UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to _________
Commission File No.: 0-22693
InfoTech USA, Inc. |
(Exact name of registrant as specified in its charter) |
Delaware (State or other jurisdiction of incorporation or organization) | 11-2889809 (I.R.S. Employer Identification No.) |
7 Kingsbridge Road, Fairfield, New Jersey 07004 (Address of principal executive offices) (Zip Code) | (973) 227-8772 (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of our common stock held by non-affiliates of the registrant computed by reference to the average bid and ask price of our common stock on March 31, 2003 was $636,480. For purposes of this calculation only, directors, executive officers and the principal controlling shareholder of the registrant are deemed to be affiliates of the registrant.
The number of shares outstanding of each class of our common equity as of December 17, 2003 is as follows:
Class of Common Equity Common Stock, par value $.01 per share | Number of Shares 4,895,998 |
The information required by Part III of this Form 10-K is incorporated by reference from the registrant's definitive proxy statement to be filed with the Commission on or before January 28, 2004.
EXPLANATORY NOTE
This Form 10-K/A is being filed solely for the purpose of amending Notes 1 and 10 to the consolidated financial statements of InfoTech USA, Inc. (the “Registrant”) contained in Item 8 of Part II and Item 15 of Part IV of the Registrant's Annual Report on Form 10-K for the year ended September 30, 2003.
Due to an administrative oversight on the part of the Registrant, the number of stock options outstanding as of September 30, 2003 should have been 4,070,000 and not 2,670,000 as reported.
This change does not affect any of the amounts previously reported in the Registrant's consolidated balance sheets, statements of operations, statements of stockholders' equity and statements of cash flows. In addition, since the Registrant had a net loss in 2003, the assumed effects of the exercise of outstanding stock options for the purchase of 4,070,000 shares at September 30, 2003 would have been anti-dilutive. As a result, this change does not affect the amount previously reported by the Registrant as net loss per common share for the year ended September 30, 2003.
This report continues to speak as of the date of the original filing of the Form 10-K on December 23, 2003, and the Registrant has not updated the disclosures in this report to speak as of a later date or to reflect subsequent results, events, or developments. Item 8 of Part II and Item 15 of Part IV have been included below with the appropriate figures.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Annual Report, and the documents incorporated by reference herein, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
- our continued ability to develop our service offerings;
- the successful completion and integration of future acquisitions;
- the ability to hire and retain skilled personnel;
- the continued development of our technical, manufacturing, sales, marketing and management capabilities;
- relationships with and dependence on technological partners;
- uncertainties relating to economic conditions where we operate;
- uncertainties relating to government and regulatory policies;
- uncertainties relating to customer plans and commitments;
- rapid technological developments and obsolescence in the industries in which we operate and compete;
- potential performance issues with suppliers and customers;
- governmental export and import policies, global trade policies, worldwide political stability and economic growth;
- the highly competitive environment in which we operate;
- potential entry of new, well-capitalized competitors into our markets;
- our ability to maintain available sources of financing; and
- changes in our capital structure and cost of capital.
The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in this Annual Report are listed in Item 15 and begin immediately after Item 15.
1
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in our reporting system. Based upon, and as of the date of that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms.
There was no change in our internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
Our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2003 is being amended due to an inadvertent omission of certain outstanding stock options as of September 30, 2003 from the disclosures contained in the notes to our consolidated financial statements. Our disclosure controls and procedures and internal control over financial reporting have been revised to prevent such an error from occurring in the future.
It should be noted that our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
2
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) | The financial statements and financial statement schedules listed below are included in this report |
(a)(2) | Financial statement schedules have been included in Item 15(a)(1) above. |
(a)(3) | Exhibits |
(c) | Exhibits - Included in Item 15(a)(3) above. |
3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fairfield, State of New Jersey, on January 27, 2004.
INFOTECH USA, INC. |
By: | /s/ S. F. Perez | |
Sebastian F. Perez, Chief Operating Officer and acting President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | |||
/s/ KEVIN MCLAUGHLIN | Chairman of the Board of | January 27, 2004 | |||
(Kevin McLaughlin) | Directors and Secretary | ||||
/S/ S. F. PEREZ | Chief Operating Officer, Acting | January 27, 2004 | |||
(Sebastian F. Perez) | President and Chief Executive | ||||
Officer (Principal Executive Officer) | |||||
/S/ J. ROBERT PATTERSON | Vice President, Treasurer, Chief | January 27, 2004 | |||
(J. Robert Patterson) | Financial Officer and Director (Principal Financial Officer and Principal Accounting Officer) | ||||
/S/ CHARLES L. DOHERTY | Director | January 27, 2004 | |||
(Charles L. Doherty) | |||||
/S/ ANAT EBENSTEIN | Director | January 27, 2004 | |||
(Anat Ebenstein) |
4
LIST OF EXHIBITS
(Item 14 (c))
Exhibit | Description |
3.1 | Amended and Restated Certificate of Incorporation dated April 21, 1997 (incorporated by reference to Exhibit 3.1 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
3.2 | Certificate of Amendment of Certificate of Incorporation dated March 22, 2002 (incorporated by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
3.3 | Certificate of Amendment of Certificate of Incorporation dated April 9, 2003 (incorporated by reference to Exhibit 3.3 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
3.4 | Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
4.1 | Non-Qualified Stock Option Award Granted to David A. Loppert dated January 1, 2001 |
10.1 | Summary of Terms and Conditions setting forth the terms and conditions of the Forbearance Agreement among IBM Credit, LLC, Applied Digital Solutions, Inc., Digital Angel Share Trust and their applicable subsidiaries (if any) dated March 24, 2003 (incorporated by reference to Exhibit 10.2 to Applied Digital Solution, Inc.'s Current Report on Form 8-K, dated March 21, 2003) |
10.2 | Forbearance Agreement, Consent and Amendment, dated as of April 2, 2003, among IBM Credit, LLC, Applied Digital Solutions, Inc., Digital Angel Share Trust and the other Loan Parties thereto (incorporated by reference to Exhibit 10.27 to Applied Digital Solution, Inc.'s Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-102165) filed with the Commission on April 11, 2003) |
