Document:

Exhibit 10.2

 

Execution
Copy

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO OR AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN
CONNECTION WITH SUCH OFFER OR SALE. THIS NOTE DOES NOT REQUIRE PHYSICAL
SURRENDER HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT OR REDEMPTION
HEREOF.  ACCORDINGLY, THE OUTSTANDING
PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT SHOWN
BELOW.  NOTWITHSTANDING THE FOREGOING BUT
SUBJECT TO COMPLIANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, THIS NOTE (I) MAY BE PLEDGED OR
HYPOTHECATED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
SECURED BY THIS NOTE AND (II) MAY BE TRANSFERRED OR ASSIGNED TO AN AFFILIATE
OF THE HOLDER HEREOF.

 

APPLIED DIGITAL
SOLUTIONS, INC.

 

SENIOR SECURED NOTE

 

	
  New York, New York

  	
   

  	
  $12,000,000.00

  
	
  Issue Date:  December 29, 2005

  	
   

  	
   

  

 

FOR VALUE RECEIVED, APPLIED
DIGITAL SOLUTIONS, INC., a Missouri
corporation (the “Company”), hereby promises to
pay to the order of SATELLITE SENIOR INCOME FUND, LLC or its permitted
successors or assigns (the “Holder”)
the sum of TWELVE MILLION AND 00/100 DOLLARS ($12,000,000.00) in same day
funds, on or before June 28, 2007 (the “Maturity
Date”), in accordance with the terms and conditions of this
Senior Secured Note (this “Note”).

 

The Company has issued this Note pursuant to a Note
Purchase Agreement, dated as of December 28, 2005 (the “Note Purchase Agreement”).  The notes issued by the Company pursuant to
the Note Purchase Agreement, including this Note, are collectively referred to
herein as the “Notes”.

 

The Company’s obligations under the Notes, including
without limitation its obligation to make payments of principal thereof and
interest thereon, are secured pursuant to the terms of a Security Agreement,
dated as of December 28, 2005 (the “Security Agreement”),
and a Pledge Agreement, dated as of December 28, 2005 (the “Pledge Agreement” and, together with
the Security Agreement, the “Security Documents”).

 

 

1.                                       DEFINITIONS.

 

The following terms shall apply to this Note:

 

“Asset Sale”
means a sale, transfer or exchange, in one or more related transactions, by the
Company or any of its Subsidiaries of any of their assets or properties that
have, in the aggregate, a Fair Market Value after taxes of $500,000 or more.

 

“Applicable Interest Rate”
means the following annual rates:

 

	
  From the Issue Date
  through and including August 28, 2006

  	
   

  	
  12.00

  	
  %

  
	
  August 29, 2006 through and including September 28,
  2006

  	
   

  	
  13.00

  	
  %

  
	
  September 29, 2006 through and including October 28,
  2006

  	
   

  	
  14.00

  	
  %

  
	
  October 29, 2006 through and including November 28,
  2006

  	
   

  	
  15.00

  	
  %

  
	
  November 29, 2006 through and including December 28,
  2006

  	
   

  	
  16.00

  	
  %

  
	
  December 29, 2006 through and including January 28,
  2007

  	
   

  	
  17.00

  	
  %

  
	
  January 29, 2007 through and including February 28,
  2007

  	
   

  	
  18.00

  	
  %

  
	
  March 1, 2007 through and including March 28,
  2007

  	
   

  	
  19.00

  	
  %

  
	
  March 29, 2007 through and including April 28,
  2007

  	
   

  	
  20.00

  	
  %

  
	
  April 29, 2007 through and including May 28,
  2007

  	
   

  	
  21.00

  	
  %

  
	
  May 29, 2007 through and including June 28,
  2007

  	
   

  	
  22.00

  	
  %

  

 

The foregoing annual interest rates rate shall, in each case, be
computed on the basis of a 360-day year and calculated using the actual number
of days elapsed since the Issue Date or the date on which Interest was most
recently paid, as the case may be, and compounded monthly.

