Document:

Second Amend to Loan Agr

    Exhibit
      10.1

    
 

    SECOND
      AMENDMENT

     

    TO
      LOAN
      AND SECURITY AGREEMENT

     

    This
      Second Amendment to Loan and Security Agreement (this “Amendment”) is entered
      into as of July 17, 2006, by and between COMERICA BANK (“Bank”) and VITALSTREAM
      HOLDINGS, INC., VITALSTREAM, INC. and VITALSTREAM BROADCASTING CORPORATION
      (each
      a “Borrower” and collectively, "Borrowers").

     

    RECITALS

     

    Borrowers
      and Bank are parties to that certain Loan and Security Agreement dated as of
      October 7, 2004, as amended from time to time, including by that certain First
      Amendment to Loan and Security Agreement dated as of December 31, 2005
      (collectively, the “Agreement”). The parties desire to amend the Agreement in
      accordance with the terms of this Amendment.

     

    NOW,
      THEREFORE, the parties agree as follows:

     

    1.  
      Section
      1.1
      of the
      Agreement is hereby amended by adding or amending and restated the following
      defined terms:

     

    "'Letter
      of Credit" means a commercial or standby letter of credit or similar undertaking
      issued by Bank at Parent's request in accordance with Section
      2.1(b)(iii)."

     

    "'Letter
      of Credit Sublimit' means a sublimit for Letters of Credit under the Revolving
      Line not to exceed $1,000,000."

     

    "'Liquidity
      Ratio' means, with respect to any period, the ratio
      of (a)
      the sum of (i) Cash plus
      (ii) net
      trade Accounts, provided,
      however
      that
      such Accounts may comprise no more than 50% of the sum of the preceding clauses
      (i) and (ii), divided by
      (b) the
      sum of (i) the current and long term portions of all loans extended to Borrowers
      (including issued and outstanding letters of credit, except to the extent such
      letters of credit are cash secured) plus
      (ii) all
      capitalized leases; in each case as determined in accordance with GAAP,
      consistently applied."

     

    "'Permitted
      Indebtedness' means:

     

    (a) Indebtedness
      of Borrowers in favor of Bank arising under this Agreement or any other Loan
      Document;

     

    (b) Indebtedness
      existing on the Closing Date and disclosed in the Schedule;

     

    (c) Indebtedness
      not to exceed Three Million Five Hundred Thousand Dollars ($3,500,000) in the
      aggregate in any fiscal year of Borrowers secured by a lien described in clause
      (c) of the defined term 'Permitted Liens;' provided such Indebtedness does
      not
      exceed the lesser of the cost or fair market value of the equipment financed
      with such Indebtedness;

     

    (d) Subordinated
      Debt; 

     

    (e) Indebtedness
      to trade creditors incurred in the ordinary course of business; and

     

    
      
         

      

      
        -1-

        
          

        

      

      
         

      

    

     

    (f) Extensions,
      refinancings and renewals of any items of Permitted Indebtedness, provided
      that
      the principal amount is not increased or the terms modified to impose more
      burdensome terms upon the respective Borrower or its Subsidiary, as the case
      may
      be."

     

    "'Permitted
      Liens' means the following:

     

    (a) Any
      Liens
      existing on the Closing Date and disclosed in the Schedule (excluding Liens
      to
      be satisfied with the proceeds of the Advances) or arising under this Agreement
      or the other Loan Documents;

     

    (b) Liens
      for
      taxes, fees, assessments or other governmental charges or levies, either not
      delinquent or being contested in good faith by appropriate proceedings and
      for
      which the relevant Borrower maintains adequate reserves, provided the same
      have
      no priority over any of Bank's security interests;

     

    (c) Liens
      not
      to exceed Three Million Five Hundred Thousand Dollars ($3,500,000) in the
      aggregate (i) upon or in any Equipment (other than Equipment financed by an
      Equipment Advance) acquired or held by a Borrower or any of its Subsidiaries
      to
      secure the purchase price of such Equipment or indebtedness incurred solely
      for
      the purpose of financing the acquisition or lease of such Equipment, or (ii)
      existing on such Equipment at the time of its acquisition, provided that the
      Lien is confined solely to the property so acquired and improvements thereon,
      and the proceeds of such Equipment;

     

