Exhibit 10.3

 

Execution Copy

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this “Security Agreement”), dated as of December 28,
2005, is by and between Applied Digital Solutions, Inc., a Missouri corporation
(“Obligor”), 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 Obligor and the
Investors named therein (such Investors, collectively with their successors and
permitted assigns, the “Investors”), Obligor 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 all of the assets and properties owned by the Obligor.

 

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:  Accounts, Chattel Paper, Deposit Accounts, Disbursement Accounts,
Documents, Equipment, Fixtures, General Intangibles, Goods, Instruments,
Investment Property, Inventory, Letter-of Credit Rights, Proceeds, Software and
Supporting Obligations.

 

2.                                       GRANT OF SECURITY INTEREST.

 

Subject to the terms and conditions of this Security Agreement and to secure the
performance of the Secured Obligations (as defined in Section 3 hereof), Obligor
hereby 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 Obligor in and to all of its assets and properties, including,
without limitation, the following assets and properties, whether now owned or
existing or owned, acquired, or arising hereafter (collectively, the
“Collateral”):

 

(i)                                     all Accounts;

 

(ii)                                  all Chattel Paper;

 

(iii)                               all Documents;

 

(iv)                              all General Intangibles (including payment
intangibles and Software);

 

(v)                                 all Goods (including Inventory, Equipment
and Fixtures);

 

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(vi)                              all Instruments;

 

(vii)                           all Investment Property;

 

(viii)                        all Deposit Accounts (as such term is defined in
the UCC) of the Obligor, including all Disbursement Accounts and all other bank
accounts and all deposits therein;

 

(ix)                                all money, cash or cash equivalents of the
Obligor;

 

(x)                                   all Supporting Obligations and Letter-of
Credit Rights of the Obligor; and

 

(xi)                                to the extent not otherwise included, all
Proceeds, tort claims, insurance claims and other rights to payments not
otherwise included in the foregoing and products of the foregoing and all
accessions to, substitutions and replacements for, and rents and profits of,
each of the foregoing.

 

Without limiting the generality of the foregoing, it is hereby specifically
understood and agreed that the Obligor may from time to time hereafter deliver
additional assets and properties to the Collateral Agent as collateral security
for the Secured Obligations. Upon such delivery to the Collateral Agent, such
additional assets and properties shall be deemed to be part of the Collateral
and shall be subject to the terms of this Security Agreement.

 

3.                                       SECURITY FOR SECURED OBLIGATIONS.

 

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

 

Obligor 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 Collateral in such manner as the Collateral Agent deems
necessary or advisable. Obligor shall also execute and deliver to the Collateral
Agent and/or file such agreements, assignments or instruments (including
affidavits, notices, reaffirmations, amendments and restatements of existing
documents and any documents as may be necessary if the law of any jurisdiction
other than New York

 

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becomes or is applicable to the 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.

 

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

 

5.1.                              Title. Obligor has good and indefeasible title
to, or has a valid and subsisting leasehold interest in, all of the Collateral
and will at all times be the legal and beneficial owner of such Collateral free
and clear of any Lien, other than Permitted Liens.

 

5.2                                 Authority; Enforceability.  The Obligor has
the authority and capacity to perform its obligations hereunder, and this
Security Agreement is the valid and binding obligation of the Obligor
enforceable against the Obligor 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.

 

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

 

5.4.                              Obligor’s Authority. No authorization,
approval or action by, and no notice or filing with any Governmental Authority
or any other Person is required either (i) for the granting of the security
interest by Obligor pursuant to this Security 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).

 

5.5.                              Security Interest/Priority. This Security
Agreement creates a valid security interest in favor of the Collateral Agent,
for the ratable benefit of the Investors, in the Collateral. Upon the filing of
UCC financing statements in the location of Obligor’s state of organization by
the Collateral Agent, the Collateral Agent shall have a first priority perfected
security interest in all of the Collateral for which the filing of UCC financing
statements is a valid method of perfection, free and clear of all Liens (other
than the Permitted Liens).

 

6.                                       COVENANTS.

 

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

 

6.1.                              Defense of Title. Warrant and defend title to
and ownership of the Collateral at its own expense against the claims and
demands of all other parties claiming an interest therein; keep the Collateral
free from all Liens, other than Permitted Liens; and not sell,

 

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exchange, transfer, assign, lease or otherwise dispose of the 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 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 Collateral.