10.3 | Commercial Loan Agreement, dated June 27, 2003, between InfoTech USA, Inc. and Applied Digital Solutions, Inc. (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K, dated June 27, 2003, filed with the Commission on July 11, 2003) |
10.4 | Term Note, dated June 27, 2003, issued by Applied Digital Solutions, Inc. in favor of InfoTech USA, Inc. (incorporated by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K, dated June 27, 2003, filed with the Commission on July 11, 2003) |
10.5 | Stock Pledge Agreement, dated June 27, 2003, between Applied Digital Solutions, Inc. and InfoTech USA, Inc. (incorporated by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K, dated June 27, 2003, filed with the Commission on July 11, 2003) |
10.6* | 1998 Incentive Stock Option Plan, as Amended (incorporated herein by reference to Exhibit 99 to the Company's definitive Proxy Statement filed with the Commission on December 27, 1999) |
10.7* | 1999 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit A to the Company's definitive Proxy Statement filed with the Commission on December 28, 1998) |
10.8* | 2001 Flexible Stock Plan (incorporated herein by reference to Exhibit A to the Company's definitive Proxy Statement filed with the Commission on February 28, 2001) |
10.13 | Sublease Agreement dated as of May 25, 2000 by and between Sungard Portfolio Solutions and Information Products Center, Inc. |
21.1 | List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the registrant's Annual Report on Form 10-K filed with the Commission on December 23, 2003) |
5
31.1 | Certification by Chief Executive Officer of the registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification by Chief Financial Officer of the registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification by Chief Executive Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification by Chief Financial Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Management contract or compensatory plan. |
6
Contents
Page
Reports of Independent Public Accountants | F-2/3 |
Financial Statements |
Consolidated Balance Sheets September 30, 2003 and 2002 | F-4 |
Consolidated Statements of Operations Years ended September 30, 2003, 2002 and 2001 | F-5 |
Consolidated Statements of Stockholders' Equity Years ended September 30, 2003, 2002 and 2001 | F-6 |
Consolidated Statements of Cash Flows Years ended September 30, 2003, 2002 and 2001 | F-7 |
Notes To Consolidated Financial Statements | F-8/26 |
Schedule II - Valuation and Qualifying Accounts Years ended September 30, 2003, 2002 and 2001 | S-1 |
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
InfoTech USA, Inc. (f/k/a SysComm International Corporation)
Fairfield, New Jersey
We have audited the accompanying consolidated balance sheets of InfoTech USA, Inc. and Subsidiaries (f/k/a SysComm International Corporation and Subsidiaries) as of September 30, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InfoTech USA, Inc. and Subsidiaries (f/k/a SysComm International Corporation and Subsidiaries) as of September 30, 2003 and 2002, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Our audits referred to above included the information in Schedule II, which presents fairly, in all material respects, when read in conjunction with the consolidated financial statements, the information required to be set forth therein.
As discussed in Notes 1 and 10 to the accompanying consolidated financial statements, the number of shares of common stock subject to outstanding stock options as of September 30, 2003 has been revised from the number reflected as outstanding in the notes to the consolidated financial statements previously issued by the Company.
/s/ J. H. Cohn LLP
Roseland, New Jersey
November 4, 2003
F-2
INDEPENDENT AUDITORS’ REPORT
Board of Directors and Stockholders
InfoTech USA, Inc.
Fairfield, New Jersey
We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of InfoTech USA, Inc. and subsidiaries (formerly SysComm International Corporation and subsidiaries) for the year ended September 30, 2001. Our audit also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of InfoTech USA, Inc. and subsidiaries for the year ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America, and the supporting schedule presents fairly the information required to be set forth therein.
/s/ RUBIN, BROWN, GORNSTEIN & CO., LLP
Saint Louis, Missouri
November 7, 2001
F-3
INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Assets
September 30, | |||||
2003 | 2002 | ||||
Current Assets Cash and cash equivalents | $ 855 | $ 3,398 | |||
Accounts receivable (net of allowance for doubtful accounts | |||||
of $113 in 2003 and $208 in 2002) | 2,955 | 1,913 | |||
Inventories | 120 | 91 | |||
Note receivable - Parent Company | 1,013 | ||||
Deferred tax assets | 44 | 42 | |||
Other current assets | 283 | 135 | |||
Total Current Assets | 5,270 | 5,579 | |||
Property, equipment and improvements, net | 325 | 524 | |||
Goodwill, net | 2,154 | 2,154 | |||
Other assets | 1,619 | 1,500 | |||
Total Assets | $ 9,368 | $ 9,757 | |||
Liabilities And Stockholders' Equity | |||||
Current Liabilities | |||||
Current maturities of capital lease obligations | $ 21 | $ 21 | |||
Amounts due to Parent Company | 105 | 127 | |||
Accounts payable | 146 | 190 | |||
Accrued expenses and other liabilities | 1,502 | 1,160 | |||
Total Current Liabilities | 1,774 | 1,498 | |||
Capital lease obligations | -- | 21 | |||
Total Liabilities | 1,774 | 1,519 | |||
Commitments and contingencies | |||||
Stockholders' Equity | |||||
Preferred shares: | |||||
Authorized 5,000 shares, no par value: none issued | -- | -- | |||
Common shares: | |||||
Authorized 80,000 shares of $.01 par value; 5,757 shares | |||||
issued; 4,896 shares outstanding | 58 | 58 | |||
Additional paid-in capital | 6,653 | 6,653 | |||
Retained earnings | 1,801 | 2,445 | |||
Treasury stock (861 shares, carried at cost) | (918 | ) | (918 | ) | |
Total Stockholders' Equity | 7,594 | 8,238 | |||
Total Liabilities and Stockholders' Equity | $ 9,368 | $ 9,757 | |||
See the accompanying notes to consolidated financial statements.
F-4
INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Years Ended September 30, | |||||||
2003 | 2002 | 2001 | |||||
Revenue Product revenue | $ 11,071 | $ 22,266 | $ 32,773 | ||||
Service revenue | 2,537 | 2,916 | 3,488 | ||||
Total revenue | 13,608 | 25,182 | 36,261 | ||||
Cost of sales | |||||||
Cost of products sold | 9,533 | 19,203 | 28,583 | ||||
Cost of services sold | 1,621 | 1,562 | 1,493 | ||||
Total cost of products and services sold | 11,154 | 20,765 | 30,076 | ||||
Gross profit | 2,454 | 4,417 | 6,185 | ||||
Selling, general and administrative expenses | 3,332 | 4,179 | 6,249 | ||||
Depreciation and amortization | 223 | 268 | 535 | ||||
Asset impairment | -- | -- | 95 | ||||
Loss from operations | (1,101 | ) | (30 | ) | (694 | ) | |
Other expense (income) | 26 | 223 | (102 | ) | |||
Interest (income) expense | (36 | ) | 274 | 272 | |||
Loss before income tax benefit | (1,091 | ) | (527 | ) | (864 | ) | |
Income tax benefit | (447 | ) | (115 | ) | (159 | ) | |
Net Loss Applicable To Common Stockholders | $ (644 | ) | $ (412 | ) | $ (705 | ) | |
Net Loss Per Common Share - Basic | $ (0.13 | ) | $ (0.08 | ) | $ (0.15 | ) | |
Weighted Average Number Of Common Shares | |||||||
Outstanding - Basic | 4,896 | 4,896 | 4,823 | ||||
See the accompanying notes to consolidated financial statements.