    (d) Liens
      incurred in connection with the extension, renewal or refinancing of the
      indebtedness secured by Liens of the type described in clauses (a) through
      (c)
      above, provided that any extension, renewal or replacement Lien shall be limited
      to the property encumbered by the existing Lien and the principal amount of
      the
      indebtedness being extended, renewed or refinanced does not increase;

     

    (e) Liens
      arising from judgments, decrees or attachments in circumstances not constituting
      an Event of Default under Sections 8.5 or 8.9; and

     

    (f) Liens
      in
      favor of other financial institutions arising in connection with Borrower's
      deposit accounts held at such institutions to secured standard fees for deposit
      services charged by, but not financing made available by such institutions,
      provided that Bank has a perfected security interest in the amounts held in
      such
      deposit accounts."

     

    "'Revolving
      Line' means a Credit Extension of up to Two Million Two Hundred Thirty Five
      Thousand Dollars ($2,235,000) (inclusive of any amounts outstanding under the
      Letter of Credit Sublimit.)"

     

    2.  
      The
      defined term "EBITDA" set forth in Section
      1.1
      of the
      Agreement is hereby deleted.

     

    3.  
      Section
      2.1(b)(i)
      of the
      Agreement is hereby amended and restated in its entirety to read as
      follows:

     

    "(i) Amount.
      Subject
      to and upon the terms and conditions of this Agreement (1) Parent may request
      Advances in an aggregate outstanding amount not to exceed the Revolving Line,
      less any amounts outstanding under the Letter of Credit Sublimit, and (2)
      amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed
      at
      any time prior to the Revolving Maturity Date, at which time all Advances under
      this Section 2.1(b) shall be immediately due and payable. Borrowers may prepay
      any Advances without penalty or premium."

     

     

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

     

    4.  
      New
      Section
      2.1(b)(iii)
      is
      hereby added to the Agreement to read in its entirety as follows:

     

    "(iii) Letter
      of Credit Sublimit.
      Subject
      to the availability under the Revolving Line, and in reliance on the
      representations and warranties of Borrowers set forth herein, at any time and
      from time to time from the date hereof through the Business Day immediately
      prior to the Revolving Maturity Date, Bank shall issue for the account of one
      or
      all of the Borrowers such Letters of Credit as Parent may request by delivering
      to Bank a duly executed letter of credit application on Bank's standard form;
      provided, however, that the outstanding and undrawn amounts under all such
      Letters of Credit (i) shall not at any time exceed the Letter of Credit
      Sublimit, and (ii) shall be deemed to constitute Advances for the purpose of
      calculating availability under the Revolving Line. Any drawn but unreimbursed
      amounts under any Letters of Credit shall be charged as Advances against the
      Revolving Line. All Letters of Credit shall be in form and substance acceptable
      to Bank in its sole discretion and shall be subject to the terms and conditions
      of Bank's form application and letter of credit agreement. Borrower will pay
      any
      standard issuance and other fees that Bank notifies Borrower it will charge
      for
      issuing and processing Letters of Credit."

     

    5.  
      New
      Section
      2.1(b)(iv)
      is
      hereby added to the Agreement to read in its entirety as follows:

     

    "(iv) Collateralization
      of Obligations Extending Beyond Maturity.
      If any
      Borrower has not secured to Bank's satisfaction its obligations with respect
      to
      any Letters of Credit by the Revolving Maturity Date, then, effective as of
      such
      date, the balance in any deposit accounts held by Bank and the certificates
      of
      deposit or time deposit accounts issued by Bank in any one or all of Borrowers'
      name (and any interest paid thereon or proceeds thereof, including any amounts
      payable upon the maturity or liquidation of such certificates or accounts),
      shall automatically secure such obligations to the extent of the then continuing
      or outstanding and undrawn Letters of Credit. Borrowers authorize Bank to hold
      such balances in pledge and to decline to honor any drafts thereon or any
      requests by any Borrower or any other Person to pay or otherwise transfer any
      part of such balances for so long as the Letters of Credit are outstanding
      or
      continue."

     

    6.  
      Section
      6.7 of
      the
      Agreement is hereby amended and restated in its entirety to read as
      follows:

     

    "6.7 Financial
      Covenants.
      Borrowers shall at all times maintain the following financial
      covenants:

     

    (a) Minimum
      Cash.
      A
      balance of Cash at Bank of not less (i) Three Million Dollars ($3,000,000)
      when
      aggregate outstanding Advances and Equipment Advances are less than or equal
      to
      Three Million Dollars ($3,000,000); and (ii) Three Million Five Hundred Thousand
      Dollars ($3,500,000) when aggregate outstanding Advances and Equipment Advances
      are greater than Three Million Dollars ($3,000,000). Borrowers may not request
      or receive Advances in order to comply with this Section 6.7(a).