 

“Change of Control”
means, with respect to a Person, the existence or occurrence of any of the
following: (i) the effectuation of a transaction or series of transactions
in which more than fifty percent (50%) of the voting power of such Person is
disposed of; (ii) the consolidation, merger or other business combination
of such Person with or into any other entity, immediately following which the
prior stockholders of such Person fail to own, directly or indirectly, at least
fifty percent (50%) of the surviving entity; (iii) a transaction or series
of transactions in which any Person or group acquires more than fifty percent
(50%) of the voting equity of such Person; (iv) in the case of the
Company, the Continuing Directors do not at any time constitute at least a
majority of the Board of Directors, (v) in the case of any Person other
than the Company, the directors, managers, general partners or similar governing
parties of such Person as of the date hereof cease to constitute a majority of
the directors, managers, general partners or similar governing parties of such
Person, or (vi) such Person entering into one or more definitive
agreements which contemplate transactions that, if consummated, would result in
the occurrence of any of the events described in the foregoing clauses (i) – (v).

 

 

“Continuing Director” means at
any date a member of the Board of Directors (i) who was a member of such
board on the date of the Note Purchase Agreement or (ii) who was nominated
or elected by at least a majority of the directors who were Continuing
Directors at the time of such nomination or election or whose election to the
Board of Directors was recommended or endorsed by at least a majority of the
directors who were Continuing Directors at the time of such nomination or
election or such lesser number comprising a majority of a nominating committee
if authority for such nominations or elections has been delegated to a nominating
committee whose authority and composition have been approved by at least a
majority of the directors who were Continuing Directors at the time such
committee was formed.

 

“Default Interest Rate”
means the lower of (i) the Applicable Interest Rate then in effect plus
five percent (5.0%) and (ii) the maximum rate permitted by applicable law
or by the applicable rules or regulations of any Governmental Authority.

 

“Excluded Securities”
means
(A) shares of Common Stock (or the common stock of any of the Subsidiaries)
issuable or issued to (x) employees or directors of the Company or any of the
Subsidiaries from time to time either directly or upon the exercise of options,
in such case granted or to be granted in the discretion of the Company’s or
such Subsidiary’s board of directors (or similar governing body) as an
inducement to join the Company or such Subsidiary or pursuant to one or more
stock option plans, restricted stock plans or stock purchase plans in effect as
of the Execution Date or adopted after the Execution Date by the Company’s or
such Subsidiary’s board of directors (or similar governing body) or by the
Company’s or such Subsidiary’s shareholders, (y) vendors, service providers or
consultants, either directly or pursuant to options or warrants to purchase
Common Stock that are outstanding on the Execution Date or issued thereafter,
provided such issuances are approved by the Company’s or such Subsidiary’s
board of directors (or similar governing body) or by the Company’s or such
Subsidiary’s shareholders, or (z) third parties, either directly or pursuant to
options or warrants to purchase Common Stock, in connection with the settlement
of a bona fide litigation or dispute approved by the Company’s or such
Subsidiary’s board of directors (or similar governing body); (B) shares of
Common Stock issued in connection with any stock split, stock dividend or
recapitalization of the Company or any of the Subsidiaries; (C) shares of
Common Stock issued as consideration for the acquisition by the Company or any
of the Subsidiaries of any corporation or other entity occurring after the
Execution Date; (D) shares of Common Stock issued under any convertible
securities or other obligations of the Company that are outstanding on the
Execution Date and disclosed on Schedule 3.5
to the Note Purchase Agreement; (E) shares issued to Persons with whom the
Company or any of its Subsidiaries is entering into a joint venture, strategic
alliance or other commercial relationship in connection with the operation of
the Company’s or such Subsidiary’s business and not in connection with a
transaction the primary purpose of which is to raise equity capital; and (F) shares
issued to a subsidiary of the Company pursuant to a share exchange, provided that the Company shall, at its
sole cost and expense, (i) pledge all of the shares received in such
exchange to the Collateral Agent (as defined in the Pledge Agreement) pursuant
to the Pledge Agreement, and (ii) if such subsidiary is not a Pledged
Subsidiary, then prior to such issuance, the Company shall pledge all of its
current and future equity interests in such subsidiary to the Collateral Agent
pursuant to the Pledge Agreement.