F-5
INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For The Years Ended September 30, 2003, 2002 and 2001
(In thousands)
Common Stock | Additional Paid-In | Retained | Treasury | Total Stockholders' | |||||||||
Number | Amount | Capital | Earnings | Stock | Equity | ||||||||
Balance - October 1, 2000 | 5,555 | $56 | $6,502 | $ 3,562 | $(912 | ) | $ 9,208 | ||||||
Net Loss | – | – | – | (705 | ) | – | (705 | ) | |||||
Compensatory Stock Options | |||||||||||||
Issued To Non-employees | – | – | 73 | – | – | 73 | |||||||
Common Stock Issued Pursuant | |||||||||||||
To Stock Purchase Plan | 2 | – | – | – | – | – | |||||||
Net Proceeds From Issuance of | |||||||||||||
Common Stock | 200 | 2 | 78 | – | – | 80 | |||||||
Purchase of Treasury Shares | – | – | – | – | (6 | ) | (6 | ) | |||||
Balance - September 30, 2001 | 5,757 | 58 | 6,653 | 2,857 | (918 | ) | 8,650 | ||||||
Net Loss | – | – | – | (412 | ) | – | (412 | ) | |||||
Balance - September 30, 2002 | 5,757 | 58 | 6,653 | 2,445 | (918 | ) | 8,238 | ||||||
Net Loss | – | – | – | (644 | ) | – | (644 | ) | |||||
Balance - September 30, 2003 | 5,757 | $58 | $6,653 | $ 1,801 | $(918 | ) | $ 7,594 | ||||||
See the accompanying notes to consolidated financial statements.
F-6
INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For The Years Ended September 30, | |||||||
2003 | 2002 | 2001 | |||||
Cash flows from operating activities Net loss | $ (644 | ) | $ (412 | ) | $ (705 | ) | |
Adjustments to reconcile net loss to net cash | |||||||
(used in) provided by operating activities: | |||||||
Depreciation and amortization | 223 | 268 | 535 | ||||
Compensatory stock options issued to non-employees | – | – | 73 | ||||
Deferred income taxes | (450 | ) | (115 | ) | (283 | ) | |
Loss on disposition of property and equipment | – | – | (6 | ) | |||
Asset impairment | – | – | 95 | ||||
Changes in operating assets and liabilities: | |||||||
(Increase) decrease in accounts receivable | (1,042 | ) | 7,496 | 4,493 | |||
(Increase) decrease in inventories | (29 | ) | 404 | 331 | |||
(Increase) decrease in other current assets | (166 | ) | 386 | (418 | ) | ||
Decrease in other assets | – | 15 | 29 | ||||
Increase (decrease) in accounts payable | |||||||
and accrued expenses | 298 | (4,677 | ) | (909 | ) | ||
Net cash (used in) provided by operating activities | (1,810 | ) | 3,365 | 3,235 | |||
Cash flows from investing activities | |||||||
Capital expenditures | (24 | ) | (56 | ) | (97 | ) | |
Payment for costs of business acquisitions (net of cash | – | – | (1,966 | ) | |||
acquired) | |||||||
Payments received on note receivable - other | 18 | 68 | 31 | ||||
Notes received for loan to Parent Company | (1,013 | ) | – | – | |||
Proceeds from disposition of property and equipment | – | 2,441 | 10 | ||||
Net decrease (increase) in cash surrender value of life | |||||||
insurance | 329 | (6 | ) | 10 | |||
Net cash (used in) provided by investing activities | (690 | ) | 2,447 | (2,012 | ) | ||
Cash flows from financing activities | |||||||
Payments of capital lease obligations and other long-term debt | (21 | ) | (3,405 | ) | (293 | ) | |
Net payments on Parent Company line of credit | (22 | ) | (820 | ) | (232 | ) | |
Net proceeds from issuance of common stock | – | – | 80 | ||||
Purchase of treasury stock | – | – | (6 | ) | |||
Net cash used in financing activities | (43 | ) | (4,225 | ) | (451 | ) |
F-7
Net (decrease) increase in cash and cash equivalents | (2,543 | ) | 1,587 | 772 | |||
Cash and cash equivalents - beginning of year | 3,398 | 1,811 | 1,039 | ||||
Cash and cash equivalents - end of year | $ 855 | $ 3,398 | $ 1,811 | ||||
Supplemental disclosure of cash flow information | |||||||
Income taxes paid | $ 35 | $ 74 | $ 32 | ||||
Interest paid | 23 | 321 | 224 | ||||
See the accompanying notes to consolidated financial statements.