     

    (b) Intentionally
      Omitted.

     

     

    
      
         

      

      
        -3-

        
          

        

      

      
         

      

    

     

    (c) Total
      Liabilities to Tangible Net Worth.
      A ratio
      of Total Liabilities to Tangible Net Worth of not more than 1.60 to
      1.00.

    

    (d) Minimum
      Liquidity Ratio.
      A
      Liquidity Ratio of not less than 1.40 to 1.00."

    

    7.  
      Exhibit
      C
      to the Agreement is hereby replaced with Exhibit C attached hereto.

     

    8.  
      No
      course
      of dealing on the part of Bank or its officers, nor any failure or delay in
      the
      exercise of any right by Bank, shall operate as a waiver thereof, and any single
      or partial exercise of any such right shall not preclude any later exercise
      of
      any such right. Bank’s failure at any time to require strict performance by a
      Borrower of any provision shall not affect any right of Bank thereafter to
      demand strict compliance and performance. Any suspension or waiver of a right
      must be in writing signed by an officer of Bank.

     

    9.  
      Unless
      otherwise defined, all initially capitalized terms in this Amendment shall
      be as
      defined in the Agreement. The Agreement, as amended hereby, shall be and remain
      in full force and effect in accordance with its respective terms and hereby
      is
      ratified and confirmed in all respects. Except as expressly set forth herein,
      the execution, delivery, and performance of this Amendment shall not operate
      as
      a waiver of, or as an amendment of, any right, power, or remedy of Bank under
      the Agreement, as in effect prior to the date hereof.

     

    10.  
      Borrowers
      represent and warrant that the Representations and Warranties contained in
      the
      Agreement are true and correct as of the date of this Amendment, and that no
      Event of Default has occurred and is continuing. 

     

    11.  
      As
      a
      condition to the effectiveness of this Amendment, Bank shall have received,
      in
      form and substance satisfactory to Bank, the following:

     

    (a) this
      Amendment, duly executed by each Borrower;

     

    (b) a
      Certificate of the Secretary of each Borrower with respect to incumbency and
      resolutions authorizing the execution and delivery of this
      Amendment;

     

    (c) a
      non-refundable amendment fee of $2,500, which may be debited from any of
      Borrowers' accounts;

     

    (d) all
      reasonable Bank Expenses incurred through the date of this Amendment, which
      may
      be debited from any of Borrower's accounts; 

     

    (e) such
      other documents, and completion of such other matters, as Bank may reasonably
      deem necessary or appropriate.

     

    12.  
      This
      Amendment may be executed in two or more counterparts, each of which shall
      be
      deemed an original, but all of which together shall constitute one
      instrument.

     

    [Remainder
      of page intentionally left blank - Signature page follows]

     

    

     

    
      
         

      

      
        -4-

        
          

        

      

      
         

      

    

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

     

    
 

    
      
        	 	
                VITALSTREAM
                  HOLDINGS, INC.

                 

              
	 	By:	/s/
                Philip Kaplan
                
                

              
	 	 	
                Title:
                  President & COO

              
	 	 	 
	 	
                VITALSTREAM,
                  INC.

                 

              
	 	 	
                By:
                  /s/ Philip Kaplan
                  
                  

                

              
	 	 	
                Title:
                  President & COO

              
	 	 
	 	
                VITALSTREAM
                  BROADCASTING CORPORATION

                 

              
	 	
                By:
                  

              	
                /s/
                  Philip Kaplan
                  
                  

                

              
	 	 	
                Title:
                  President & COO

              
	 	 	 
	 	
                COMERICA
                  BANK

                 

              
	 	
                By:
                  

              	
                Gary
                  Reagan
                  
                  

                

              
	 	
                Title:

              	
                Senior
                  Vice President

              
	 	 	 

      

    

     

    
      
         

      

      
        -5-

        
          

        

      

      
         

      

    

    EXHIBIT C

     

    COMPLIANCE
      CERTIFICATE

     

    TO:        COMERICA
      BANK

     

    FROM:      VITALSTREAM
      HOLDINGS, INC., for itself and on behalf of all Borrowers