 

 

“Fair
Market Value” means, with respect to any Asset Sale, the price
that would be negotiated in an arm’s-length transaction for cash between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction, as such price is determined in good
faith by the independent members of the board of directors or other similar
governing body of the selling Person.

 

“Issue Date”
has the meaning set forth on the cover page of this Note.

 

“Liquidation Event”
means (x) the institution of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Company or any Pledged Subsidiary or to
its or their creditors, as such, or to its or their assets, or (y) the
dissolution or other winding up of the Company or any Pledged Subsidiary,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy proceedings, or (z) any assignment for the benefit of creditors or
any marshalling of the material assets or material liabilities of the Company
or any Pledged Subsidiary.

 

“Mandatory Redemption Event”
means each of the following:

 

(i)                                     the
Company defaults in the payment when due of any principal of, or premium, if
any, on this Note or the Company defaults in the payment when due of any
interest on this Note and such default continues for a period three (3) Business
Days after written notice thereof from the Holder;

 

(ii)                                  the
Company breaches or provides notice of its intent to breach, any covenant or
other term or condition of this Note or any other Transaction Document, and
such breach continues for a period of ten (10) Business Days following
written notice thereof from the Holder;

 

(iii)                               any
material representation or warranty made by the Company  in this Note or any other Transaction
Document was inaccurate or misleading in any material respect as of the date
such representation or warranty was made.

 

(iv)                              the
occurrence of a VeriChip Event or, prior to the occurrence of a VeriChip Event,
VeriChip Corporation consummates an unregistered offering of its debt or equity
securities (such offering, a “VeriChip Private Placement”);

 

(v)                                 the consummation of a Subsequent Placement;

 

(vi)                              the consummation of an Asset Sale;

 

(vii)                           the occurrence of a Change of Control of the Company;

 

(viii)                        a default under any mortgage, guarantee, indenture or
instrument of the Company or any of the Pledged Subsidiaries under which there
may be issued or by which there may be secured or evidenced any indebtedness
for money borrowed by the Company or any of the Pledged Subsidiaries (or the
payment of which is guaranteed

 

 

by the Company or any of the Pledged Subsidiaries) (in
each case, other than this Note and the other Transaction Documents) and such
default could reasonably be expected to have a Material Adverse Effect, provided that such default (A) is not cured within any
applicable grace periods or (B) results in the acceleration of the
maturity of any Indebtedness;

 

(ix)                                the
Company or any of the Pledged Subsidiaries breaches or provides notice of its
intent to breach, any of their material agreements (other than this Note, the
other Transaction Documents, and the agreements described in clause (viii) of this
definition), and such breach could reasonably be expected to have a Material
Adverse Effect; or

 

(x)                                   a Liquidation Event occurs or is publicly announced.

 

“Mandatory Redemption Price”
has the meaning given to it in Section 3(a) of
this Note.

 

“Maturity Date”
has the meaning set forth in the preamble to this Agreement.

 

“Scheduled Interest Payment
Date” means the first Business Day of January, April, July and
October of each year this Note remains outstanding.  The first Scheduled Interest Payment Date
shall be April 3, 2006.

 

“Subsequent
Placement” means the issuance, sale or exchange by the Company
or any of the Subsidiaries of (1) any shares of common stock of the
Company or any of the Subsidiaries, (2) any other equity security of the
Company or any of the Subsidiaries, including, without limitation, shares of
preferred stock, (3) any other security of the Company or any of the
Subsidiaries which by its terms is convertible into or exchangeable or
exercisable for any equity security of the Company or any of the Subsidiaries,
or (4) any option, warrant or other right to subscribe for, purchase or
otherwise acquire any such security described in the foregoing clauses (1) through
(3); provided, however, that the term “Subsequent Placement”
shall not include the issuance, sale or exchange by the Company or any of the
Subsidiaries of any Excluded Security.