F-8
INFOTECH USA, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) |
Note 1 – Summary Of Significant Accounting Policies
Business Organization And Basis Of Presentation InfoTech USA, Inc. (formerly, SysComm International Corporation) (the “Company”) was incorporated on September 30, 1987 as a Delaware corporation. The Company has two subsidiaries: Information Technology Services, Inc. (doing business as InfoTech), a New York Corporation since 1980, and InfoTech USA, Inc., a New Jersey corporation since 1983. The Company is controlled by its 53% majority stockholder, Applied Digital Solutions, Inc. (“ADS”, “Applied Digital” or the “Parent Company”). |
The Company, through its subsidiaries, is a supplier and systems integrator of a broad range of computer services and related products. The Company conducts business in the New York City Metropolitan area and New Jersey. The Company’s customers are generally medium to large size entities. |
Change In Control On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between the selling stockholders described in Note 2 and ADS, a Missouri corporation, ADS acquired approximately 55% of the then issued and outstanding common stock of the Company, resulting in a change in control. |
Basis Of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. |
Use Of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
F-9
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Revenue Recognition For product sales, the Company recognizes revenue upon delivery in accordance with the applicable product’s shipping terms. The Company has no obligation for warranties on new hardware sales, because the manufacturer provides the warranties. For consulting and other services, the Company recognizes revenue based on the direct labor hours incurred for service rendered times the standard billing rate, adjusted to realizable value, if necessary. Revenues from sales contracts involving both products and consulting and other services are allocated to each element based on the relative fair value of each element. The Company does not offer a warranty policy for services to customers. Revenues are not recognized unless prices are fixed or determinable and collectibility is reasonably assured. |
The Company does not require any collateral in connection with sales of products or services. It provides an allowance for doubtful accounts equal to the estimated collection losses based on historical experience coupled with a review of the current status of existing receivables. |
Inventories Inventories consist principally of computer hardware and software and are valued at the lower of cost (first-in, first-out) or market. Substantially all inventory items are finished goods. |
The Company reviews the movement of inventories on an item-by-item basis to determine the value of items which are slow moving. After considering the potential for near term product engineering changes and/or technological obsolescence and current realizability due to changes in returns and price protection policies, the Company determines the need for an inventory valuation allowance. The allowance was $39 and $78 as of September 30, 2003 and 2002, respectively. |
Property, Equipment And Improvements Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged against operations as incurred. Upon retirement or sale, any assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Capitalized values of property under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. |
Depreciation and amortization are computed using straight-line and accelerated method over the following estimated useful lives: |
Estimated Useful Life | |||
Vehicles | 1-5 years | ||
Computer equipment | 5 years | ||
Furniture and fixtures | 7 years | ||
Leasehold improvements | 5 years | ||
F-10
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Impairment losses on long-lived assets with definitive lives, such as equipment and improvements, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. |
Goodwill The cost in excess of fair value of net assets of businesses acquired is recorded as goodwill. Prior to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) in fiscal 2002, goodwill was amortized on a straight-line basis over 10 years. Goodwill is no longer amortized. Instead, it is tested at least annually for impairment. Goodwill is deemed to be impaired only when the carrying amount exceeds the estimated fair value, which is determined based on models that incorporate estimates of future profitability and cash flows. See Note 5 for the impact of the adoption of SFAS 142 on the consolidated financial statements. |
Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS 109”) which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. |
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. |
Net Earnings (Loss) Per Common Share The Company presents “basic” earnings (loss) per common share and, if applicable, “diluted” earnings per common share pursuant to the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). Basic earnings (loss) per common share is calculated by dividing net income or loss applicable to common stock by the weighted average number of common shares outstanding during each period. The calculation of diluted earnings per common share is similar to that of basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options, were issued during the period. |
Since the Company had net losses in 2003, 2002 and 2001, the assumed effects of the exercise of outstanding stock options for the purchase of 4,070, 4,970 and 2,665 common shares outstanding at September 30, 2003, 2002 and 2001, respectively, would have been anti-dilutive. |
Revisions of Financial Statement Disclosures Related to Shares Subject to Outstanding Stock Options Subsequent to the original issuance of its consolidated financial statements as of and for the year ended September 30, 2003, the Company determined that it had inadvertently reflected outstanding stock options for the purchase of 1,400 shares of common stock as having been cancelled. However, the options continued to be outstanding as of September 30, 2003. The disclosures in Note 10 herein have been revised to reflect the additional outstanding stock options. |
F-11
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Cash And Cash Equivalents The Company considers all liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents. |
Fair Value Of Financial Instruments The carrying values of financial instruments including cash and cash equivalents, accounts and trade notes receivable and accounts payable approximate fair value due to the relatively short maturity of these instruments. The carrying value of the note receivable from the Parent Company approximates fair value because it bears interest at a market interest rate and has a relatively short maturity. The carrying values of the cash surrender value of life insurance policies approximate fair values because the balance is recorded at the amount realizable if the policies were terminated as of the balance sheet date. The carrying value of long-term debt, including the current portion, approximates fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities. |
Stock-based Compensation In accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the Company will recognize compensation costs as a result of the issuance of stock options to employees, including directors, based on the excess, if any, of the fair value of the underlying stock at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employees must pay to acquire the stock (the "intrinsic value method"). However, the Company will not be required to recognize compensation expense as a result of any grants to employees at an exercise price that is equal to or greater than fair value. The Company will also make pro forma disclosures, as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosures" ("SFAS 148"), of net income or loss as if a fair value based method of accounting for stock options had been applied if such amounts differ materially from the historical amounts. |