     

    The
      undersigned authorized officer of VITALSTREAM HOLDINGS, INC., for itself and
      on
      behalf of all Borrowers, hereby certifies that in accordance with the terms
      and
      conditions of the Loan and Security Agreement between Borrowers and Bank (the
      "Agreement"), (i) Each Borrower is in complete compliance for the period
      ending _______________ with all required covenants except as noted below and
      (ii) all representations and warranties of each Borrower stated in the
      Agreement are true and correct as of the date hereof. Attached herewith are
      the
      required documents supporting the above certification. The Officer further
      certifies that these are prepared in accordance with Generally Accepted
      Accounting Principles (GAAP) and are consistently applied from one period to
      the
      next except as explained in an accompanying letter or footnotes.

     

    Please
      indicate compliance status by circling Yes/No under "Complies"
      column.

     

    
      	
              Reporting
                Covenant

            	
              Required

            	
              Complies

            
	 	 	 	 
	
              Quarterly
                financial statements

            	
              Quarterly;
                within 45 days of Quarter end

            	
              Yes

            	
              No

            
	
              Annual
                (CPA Audited)

            	
              FYE
                within 90 days

            	
              Yes

            	
              No

            
	
              10K
                and 10Q

            	
              Within
                5 days of filing

            	
              Yes

            	
              No

            
	
              Compliance
                Cert.

            	
              Quarterly;
                within 45 days of Quarter end

            	
              Yes

            	
              No

            
	
              A/R
                Audit

            	
              Initial
                and Semi-Annual

            	
              Yes

            	
              No

            
	
              IP
                Report

            	
              Quarterly
                within 30 days

            	
              Yes

            	
              No

            
	
              Total
                amount of Borrowers' cash and investments

            	
              Amount:
                $________

            	 	 
	
              Total
                amount of Borrowers' cash and investments maintained with
                Bank

            	
              Amount:
                $________

            	 	 
	 	 	 	 
	
              Financial
                Covenant

            	
              Required

            	
              Actual

            	
              Complies

            
	 	 	 	 	 
	
              Measured
                at all Times:

            	 	 	 	 
	
              Minimum
                Cash with Bank

            	 	
              $_____________

            	 	 
	
              -
                when aggregate Advances1≤
                 $3,000,000

            	
              $3,000,000

            	 	
              Yes

            	
              No

            
	
              -
                when aggregate Advances >  $3,000,000

            	
              $3,500,000

            	 	
              Yes

            	
              No

            
	 	 	 	 	 
	
              Measured
                on a Quarterly Basis

            	 	 	 	 
	
              Maximum
                Total Liabilities to  Tangible
                Net Worth

            	
              1.60:1.00

            	
              ______:1.00

            	
              Yes

            	
              No

            
	
              Minimum
                Liquidity Ratio

            	
              1.40:1.00

            	
              ______:1.00

            	
              Yes

            	
              No

            
	 	 	 	 	 
	 	 	 	 	 
	
              1
                includes Advances and Equipment
                Advances

            

    

    

    

    [Remainder
      of page intentionally left blank - Signature page follows]

    

    

    

    
      
         

      

      
        -1-

        
          

        

      

      
         

      

    

    

    
      	
              Comments
                Regarding Exceptions:
                See Attached.

            	
              BANK
                USE ONLY

            
	 	 
	
              Sincerely,

            	
              Received
                by:       

            
	 	
              
                
 AUTHORIZED
                SIGNER

            
	
               

              

              SIGNATURE

            	
              Date:     
                
                
    

            
	
            	 
	 

              

              TITLE

            	
              Verified:   

            
	
            	
              
                
 AUTHORIZED
                SIGNER

            
	 	
              Date:
                      

            
	 

              

              DATE

            	 
	
            	
              Compliance
                Status

            	
              Yes

            	
              No

            
	 	 

    

    

    -2-Exhibit 10.1

    
      

    

     

    Exhibit
      10.1

     

    Sales
      Plan

     

            Sales
      Plan, dated as of the date set forth on the signature page (the “Sales Plan”),
      between Scott
      Silverman (“Seller”) and Goldman, Sachs & Co. (“Broker”).