 

All definitions contained in this Note are equally
applicable to the singular and plural forms of the terms defined.  The words “hereof”, “herein” and “hereunder”
and words of similar import referring to this Note refer to this Note as a
whole and not to any particular provision of this Note. Any capitalized term
used but not defined herein has the meaning specified in the Note Purchase
Agreement.

 

2.                                       PAYMENT OF PRINCIPAL AND INTEREST.

 

(a)                                  Principal.  The Company shall pay the unpaid principal
amount of this Note as and when required under this Note, provided that
the remaining unpaid principal amount of this Note shall be due and payable in
full on the Maturity Date.  Any principal
(or premium thereon) that is not paid when due shall bear interest until paid
at the Default Interest Rate.

 

 

(b)                                 Interest.
This Note shall bear interest on the unpaid principal amount hereof (“Interest”) at the Applicable
Interest Rate. The Company shall pay all accrued and unpaid Interest (i) on
each Scheduled Interest Payment Date, (ii) on the Maturity Date and (iii) on
any date on which the any principal amount of this Note is paid (each of (i), (ii) and
(iii) being referred to herein as an “Interest Payment Date”).  Any Interest that is not paid within three (3) Business
Days of the applicable Interest Payment Date shall bear interest until paid at
the Default Interest Rate.

 

(c)                                  Payment
Method.  The Company shall make all
payments of principal and Interest in cash by wire transfer of immediately
available funds to the Holder’s account pursuant to the Holder’s written wiring
instructions.

 

(d)                                 Cancellation
of Note upon Repayment.  In the event
that the Company repays the entire unpaid principal amount of this Note, and
pays to the Holder all Interest accrued thereon and all other amounts due in
connection therewith, the Holder shall return this Note to the Company for
cancellation.

 

3.                                       REDEMPTIONS.

 

(a)                                  Mandatory
Redemption.  In the event that a
Mandatory Redemption Event occurs, the Holder shall have the right, upon
written notice to the Company (a “Mandatory Redemption
Notice”), to have all or any portion of the unpaid principal
amount of this Note, plus all accrued and unpaid Interest thereon, redeemed by
the Company at the Mandatory Redemption Price (as hereinafter defined).  The Mandatory Redemption Notice shall specify
the amount of principal and Interest to be redeemed.  The term “Mandatory
Redemption Price” means, with respect to a redemption being effected pursuant to this Section 3(a),
an amount equal to the sum of (a) 104% of the principal being redeemed
plus (b) all accrued and unpaid Interest thereon.  The Company shall pay the Mandatory
Redemption Price to the Holder on or prior to the date that is two (2) Business
Days after the date on which the Mandatory Redemption Notice is delivered to
the Company.  Notwithstanding the
foregoing, the aggregate amount that may be redeemed under this Section 3(a) by the Holder
and the other holders of the Notes in connection with (i) a VeriChip Event
shall not exceed the greater of (x) the net proceeds payable to the Company in
connection with such VeriChip Event and (y) $6,845,000, (ii) a VeriChip
Private Placement shall not exceed the net proceeds payable to the Company in
connection with such offering, (iii) an Asset Sale shall not exceed the
net proceeds payable to the Company in connection with such sale, and (iv) a
Subsequent Placement shall not exceed the net proceeds payable to the Company
in connection with such offering; provided that
all such redemptions shall be made ratably to the holders of the Notes
requesting redemption in proportion to the amounts then outstanding under their
respective Notes or in such other manner as such holders may agree.  

