary or advisable. Pledgor shall also execute and deliver to the
Collateral Agent and/or file such agreements, assignments or instruments
(including affidavits, notices, reaffirmations,

 

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amendments and restatements of existing documents and any documents as may be
necessary if the law of any jurisdiction other than New York becomes or is
applicable to the Pledged Collateral or any portion thereof, in each case as the
Collateral Agent may reasonably request) and do all such other things as the
Collateral Agent may reasonably deem necessary or appropriate (i) to assure to
the Collateral Agent its security interests hereunder are perfected, including
such financing statements (including continuation statements) or amendments
thereof or supplements thereto or other instruments as the Collateral Agent may
from time to time reasonably request in order to perfect and maintain the
security interests granted hereunder in accordance with the UCC and any other
personal property security legislation in the appropriate jurisdictions, (ii) to
consummate the transactions contemplated hereby and (iii) to otherwise protect
and assure the Collateral Agent of its rights and interests hereunder.

 

5.                                      REPRESENTATIONS AND WARRANTIES.

 

Pledgor hereby represents and warrants to the Collateral Agent, for the benefit
of the Investors, that:

 

5.1.                              Authorization of Pledged Capital Stock. The
Pledged Capital Stock is duly authorized and validly issued, is fully paid and
nonassessable and is not subject to the preemptive rights of any Person.

 

5.2.                              Title. Pledgor has good and indefeasible title
to all of the Pledged Collateral and will at all times be the legal and
beneficial owner of such Pledged Collateral free and clear of any Lien, other
than Permitted Liens. There exists no “adverse claim” within the meaning of
Section 8-102 of the UCC with respect to the Pledged Capital Stock.

 

5.3.                              Authority; Enforceability.  The Pledgor has
the authority and capacity to perform their obligations hereunder, and this
Pledge Agreement is the valid and binding obligation of the Pledgor enforceable
against the Pledgor in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency or other similar laws of
general application affecting the enforcement of creditors’ rights or general
equitable principles, whether applied in law or equity.

 

5.4.                              Exercising of Rights. The grant by the Pledgor
of the rights and remedies hereunder will not violate any law or governmental
regulation or any material contractual restriction binding on or affecting the
Pledgor or any of its property.

 

5.5.                              Pledgor’s Authority. No authorization,
approval or action by, and no notice or filing with any Governmental Authority,
the issuer of any Pledged Capital Stock or any other Person is required either
(i) for the pledge made by Pledgor or for the granting of the security interest
by Pledgor pursuant to this Pledge Agreement or (ii) for the exercise by the
Collateral Agent or the Investors of their rights and remedies hereunder (except
as may be required by laws affecting the offering and sale of securities).

 

5.6.                              Security Interest/Priority. This Pledge
Agreement creates a valid security interest in favor of the Collateral Agent,
for the ratable benefit of the Investors, in the Pledged Collateral. The taking
of possession by the Collateral Agent of the certificates (if any) representing
the Pledged Capital Stock and all other certificates and

 

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instruments constituting Pledged Collateral will perfect and establish the first
priority of the Collateral Agent’s security interest in all certificated Pledged
Capital Stock and such certificates and instruments. Upon the filing of UCC
financing statements in the location of Pledgor’s state of organization by the
Collateral Agent, the Collateral Agent shall have a first priority perfected
security interest in all uncertificated Pledged Capital Stock consisting of
partnership or limited liability company interests that do not constitute a
Security pursuant to Section 8-103(c) of the UCC. With respect to any Pledged
Collateral consisting of an Uncertificated Security or a Security Entitlement or
any Pledged Collateral held in a Securities Account, upon execution and delivery
by Pledgor, the Collateral Agent and the applicable Securities Intermediary or
the applicable issuer of the Uncertificated Security of an agreement granting
Control to the Collateral Agent over such Pledged Collateral, the Collateral
Agent shall have a first priority perfected security interest in such Pledged
Collateral. Except as set forth in this Section 5.6, no action is necessary to
perfect the Collateral Agent’s security interest.

 

6.                                      COVENANTS.

 

Pledgor hereby covenants and agrees with the Collateral Agent that Pledgor
shall:

 

6.1.                              Defense of Title. Warrant and defend title to
and ownership of the Pledged Collateral at its own expense against the claims
and demands of all other parties claiming an interest therein; keep the Pledged
Collateral free from all Liens, other than Permitted Liens; and not sell,
exchange, transfer, assign, lease or otherwise dispose of the Pledged Collateral
or any interest therein, except as otherwise expressly permitted herein or in
the Transaction Documents.