     

            WHEREAS,
      Seller desires to establish the Sales Plan to sell shares of common stock,
      par
      value $0.01 per share (the “Stock”), of
      Applied Digital Solutions, Inc. (the “Issuer”) in
      accordance with the requirements of Rule 10b5-1 under the Securities Exchange
      Act of 1934, as amended (the “Exchange
      Act”) as
      further set forth herein;

     

            NOW,
      THEREFORE, Seller and Broker hereby agree as follows:

     

    1.    Broker
      shall effect
      one or more sales (each a “Sale”) of shares
      of Stock (the “Shares”),
      including Shares that Seller has the right to acquire under stock options issued
      by the Issuer (the “Options”), as
      further set forth in the attached Annex A to this Sales Plan. All orders will
      be
      deemed day orders only and not held unless otherwise specified in Annex
      A.

     

    2.    This
      Sales Plan shall
      become effective as of the date hereof and shall terminate on the earliest
      of
      (a) July 15, 2007, (b) the date on which Broker has sold all Shares specified
      in
      Annex A, (c) the date that this Sales Plan is terminated in accordance with
      paragraph 11 below, or (d) the date Broker receives notice of the death of
      Seller.

     

    3.    Seller
      understands
      that Broker may effect Sales hereunder jointly with orders for other sellers
      of
      Stock of the Issuer and that the average price for executions resulting from
      bunched orders will be assigned to Seller's account.

     

    4.    Seller
      represents and
      warrants that Seller is not aware of material, nonpublic information with
      respect to the Issuer or any securities of the Issuer (including the Stock)
      and
      is entering into this Sales Plan in good faith and not as part of a plan or
      scheme to evade the prohibitions of Rule 10b5-1.

     

    5.    It
      is the intent of
      the parties that this Sales Plan comply with the requirements of Rule
      10b5-1(c)(1)(i)(B) under the Exchange Act and this Sales Plan shall be
      interpreted to comply with the requirements of Rule 10b5-1(c). Seller has
      consulted with Seller’s own advisors
      as
      to the legal and tax aspects of Seller’s adoption
      and
      implementation of this Sales Plan.

     

    6.    Seller
      represents
      that the Shares are “restricted
      securities” and/or that Seller may be deemed an “affiliate”
of the
      Issuer as those terms are defined under Rule 144 of the Securities Act of 1933.
      Seller shall not take, and shall not cause any person or entity with which
      he or
      she would be required to aggregate sales of Stock pursuant to paragraph (a)(2)
      or (e) of Rule 144 to take, any action that would cause the Sales not to comply
      with Rule 144. Seller has provided Broker with ten (10) executed Forms 144,
      which Broker will complete and file on behalf of the Seller. Seller understands
      and agrees that unless otherwise agreed or instructed, Broker will generally
      make one Form 144 filing as necessary at the beginning of each three-month
      period commencing prior to the first Sale to be effected pursuant to this Plan;
      provided that Broker may file Forms 144 more or less

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    frequently
      as may be appropriate under the circumstances. Such Form 144 shall
      specify that the Sales are being effected in accordance with a Sales Plan
      intended to comply with Rule 10b5-1. Seller agrees to provide Broker with such
      information as is reasonably necessary for Broker accurately and timely to
      complete the Forms 144.

     

    7.    (a)
      Seller represents and warrants that Seller is currently permitted to sell
      Stock in accordance with the Issuer’s insider
      trading
      policies and has obtained the approval of the Issuer’s insider
      trading
      policies and has obtained the approval of the Issuer’s counsel
      to enter
      into this Sales Plan and that, other than any Rule 144 requirements set forth
      herein, there are no contractual, regulatory, or other restrictions applicable
      to the Sales contemplated under this Sales Plan that would interfere with
      Broker’s
      ability to execute Sales and effect delivery and settlement of such Sales on
      behalf of Seller, other than restrictions with respect to which the Seller
      has
      obtained all required consents, approvals and waivers. Seller shall notify
      Broker immediately in the event that any of the above statements become
      inaccurate prior to the termination of this Sales Plan.

     

           
      (b)    With
      respect to Shares underlying options held by Seller that are to be exercised
      and
      sold pursuant to this Plan (“Options”), Seller
      has delivered to Broker executed option exercise notices in the form attached
      hereto as Annex B covering up to the maximum number of Shares that may be sold
      pursuant to option exercise hereunder, and hereby authorizes Broker to deliver
      such notices to the Issuer’s stock
      administrator on Seller’s behalf
      as
      necessary to effectuate such exercises and settle such Sales. Seller agrees
      to make appropriate arrangements with the Issuer and its transfer agent and
      stock plan administrator to assure that Stock received upon exercise of Options
      shall be delivered to an account at Broker in the name of and for the benefit
      of
      Seller.