 

(b)                                 Optional
Redemption.  The Company shall have
the right, upon written notice to the Holder (an “Optional
Redemption Notice”), to redeem all or any portion of the unpaid
principal amount of this Note, plus all accrued and unpaid Interest thereon, at
the Optional Redemption Price (as hereinafter defined); provided
that the Company shall also redeem the same percentage of all of the other
outstanding Notes in accordance with the optional redemption provisions
thereof.  The Optional Redemption Notice
shall specify the amount of principal and Interest to be redeemed by the
Company.  The term “Optional
Redemption Price” means, with respect to a

 

 

redemption being effected
pursuant to this Section 3(b), an amount
equal to the sum of (a) 104% of the principal being redeemed plus (b) all
accrued and unpaid Interest thereon.  The
Company shall pay the Optional Redemption Price to the Holder on or prior to
the date that is two (2) Business Days after the date on which the
Optional Redemption Notice is delivered to the Company.  Except as specifically
provided by the terms of this Section 3(b),
the Company shall not have the right to prepay any principal of this Note.

 

4.                                       MISCELLANEOUS.

 

(a)                                  Failure
to Exercise Rights not Waiver.  No
failure or delay on the part of the Holder in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude any other or
further exercise thereof.  All rights and
remedies of the Holder hereunder are cumulative and not exclusive of any rights
or remedies otherwise available.

 

(b)                                 Notices.  Any notice, demand or request required or
permitted to be given by the Company or the Holder pursuant to the terms of
this Note shall be in writing and shall be deemed delivered (i) when
delivered personally or by verifiable facsimile transmission, unless such
delivery is made on a day that is not a Business Day, in which case such
delivery will be deemed to be made on the next succeeding Business Day and (ii) on
the next Business Day after timely delivery to an overnight courier, addressed
as follows:

 

Applied Digital Solutions, Inc.

1690 S. Congress Avenue, Suite 200

Delray, 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, Florida 33131

Attn:      Harvey A. Goldman, Esq.

Tel:              305-374-8500

Fax:             305-789-7799

 

and if to the Holder, at such
address as the Holder shall have furnished the Company in writing.

 

(c)                                  Amendments.  No amendment, modification or other change
to, or waiver of any provision of, this Note may be made unless such amendment,
modification or change is set forth in writing and is signed by the Company and
the Holder.

 

(d)                                 Transfer
of Note.  The Holder may sell,
transfer or otherwise dispose of all or any part of this Note (including
without limitation pursuant to a pledge) to any person or entity as

 

 

long as such sale, transfer or
disposition is in accordance with the provisions of the Note Purchase
Agreement.  From and after the date of
any such sale, transfer or disposition, the transferee hereof shall be deemed
to be the holder of a Note in the principal amount acquired by such transferee,
and the Company shall, as promptly as practicable, issue and deliver to such
transferee a new Note identical in all respects to this Note, in the name of
such transferee and, if such transferee acquires less than the entire principal
amount of this Note, the Company shall contemporaneously issue to the Holder a
new Note identical in all respects to this Note, representing the outstanding balance
of this Note.  The Company shall be
entitled to treat the original Holder as the holder of this entire Note unless
and until it receives written notice of the sale, transfer or disposition
hereof.

 

(e)                                  Lost
or Stolen Note.  Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of this Note,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Company, and upon surrender and cancellation of
the Note, if mutilated, the Company shall execute and deliver to the Holder a
new Note identical in all respects to this Note.

 

(f)                                    Governing
Law.  This Note shall be governed by
and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed entirely within the State of New York.

 

(g)                                 Successors
and Assigns.  The terms and
conditions of this Note shall inure to the benefit of and be binding upon the
respective successors (whether by merger or otherwise) and permitted assigns of
the Company and the Holder. The Company may not assign its rights or
obligations under this Note except as specifically required or permitted
pursuant to the terms hereof.