 

6.2.                              Further Assurances. Promptly execute and
deliver at its expense all further instruments and documents and take all
further action that may be necessary and desirable or that the Collateral Agent
may request in order to (i) perfect and protect the security interest created
hereby in the Pledged Collateral (including, without limitation, execution and
delivery of one or more control agreements reasonably acceptable to the
Collateral Agent, filing of UCC financing statements and any and all other
actions reasonably necessary to satisfy the Collateral Agent that the Collateral
Agent has obtained a first priority perfected security interest in all Pledged
Collateral); and (ii) enable the Collateral Agent to exercise and enforce its
rights and remedies hereunder in respect of the Pledged Collateral.

 

6.3.                              Amendments. Not make or consent to any
amendment or other modification or waiver with respect to any of the Pledged
Collateral or enter into any agreement or allow to exist any restriction with
respect to any of the Pledged Collateral other than pursuant hereto.

 

6.4.                              Compliance with Securities Laws. File all
reports and other information now or hereafter required to be filed by Pledgor
with the Securities and Exchange Commission and any other state, federal or
foreign agency in connection with the ownership of the Pledged Collateral.

 

6.5.                              Change Name or Location.  Shall not, except
upon thirty (30) days’ prior written notice to the Collateral Agent, change its
company name or conduct its business under any name other than that set forth
herein or change its jurisdiction of organization or incorporation.

 

6.6.                              Fees and Expenses.  Promptly upon demand by
the Collateral Agent, pay all reasonable fees and out-of-pocket costs and
expenses (including, without limitation, reasonable attorneys’ fees and legal
expenses) incurred by the Collateral Agent in connection with (i) filing or
recording any documents (including all taxes in connection therewith) in

 

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public offices; and (ii) paying or discharging any taxes, counsel fees,
maintenance fees, encumbrances or other amounts in connection with protecting,
maintaining or preserving the Pledged Collateral.

 

7.                                      PERFORMANCE OF OBLIGATIONS; ADVANCES BY
COLLATERAL AGENT.

 

On failure of Pledgor to perform any of the covenants and agreements contained
herein after written notice and ten (10) days to cure, the Collateral Agent may,
at its sole option and in its sole discretion, perform or cause to be performed
the same and in so doing may expend such sums as the Collateral Agent may
reasonably deem advisable in the performance thereof, including, without
limitation, the payment of any insurance premiums, the payment of any taxes, a
payment to obtain a release of a Lien or potential Lien (other than in either
case a Permitted Lien), expenditures made in defending against any adverse claim
and all other expenditures which the Collateral Agent may make for the
protection of the security interest hereof or may be compelled to make by
operation of law. All such sums and amounts so expended shall be repayable by
Pledgor promptly upon timely notice thereof and demand therefor and shall
constitute additional Secured Obligations. No such performance of any covenant
or agreement by the Collateral Agent on behalf of Pledgor, and no such advance
or expenditure therefor, shall relieve Pledgor of any default under the terms of
this Pledge Agreement. The Collateral Agent may make any payment hereby
authorized upon prior notice to Pledgor and in accordance with any bill,
statement or estimate procured from the appropriate public office or holder of
the claim to be discharged without inquiry into the accuracy of such bill,
statement or estimate or into the validity of any tax assessment, sale,
forfeiture, tax lien, title or claim except to the extent such payment is being
contested in good faith by Pledgor in appropriate proceedings and against which
adequate reserves are being maintained in accordance with GAAP.

 

8.                                      EVENTS OF DEFAULT.

 

The occurrence of either of the following events shall constitute an event of
default under this Pledge Agreement (each, an “Event of Default”):  (a) (i) the
occurrence of a Mandatory Redemption Event (as defined in the Notes) and
(ii) the failure of the Obligor to pay the Mandatory Redemption Price (as
defined in the Notes) in full on or prior to the Mandatory Redemption Date (as
defined in the Notes); or (b) any material portion of the Pledged Collateral
shall be lost or deemed invalid and such loss or deemed invalidation is not
covered by insurance.

 

8.1.                              Remedies.

 

(a)          General Remedies. Upon the occurrence of an Event of Default and
during the continuation thereof, the Collateral Agent shall have, in respect of
the Pledged Collateral, in addition to the rights and remedies provided herein
and in the other Transaction Documents, the rights and remedies of a secured
party under the UCC or any other applicable law.

