The following discloses the results of Intellesale and all other non-core businesses comprising discontinued operations for the period January 1 to March 1, 2001 and the three and six months ended June 30, 2000:
The above results do not include any allocated or common overhead expenses. Included in Interest, net, above are interest charges based on the debt of these businesses that we believe will be assumed by a purchaser when the business is sold.
Intellesale has refocused its business model away from the Internet segment and is now concentrating on its traditional business of asset management and brokerage services and the sale of refurbished and new desktop and notebook computers, monitors and related components as a wholesale, business to business supplier. The transition resulted in significantly reduced revenues from its Bostek business unit in the first half of 2001 compared to substantial sales from this unit in the first half of 2000. Gross profit was significantly impacted by lower margin business in the first half of 2001.
During the second quarter of 2001, discontinued operations incurred actual losses in excess of estimated operating losses accrued on the measurement date due primarily to inventory write-downs of $4.5 million. The majority of the inventory write-downs were associated with a reduction in the net realizable value of Intellesale's computer-related inventory as a result of deteriorating market conditions during the second quarter. In addition, we increased our provisions for estimated operating losses during the remainder of the phase-out period by $3.0 million. We also increased our estimated loss on the sale of Intellesale by $13.9 million and on the sale of Innovative Vacuum Solutions, Inc., which was sold effective May 10, 2001, by $0.2 million. The increase in the estimated loss on the sale of Intellesale is the result of a combination of the deteriorating market conditions for the technology sector as well as our strategic decision to reallocate funding to our core businesses.
In the second quarter of 2000, Intellesale recorded a pre-tax charge of $17.0 million. Included in this charge was an inventory reserve of $8.5 million for products Intellesale expected to sell below cost (included in cost of goods and services sold), $5.5 million related to specific accounts and other receivables, and $3.0 million related to fees and expenses incurred in connection with Intellesale’s cancelled public offering and certain other intangible assets. This charge reflects the segment’s decreasing revenue trend, lower quarterly gross profits and the expansion of Intellesale’s infrastructure into a major warehouse facility. In addition, a more competitive business environment resulting from an overall slowdown in Intellesale’s business segment, as well as management’s attention to certain operational and legal issues, contributed to the negative results.
The following are the components of the change in estimate of the loss on disposal of discontinued operations and operating losses during the phase out period for the three and six months ended June 30, 2001.
| | Operating Losses | | $ 7,681 | | |
| | Estimated loss on sale | | 14,108
|
| |
| | Total | | $ 21,789
|
| |
LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS
As of June 30, 2001, cash and cash equivalents totaled $6.4 million, a decrease of $1.6 million, or 20.0%, from $8.0 million at December 31, 2000. We utilize a cash management system to apply excess cash on hand against our revolving credit facility for which we had no availability at June 30, 2001, down from $17.0 million at December 31, 2000. The Second Amended and Restated Term and Revolving Credit Agreement with IBM Credit, as amended on March 30, 2001 and July 1, 2001, reduced the total availability on the revolver from $67.3 at December 31, 2000 to $53.4 million at March 30, 2001. As of June 30, 2001, IBM has temporarily advanced the Company $6.4 million in excess funding under the U.S. revolving credit line. The temporary advances are under the terms and conditions of our revolving credit agreement and are provided at the discretion of IBM. Cash used in operating activities totaled $4.2 million and $28.6 million in first six months of 2001 and 2000, respectively. In the first six months of 2001, cash was used primarily to reduce accounts payable and accrued expenses and to fund Discontinued Operations, after adjusting for the net loss and for non-cash charges. Partially offsetting the uses of cash were an increase in cash from the collection of accounts receivable, and an increase in other current assets. In the first six months of 2000, cash was used primarily to decrease accounts payable and accrued expenses and to increase accounts receivable, inventories and other current assets, after adjusting for the net loss, the income from discontinued operations and for non-cash charges. Partially offsetting the uses of cash was cash provided by Discontinued Operations.
Accounts and unbilled receivables, net of allowance for doubtful accounts, decreased by $5.4 million, or 12.3%, to $38.5 million at June 30, 2001 from $43.9 million at December 31, 2000. This decrease was primarily as a result of increased collection efforts during the first six months of 2001.