 

(h)                                 Usury.  This Note is subject to the express condition
that at no time shall the Company be obligated or required to pay interest
hereunder at a rate which could subject the Holder to either civil or criminal
liability as a result of being in excess of the maximum interest rate which the
Company is permitted by applicable law to contract or agree to pay.  If by
the terms of this Note, the Company is at any time required or obligated to pay
interest hereunder at a rate in excess of such maximum rate, the rate of
interest under this Note shall be deemed to be immediately reduced to such
maximum rate and the interest payable shall be computed at such maximum rate
and all prior interest payments in excess of such maximum rate shall be applied
and shall be deemed to have been payments in reduction of the principal balance
of this Note.

 

(i)                                     Note
Purchase Agreement.  The terms of
this Note include those stated in the Note Purchase Agreement.  To the extent any provision of this Note
conflicts with the express provisions of the Note Purchase Agreement, the
provisions of the Note Purchase Agreement shall govern and be controlling.

 

[Signature Page to Follow]

 

 

IN WITNESS WHEREOF, the Company has caused this Note
to be signed in its name by its duly authorized officer on the date first above
written.

 

APPLIED DIGITAL SOLUTIONS, INC.

 

 

	
  By:

  	
  /s/ Michael Krawitz

  	
   

  
	
   

  	
  Name: Michael Krawitz

  
	
   

  	
  Title: Executive Vice President and General CounselExhibit 10.3

 

Execution Copy

 

SECURITY AGREEMENT

 

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

 

W I T N E S S E T
H:

 

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

 

WHEREAS, pursuant
to the terms of the Note Purchase Agreement, the Notes will be secured, in
part, by all of the assets and properties owned by the Obligor.

 

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

 

1.                                      DEFINITIONS.

 

Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Note Purchase
Agreement, and the following terms that are defined in the Uniform Commercial
Code from time to time in effect in the State of New York (the “UCC”) are used herein as so defined:  Accounts, Chattel Paper, Deposit Accounts,
Disbursement Accounts, Documents, Equipment, Fixtures, General Intangibles,
Goods, Instruments, Investment Property, Inventory, Letter-of Credit Rights,
Proceeds, Software and Supporting Obligations.

 

2.                                       GRANT OF SECURITY INTEREST.

 

Subject to the terms and conditions of this Security
Agreement and to secure the performance of the Secured Obligations (as defined
in Section 3 hereof), Obligor
hereby grants to the Collateral Agent, for the benefit of the Investors, a
continuing first priority security interest in any and all right, title and interest
of Obligor in and to all of its assets and properties, including, without
limitation, the following assets and properties, whether now owned or existing
or owned, acquired, or arising hereafter (collectively, the “Collateral”):

 

(i)                                     all
Accounts;

 

(ii)                                  all
Chattel Paper;

 

(iii)                               all
Documents;

 

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

 

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

 

 

(vi)                              all
Instruments;

 

(vii)                           all
Investment Property;

 

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

 

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

 

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

 

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

 

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

 

3.                                       SECURITY FOR SECURED OBLIGATIONS.

 

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

 

4.                                       PERFECTION OF SECURITY INTEREST.

 

Obligor hereby
authorizes the Collateral Agent to prepare and file such financing statements
(including continuation statements) or amendments thereof or supplements
thereto or other instruments as the Collateral Agent may from time to time deem
reasonably necessary or appropriate in order to perfect and maintain the
security interests granted hereunder in accordance with the UCC that describes
the Collateral in such manner as the Collateral Agent deems necessary or
advisable. Obligor shall also execute and deliver to the Collateral Agent
and/or file such agreements, assignments or instruments (including affidavits,
notices, reaffirmations, amendments and restatements of existing documents and
any documents as may be necessary if the law of any jurisdiction other than New
York

 

2

 

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

 

5.                                       REPRESENTATIONS AND WARRANTIES.

 

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

 

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

 

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

 

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

 

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

 

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

 

6.                                       COVENANTS.

 

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

 

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

 

3

 

exchange, transfer, assign,
lease or otherwise dispose of the Collateral or any interest therein, except as
otherwise expressly permitted herein or in the Transaction Documents.