 

(b)         Sale of Pledged Collateral. Upon the occurrence of an Event of
Default and during the continuation thereof, without limiting the generality of
this Section 8.1, the Collateral Agent may, in its sole discretion, sell or
otherwise dispose of or realize upon the Pledged Collateral, or any part
thereof, in one or more parcels, at public or private sale, at any exchange or
broker’s board or elsewhere, at such price or prices and on such other terms as
the Collateral Agent may deem commercially reasonable, for cash, credit or for
future

 

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delivery or otherwise in accordance with applicable law. To the extent permitted
by law, any Investor may, in such event, bid for the purchase of such
securities. Pledgor agrees that, to the extent notice of sale shall be required
by law and has not been waived by Pledgor, any requirement of reasonable notice
shall be met if an authenticated notification of disposition under Section 9-611
of the UCC, specifying the place of any public sale or the time after which any
private sale is to be made, is personally served on or mailed, postage prepaid,
to Pledgor, in accordance with Section 9.6 at least twenty (20) days before the
time of such sale. The Collateral Agent shall not be obligated to make any sale
of Pledged Collateral regardless of notice of sale having been given. The
Collateral Agent may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.

 

(c)          Private Sale. Upon the occurrence of an Event of Default and during
the continuation thereof, Pledgor recognizes that the Collateral Agent may deem
it impracticable to effect a public sale of all or any part of the Pledged
Collateral and that the Collateral Agent may, therefore, determine to make one
or more private sales of any such Pledged Collateral to a restricted group of
purchasers who will be obligated to agree, among other things, to acquire such
Pledged Collateral for their own account, for investment and not with a view to
the distribution or resale thereof. Pledgor acknowledges that any such private
sale may be at prices and on terms less favorable to the seller than the prices
and other terms which might have been obtained at a public sale and,
notwithstanding the foregoing, agrees that the Collateral Agent shall have no
obligation to delay sale of any such Pledged Collateral for the period of time
necessary to permit the issuer of such Pledged Collateral to register such
Pledged Collateral for public sale under the Securities Act. Pledgor further
acknowledges and agrees that any offer to sell such Pledged Collateral which has
been (i) publicly advertised on a bona fide basis in a newspaper or other
publication of general circulation in the financial community of New York, New
York (to the extent that such offer may be advertised without prior registration
under the Securities Act), or (ii) made privately in the manner described above,
shall be deemed to involve a “public sale” under the UCC, notwithstanding that
such sale may not constitute a “public offering” under the Securities Act, and
the Collateral Agent or any Investor may, in such event, bid for the purchase of
such Pledged Collateral, in each case except to the extent limited or prohibited
by applicable law.

 

(d)         Retention of Pledged Collateral. In addition to the rights and
remedies hereunder, upon the occurrence of an Event of Default and during the
continuation thereof, the Collateral Agent may, after providing the notices
required by Sections 9-620 and 9-621 of the UCC (or any successor sections of
the UCC) or otherwise complying with the notice requirements of applicable law
of the relevant jurisdiction, accept or retain all or any portion of the Pledged
Collateral in satisfaction of the Secured Obligations. Unless and until the
Collateral Agent shall have provided such notices, however, the Collateral Agent
shall not be deemed to have retained any Pledged Collateral in satisfaction of
any Secured Obligations for any reason.

 

(e)          Deficiency. In the event that the proceeds of any sale, collection
or realization are insufficient to pay all amounts to which the Collateral Agent
or the Investors are legally entitled, Pledgor shall be liable for the
deficiency, together with the costs of collection and the reasonable fees of any
attorneys employed by the Collateral Agent to collect such deficiency. Any
surplus remaining after the full payment and satisfaction of the Secured
Obligations shall be returned to Pledgor or to whomsoever a court of competent
jurisdiction shall determine to be entitled thereto.

 

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(f)            Other Security. To the extent that any of the Secured Obligations
are now or hereafter secured by property other than the Pledged Collateral
(including, without limitation, real and other personal property owned by
Pledgor), or by a guarantee, endorsement or property of any other Person, then
the Collateral Agent shall have the right to proceed against such other
property, guarantee or endorsement upon the occurrence and during the
continuation of any Event of Default, and the Collateral Agent shall have the
right, in its sole discretion, to determine which rights, security, Liens,
security interests or remedies the Collateral Agent shall at any time pursue,
relinquish, subordinate, modify or take with respect thereto, without in any way
modifying or affecting any of them, any of the Collateral Agent’s rights or the
Secured Obligations under this Pledge Agreement or under any of the Transaction
Documents.

 

(g)         Cumulative Remedies.  The rights and remedies provided in this
Pledge Agreement are cumulative, may be exercised singly or concurrently, and
are not exclusive of any other rights or remedies provided by law.