In accordance with the provisions of SFAS 123, all other issuances of common stock, stock options or other equity instruments to employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options or similar equity instruments issued will be estimated based on the Black-Scholes option-pricing model, which meets the criteria set forth in SFAS 123, and the assumption that all of the options or other equity instruments will ultimately vest. Such fair value is measured as of an appropriate date pursuant to EITF Issue No. 96-18 (generally, the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete) and capitalized or expensed as if the Company had paid cash for the goods or services. |
F-12
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Impact Of Recently Issued Accounting Standards In December 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS 148 which amends SFAS 123. SFAS 148 provides alternate methods of transition for a voluntary change from the intrinsic value method to the fair value method of accounting for stock-based employee compensation. However, management of the Company does not expect to make such a change. In addition, SFAS 148 amends SFAS 123 to require more prominent annual and quarterly disclosures in the financial statements about the effects of using the intrinsic value method rather than the fair value method for stock-based compensation. The Company has included the additional disclosures required by SFAS 148 in Note 10 to the financial statements below. |
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Company does not hold any material derivative instruments and does not conduct any significant hedging activities. |
In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS 150 was effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of the provisions of SFAS 150 did not have any impact on the Company's consolidated financial statements. |
In November 2002, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” related to the separation and allocation of consideration for arrangements that include multiple deliverables. EITF 00-21 requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately as separate units of accounting. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenues recognized in a bundled sales arrangement. The allocation of revenues to the separate deliverables is based on the relative fair value of each item. If the fair value is not available for the delivered items then the residual method must be used. This method requires that the amount allocated to the undelivered items in the arrangement is their full fair value. This would result in the discount, if any, being allocated to the delivered items. This consensus was effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the provisions of EITF 00-21 did not have a material impact on the Company's consolidated financial statements. |
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an Interpretation of FASB Statements Nos. 5, 57 and 107 and a Rescission of FASB Interpretation No. 34.” This Interpretation, among other things, clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The adoption of the initial recognition and measurement provisions of the Interpretation was required for guarantees issued or modified after December 31, 2002. Such adoption did not have a material impact on the Company’s consolidated financial statements. |
F-13
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Note 2 – Acquisitions
On December 14, 2000, the Company acquired 51% of the outstanding shares of common stock of Information Products Center, Inc., a New Jersey corporation currently doing business as “InfoTech USA, Inc.”, from ADS. InfoTech USA, Inc. is a systems integrator and network solutions provider. The purchase price for the shares of InfoTech USA, Inc. was $2,075, payable $1,821 in cash and $254 by promissory note. On December 15, 2000, the Company acquired the remaining 49% of the outstanding shares of common stock of InfoTech USA, Inc. for $2,398, payable by promissory note. The purchase price for InfoTech USA, Inc. was assigned to the tangible and identifiable intangible assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, which approximated their book values, using the purchase method of accounting. Based upon such allocations, the aggregate purchase price exceeded the estimated fair value of net assets acquired resulting in goodwill of approximately $2,339, which was being amortized on a straight-line basis over 10 years until SFAS 142 was adopted. Results of operations of InfoTech USA, Inc. are included from December 14, 2000. |
The following unaudited pro forma consolidated information of the Company for 2001 gives effect to the acquisition as if it was effective at October 1, 2000. |
Total revenues | $ 41,798 | ||
Net loss | (734 | ) | |
Loss per common share - basic | (0.15 | ) |
During 2002, the Company had entered into a nonbinding letter of intent to merge with VeriChip Corporation, a wholly-owned subsidiary of ADS. The Company did not complete the merger. Charges of $274 for related expenses are included in other (income) expense in the accompanying 2002 consolidated statement of operations. |
Note 3 – Other Current Assets
2003 | 2002 | ||||
Vendor receivables (rebates and returns) | $ 89 | 65 | |||
Prepaid expenses | 56 | 39 | |||
Trade notes receivable | – | 19 | |||
Miscellaneous receivable | 105 | – | |||
Other | 33 | 12 | |||
Totals | $ 283 | $ 135 | |||
F-14
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Note 4 - Property, Equipment and Improvements
2003 | 2002 | ||||
Vehicles | $ 24 | $ 26 | |||
Computer equipment | 1,422 | 1,403 | |||
Furniture and fixtures | 321 | 316 | |||
Leasehold improvements | 63 | 63 | |||
1,830 | 1,808 | ||||
Less accumulated depreciation | (1,505 | ) | (1,284 | ) | |
Totals | $ 325 | $ 524 | |||
F-15
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Included above are computer equipment and furniture and fixtures acquired under capital lease obligations in the amount of $64 at September 30, 2003 and 2002. Related accumulated depreciation amounted to $44 and $23 at September 30, 2003 and 2002, respectively. Amortization expense of capital lease assets is included in depreciation expense. |
Depreciation and amortization charged to operations amounted to $223, $268 and $350 for 2003, 2002 and 2001, respectively. |
In August 2001, the Company entered into a plan to dispose of its Shirley, New York facility. At that time, the Company determined that the net book value of the land, building and equipment to be offered for sale exceeded its fair value, less costs to sell. The carrying value of these assets, prior to impairment, was approximately $2,500. The expected sales proceeds were estimated at $2,400. This resulted in an asset impairment of $95 being charged to operations in 2001. |
On January 28, 2002, the Company sold its facilities in Shirley, New York for $2,400. The sale generated cash of approximately $1,300 after repaying the related mortgage and other transaction fees. The Company has centralized all back office and warehousing operations in its Fairfield, New Jersey location, which has become the new corporate headquarters. |
Note 5 – Goodwill
Goodwill consists of the unamortized excess of cost over fair value of tangible and identifiable intangible assets of InfoTech USA, Inc. at the date of acquisition. The Company applied APB No. 16, “Business Combinations,” and used the purchase method of accounting for this acquisition. Goodwill at September 30, 2003 and 2002 consists of: |
Original balance | $ 2,339 | |||
Less accumulated amortization | (185 | ) | ||
Carrying value | $ 2,154 | |||
Amortization expense amounted to $185 for 2001. |
Effective October 1, 2001, the Company adopted SFAS 142. Under SFAS 142, goodwill amortization ceased upon the adoption of the new standard. The new rules also require an initial goodwill impairment assessment in the year of adoption and annual impairment tests thereafter. Valuation analysis testing for goodwill impairment upon the adoption of SFAS 142 and as of September 30, 2003 and 2002 resulted in no charges for goodwill impairment. |