Inventory levels remained relatively constant at $12.5 million at June 30, 2001 compared to $12.3 million at December 31, 2000.
Other assets decreased $14.5 million to $10.6 million at June 30, 2001 compared to $25.1 million at December 31, 2000, primarily as a result of an increase in the valuation allowance of deferred tax assets. and the
Accounts payable increased by $2.5 million, or 14.8%, to $19.4 million at June 30, 2001 from $16.9 million at December 31, 2000. The increase was primarily attributable to a change in our cash management strategy..
Accrued expenses decreased by $6.1 million, or 37.2%, to $10.3 million at June 30, 2001 from $16.4 million at December 31, 2000. The decrease is attributable to the payment during 2001 of various accrued expenses accrued in the fourth quarter of 2000.
“Due to sellers of acquired subsidiary” represented the deferred purchase price due to the Bostek sellers. During June 2001, we satisfied certain contingencies, as discussed inPart II, Item 1. Legal Proceedings, and the debt was forgiven. The extinguishment of the $9.5 million payable was recorded as an extraordinary gain in the second quarter of 2001.
Earnout and put accruals represent the accrued earnout and deferred purchase price payments earned at June 30, 2001 and December 31, 2000, respectively. The reduction of $17.3 million at June 30, 2001, represents amounts payable at December 31, 2000 subsequently settled by the issuance of shares of our common stock.
Investing activities used cash of $4.9 million in the first six months of 2001, and provided cash of $24.4 million in the first six months of 2000. In the first six months of 2001, $2.6 million was spent to acquire property and equipment, $2.0 million was used to increase other assets and $0.5 million was used by Discontinued Operations. Partially offsetting the uses was $0.2 million in collection of notes receivable. In the first six months of 2000, $30.1 million was collected from the purchaser of TigerTel, offset by cash of $1.9 million used to acquire businesses, $3.4 million used to acquire property and equipment, $0.3 million used by Discontinued Operations and $0.2 million used to increase other assets.
29
Cash of $7.5 million was provided by financing activities in the first six months of 2001 while cash of $11.8 million was provided by financing activities in the first six months of 2000. In the first six months of 2001, sources of cash were primarily proceeds from long-term debt of $7.8 million. Sources of cash in the first six months of 2000 included net borrowings of $1.0 million and $4.9 million from notes payable and long-term debt, respectively, $5.3 million from the issuances of common stock and $0.5 million provided by Discontinued Operations.
One of our stated objectives is to maximize cash flow, as management believes positive cash flow is an indication of financial strength. However, due to our significant growth rate, our investment needs have increased. Consequently, we may continue in the future to use cash from operations and may continue to finance this use of cash through financing activities such as the sale of preferred or common stock and/or bank borrowing, if available.
Debt, Covenant Compliance and Liquidity
On May 25, 1999, the Company entered into a Term and Revolving Credit Agreement with IBM Credit Corporation (the “IBM Agreement”). The IBM Agreement was amended and restated on October 17, 2000, and further amended on March 30, 2001 and July 1, 2001, and currently provides for the following:
| (a) | a revolving credit line of up to $53.4 million, subject to availability under a borrowing base formula, designated as follows: (i) a USA revolving credit line of up to $49.5 million, and (ii) a Canadian revolving credit line of up to $3.9 million,
|
| (b) | a term loan A of up to $21.8 million, and
|
| (c) | a term loan C of up to $1.8 million. |
The revolving credit line may be used for general working capital requirements, capital expenditures and certain other permitted purposes and is repayable in full on May 25, 2002. The USA revolving credit line bears interest at the 30-day LIBOR rate plus 3.25%; the Canadian revolving credit line bears interest at the base rate as announced by the Toronto-Dominion Bank of Canada each month plus 1.67%. As of June 30, 2001, the LIBOR rate was approximately 4.16% and approximately $55.9 million outstanding on the U.S. revolving credit line, which is included in short-term debt and approximately $3.5 million was outstanding on the Canadian revolving credit line, which is included in the net assets of discontinued operations. As of June 30, 2001, IBM has temporarily advanced the Company $6.4 million in excess funding under the U.S. revolving credit line. The temporary advances are under the terms and conditions of our revolving credit agreement and are provided at the discretion of IBM.