 

8.2.                              Rights of the Collateral Agent.

 

(a)          Power of Attorney. Pledgor hereby designates and appoints the
Collateral Agent, on behalf of the Investors, and each of its designees or
agents as attorney-in-fact of Pledgor, irrevocably and with power of
substitution, with authority to take any or all of the following actions upon
the occurrence and during the continuation of an Event of Default:

 

(I)                                     TO DEMAND, COLLECT, SETTLE, COMPROMISE,
ADJUST AND GIVE DISCHARGES AND RELEASES CONCERNING THE PLEDGED COLLATERAL OF
PLEDGOR, ALL AS THE COLLATERAL AGENT MAY REASONABLY DETERMINE IN RESPECT OF THE
PLEDGED COLLATERAL;

 

(II)                                  TO COMMENCE AND PROSECUTE ANY ACTIONS AT
ANY COURT FOR THE PURPOSES OF COLLECTING ANY OF THE PLEDGED COLLATERAL AND
ENFORCING ANY OTHER RIGHT IN RESPECT THEREOF;

 

(III)                               TO DEFEND, SETTLE, ADJUST OR COMPROMISE ANY
ACTION, SUIT OR PROCEEDING BROUGHT WITH RESPECT TO THE PLEDGED COLLATERAL AND,
IN CONNECTION THEREWITH, GIVE SUCH DISCHARGE OR RELEASE AS THE COLLATERAL AGENT
MAY DEEM REASONABLY APPROPRIATE;

 

(IV)                              TO PAY OR DISCHARGE TAXES, LIENS, SECURITY
INTERESTS, OR OTHER ENCUMBRANCES LEVIED OR PLACED ON OR THREATENED AGAINST THE
PLEDGED COLLATERAL;

 

(V)                                 TO DIRECT ANY PARTIES LIABLE FOR ANY PAYMENT
UNDER ANY OF THE PLEDGED COLLATERAL TO MAKE PAYMENT OF ANY AND ALL MONIES DUE
AND TO BECOME DUE THEREUNDER DIRECTLY TO THE COLLATERAL AGENT OR AS THE
COLLATERAL AGENT SHALL DIRECT;

 

(VI)                              TO RECEIVE PAYMENT OF AND RECEIPT FOR ANY AND
ALL MONIES, CLAIMS, AND OTHER AMOUNTS DUE AND TO BECOME DUE AT ANY TIME IN
RESPECT OF OR ARISING OUT OF ANY OF THE PLEDGED COLLATERAL;

 

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(VII)                           TO SIGN AND ENDORSE ANY DRAFTS, ASSIGNMENTS,
PROXIES, STOCK POWERS, VERIFICATIONS, NOTICES AND OTHER DOCUMENTS RELATING TO
THE PLEDGED COLLATERAL;

 

(VIII)                        TO EXECUTE AND DELIVER AND/OR FILE ALL
ASSIGNMENTS, CONVEYANCES, STATEMENTS, FINANCING STATEMENTS, CONTINUATION
STATEMENTS, PLEDGE AGREEMENTS, AFFIDAVITS, NOTICES AND OTHER AGREEMENTS,
INSTRUMENTS AND DOCUMENTS THAT THE COLLATERAL AGENT MAY DETERMINE NECESSARY IN
ORDER TO PERFECT AND MAINTAIN THE SECURITY INTERESTS AND LIENS GRANTED IN THIS
PLEDGE AGREEMENT AND IN ORDER TO FULLY CONSUMMATE ALL OF THE TRANSACTIONS
CONTEMPLATED HEREIN;

 

(IX)                                TO EXCHANGE ANY OF THE PLEDGED COLLATERAL OR
OTHER PROPERTY UPON ANY MERGER, CONSOLIDATION, REORGANIZATION, RECAPITALIZATION
OR OTHER READJUSTMENT OF THE ISSUER THEREOF AND, IN CONNECTION THEREWITH,
DEPOSIT ANY OF THE PLEDGED COLLATERAL WITH ANY COMMITTEE, DEPOSITORY, TRANSFER
AGENT, REGISTRAR OR OTHER DESIGNATED AGENCY UPON SUCH TERMS AS THE COLLATERAL
AGENT MAY DETERMINE;

 

(X)                                   TO VOTE FOR A SHAREHOLDER, PARTNER OR
MEMBER RESOLUTION, OR TO SIGN AN INSTRUMENT IN WRITING, SANCTIONING THE TRANSFER
OF ANY OR ALL OF THE PLEDGED COLLATERAL INTO THE NAME OF THE COLLATERAL AGENT OR
INTO THE NAME OF ANY TRANSFEREE TO WHOM THE PLEDGED COLLATERAL OR ANY PART
THEREOF MAY BE SOLD PURSUANT TO SECTION 8.1 HEREOF; AND

 

(XI)                                TO DO AND PERFORM ALL SUCH OTHER ACTS AND
THINGS AS THE COLLATERAL AGENT MAY REASONABLY DEEM TO BE NECESSARY, PROPER OR
CONVENIENT IN CONNECTION WITH THE PLEDGED COLLATERAL.