 

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

 

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

 

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

 

6.5.                              Disposition
of Collateral.  Refrain from selling, assigning or otherwise
disposing of any of the Collateral or moving or removing any of the Collateral
(other than sales of Inventory and dispositions of obsolete Equipment, in each
case, in the ordinary course of business consistent with past practice),
without obtaining the prior written consent of the Collateral Agent, or until
all of the Secured Obligations have been fully performed and paid in full.

 

6.6.                              Reports.  Promptly provide to the Collateral
Agent such financial statements, reports, lists and schedules related to the
Collateral and any other information relating to the Collateral as the Collateral
Agent may reasonably request from time to time.

 

6.7.                              Inspections.  Upon reasonable notice, permit
the Collateral Agent to inspect all books and records of the Obligor relating
to the Collateral at such times and as often as the Collateral Agent may
reasonably request.

 

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

 

6.9.                              Fees and Expenses.  Promptly upon demand by the Collateral Agent,
pay all reasonable fees and out-of-pocket costs and expenses (including,
without limitation, reasonable attorneys’ fees and legal expenses) incurred by
the Collateral Agent in connection with (i) filing or recording any
documents (including all taxes in connection therewith) in public offices; and (ii) paying
or discharging any taxes, counsel fees, maintenance fees, encumbrances or other
amounts in connection with protecting, maintaining or preserving the
Collateral.

 

4

 

7.                                       PERFORMANCE OF OBLIGATIONS; ADVANCES BY COLLATERAL
AGENT.

 

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

 

8.                                       EVENTS OF DEFAULT.

 

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

 

8.1.                              Remedies.

 

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

 

(b)                                 Sale of Collateral. Upon the occurrence of an
Event of Default and during the continuation thereof, without limiting the
generality of this Section 8.1, the Collateral
Agent may, in its sole discretion, sell or otherwise dispose of or realize upon
the Collateral, or any part thereof, in one or more parcels, at public or
private sale, at any exchange or broker’s board or elsewhere, at such price or
prices and on such other terms as the Collateral Agent may deem commercially
reasonable, for cash, credit or for future delivery or otherwise in accordance
with applicable law. To the extent permitted by law, any Investor may, in such
event, bid for the purchase of such Collateral. Obligor agrees that, to the
extent notice of sale shall be required by law and has not been waived by Obligor,
any requirement of reasonable notice shall be met if an authenticated
notification of disposition under Section 9-611 of the UCC, specifying the
place of any public sale or the time after which any private sale is to be
made, is personally served on or mailed, postage prepaid, to

 

5

 

Obligor, in accordance with Section 9.6 at least twenty (20)
days before the time of such sale. The Collateral Agent shall not be obligated
to make any sale of Collateral regardless of notice of sale having been given.
The Collateral Agent may adjourn any public or private sale from time to time
by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.

 

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

 

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

 

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

 

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

 

8.2.                              Rights of the Collateral
Agent.

 

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

 

(i)                                     to demand, collect, settle, compromise, adjust and give discharges and
releases concerning the Collateral of Obligor, all as the Collateral Agent may
reasonably determine in respect of the Collateral;

 

6

 

(ii)                                  to commence and prosecute any actions at any court for the purposes of
collecting any of the Collateral and enforcing any other right in respect
thereof;

 

(iii)                               to defend, settle, adjust or compromise any action, suit or proceeding
brought with respect to the Collateral and, in connection therewith, give such
discharge or release as the Collateral Agent may deem reasonably appropriate;

 

(iv)                              to pay or discharge taxes, Liens, security interests, or other
encumbrances levied or placed on or threatened against the Collateral;

 

(v)                                 to direct any parties liable for any payment under any of the Collateral
to make payment of any and all monies due and to become due thereunder directly
to the Collateral Agent or as the Collateral Agent shall direct;

 

