Filed by Bowne Pure Compliance



 




Exhibit 10.11


SUBORDINATION AGREEMENT


This Subordination
Agreement (as amended, restated, modified and/or supplemented from time to
time, this “Agreement”) is entered into as of the 29th day
of February, 2008, by and among Applied Digital Solutions, Inc., a Delaware
corporation (“Subordinated Lender”), and LV Administrative
Services, Inc., a Delaware corporation, as agent (in such capacity,
“Agent”) for itself and the Purchasers from time to time
party to the Securities Purchase Agreement referred to below (each, a
“Lender” and, together with Agent, the “Senior
Lenders” ). Unless otherwise defined herein, capitalized terms used
herein shall have the meaning provided such terms in the Securities Purchase
Agreement referred to below.


BACKGROUND


WHEREAS, it is a
condition to each Lender’s providing financial accommodations to VeriChip
Corporation, a Delaware corporation (the “Company”) and
certain Subsidiaries of the Company pursuant to, and in accordance with, (i)
that certain Securities Purchase Agreement to be dated on or about
February 29, 2008 by and among the Company, certain Subsidiaries of the
Company, Agent and the Purchasers party thereto (as amended, restated, modified
or supplemented from time to time, the “Securities Purchase
Agreement”) and (ii) the Related Agreements referred to in the
Securities Purchase Agreement, that Subordinated Lender enter into this
Agreement.


WHEREAS,
Subordinated Lender has made loans to the Company which are secured by a lien
on all assets of the Company including, without limitation, the stock of XMark
Corporation owned by the Company (the “Stock”).


NOW, THEREFORE, in
order to facilitate the transactions contemplated by the Securities Purchase
Agreement, Subordinated Lender has agreed to enter into this Agreement and
Subordinated Lender and Agent, on its own behalf and on behalf of the Senior
Lenders, hereby agree as follows:


TERMS


1. All
obligations of the Company and/or any of its Subsidiaries to any Senior Lender,
howsoever created, arising or evidenced, whether direct or indirect, absolute
or contingent or now or hereafter existing, or due or to become due are
referred to as “Senior Liabilities”. Any and all loans made
by Subordinated Lender to the Company and/or any of its Subsidiaries, together
with all other obligations (whether monetary or otherwise) of the Company
and/or any of its Subsidiaries to Subordinated Lender (in each case, including
any interest, fees or penalties related thereto), howsoever created, arising or
evidenced, whether direct or indirect, absolute or contingent or now or
hereafter existing, or due or to become due are referred to as “Junior
Liabilities”. Junior Liabilities shall not include any of the
obligations owing by the Company to Subordinated Lender under that certain
(i) Amended and Restated Supply, License, and Development Agreement dated
December 27, 2005 between the Company and Subordinated Lender and (ii)
Glucose Sensor Development Agreement dated as of January 1, 2008 among the
Subordinated Lender, the Company and Receptors LLC. In addition, Junior
Liabilities, shall exclude all rights of Subordinated Lender to receive any
monies from the


 


 









 





Company in Subordinated
Lender’s capacity as a shareholder of the Company, to the extent such
payments are permitted to be paid under the terms of the Securities Purchase
Agreement. It is expressly understood and agreed that the term “Senior
Liabilities”, as used in this Agreement, shall include, without
limitation, any and all interest, fees and penalties accruing on any of the
Senior Liabilities after the commencement of any proceedings referred to in
paragraph 4 of this Agreement, notwithstanding any provision or rule of law
which might restrict the rights of any Senior Lender, as against the Company,
its Subsidiaries or anyone else, to collect such interest, fees or penalties,
as the case may be.


2. Except as
expressly otherwise provided in this Agreement or as Agent on its own behalf
and on behalf of the Lenders may otherwise expressly consent in writing, the
payment of the Junior Liabilities shall be postponed and subordinated in right
of payment and priority to the payment in full of all Senior Liabilities.
Furthermore, whether directly or indirectly, no payments or other distributions
whatsoever in respect of any Junior Liabilities shall be made (whether at
stated maturity, by acceleration or otherwise), nor shall any property or
assets of the Company or any of its Subsidiaries be applied to the purchase or
other acquisition or retirement of any Junior Liability until such time as the
Senior Liabilities have been indefeasibly paid in full. Notwithstanding
anything to the contrary contained in this paragraph 2 or elsewhere in this
Agreement, the Company and its Subsidiaries may make payment of account of the
Junior Liabilities if such payment is occurring with the simultaneous payment
in full in cash of the Senior Liabilities..