 

This power of attorney is a power coupled with an interest and shall be
irrevocable for so long as any of the Secured Obligations remain outstanding.
The Collateral Agent shall be under no duty to exercise or withhold the exercise
of any of the rights, powers, privileges and options expressly or implicitly
granted to the Collateral Agent in this Pledge Agreement, and shall not be
liable for any failure to do so or any delay in doing so. The Collateral Agent
shall not be liable for any act or omission or for any error of judgment or any
mistake of fact or law in its individual capacity or its capacity as
attorney-in-fact except acts or omissions resulting from its gross negligence or
willful misconduct. This power of attorney is conferred on the Collateral Agent
solely to perfect, protect, preserve and realize upon its security interest in
the Pledged Collateral.

 

(b)         Assignment by the Collateral Agent. The Collateral Agent may from
time to time assign the Secured Obligations or any portion thereof and/or the
Pledged Collateral or any portion thereof to a successor Collateral Agent, and
the assignee shall be entitled to all of the rights and remedies of the
Collateral Agent under this Pledge Agreement in relation thereto.

 

(c)          The Collateral Agent’s Duty of Care. Other than the exercise of
reasonable care to assure the safe custody of the Pledged Collateral while being
held by the Collateral Agent hereunder, the Collateral Agent shall have no duty
or liability to preserve rights pertaining thereto, it being understood and
agreed that Pledgor shall be responsible for preservation of all rights in the
Pledged Collateral, and the Collateral Agent shall be relieved of all
responsibility for the Pledged Collateral upon surrendering it or tendering the
surrender

 

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of it to Pledgor. The Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of the Pledged Collateral in its
possession if such Pledged Collateral is accorded treatment substantially equal
to that which the Collateral Agent accords its own property, which shall be no
less than the treatment employed by a reasonable and prudent agent in the
industry, it being understood that the Collateral Agent shall not have
responsibility for (i) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relating to any
Pledged Collateral, whether or not the Collateral Agent has or is deemed to have
knowledge of such matters; or (ii) taking any necessary steps to preserve rights
against any parties with respect to any Pledged Collateral.

 

(d)         Voting Rights in Respect of the Pledged Collateral.

 

(i)             So long as no Event of Default shall have occurred and be
continuing, to the extent permitted by law, Pledgor may exercise any and all
voting and other consensual rights pertaining to the Pledged Collateral or any
part thereof for any purpose not inconsistent with the terms of this Pledge
Agreement.

 

(II)          SUBJECT TO SUBSECTION (E) OF THIS SECTION 8.2, UPON THE OCCURRENCE
AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, ALL RIGHTS OF PLEDGOR TO
EXERCISE THE VOTING AND OTHER CONSENSUAL RIGHTS WHICH IT WOULD OTHERWISE BE
ENTITLED TO EXERCISE PURSUANT TO PARAGRAPH (I) OF THIS SUBSECTION (D) SHALL
CEASE AND ALL SUCH RIGHTS SHALL THEREUPON BECOME VESTED IN THE COLLATERAL AGENT,
WHICH SHALL THEN HAVE THE SOLE RIGHT TO EXERCISE SUCH VOTING AND OTHER
CONSENSUAL RIGHTS.

 

(e)          Dividend and Distribution Rights in Respect of the Pledged
Collateral.

 

(i)             So long as no Event of Default shall have occurred and be
continuing, Pledgor may receive and retain any and all dividends (other than
dividends payable in the form of Capital Stock and other dividends constituting
Pledged Collateral which are required to be delivered to the Collateral Agent
pursuant to Section 4 of this Pledge Agreement), distributions or interest paid
in respect of the Pledged Collateral to the extent they are allowed under the
Note Purchase Agreement.