F-16
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Net loss and loss per share for the year ended September 30, 2001, adjusted for the assumed exclusion of goodwill amortization expense from October 1, 2000 are as follows: |
Net Loss: | |||
Net Loss, as Reported | $ (705 | ) | |
Goodwill Amortization | 185 | ||
Net Loss, as Adjusted | $ (520 | ) | |
Basic and Diluted Loss Per Common Share: | |||
Net Loss Per Share, as Reported | $ (0.15 | ) | |
Goodwill Amortization | 0.04 | ||
Net Loss Per Common Share, as Adjusted | $ (0.11 | ) | |
Note 6 - Other Assets
2003 | 2002 | ||||
Long-term net deferred tax assets | $ 1,501 | $1,053 | |||
Cash surrender value of life insurance policies | 76 | 405 | |||
Other | 42 | 42 | |||
Totals | $ 1,619 | $1,500 | |||
Note 7 – Financing Arrangements
The Company's financing agreement with IBM Credit LLC ("IBM Credit") in effect as of September 30, 2003 provides financing on inventory purchases up to $2,500. Borrowing for purchases is based upon 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories. IBM Credit may grant temporary increases, thereby increasing the line of credit in order to accommodate high volume sale opportunities. Interest for balances not paid within the 30-day interest free period accrues at prime plus 4.4%. |
At September 30, 2002, the Company's subsidiary, Information Technology Services, Inc., had an agreement for Wholesale Financing with IBM Credit (the “AWF Agreement”). The AWF Agreement provided for financing of inventory purchases up to $2,350. Borrowings for purchases were limited to 75% of all eligible receivables due within 90 days and up to 100% of eligible inventories. The AWF Agreement was subject to temporary increases, thereby increasing availability up to $3,350 during certain periods. No interest was charged during the first 30 days that a purchase has been financed. After 30 days, interest accrued at prime plus 6.5% |
Additionally, at September 30, 2002, the Company's subsidiary, InfoTech USA, Inc., had an agreement for Wholesale Financing with IBM Credit through Applied Digital's credit facility for inventory purchases up to $1,000. Borrowings for purchases were limited to 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories. Payments for inventories financed under this agreement were due in 10 days and earned a discount if paid within that period. Payments made after 10 days accrued interest at prime plus 6.5%. |
F-17
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Combined borrowings under the financing arrangements described above amounted to $469 and $236 at September 30, 2003 and 2002, respectively, and are included in either, accounts payable or accrued expenses and other liabilities. |
Borrowings under the aforementioned line of credit that went beyond the grace period resulted in interest expense for 2003 and 2002 of $23 and $11, respectively. |
On June 30, 2003, the Company’s Parent Company, Applied Digital, made cash payments to IBM Credit totaling $30 million in satisfaction of its obligations to IBM Credit. Under the terms of its agreement with IBM Credit, Applied Digital had pledged its shares of the Company’s common stock as collateral for amounts outstanding under the credit agreement, and IBM Credit had a security interest in the Company’s receivables and inventories, up to the amount advanced to the Company from Applied Digital under the line of credit. Applied Digital has fully satisfied its obligations to IBM Credit and, accordingly, IBM Credit’s security interest in the shares of common stock owned by Applied Digital and in the Company’s receivables and inventories have been released under Applied Digital’s credit agreement. As disclosed above, IBM Credit will continue to have a security interest in the Company’s receivables and inventories to the extent the Company borrows under the existing financing agreements with IBM Credit. |
On September 5, 2003 the Company received a letter from IBM Credit constituting their formal notice of termination of the Company’s agreement. The effective date of such termination will be March 10, 2004. As of September 30, 2003, the Company was in the process of securing other financing and managment expects to replace the line of credit prior to the termination date set by IBM Credit. |
Management believes that the present financing arrangements with IBM Credit, the Company's cash balances at September 30, 2003 and available financing from the expected replacement of the IBM Credit facility will be sufficient to fund the Company’s operations and capital expenditures through at least September 30, 2004. The Company’s long-term capital needs may require additional sources of credit. There can be no assurances that the Company will be successful in its ability to negotiate a replacement for the IBM Credit financing needed to fund its operations in the year ending September 30, 2004, nor are there any assurances that it will be successful in negotiating additional sources of credit for its long-term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs may materially and adversely impact its financial condition, results of operations and cash flows. |
Note 8 – Capital Leases
The Company leases software under a non-cancelable capital lease. The asset acquired under the lease has been capitalized and the related obligation included in long-term debt in the financial statements. The remaining future minimum lease payments as of September 30, 2003 are due as follows: |
F-18
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
September 30, | Amount | ||
2004 | $ 23 | ||
Total future minimum lease payments | 23 | ||
Less amount representing interest | 2 | ||
Present value of future minimum lease payments | 21 | ||
Less current portion | 21 | ||
Total | $ – | ||
Note 9 – Income Taxes
The benefit for income taxes consists of the following: |
Years Ended September 30, | |||||||
2003 | 2002 | 2001 | |||||
Current | $ – | $ – | $ 124 | ||||
Deferred | (447 | ) | (115 | ) | (283 | ) | |
Totals | $ (447 | ) | $ (115 | ) | $ (159 | ) | |
The reconciliation of the effective tax rate with the statutory Federal income tax rate is as follows: |
Years Ended September 30, | |||||||
2003 | 2002 | 2001 | |||||
% | % | % | |||||
Statutory rate | (34 | ) | (34 | ) | (34 | ) | |
Non-deductible permanent difference | 2 | 6 | – | ||||
Non-deductible goodwill amortization | – | – | 21 | ||||
State income taxes, net of Federal benefits | (6 | ) | (6 | ) | (9 | ) | |
Other | (3 | ) | 12 | 4 | |||
Totals | (41 | ) | (22 | ) | (18 | ) | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows: |
F-19
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
2003 | 2002 | ||||
Deferred Tax Assets: Asset reserves | $ 63 | $ 118 | |||
Investments | 17 | 17 | |||
Accruals | 102 | 76 | |||
Stock options | 88 | 118 | |||
Net operating loss carryforwards | 1,856 | 1,373 | |||
Gross deferred tax assets | 2,126 | 1,702 | |||
Valuation allowance | (574 | ) | (574 | ) | |
Totals | 1,552 | 1,128 | |||
Deferred Tax Liabilities - property and equipment | (7 | ) | (33 | ) | |
Net Deferred Tax Assets | $ 1,545 | $ 1,095 | |||
The current and long-term components of the net deferred tax assets are as follows: |
2003 | 2002 | ||||
Current net deferred tax assets | $ 44 | $ 42 | |||
Long-term net deferred tax assets | 1,501 | 1,053 | |||
Totals | $1,545 | $1,095 | |||
At September 30, 2003, the Company has net operating loss carryforwards of approximately $4,500, which will expire in varying amounts between 2022 and 2023. Utilization of the Company’s net operating losses is subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. |
Management believes that it is more likely than not that the Company will realize a substantial portion of the benefits from its deferred tax assets in subsequent years based primarily on the Company’s projected operating results. However, a portion of the Company’s net operating loss carryforwards arose prior to the change of control during December 2000. As a result, these net operating loss carryforwards are subject to the annual limitations previously discussed. Therefore, management believes the Company is not likely to realize the tax benefits associated with the net operating loss carryforwards that arose prior to the change of control and, accordingly, the Company recorded a valuation allowance of $574 in 2000, which did not change in 2003 and 2002. |