3. Subordinated Lender hereby subordinates all claims and
security interests it may have against, or with respect to, any of the assets
of the Company and/or any of its Subsidiaries (the “Subordinated
Lender Liens”), to the security interests granted by the Company
and/or any of its Subsidiaries to each Senior Lender in respect of the Senior
Liabilities. No Senior Lender shall owe any duty to Subordinated Lender as a
result of or in connection with any Subordinated Lender Liens, including
without limitation, any marshalling of assets or protection of the rights or
interests of Subordinated Lender. Agent, on its own behalf and on behalf of the
Lenders, shall have the exclusive right to manage, perform and enforce the
underlying terms of the Securities Purchase Agreement, the Related Agreements
and each other document, instrument and agreement executed from time to time in
connection therewith (collectively, the “Security
Agreements”) relating to the assets of the Company and its
Subsidiaries and to exercise and enforce its rights according to its
discretion. Subordinated Lender waives all rights to affect the method or
challenge the appropriateness of any action taken by any Senior Lender in
connection with any Senior Lender’s enforcement of its rights under the
Security Agreements. Only Agent, on its own behalf and on behalf of the
Lenders, shall have the right to restrict, permit, approve or disapprove the
sale, transfer or other disposition of the assets of the Company or any of its
Subsidiaries. As between each Senior Lender and Subordinated Lender, the terms
of this Agreement shall govern even if all or part of any Senior Lender’s
liens are avoided, disallowed, set aside or otherwise invalidated.


4. In the
event of any dissolution, winding up, liquidation, readjustment, reorganization
or other similar proceedings relating to the Company and/or any of its
Subsidiaries or to its creditors, as such, or to its property (whether
voluntary or involuntary, partial or complete, and whether in bankruptcy,
insolvency or receivership, or upon an assignment for the benefit of creditors,
or any other marshalling of the assets and liabilities of the


 


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Company and/or any of its
Subsidiaries, or any sale of all or substantially all of the assets of the
Company and/or any of its Subsidiaries, or otherwise), the Senior Liabilities
shall first be irrevocably paid in full before Subordinated Lender shall be
entitled to receive and to retain any payment, distribution, other rights or
benefits in respect of any Junior Liability. In order to enable each Senior
Lender to enforce its rights hereunder in any such action or proceeding, each
Senior Lender is hereby irrevocably authorized and empowered in its discretion
as attorney in fact for Subordinated Lender to make and present for and on
behalf of Subordinated Lender such proofs of claims against the Company and/or
its Subsidiaries as Agent may deem expedient or proper and to vote such proofs
of claims in any such proceeding and to receive and collect any and all
dividends or other payments or disbursements made thereon in whatever form the
same may be paid or issued and to apply same on account of any the Senior
Liabilities. In the event, prior to indefeasible payment in full of the Senior
Liabilities, Subordinated Lender shall receive any payment in respect of the
Junior Liabilities and/or in connection with the enforcement of Subordinated
Lender’s rights and remedies against the Company and/or any of its
Subsidiaries, whether arising in connection with the Junior Liabilities or
otherwise, then Subordinated Lender shall forthwith deliver, or cause to be
delivered, the same to Agent in precisely the form held by Subordinated Lender
(except for any necessary endorsement) and until so delivered the same shall be
held in trust by Subordinated Lender as the property of the Senior Lenders.


5. Subordinated Lender will mark its books and records so
as to clearly indicate that its Junior Liabilities are subordinated in
accordance with the terms of this Agreement. Subordinated Lender will execute
such further documents or instruments and take such further action as Agent may
reasonably request from time to time to carry out the intent of this Agreement.


6. Subordinated Lender hereby waives all diligence in
collection or protection of or realization upon the Senior Liabilities or any
security for the Senior Liabilities.