 

(II)          UPON THE OCCURRENCE AND DURING THE CONTINUATION OF AN EVENT OF
DEFAULT:

 

(A)      ALL RIGHTS OF PLEDGOR TO RECEIVE THE DIVIDENDS, DISTRIBUTIONS AND
INTEREST PAYMENTS WHICH IT WOULD OTHERWISE BE AUTHORIZED TO RECEIVE AND RETAIN
PURSUANT TO PARAGRAPH (I) OF THIS SUBSECTION (E) SHALL CEASE AND ALL SUCH RIGHTS
SHALL THEREUPON BE VESTED IN THE COLLATERAL AGENT WHICH SHALL THEN HAVE THE SOLE
RIGHT TO RECEIVE AND HOLD AS PLEDGED COLLATERAL SUCH DIVIDENDS, DISTRIBUTIONS
AND INTEREST PAYMENTS; AND

 

(B)        ALL DIVIDENDS, DISTRIBUTIONS AND INTEREST PAYMENTS WHICH ARE RECEIVED
BY PLEDGOR CONTRARY TO THE PROVISIONS OF CLAUSE (A) OF THIS
SUBSECTION (II) SHALL BE RECEIVED IN TRUST FOR THE BENEFIT OF THE COLLATERAL
AGENT, SHALL BE SEGREGATED FROM OTHER PROPERTY OR FUNDS OF PLEDGOR, AND SHALL BE
FORTHWITH PAID OVER TO THE COLLATERAL AGENT AS PLEDGED COLLATERAL IN THE EXACT
FORM RECEIVED, TO BE HELD BY THE COLLATERAL AGENT AS PLEDGED COLLATERAL AND AS
FURTHER COLLATERAL SECURITY FOR THE SECURED OBLIGATIONS.

 

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(f)            Release of Pledged Collateral. The Collateral Agent may release
any of the Pledged Collateral from this Pledge Agreement or may substitute any
of the Pledged Collateral for other Pledged Collateral without altering, varying
or diminishing in any way the force, effect, Lien, pledge or security interest
of this Pledge Agreement as to any Pledged Collateral not expressly released or
substituted, and this Pledge Agreement shall continue as a first priority Lien
on all Pledged Collateral not expressly released or substituted.

 

8.3.                              Application of Proceeds. After the exercise of
remedies by the Collateral Agent or the Investors, any proceeds of the Pledged
Collateral, when received by the Collateral Agent or the Investors in cash or
its equivalent, will be applied in reduction of the Secured Obligations, and
Pledgor irrevocably waives the right to direct the application of such payments
and proceeds and acknowledges and agrees that the Collateral Agent shall have
the continuing and exclusive right to apply and reapply any and all such
proceeds in the Collateral Agent’s sole discretion, notwithstanding any entry to
the contrary upon any of its books and records.

 

8.4.                              Costs of Counsel. Upon the occurrence of an
Event of Default or a material breach of any provision herein or in any of the
other Transaction Documents, if the Collateral Agent employs counsel to prepare
or consider amendments, waivers or consents with respect to this Pledge
Agreement, or to take action or make a response in or with respect to any legal
or arbitral proceeding relating to this Pledge Agreement or relating to the
Pledged Collateral, or to protect the Pledged Collateral or exercise any rights
or remedies under this Pledge Agreement or with respect to the Pledged
Collateral, then Pledgor agrees to promptly pay the reasonable costs and
expenses of the Collateral Agent, all of which costs and expenses shall
constitute Secured Obligations hereunder.

 

8.5.                              Continuing Agreement.

 

(a)          This Pledge Agreement shall be a continuing agreement in every
respect and shall remain in full force and effect so long as any of the Secured
Obligations remain outstanding. Upon such payment and termination, this Pledge
Agreement shall be automatically terminated and the Collateral Agent shall, upon
the request and at the expense of Pledgor, forthwith release all of the Liens
and security interests granted hereunder and shall deliver all UCC termination
statements and/or other documents reasonably requested by Pledgor evidencing
such termination. Notwithstanding the foregoing, all releases and indemnities
provided hereunder shall survive termination of this Pledge Agreement.

 

(b)         This Pledge Agreement shall continue to be effective or be
automatically reinstated, as the case may be, if at any time payment, in whole
or in part, of any of the Secured Obligations is rescinded or must otherwise be
restored or returned by the Collateral Agent or any Investor as a preference,
fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar
law, all as though such payment had not been made; provided that in the event
payment of all or any part of the Secured Obligations is rescinded or must be
restored or returned, all reasonable costs and expenses (including without
limitation any reasonable legal fees and disbursements) incurred by the
Collateral Agent or any Investor in defending and enforcing such reinstatement
shall be deemed to be included as a part of the Secured Obligations.

 

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9.                                      MISCELLANEOUS.