     

           
      (c)    On
      each day that sales are to be made pursuant to option exercise under this Sales
      Plan, Broker shall exercise a sufficient number of Options to effect such sales
      provided, that in the event sales of any Shares to be executed are subject
      to a limit order, Seller shall have been deemed to have exercised the Options
      with respect to such notice from Broker with respect to such Shares at the
      beginning of the trading day on which such sales took place.

     

    8.    Seller
      will
      not directly or indirectly communicate any information relating to Issuer or
      Issuer securities to any employee of Broker or its affiliates who is directly
      or indirectly involved in executing this Sales Plan at any time while this
      Sales Plan is in effect.

     

    9.    Seller
      shall
      make all filings, if any, required under Sections 13(d) and 16 of the Exchange
      Act.

     

    10.        
      Seller understands that Broker may not effect a Sale due to a market disruption
      or a legal, regulatory or contractual restriction applicable to the Broker
      or
      any other event or circumstance (a “Blackout”). Seller
      also understands that even in the absence of a Blackout, Broker may be unable
      to
      effect Sales consistent with ordinary principles of best execution due to
      insufficient volume of trading, failure of the Stock to reach and sustain
      a

     

    2

     
      

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    limit
      order price, or other market factors in effect on the date of a Sale set forth
      in Annex A (“Unfilled
      Sales”).

     

    Broker agrees that if Issuer enters into a transaction
      that
      imposes trading restrictions on the Seller, such as a stock offering requiring
      an affiliate lock-up (an “Issuer
      Restriction”), and if Issuer and Seller shall provide Broker at least three (3)
      days’ prior
      notice of such trading restrictions, then Broker will cease effecting Sales
      under this Sales Plan until notified by Issuer and Seller that such restrictions
      have terminated. All required notifications to Broker under this paragraph
      10
      shall be made in writing (signed by Seller and Issuer) and confirmed by
      telephone as follows: (Attn: Structured Equity Solutions, c/o Control Room;
      Fax
      No. (212) 902-0943; Tel: (212) 902-1511). Broker shall resume effecting Sales
      in
      accordance with this Sales Plan as soon as practicable after the cessation
      or
      termination of a Blackout or Issuer Restriction. Any Unfilled Sales, and any
      Sales that would have been executed in accordance with the terms of Annex A
      but
      are not executed due to the existence of a Blackout or Issuer Restriction,
      shall
      be deemed to be cancelled, and shall not be effected pursuant to this Sales
      Plan.

     

    11.    This
      Sales Plan and
      its enforcement, and each transaction entered into hereunder and all matters
      arising in connection with this Sales Plan and transactions hereunder shall
      be
      governed by, and construed in accordance with, the laws of the State of New
      York, without reference to its choice of law doctrine. The Sales Plan may be
      modified, terminated or amended only by a writing signed by the parties hereto,
      which the Issuer has reviewed and not objected to, and provided that any such
      modification, termination or amendment shall only be permitted at a time when
      the Seller is otherwise permitted to effect sales under the Issuer's trading
      policies and at a time when the Seller is not aware of material nonpublic
      information concerning the Issuer or its securities. In the event of a
      modification or amendment to this Sales Plan, or in the event Seller establishes
      a new plan after termination of the Sales Plan, no sales shall be effected
      during the thirty days immediately following such modification, amendment or
      termination (other than Sales already provided for in the Sales Plan prior
      to
      modification, amendment or termination).

     

    12.    Seller
      agrees that
      Broker and its affiliates and their directors, officers, employees, and agents
      (collectively, “Broker
      Persons”)
      shall not have any liability whatsoever to Seller for any action taken or
      omitted to be taken in connection with the Sales Plan, the making of any Sale,
      or any amendment, modification or termination of this Sales Plan, unless such
      liability is determined in a non-appealable order of a court of competent
      jurisdiction to have resulted solely from the gross negligence, willful
      misconduct or bad faith of the Broker Person. Seller further agrees to hold
      each
      Broker Person free and harmless from any and all losses, damages, liabilities
      or
      expenses (including reasonable attorneys’ fees and
      costs)
      incurred or sustained by such Broker Person in connection with or arising out
      of
      any suit, action or proceeding relating to this Sales Plan, any Sale, or any
      amendment, modification or termination of this Sales Plan (each an “Action”) and to
      reimburse each Broker Person for its expenses, as they are incurred, in
      connection with any Action, unless such loss, damage, liability or expense
      is
      determined in a non-appealable order of a court of competent jurisdiction to
      be
      solely the result of such Broker Person’s gross
      negligence, willful misconduct or bad faith. This paragraph 12 shall survive
      termination of this Sales Plan.

