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:


 





















 


(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.


 


10





















 


(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





















 


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


 


13





















 


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.


 


14





















 


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]


 


15





















 


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

  
				



 





















 


SCHEDULE 2.1(I)


 


Subsidiaries


 


•                  Computer Equity Corporation


 


•                  Government Telecommunications, Inc.


 


•                  Pacific Decisions Sciences  Corporation


 


•                  Perimeter Acquisition Corp.


 


•                  Thermo Life Energy Corp.


 





















 


SCHEDULE 2.1(II)


 


Excluded
Collateral


 


•                  15,453,506 shares of
Digital Angel Corporation