 

9.1                                 Survival; Severability.  The
representations, warranties, covenants and indemnities made by the Pledgor
herein shall survive the execution and delivery of this Pledge Agreement until
such time as there are no Secured Obligations due to the Collateral Agent.  In
the event that any provision of this Pledge Agreement becomes or is declared by
a court of competent jurisdiction to be illegal, unenforceable or void, this
Pledge Agreement shall continue in full force and effect without said provision;
provided, that in such case the parties shall negotiate in good faith to replace
such provision with a new provision which is not illegal, unenforceable or void,
as long as such new provision does not materially change the economic benefits
of this Pledge Agreement to the parties.

 

9.2                                 Successors and Assigns.  This Pledge
Agreement shall create a continuing security interest in the Pledged Collateral
and shall be binding upon Pledgor and shall inure, together with the rights and
remedies of the Collateral Agent hereunder, to the benefit of the Collateral
Agent and the holders of the Notes and their respective successors and permitted
assigns.  The Pledgor may not assign its rights or obligations under this Pledge
Agreement.

 

9.3                                 Governing Law; Jurisdiction.  This Pledge
Agreement shall be governed by and construed under the laws of the State of New
York applicable to contracts made and to be performed entirely within the State
of New York.  The Pledgor hereby irrevocably submit to the non-exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waive, and agree not to assert in any suit, action or proceeding, any claim that
it is not personally subject to the jurisdiction of any such court, that such
suit, action or proceeding is brought in an inconvenient forum or that the venue
of such suit, action or proceeding is improper.  The Pledgor hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to the Pledgor via
express mail (effective five (5) days after such mailing) at the address in
effect for notices to them under this Pledge Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  The Pledgor hereby irrevocably
and unconditionally waives trial by jury in any legal action or proceeding
relating to this Pledge Agreement or any other Transaction Document to which it
is a party and for any counterclaim therein.

 

9.4                                 Counterparts.  This Pledge Agreement may be
executed in counterparts, each of which where so executed and delivered shall be
an original, but all of which shall constitute one and the same instrument. It
shall not be necessary in making proof of this Pledge Agreement to produce or
account for more than one such counterpart. Delivery of executed counterparts of
this Pledge Agreement by facsimile shall be effective as an original and shall
constitute a representation that an original shall be delivered upon the request
of the Collateral Agent.

 

9.5                                 Headings.  The headings used in this Pledge
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Pledge Agreement.

 

9.6                                 Notices.  Any notice, demand or request
required or permitted to be given by the Pledgor or the Collateral Agent
pursuant to the terms of this Pledge Agreement shall be in writing and shall be
deemed delivered (i) when delivered personally or by verifiable facsimile
transmission (immediately followed by written confirmation delivered according
to another mechanism provided by this section), unless such delivery is made on
a day that is not a

 

12

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Business Day, in which case such delivery will be deemed to be made on the next
succeeding Business Day, (ii) on the next Business Day after timely delivery to
an overnight courier and (iii) on the Business Day actually received if
deposited in the U.S. mail (certified or registered mail, return receipt
requested, postage prepaid), addressed as follows:

 

If to the Pledgor:

 

Applied Digital Solutions, Inc.

1690 S. Congress Avenue, Suite 200

Delray Beach, FL  33445

Attn:                    Scott R. Silverman

Tel:                            (561) 805-8000

Fax:                           (561) 805-0002

 

with a copy to:

 

Holland & Knight LLP

701 Brickell Avenue, Suite 3000

Miami, FL  33131

Attn: Harvey A. Goldman, Esq.

Tel:                            (305) 374-8500

Fax:                           (305) 789-7799

 

If to the Collateral Agent:

 

Satellite Asset Management, L.P.

623 Fifth Avenue, 20th Floor

New York, NY 10022

Attn: Jim LaChance

Tel: 212-209-2000

Fax: 212- 209-2020

 

with a copy to:

 

Mazzeo Song LLP

708 Third Avenue, 19th Floor

New York, NY 10017

Attn: Robert L. Mazzeo

Tel: 212-599-0700

Fax: 212-599-8400

 

Either party may, by notice given in accordance with this Section 9.6, change
the address to which notices, demands and requests shall be sent to such party.

 

9.7                                 Entire Agreement; Amendments.  This Pledge
Agreement and the other Transaction Documents constitute the entire agreement
between the parties with regard to the subject matter hereof and thereof,
superseding all prior agreements or understandings, whether written or oral,
between or among the parties.  Except as expressly provided herein, neither this
Pledge Agreement nor any term hereof may be amended except pursuant to a written
instrument executed by the Pledgor and the Collateral Agent, and no provision
hereof may be waived other

 

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than by a written instrument signed by the party against whom enforcement of any
such waiver is sought.