7. Subordinated Lender shall not, without the prior
written consent of Agent: (a) attempt to enforce or collect any Junior
Liability or any rights in respect of any Junior Liability or any other right
or remedies of any kind or nature whatsoever against the Company and/or any of
its Subsidiaries whether in respect of the Junior Liabilities or otherwise
(each an “Enforcement Action”); unless in each case
(i) an event of default arising out the failure to make payment of any of
the Junior Liabilities shall have occurred and be continuing (the
“Subordinated Lender Default”), (ii) the Subordinated
Lender shall have provided Agent written notice of each such Subordinated
Lender Default and that it intends to take an Enforcement Action (each a
“Subordinated Lender Enforcement Action Notice”),
(iii) Agent is not pursuing any rights or remedies against the Company or
any of its Subsidiaries with respect to the Senior Liabilities and (iv) a
period of time of at least one hundred and eighty (180) days shall have
elapsed after the receipt by Agent of the Subordinated Lender Enforcement
Action Notice; provided that, notwithstanding the foregoing, the Subordinated
Lender shall only be permitted to provide Agent with one Subordinated Lender
Enforcement Action Notice in any three hundred and sixty-five (365) day
period; or (b) commence, or join with any other creditor in commencing,
any bankruptcy, reorganization or insolvency proceedings with respect to the
Company and/or any of its Subsidiaries.


 


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8. Agent, on
its own behalf and on behalf of the Lenders, may, from time to time, at its
sole discretion and without notice to Subordinated Lender, take any or all of
the following actions: (a) retain or obtain a security interest in any
property to secure any of the Senior Liabilities; (b) retain or obtain the
primary or secondary obligation of any other obligor or obligors with respect
to any of the Senior Liabilities; and (c) release its security interest
in, or surrender, release or permit any substitution or exchange for, all or
any part of any property securing any of the Senior Liabilities, or extend or
renew for one or more periods (whether or not longer than the original period)
or release, compromise, alter or exchange any obligations of any nature of any
obligor with respect to any such property. Without the consent of Subordinated
Lender, Agent or Lenders shall not (i) increase the principal amount of
the Senior Liabilities to an amount in excess of the Senior Liabilities as of
the date hereof plus $1,000,000; provided, however, that such
limitation shall not apply to any additional fees charged by Agent of Lenders
in connection with any waiver, amendment or modification to the Securities
Purchase Agreement or the Related Agreements, any advances made by Agent or any
Lender to preserve and protect the value of the collateral securing the Senior
Liabilities or following the occurrence of an Event of Default (under and as
defined in the Securities Purchase Agreement or the Related Agreements) or
(ii) extend or renew for one or more periods (whether or not longer than
the original period).


9. Agent, on
its own behalf and on behalf of the Lenders, may, from time to time, whether
before or after any discontinuance of this Agreement, without notice to
Subordinated Lender, assign or transfer any or all of the Senior Liabilities or
any interest in the Senior Liabilities; and, notwithstanding any such
assignment or transfer or any subsequent assignment or transfer of the Senior
Liabilities, such Senior Liabilities shall be and remain Senior Liabilities for
the purposes of this Agreement, and every immediate and successive assignee or
transferee of any of the Senior Liabilities or of any interest in the Senior
Liabilities shall, to the extent of the interest of such assignee or transferee
in the Senior Liabilities, be entitled to the benefits of this Agreement to the
same extent as if such assignee or transferee were a Senior Lender, as
applicable; provided, however, that, unless Agent on its own behalf and on
behalf of the Lenders, shall otherwise consent in writing, the Senior Lenders
shall have an unimpaired right, prior and superior to that of any such assignee
or transferee, to enforce this Agreement, for the benefit of the Senior
Lenders, as to those of the Senior Liabilities which the Senior Lenders have
not assigned or transferred.


10. The Senior
Lenders shall not be prejudiced in their rights under this Agreement by any act
or failure to act of Subordinated Lender, or any noncompliance of Subordinated
Lender with any agreement or obligation, regardless of any knowledge thereof
which any Senior Lender may have or with which any Senior Lender may be
charged; and no action of any Senior Lender permitted under this Agreement
shall in any way affect or impair the rights of any other Senior Lender and the
obligations of Subordinated Lender under this Agreement.


11. No delay
on the part of any Senior Lender in the exercise of any right or remedy shall
operate as a waiver of such right or remedy, and no single or partial exercise
by the Senior Lenders of any right or remedy shall preclude other or further
exercise of such right or remedy or the exercise of any other right or remedy;
nor shall any modification or waiver of any of the provisions of this Agreement
be binding upon any Senior Lender except as expressly set forth in a writing
duly signed and delivered by Agent on it own behalf and on behalf of the Senior


 


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Lenders. For the purposes of this
Agreement, Senior Liabilities shall have the meaning set forth in paragraph 1
above, notwithstanding any right or power of Subordinated Lender or anyone else
to assert any claim or defense as to the invalidity or unenforceability of any
such obligation, and no such claim or defense shall affect or impair the
agreements and obligations of Subordinated Lender under this Agreement.