 

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

 

6.4.                              Maintenance of Collateral.  Preserve the
Collateral in good condition and order (ordinary wear and tear excepted) and not
permit it to be abused or misused, and not allow any of the Collateral to be
affixed to real estate, except for any property deemed to be fixtures.

 

6.5.                              DISPOSITION OF COLLATERAL.  REFRAIN FROM
SELLING, ASSIGNING OR OTHERWISE DISPOSING OF ANY OF THE COLLATERAL OR MOVING OR
REMOVING ANY OF THE COLLATERAL (OTHER THAN SALES OF INVENTORY AND DISPOSITIONS
OF OBSOLETE EQUIPMENT, IN EACH CASE, IN THE ORDINARY COURSE OF BUSINESS
CONSISTENT WITH PAST PRACTICE), WITHOUT OBTAINING THE PRIOR WRITTEN CONSENT OF
THE COLLATERAL AGENT, OR UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN FULLY
PERFORMED AND PAID IN FULL.

 

6.6.                              REPORTS.  PROMPTLY PROVIDE TO THE COLLATERAL
AGENT SUCH FINANCIAL STATEMENTS, REPORTS, LISTS AND SCHEDULES RELATED TO THE
COLLATERAL AND ANY OTHER INFORMATION RELATING TO THE COLLATERAL AS THE
COLLATERAL AGENT MAY REASONABLY REQUEST FROM TIME TO TIME.

 

6.7.                              INSPECTIONS.  UPON REASONABLE NOTICE, PERMIT
THE COLLATERAL AGENT TO INSPECT ALL BOOKS AND RECORDS OF THE OBLIGOR RELATING TO
THE COLLATERAL AT SUCH TIMES AND AS OFTEN AS THE COLLATERAL AGENT MAY REASONABLY
REQUEST.

 

6.8.                              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.

 

6.9.                              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 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 Collateral.

 

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7.                                       PERFORMANCE OF OBLIGATIONS; ADVANCES BY
COLLATERAL AGENT.

 

On failure of Obligor 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
Obligor 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 Obligor, and no such advance
or expenditure therefor, shall relieve Obligor of any default under the terms of
this Security Agreement. The Collateral Agent may make any payment hereby
authorized upon prior notice to Obligor 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 Obligor 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 Security 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 Collateral shall be
damaged, destroyed or otherwise lost and such damage, destruction or loss 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 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 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 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 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 Collateral. Obligor agrees that, to the extent notice of sale shall be
required by law and has not been waived by Obligor, 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

 

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Obligor, 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 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)                                  Retention of 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 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 Collateral in satisfaction of any
Secured Obligations for any reason.

 

(d)                                 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, Obligor 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 Obligor or to whomsoever a court
of competent jurisdiction shall determine to be entitled thereto.

 

(e)                                  Other Security. To the extent that any of
the Secured Obligations are now or hereafter secured by property other than the
Collateral, 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 Security Agreement or under any of the
Transaction Documents.

 

(f)                                    Cumulative Remedies.  The rights and
remedies provided in this Security 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. Obligor hereby
designates and appoints the Collateral Agent, on behalf of the Investors, and
each of its designees or agents as attorney-in-fact of Obligor, 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 COLLATERAL OF OBLIGOR,
ALL AS THE COLLATERAL AGENT MAY REASONABLY DETERMINE IN RESPECT OF THE
COLLATERAL;

 

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(II)                                  TO COMMENCE AND PROSECUTE ANY ACTIONS AT
ANY COURT FOR THE PURPOSES OF COLLECTING ANY OF THE 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 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
COLLATERAL;

 

(V)                                 TO DIRECT ANY PARTIES LIABLE FOR ANY PAYMENT
UNDER ANY OF THE 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 COLLATERAL;

 

(VII)                           TO SIGN AND ENDORSE ANY DRAFTS, ASSIGNMENTS,
PROXIES, STOCK POWERS, VERIFICATIONS, NOTICES AND OTHER DOCUMENTS RELATING TO
THE 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
SECURITY AGREEMENT AND IN ORDER TO FULLY CONSUMMATE ALL OF THE TRANSACTIONS
CONTEMPLATED HEREIN; AND

 

(IX)                                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 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 Security 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 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 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 Security Agreement in relation
thereto.