F-20
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Note 10 – Stock-Based Compensation
Stock Option Plans In February 1998, a stock option plan (the “1998 Plan”) was approved by the stockholders. The 1998 Plan was amended in January 2000. Under the revised plan, 1,000 shares of common stock are reserved for issuance upon the exercise of options designated as either incentive stock options or non-qualified stock options. The 1998 Plan will terminate in February 2008. Options granted under the 1998 Plan will expire not more than ten years from the date of grant. At September 30, 2003, no options remain available for issuance under the 1998 Plan. |
During 2000 and 1999, options for the purchase of 110 and 115 shares, respectively, were granted to investment bankers, directors and employees of the Company with immediate vesting under the 1998 Plan. All other options granted vest over a four-year period following the date of grant. All options under the 1998 Plan expire five years from the date of grant. The options granted in 1997 under a previous plan expired on September 1, 2001. |
In March 2001, the stockholders approved the 2001 Flexible Stock Plan (the “2001 Plan”). Under the 2001 Plan, the number of shares which may be issued or sold, or for which options, Stock Appreciation Rights (“SARs”) or Performance Shares may be granted to certain directors, officers and employees of the Company is 2,500 per year, plus an annual increase, effective as of the first day of each calendar year, commencing with 2002, equal to 25% of the number of outstanding shares as of the first day of such calendar year, but in no event more than 10,000 shares in the aggregate. A total of 4,948 and 3,724 shares were issuable under the 2001 Plan at October 1, 2003 and 2002, respectively. In 2001, the Company issued options to purchase 1,250 shares under the 2001 Plan and recognized a related compensation charge of $73. Those were the only options issued under the 2001 Plan and they all remained outstanding as of September 30, 2003. The options may not be exercised until one year after the options have been granted, and are exercisable over a period of ten years. |
On June 28, 2002, the Board of Directors approved a grant of 2,200 stock options at an exercise price of $.28 to the Officers and Directors of the Company, and to outside parties. The options became exercisable on June 28, 2003 and expire on June 28, 2010. Additionally the Board of Directors approved a grant of 375 stock options under the same terms to be used as employee incentives. |
A summary of stock option activity related to the Company’s stock option plans as revised as explained in Note 1 is as follows: |
F-21
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
2003 | 2002 | 2001 | |||||||||||
Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||
Outstanding on October 1 | 4,970 | $ .46 | 2,665 | $ .64 | 309 | $ 2.12 | |||||||
Granted | – | – | 2,575 | .28 | 2,380 | .50 | |||||||
Exercised | – | – | – | – | – | – | |||||||
Forfeited | (900 | ) | (.53 | ) | (270 | ) | (.54 | ) | (24 | ) | 6.21 | ||
Outstanding on September 30 | 4,070 | .45 | 4,970 | .46 | 2,665 | .64 | |||||||
Exercisable on September 30 | 4,070 | .45 | 3,039 | .57 | 643 | 1.07 | |||||||
The following table summarizes information about the options outstanding at September 30, 2003: |
Outstanding Stock Options | Exercisable Stock Options | ||||||||||
Range of Exercise Prices | Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||
$0.01 to $1.00 | 3,955 | 9.94 | $ .38 | 3,955 | $ .38 | ||||||
$2.01 to $3.00 | 115 | .49 | 2.83 | 115 | 2.83 | ||||||
$0.01 to $3.00 | 4,070 | .45 | 4,070 | .45 | |||||||
F-22
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
The Company continues to measure compensation cost related to stock options issued to employees using the intrinsic value method of accounting prescribed by APB 25. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no earned or unearned compensation cost was recognized in the accompanying consolidated financial statements for the stock options granted by the Company to its employees since all of those options have been granted at exercise prices that equaled or exceeded the market value at the date of grant. The Company's historical net loss and net loss per common share and pro forma net loss and net loss per common share assuming compensation cost had been determined in 2003, 2002 and 2001 based on the fair value at the grant date for all awards by the Company consistent with the provisions of SFAS 123 are set forth below: |
2003 | 2002 | 2001 | |||||
Net loss-as reported | $ (644 | ) | $ (412 | ) | $ (705 | ) | |
Deduct total stock-based employee compensation expense determined under a fair value based method for all awards, net of related tax effects | – | (191 | ) | (156 | ) | ||
Net loss - pro forma | $ (644 | ) | $ (603 | ) | $ (861 | ) | |
Net Loss Per Common Share: Basic - as reported | (0.13 | ) | (0.08 | ) | (0.15 | ) | |
Basic - pro forma | (0.13 | ) | (0.12 | ) | (0.18 | ) |
There were no options granted in the year ended September 30, 2003. The weighted average per share fair value of the options granted for the years ended September 30, 2002 and 2001 was $.27 and $.29, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for determining the fair value of options granted in 2002 and 2001: |
2002 | 2001 | ||||
Risk-free interest rates | 3.5% | 3.93% | |||
Expected option lives | 4 years | 3 – 5 years | |||
Expected volatilities | 169% | 233% | |||
Expected dividend yields | 0% | 0% |
F-23
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Employee Stock Purchase Plan On December 17, 1998, the Company adopted the 1999 Employee Stock Purchase Plan (the “1999 Plan”) whereby 200 shares of common stock were reserved for issuance to eligible employees. A participant may have up to 10% of their earnings withheld during a period of approximately six months commencing on the first trading day on or after April 1 and terminating on the last trading day ending the following September 30, or commencing on the first trading day on or after October 1 and terminating on the last trading day ending the following March 31. The purchase price shall be an amount equal to 85% of the fair market value of a share of common stock on the enrollment date or on the exercise date, whichever is lower. For 2001, participating employees exercised their rights to purchase 2 shares of common stock. There were no charges recorded in connection with such purchases. |
Note 11 — 401(k) Plan
The Company has a 401(k) Savings Plan (the “Plan”) for the benefit of all eligible employees. An employee would become a participant after the completion of a half-year of service and the attainment of 20 years of age. |
Participants may elect to contribute from their compensation any amount up to the maximum deferral allowed by the Internal Revenue Code. Employer contributions are a discretionary percentage match. The Company may make optional contributions for any Plan year at its discretion. |
During 2003, 2002 and 2001, there were no Company contributions to the Plan. |
Effective January 1, 2002, the InfoTech USA, Inc. employees ceased contributing to the Parent Company’s 401(k) plan and became participants of the Plan. |
Note 12 — Concentration Of Credit Risk
Cash The Company places most of its temporary cash investments with one financial institution. Balances normally exceed the Federal Deposit Insurance Corporation limit. At September 30, 2003, amounts in excess of the Federally insured limit totaled approximately $897. The Company has not experienced any loss to date as a result of its practices. |