12. This
Agreement shall continue in full force and effect after the filing of any
petition (“Petition”) by or against the Company and/or any
of its Subsidiaries under the United States Bankruptcy Code (the
“Code”) and all converted or succeeding cases in respect
thereof. All references herein to the Company and/or Subsidiary shall be deemed
to apply to the Company and such Subsidiary as debtor-in-possession and to a
trustee for the Company and/or such Subsidiary. If the Company or any of its
Subsidiaries shall become subject to a proceeding under the Code, and if the
Senior Lenders shall desire to permit the use of cash collateral or to permit
or provide post-Petition financing from any Senior Lender (or an affiliate or a
third party satisfactory to the Senior Lenders) to the Company or any such
Subsidiary under the Code, Subordinated Lender agrees as follows:
(1) adequate notice to Subordinated Lender shall be deemed to have been
provided for such consent or post-Petition financing if Subordinated Lender
receives notice thereof three (3) business days (or such shorter notice as
is given to the Senior Lenders) prior to the earlier of (a) any hearing on
a request to approve such post-petition financing or (b) the date of entry
of an order approving same and (2) no objection will be raised by
Subordinated Lender to any such use of cash collateral or such post-Petition
financing from any Senior Lender (or an affiliate of the Senior Lender).


13. This
Agreement shall be binding upon Subordinated Lender and upon the heirs, legal
representatives, successors and assigns of Subordinated Lender. This Agreement
may be executed in one or more counterparts, each of which shall be deemed an
original and all of which together shall be deemed to constitute one agreement.
It is understood and agreed that if facsimile or electronic copies of this
Agreement bearing facsimile or electronic signatures are exchanged between the
parties hereto, such copies shall in all respects have the same weight, force
and legal effect and shall be fully as valid, binding, and enforceable as if
such signed facsimile or electronic copies were original documents bearing
original signature.


14. THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED
ACCORDING TO, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS PROVISIONS THEREOF AND SHALL BE BINDING UPON THE PARTIES
HERETO AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. ANY ACTION BROUGHT
CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT SHALL BE BROUGHT
ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE
STATE OF NEW YORK; PROVIDED, HOWEVER, THAT THE SENIOR LENDER MAY CHOOSE TO
WAIVE THIS PROVISION AND BRING AN ACTION OUTSIDE THE STATE OF NEW YORK. The
individuals executing this Agreement on behalf of Subordinated Lender agree to
submit to the jurisdiction of such courts and waive trial by jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorneys’ fees and costs. Wherever possible each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under such law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.


 


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15. Agent
represents and warrants that it is authorized to enter into this Agreement as
agent for the Senior Lenders.


16. Promptly
following the payment in full in cash of the Senior Liabilities, Agent shall,
upon the request of the Subordinated Lender, deliver the remainder of the
collateral securing the Senior Liabilities, if any, in its possession
(including the Stock) to Subordinated Lender (except as may otherwise be
required by applicable law or court order). It is understood and agreed that
this Section 16 is intended solely to assure continuous perfection
of the liens of the Subordinated Lender, and nothing in this
Section 16 shall be deemed or construed as altering the priorities
or obligations set forth elsewhere in this Agreement.


[signature page follows]


 


 


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IN WITNESS WHEREOF,
this Agreement has been made and delivered this 29th day of February, 2008.


APPLIED DIGITAL
SOLUTIONS, INC.



	 	 	 	
By: /s/ Lorraine M.
Breece                                    








	 	 	
Name: Lorraine M. Breece

Title: Senior
Vice President and

          Acting Chief Financial Officer







LV ADMINISTRATIVE SERVICES, INC., as Agent



	 	 	 	
By: /s/ Scott Bluestein
                                           









	 	 	
Name: Scott Bluestein

Title: Authorized
Signatory







	 	 	 	 
	Acknowledged and Agreed to
by:


	
VERICHIP CORPORATION


	

By: 

	 	
/s/ William J.
Caragol                                   
	
 

	 	 






	 	 	
Name: William J. Caragol

Title: President
and Chief Financial Officer








	 	 	 
	 
	SIGNATURE PAGE TO

SUBORDINATION
AGREEMENT