Term loan A bears interest at the 30-day LIBOR rate plus 4.00%, is amortized in quarterly installments over six years and is repayable in full on May 25, 2002. As of June 30, 2001, approximately $21.8 million was outstanding on this loan, which is included in short-term debt.
Term loan C, which was used by our discontinued Canadian subsidiary to pay off their bank debt, bears interest at the base rate as announced by the Toronto-Dominion Bank of Canada each month plus 1.67%, is amortized in quarterly installments over six years and is repayable in full on May 25, 2002. As of June 30, 2001, the Toronto-Dominion’s rate was approximately 6.25% and approximately $1.8 million was outstanding on this loan, which is included in the net assets of discontinued operations.
The IBM Agreement is secured by a security interest in substantially all of our assets, including shares of our subsidiaries.
The IBM Agreement, as amended on March 30, 2001 and July 1, 2001, contains standard debt covenants relating to our financial position and performance, as well as restrictions on the declarations and payments of dividends and redemption of preferred stock. Those covenants and the covenant requirements are as follows:
30
| | | Covenant
| | Covenant Requirement
As of the following dates not less than:
| |
| | (i) | Tangible Net Worth | | 06/30/01
09/30/01
12/31/01
03/31/02 | | (47,000,000)
(35,000,000)
(34,500,000)
(20,000,000)
| |
| | (ii) | Current Assets to Current Liabilities | | 06/30/01
09/30/01
12/31/01
03/31/02 | | 0.6:1.0
0.8:1.0
0.8:1.0
1.0:1.0
| |
| | (iii) | Minimum Cumulative EBITDA | | 06/30/01
09/30/01
12/31/01
03/31/02 | | 5,000,000
7,500,000
11,000,000
10,000,000 | |
On March 8, 2001, we notified IBM Credit that as of and for the quarter ended December 31, 2000 we were not in compliance with the covenants for Tangible Net Worth and Minimum EBITDA and that we had a collateral shortfall. IBM Credit agreed to waive such non-compliance and, on March 30, 2001, we, IBM Credit and others entered into a waiver and amendment to the credit agreement. In connection therewith the Company agreed to pay IBM Credit a $375,000 waiver fee, and we granted IBM Credit warrants to acquire 2.9 million shares of our common stock valued at $1.2 million and 1.2 million shares of Digital Angel Corporation’s common stock.
As of June 30, 2001, our actual EBITDA was $3.4 million, or $1.6 million less than the Minimum EBITDA covenant, and we had a collateral shortfall of $22.0 million, or $15.5 million more than the allowable shortfall of $6.5 million. We have not received, and do not anticipate receiving, waivers concerning our non-compliance at June 30, 2001. The Tangible Net Worth and Minimum EBITDA covenants are based on cumulative financial results. As a result, if we are not successful in obtaining waivers or amending the IBM Agreement, we may not be able to maintain compliance with certain covenants in the future. We are currently seeking to restructure our credit agreement with IBM Credit. Although it is not obligated under the credit agreement to do so, IBM Credit has continued to provide funding to us in excess of the availability under the revolving credit facility. The IBM Agreement matures on May 25, 2002 and, accordingly, it is classified in our financial statements as short-term debt.
We believe that we will be successful in our efforts to restructure the IBM Agreement. There can be no assurance, however, that we will be successful in negotiating such amendments. In addition, there can be no assurance that IBM Credit will continue to provide funding in excess of our borrowing base necessary to fund ongoing operations or that our ongoing discussions with IBM Credit concerning the restructuring of the credit arrangements will be successful. In the absence of a waiver or amendment to the financial covenants, our non-compliance constitutes an event of default under the IBM Agreement, and IBM Credit is entitled to accelerate the maturity of all amounts owed them. We do not currently have available funds to repay the amounts owed to IBM Credit if the maturity of the obligation is accelerated. If IBM Credit were to accelerate these obligations and enforce its rights against the collateral securing these obligations, without additional financing resources, there would be substantial doubt we would be able to continue operations in the normal course of business.