Major Customers Computer sales encompass markets wherein the demands of any one customer may vary greatly due to changes in technology. For 2003, the top three customers comprised 51% of sales. These customers comprised 60% of accounts receivable at September 30, 2003. For 2002, the top three customers comprised 39% of sales. These customers comprised 46% of accounts receivable at September 30, 2002. In addition, another customer comprised 11% of accounts receivable at September 30, 2002. For 2001, the top three customers comprised 46% of sales and 55% of accounts receivable. |
F-24
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Note 13 – Commitments And Contingencies
Operating Leases and Consulting Contract The Company has operating leases on real property and equipment expiring through the year 2005. In addition to fixed rentals, the real property leases have escalation clauses that require the Company to pay a percentage of common area maintenance, real estate taxes and insurance. |
Rent expense and other charges totaled $256, $311 and $348 for 2003, 2002 and 2001, respectively. |
The Company has entered into a consulting contract with the former majority stockholder of the Company. The agreement is for a period of five years through December 2005. |
The approximate minimum payments required under operating leases, that have initial or remaining terms in excess of one year, and the consulting contract at September 30, 2003 are: |
Year Ending September 30, | Minimum Rental Payments | Consulting Contract | |||
2004 | $218 | $120 | |||
2005 | 162 | 120 | |||
2006 | 39 | 30 | |||
Totals | $419 | $270 | |||
Purchases The Company purchases a majority of its products from a small number of suppliers. Approximately 73%, 87% and 85% of purchases were from the top four vendors for 2003, 2002 and 2001, respectively. |
F-25
INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Legal Proceedings On October 22, 2002, Anat Ebenstein, our former Chief Executive Officer, filed a complaint against the Company, ADS and certain officers and directors in connection with the termination of her employment. The complaint filed in the Superior Court of New Jersey, Mercer County, seeks compensatory and punitive damages of $1,000 arising from an alleged improper termination. The action is currently in the initial stages of discovery. As a result, the Company cannot provide any assurance that it will be successful in defending against these allegations. Management believes that a portion of any ultimate damages may be covered under the Company's employment practices liability insurance. As of September 30, 2003, the Company has accrued the full amount of the insurance deductible of $250. An unfavorable outcome in this action not covered by its insurance policy, however, may have a material adverse effect on the Company’s liquidity, financial position or results of operations. Additionally, the Company is party to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, these proceedings are not likely to have a material adverse impact on the financial position, results of operations or cash flows of the Company. The estimate of the potential impact of the legal proceedings could change in the future. |
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INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Note 14 – Related Party Transactions
The Parent Company incurs certain expenses on behalf of the Company. In 2003, 2002 and 2001, these costs included various business insurance coverages, miscellaneous business expenses, and salary, payroll taxes and benefits of personnel assigned to the Company. The Company incurred $367, $166 and $100 of these costs for the Parent Company for 2003, 2002 and 2001, respectively. |
At September 30, 2003 and 2002, amounts due to the Parent Company were $105 and $127, respectively. These amounts arose out of inter-company expenses. |
The Company incurs certain expenses on behalf of the Parent Company, primarily related to services performed by Company officers related to the management of other companies owned by the Parent Company. The Company received $49 and $230 for 2002 and 2001, respectively, in reimbursements from the Parent Company, primarily for salaries of certain officers. There were no reimbursements in 2003 due to the restructuring of Parent Company’s operations. |
Interest expense paid or accrued to the Parent Company amounted to $208 and $165 for 2002 and 2001, respectively. There were no borrowings from the Parent Company in 2003. |
On June 27, 2003, the Company loaned $1,000 to ADS, its majority stockholder. Under the terms of the loan, interest, which accrues at an annual rate of 16%, is due and payable on a monthly basis beginning July 31, 2003. The principal amount of the loan and any unpaid interest is due on or before June 30, 2004. As collateral for the loan, ADS pledged 750,000 shares of the common stock of Digital Angel Corporation (“Digital Angel”), a majority-owned subsidiary of ADS. As of September 30, 2003, the market value of the shares of stock of Digital Angel was approximately $1,560 based on the closing price of Digital Angel's common stock. |
Note 15 – Supplemental Cash Flow Information
In 2001, the Company acquired software under capital leases in the amount of $63. The Company issued options for consulting services in the amount of $73. |
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INFOTECH USA, INC. AND SUBSIDIARIES |
Notes to Consolidated Financial Statements(Continued) |
Note 16 – Summarized Quarterly Data (Unaudited)
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | |||||||
2003 Total revenue | $ 2,880 | $ 2,534 | $ 3,970 | $ 4,224 | $ 13,608 | ||||||
Gross profit | 644 | 487 | 556 | 767 | 2,454 | ||||||
Net loss | (219 | ) | (289 | ) | (98 | ) | (38 | ) | (644 | ) | |
Basic net loss per share | (0.04 | ) | (0.06 | ) | (0.02 | ) | (0.01 | ) | (0.13 | ) | |
Diluted net loss per share | (0.04 | ) | (0.06 | ) | (0.02 | ) | (0.01 | ) | (0.13 | ) | |
2002 Total revenue | $ 5,341 | $ 10,505 | $ 4,795 | $ 4,541 | $ 25,182 | ||||||
Gross profit | 910 | 1,365 | 964 | 1,178 | 4,417 | ||||||
Net income (loss) | (281 | ) | 21 | (72 | ) | (80 | ) | (412 | ) | ||
Basic net income (loss) per share | (0.06 | ) | 0.00 | (0.01 | ) | (0.01 | ) | (0.08 | ) | ||
Diluted net income (loss) per share | (0.06 | ) | 0.00 | (0.01 | ) | (0.01 | ) | (0.08 | ) | ||
Earnings (loss) per share are calculated independently for each of the quarters presented. Therefore, the sum of the quarterly amounts of net earnings (loss) per share will not necessarily equal the total for the year. |
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INFOTECH USA, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions | |||||||||||||
Deducted from Assets | Balance at Beginning of Period | Charged to Costs and Expenses | Acquisition (a) | Deductions | Balance at End of Period | ||||||||
Allowance for Doubtful Accounts: Year ended September 30, 2001 | $133 | $ 192 | $247 | $158 | (b) | $414 | |||||||
Year ended September 30, 2002 | 414 | (125 | ) | – | 81 | (b) | 208 | ||||||
Year ended September 30, 2003 | 208 | (66 | ) | – | 29 | (b) | 113 | ||||||
Allowance for Sales Returns: | |||||||||||||
Year ended September 30, 2001 | 25 | – | – | 25 | – | ||||||||
Year ended September 30, 2002 | – | – | – | – | – | ||||||||
Year ended September 30, 2003 | – | – | – | – | – | ||||||||
Allowance for Inventory Obsolescence: | |||||||||||||
Year ended September 30, 2001 | 250 | – | 10 | 145 | 115 | ||||||||
Year ended September 30, 2002 | 115 | 62 | – | 99 | 78 | ||||||||
Year ended September 30, 2003 | 78 | – | – | 39 | 39 | ||||||||
Deferred Tax Valuation Allowance: | |||||||||||||
Year ended September 30, 2001 | 574 | – | – | – | 574 | ||||||||
Year ended September 30, 2002 | 574 | – | – | – | 574 | ||||||||
Year ended September 30, 2003 | 574 | – | – | – | 574 | ||||||||
(a) Reflects the effects of the acquisition of Information Products Center, Inc. (See Note 2 to the Consolidated Financial Statements.) | |||||||||||||
(b) Amounts written off, net of recoveries |
See Reports of Independent Public Accountants.
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