(vi)                              to receive payment of and receipt for any and all monies, claims, and
other amounts due and to become due at any time in respect of or arising out of
any of the Collateral;

 

(vii)                           to sign and endorse any drafts, assignments, proxies, stock powers,
verifications, notices and other documents relating to the Collateral;

 

(viii)                        to execute and deliver and/or file all assignments, conveyances,
statements, financing statements, continuation statements, pledge agreements,
affidavits, notices and other agreements, instruments and documents that the Collateral
Agent may determine necessary in order to perfect and maintain the security
interests and Liens granted in this Security Agreement and in order to fully
consummate all of the transactions contemplated herein; and

 

(ix)                                to do and perform all such other acts and things as the Collateral Agent
may reasonably deem to be necessary, proper or convenient in connection with
the Collateral.

 

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

 

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

 

7

 

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

 

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

 

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

 

8.5.                              Continuing Agreement.

 

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

 

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

 

8

 

9.                                      MISCELLANEOUS.

 

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

 

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

 

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

 

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

 

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

 

9.6                                 Notices.  Any notice, demand or request required or
permitted to be given by the Obligor or the Collateral Agent pursuant to the
terms of this Security Agreement shall be in writing and shall be deemed
delivered (i) when delivered personally or by verifiable facsimile
transmission (immediately followed by written confirmation delivered according
to

 

9

 

another mechanism provided by this section), unless such delivery is
made on a day that is not a Business Day, in which case such delivery will be
deemed to be made on the next succeeding Business Day, (ii) on the next
Business Day after timely delivery to an overnight courier and (iii) on
the Business Day actually received if deposited in the U.S. mail (certified or
registered mail, return receipt requested, postage prepaid), addressed as
follows:

 

If to the Obligor:

 

Applied
Digital Solutions, Inc.

1690 S.
Congress Avenue, Suite 200

Delray Beach,
FL  33445

Attn:      Scott R. Silverman

Tel:              (561) 805-8000

Fax:             (561) 805-0002

 

with a copy
to:

 

Holland &
Knight LLP

701 Brickell
Avenue, Suite 3000

Miami, FL  33131

Attn: Harvey
A. Goldman, Esq.

Tel:              (305) 374-8500

Fax:             (305) 789-7799

 

If to the Collateral Agent:

 

Satellite Asset Management, L.P.

623 Fifth Avenue, 20th Floor

New York, NY 10022

Attn:      Jim LaChance

Tel:              212-209-2000

Fax:             212- 209-2020

 

with a copy to:

 

Mazzeo Song
LLP

708 Third
Avenue, 19th Floor

New York, NY
10017

Attn:      Robert L. Mazzeo

Tel:              212-599-0700

Fax:             212-599-8400

 

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

 

9.7                                 Entire Agreement; Amendments.  This Security Agreement and the other
Transaction Documents constitute the entire agreement between the parties with
regard to the subject matter hereof and thereof, superseding all prior agreements
or understandings, whether written or oral, between or among the parties.  Except as expressly provided herein, neither
this Security Agreement nor any term hereof may be amended except pursuant to a
written

 

10

 

instrument executed by the Obligor and the Collateral
Agent, and no provision hereof may be waived other than by a written instrument
signed by the party against whom enforcement of any such waiver is sought.

 

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

 

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

 

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

 

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

 

11

 

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

 

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

 

[Signature
Page to Follow]

 

12

 

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

 

OBLIGOR:

 

APPLIED
DIGITAL SOLUTIONS, INC.

 

 

	
  By:

  	
  /s/
  Evan McKeown

  	
   

  
	
   

  	
  Name:
  Evan C. McKeown

  
	
   

  	
  Title:
  Senior Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  COLLATERAL
  AGENT:

  
	
   

  	
   

  
	
  SATELLITE
  ASSET MANAGEMENT, L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Simon Rayhker

  	
   

  
	
   

  	
  Name:
  Simon Raykher

  
	
   

  	
  Title:
  General Counsel

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