     

    3

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

            IN
      WITNESS WHEREOF,
      the undersigned have signed this Sales Plan as of the date below.

     

     

     

    
      
        	       /s/
                Scott
                Silverman                                          
                	 
	Scott Silverman	Goldman,
                Sachs & Co.
	 	By:    /s/
                Michael
                Dweck           
                
	Date:  
                7-14-06                                                      
                	Name:
                Michael Dweck
	 	Title:
                Managing Director

      

    

     

     

     

     

     

    Acknowledged:

    Applied Digital Solutions, Inc.

     

    By:    /s/ Evan
      McKeown                              
       

    Name: Evan McKeown

    Title: CFO

     

     

     

     

     

     

     

    4

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Annex
      A

     

    Scott
      Silverman

     

    Applied
      Digital Solutions, Inc.

     

    Broker
      will sell up to 1,289,302 Shares by entering orders on the first Trading Day*
      of
      each of the Sales Periods set forth below provided that no more than 100,000
      Shares shall be sold on any Trading Day. Each limit order shall be good until
      the end of such Sales Period. Any Shares that remain unsold at the close of
      business on the last trading day of the last Sales Period shall be cancelled
      and
      shall not be sold pursuant to this Plan.

     

     

    
      	
               Trade
                Window

               

            	
               Shares
                to be sold**

               

            	
               $
                Limit

               

            
	
               

              During
                the period commencing 8/1/06

               through
                and including 7/15/07 or the

               date
                of termination of the Sales Plan, if

               earlier

            	
               392,500

            	
               $5.95

            
	 

              During
                the period commencing 8/1/06

               through
                and including 7/15/07 or the

               date
                of termination of the Sales Plan, if

               earlier

            	
               461,802

            	
              $7.95

            
	 

              During
                the period commencing 8/1/06

               through
                and including 7/15/07 or the

               date
                of termination of the Sales Plan, if

               earlier

            	
               435,000

            	
               $9.95

            

    

     

     

     Sales
      of shares effected at a price for which more than one limit price is applicable
      shall be allocated to the highest of such limit prices.

     

    *“Trading
      Day” means
      each day on
      which the Shares trade regular way on NASDAQ.

     

    **Share amounts and limit prices listed shall be increased
      or decreased to reflect stock splits should they occur

     

    Options shall be exercised in the following
      order:

     

     

    
      	 Date
              of Grant	 Grant
              Number	 Number
              of Shares	
               Exercise
                Price

            
	 8/14/2001	 [         
              ]	 10,000	
               $1.50

            
	 9/17/2001	 [          ]	 10,000	
              $1.50

            
	 9/24/2001	 [          ]	 12,500	
               $1.50

            
	 4/8/2004	 [          ]	 36,005	
               $2.57

            

    

     

     
      

    A-1

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	 Date
              of Grant	 Grant
              Number	 Number
              of Shares	
               Exercise
                Price

            
	 5/12/2004	 [         
              ]	 2,000	
                $2.57

            
	 4/8/2004	 [          ]	 234,012	
               $2.57

            
	 4/8/2004	 [          ]	 186,285	
               $2.57

            
	 5/12/2004	 [          ]	 3,500	
               $2.57

            
	 4/8/2004	 [          ]	 16,816	
               $2.57

            
	 7/25/2002	 [          ]	 60,000	
               $2.80

            
	 2/4/2002	 [          ]	 100,000	
               $3.20

            
	 7/6/2005	 [          ]	 326,135	
               $3.23

            
	 11/3/2003	 [          ]	 200,000	
               $3.90

            
	 12/13/2004	 [          ]	 92,049	
               $5.85

            

    

     

     

     

     

    
      
        
          	       /s/
                  Scott
                  Silverman                                          
                  	 
	Scott Silverman	Goldman,
                  Sachs & Co.
	 	By:       /s/
                  Michael
                  Dweck            
                  
	Date:  
                  7-14-06                                                      
                  	Name:
                  Michael Dweck
	 	Title:
                  Managing Director

        

      

       

       

       

       

       

      Acknowledged:

      Applied Digital Solutions, Inc.