 

9.8                                 No Waiver.  Other than pursuant to an
amendment or waiver effected in accordance with Section 9.7 of this Pledge
Agreement, the Collateral Agent shall not, by any act, any failure to act or any
delay in acting be deemed to have (i) waived any right or remedy under this
Pledge Agreement, any other Transaction Document or any document, agreement or
instrument made, delivered or given in connection with this Pledge Agreement or
the other Transaction Documents, or (ii) acquiesced in any Event of Default or
in any breach of any of the terms and conditions of this Pledge Agreement, any
other Transaction Document or any document, agreement or instrument made,
delivered or given in connection with this Pledge Agreement or the other
Transaction Documents.  No failure to exercise, nor any delay in exercising, any
right, power or privilege of the Collateral Agent under this Pledge Agreement,
any other Transaction Document or any document, agreement or instrument made,
delivered or given in connection with this Pledge Agreement or the other
Transaction Documents shall operate as a waiver of any such right, power or
privilege.  No single or partial exercise of any right, power or privilege under
this Pledge Agreement, any other Transaction Document or any document, agreement
or instrument made, delivered or given in connection with this Pledge Agreement
or the other Transaction Documents shall preclude any other or further exercise
of any other right, power or privilege.  A waiver by the Collateral Agent of any
right or remedy under this Pledge Agreement, any other Transaction Document or
any other document or instrument made, delivered or given in connection with
this Pledge Agreement or the other Transaction Documents on any one occasion
shall not be construed as a bar to any right or remedy that the Collateral Agent
would otherwise have on any future occasion.

 

9.9                                 Compliance with the Transaction Documents. 
The Pledgor covenants and agrees that on and after the date hereof and until all
Secured Obligations have been paid and performed in full, such Pledgor shall
take, or will refrain from taking, all actions that are necessary to be taken or
not taken so that no violation of any covenant or agreement of such Pledgor
contained in the Note Purchase Agreement or any of the other Transaction
Documents is caused by the actions (or non-actions) of such Pledgor or any of
its Affiliates.  The Pledgor hereby agrees to pay all reasonable out-of-pocket
costs and expenses of the Collateral Agent in connection with the enforcement of
this Pledge Agreement and any amendment, waiver or consent relating hereto
(including, without limitation, reasonable legal fees and disbursements).

 

9.10                           Waivers.  The Pledgor acknowledges that the
Secured Obligations arose out of a commercial transaction and hereby knowingly
and intelligently waives any right to require the Collateral Agent to
(i) proceed against any person or entity, (ii) proceed against any other
collateral under any other agreement, or (iii) pursue any other remedy available
to the Collateral Agent.  The Pledgor further waives any defense that it may
have to the exercise by the Collateral Agent of its rights under this Pledge
Agreement, other than the defense that the Secured Obligations have fully been
paid and performed.

 

9.11                           Cross Default.  The Pledgor agrees and
acknowledges that during any period in which any Secured Obligations remain
outstanding, a default under the terms of this Pledge Agreement shall constitute
a default under the other Transaction Documents, and a default under any of the
other Transaction Documents shall constitute a default under this Pledge
Agreement.

 

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9.12                           Rights of Investors. All rights of the Collateral
Agent hereunder, if not exercised by the Collateral Agent, may be exercised by
the Investors.

 

[Signature Page to Follow]

 

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IN WITNESS WHEREOF, the undersigned have executed this Pledge Agreement as of
the date first-above written.

 

PLEDGOR:

 

 

 

APPLIED DIGITAL SOLUTIONS, INC.

 

 

 

By:

/s/ Evan C. McKeown

 

 

Name: Evan C. McKeown

 

Title: Senior Vice President and Chief Financial Officer

 

 

COLLATERAL AGENT:

 

SATELLITE ASSET MANAGEMENT, L.P.

 

 

By:

/s/ Simon Raykher

 

 

Name: Simon Raykher

 

Title: General Counsel

 

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SCHEDULE 2.1(I)

 

Subsidiaries

 

•                  Computer Equity Corporation

 

•                  Government Telecommunications, Inc.

 

•                  Pacific Decisions Sciences  Corporation

 

•                  Perimeter Acquisition Corp.

 

•                  Thermo Life Energy Corp.

 

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SCHEDULE 2.1(II)

 

Excluded Collateral

 

•                  15,453,506 shares of Digital Angel Corporation

 

 

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