 

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(c)                                  Release of Collateral. The Collateral Agent
may release any of the Collateral from this Security Agreement or may substitute
any of the Collateral for other Collateral without altering, varying or
diminishing in any way the force, effect, Lien, pledge or security interest of
this Security Agreement as to any Collateral not expressly released or
substituted, and this Security Agreement shall continue as a first priority Lien
on all 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
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
Obligor 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 Security
Agreement, or to take action or make a response in or with respect to any legal
or arbitral proceeding relating to this Security Agreement or relating to the
Collateral, or to protect the Collateral or exercise any rights or remedies
under this Security Agreement or with respect to the Collateral, then Obligor
agrees to promptly pay the costs and expenses of the Collateral Agent, all of
which costs and expenses shall constitute Secured Obligations hereunder.

 

8.5.                              Continuing Agreement.

 

(a)                                  This Security 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 Security Agreement shall be automatically terminated and
the Collateral Agent shall, upon the request and at the expense of Obligor,
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 Obligor evidencing such termination. Notwithstanding the foregoing,
all releases and indemnities provided hereunder shall survive termination of
this Security Agreement.

 

(b)                                 This Security 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 Obligor
herein shall survive the execution and delivery of this Security Agreement until
such time as there are no Secured Obligations due to the Collateral Agent.  In
the event that any provision of this Security Agreement becomes or is declared
by a court of competent jurisdiction to be illegal, unenforceable or void, this
Security 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 Security Agreement to the parties.

 

9.2                                 Successors and Assigns.  This Security
Agreement shall create a continuing security interest in the Pledged Collateral
and shall be binding upon Obligor 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 Obligor may not assign its rights or obligations under this
Security Agreement.

 

9.3                                 Governing Law; Jurisdiction.  This Security
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 Obligor 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 Obligor 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 Obligor via
express mail (effective five (5) days after such mailing) at the address in
effect for notices to them under this Security 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 Obligor hereby irrevocably
and unconditionally waives trial by jury in any legal action or proceeding
relating to this Security Agreement or any other Transaction Document to which
it is a party and for any counterclaim therein.

 

9.4                                 Counterparts.  This Security 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 Security Agreement to produce
or account for more than one such counterpart. Delivery of executed counterparts
of this Security 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
Security Agreement are used for convenience only and are not to be considered in
construing or interpreting this Security Agreement.

 

9.6                                 Notices.  Any notice, demand or request
required or permitted to be given by the Obligor or the Collateral Agent
pursuant to the terms of this Security 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

 

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another mechanism provided by this section), unless such delivery is made on a
day that is not a 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 Obligor:

 

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 Security
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
Security Agreement nor any term hereof may be amended except pursuant to a
written

 

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instrument executed by the Obligor and the Collateral Agent, and no provision
hereof may be waived other 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 Security
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
Security Agreement, any other Transaction Document or any document, agreement or
instrument made, delivered or given in connection with this Security 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 Security Agreement,
any other Transaction Document or any document, agreement or instrument made,
delivered or given in connection with this Security 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 Security Agreement,
any other Transaction Document or any document, agreement or instrument made,
delivered or given in connection with this Security 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 Security Agreement, any other Transaction Document or any document,
agreement or instrument made, delivered or given in connection with this
Security 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 Security Agreement, any other
Transaction Document or any other document or instrument made, delivered or
given in connection with this Security 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 Obligor covenants and agrees that on and after the date hereof and until all
Secured Obligations have been paid and performed in full, such Obligor 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 Obligor
contained in the Note Purchase Agreement or any of the other Transaction
Documents is caused by the actions (or non-actions) of such Obligor or any of
its Affiliates.  The Obligor hereby agrees to pay all reasonable out-of-pocket
costs and expenses of the Collateral Agent in connection with the enforcement of
this Security Agreement and any amendment, waiver or consent relating hereto
(including, without limitation, reasonable legal fees and disbursements).

 

9.10                           Waivers.  The Obligor 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 Obligor further waives any defense that it may
have to the exercise by the Collateral Agent of its rights under this Security
Agreement, other than the defense that the Secured Obligations have fully been
paid and performed.

 

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

 

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default under any of the other Transaction Documents shall constitute a default
under this Security Agreement.

 

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 Security Agreement as of
the date first-above written.

 

OBLIGOR:

 

APPLIED DIGITAL SOLUTIONS, INC.

 

 

By:

/s/ Evan McKeown

 

 

Name: Evan C. McKeown

 

Title: Senior Vice President and Chief Financial Officer

 

 

 

 

COLLATERAL AGENT:

 

 

SATELLITE ASSET MANAGEMENT, L.P.

 

 

 

 

By:

/s/ Simon Rayhker

 

 

Name: Simon Raykher

 

Title: General Counsel

 

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