       

      By:    /s/ Evan
        McKeown                              
       

      Name: Evan McKeown

      Title: CFO

       

       

       

      A-2

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    Annex
      B

     

    Applied
      Digital Solutions, Inc.

    Stock
      Options Exercise Form

     

     

    Instructions:

    1. 
      Complete form and sign.

    2. 
      Direct any questions and send back to Marc Shachtman 305-755-1032

     

    
      

    

     

    Name
      of
      Employee:  Scott Silverman

     

    Phone
      Number:  561-805-8056

     

    I
      elect
      to exercise options for 1,289,302 shares of Common Stock of Applied Digital
      Solutions, Inc. (the “Shares”)
      pursuant to
      the:

     

                           
      Incentive Stock Option Plan (ISO), or

     

               X         
      Nonqualified Stock Option Plan (NQSO)

     

     

    This
      exercise represents a partial/total (circle one) exercise of an option granted
      pursuant to an option agreement dated     
   with an exercise price of $   
    per share, for an aggregate exercise price of
      $               
           .

     

    The
      exercising procedure I wish to use is as follows (check one):

     

     

                     Option
      A: Outright Purchase of Shares with Cash

     

    I
      elect
      to exercise my option and pay for shares in full. Enclosed is my check to
      Applied Digital Solutions, Inc. for
      $                     
      representing an aggregate exercise option price of
      $                         
      plus required withholding taxes (i.e. federal, state and FICA) of
      $                        
      (this number will be provided to you by Applied Digital Solutions,
      Inc.).

    Note:
      Withholding taxes are only required if you are exercising an option under the
      Stock Option Plan (NQSO).

     

    Please
      instruct the transfer agent to issue my stock in street name and transfer it
      directly to Goldman, Sachs & Co. Via DWAC as follows:

     

    Goldman,
      Sachs & Co.

    DTC
      #0005

    For
      the
      benefit of:

    A/C
      #                             

     

     

     

     

    B-1

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

         
       X         Option
      B: Cashless Option Exercise

     

    Please
      instruct the transfer agent to issue my stock in street name and transfer ALL
      shares of Applied Digital Solutions, Inc. that are represented by this
      notification directly to Goldman, Sachs & Co. via DWAC as
      follows:

     

    
      Goldman,
        Sachs & Co.

      DTC
        #0005

      For
        the
        benefit of:

      A/C
        #                             

    

     

    I
      authorize Goldman, Sachs & Co. (“GS & Co.”)
      to sell the
      above exercised shares for my account and to pay the aggregate option exercise
      price for all shares indicated above and any required withholding taxes for
      the
      exercise to Applied Digital Solutions, Inc.. Required withholding taxes (i.e.
      federal, state and FICA) are
      $                           
      (this number will be provided by Applied Digital Solutions, Inc.). Note:
      Withholding taxes are only required if you are exercising an option under the
      Stock Option Plan (NQSO).

     

    You
      may
      contact Marc Shachtman at GS & Co. at 305-755-1032.

     

    Fax
      number is 305-755-1110

     

    General
      Authorization

    
      	
              1.

            	
              GS
                & Co. is authorized to pay the aggregate option price and applicable
                withholding taxes to Applied Digital Solutions,
                Inc..

            

    

    
      	
              2.

            	
              Upon
                sale of my stock option shares through GS & Co., my authorization and
                direction to deliver such shares to my GS & Co. account shall be
                irrevocable.

            

    

    
      	
              3.

            	
              I
                understand I am responsible for providing GS & Co. with properly
                completed Individual or Multi-Party Account Agreements, W-9 and Stock
                Power forms, so that the above-referenced sale may be
                finalized.

            

    

     

    Employee
      Signature:            
/s/ Scott
      Silverman                               
Date:         
7-14-06       
          

     

    Employee
      Name (please print):

     

    Legal
      Address:

     

     

     

     

     

     

    Approved
      by Applied Digital Solutions,
      Inc.:              
/s/ Evan
      McKeown                     

     

    Date:        
      7-14-06            

     

    Name
      (please print):     Evan
      McKeown                  

     

     

     

     

    B-2

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