The IBM Agreement is our primary source of funding. In addition to the financing provided by IBM Credit, we may be able to use proceeds from the sale of businesses, proceeds from the sale of common and preferred shares, proceeds from the exercise of stock options and warrants, and the raising of other forms of debt or equity through private placement or public offerings to fund ongoing operations. There can be no assurance however, that these options will be available, or if available, on favorable terms. Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing, and amount of investment required to bring new products on-line; revenue growth or decline; and potential acquisitions. Provided that we are successful in obtaining waivers and amending and restructuring our IBM Agreement, we believe that we will have the financial resources to meet our future business requirements for at least the next twelve months.
31
FORWARD LOOKING STATEMENTS
The risk factors included in our Annual Report on Form 10-KA for the fiscal year ended December 31, 2000, filed with the SEC on April 24, 2001 should be read in conjunction with this report.
Forward -Looking Statements and Associated Risk.
This Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business, and include statements relating to:
- our growth strategies including, without limitation, our ability to deploy the Advanced Wireless segments new Digital Angel divisions products and services;
- anticipated trends in our business and demographics;
- our ability to successfully integrate the business operations of recently acquired companies and successfully complete the divestitures of our discontinued operations;
- our future profitability and liquidity; and
- regulatory, competitive or other economic influences.
Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions also identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Some of these risks and uncertainties are beyond our control.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS 133,Accounting for Derivative Instruments and Hedging Activities, which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The statement is effective for fiscal years commencing after June 15, 2000. In June 2000, the FASB issued FAS 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities – an Amendment of FAS statement 133, which addresses implementation issues experienced by those companies that adopted FAS 133 early. We adopted these statements as of January 1, 2001 and, because we have a minimal use of derivative instruments, the adoption of these statements did not have any effect on our financial condition, results of operations or cash flows.
In July 2001, the Financial Accounting Standards Board (FASB) issued FAS No. 141Business Combinations and FAS No. 142Goodwill and Other Intangible Assets.FAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. FAS 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement, which apply to goodwill and certain intangibles acquired prior to June 30, 2001 will be adopted by us on January 1, 2002. We have not fully assessed the impact of these accounting standards. We expect the adoption of these standards will have the impact of reducing our amortization of goodwill commencing January 1, 2002; however, impairment reviews may result in future periodic write-downs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With our Canadian and United Kingdom subsidiaries, we have operations and salesinvarious regions of the world. Additionally, we may export and import to and from other countries. Our operations may therefore be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Sales and expenses may be denominated in local currencies and may be affected as currency fluctuations affect our product prices and operating costs or those of our competitors.
32
We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks, nor do we invest in speculative financial instruments. Borrowings under the existing credit agreement with IBM Credit bear interest at the London Interbank Offered Rate which is adjusted monthly. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term investments.
Due to the nature of our borrowings and our short-term investments, we have concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required.
33
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, and certain of our subsidiaries, are parties to various legal actions as either plaintiff or defendant. In our opinion , these proceedings will not have a material adverse affect on our financial position, our cash flows or our overall trends in results. The estimate of the potential impact on our financial position, our overall results of operations or our cash flows for these proceedings could change in the future.
On April 7, 2000, we and Intellesale filed a counterclaim against David Romano and Eric Limont, the former owners of Bostek, Inc. and Micro Components International Incorporated, two companies acquired by Intellesale in June 1999, in the U.S. District Court for the District of Delaware for, generally, breach of contract, breach of fiduciary duty and fraud. Messrs. Romano and Limont had filed their claim generally alleging that their earnout payment from Intellesale was inadequate. In July 2000, we and Intellesale amended our counterclaim in the U.S. District Court for the District of Delaware to seek damages for, among other things, securities law violations. In addition, on May 19, 2000, Intellesale and two of its subsidiaries, Bostek, Inc. and Micro Components International Incorporated, filed suits against Messrs. Romano and Limont in Superior Court of Massachusetts to recover damages. In July 2000, Messrs. Romano and Limont amended their complaint in the U.S. District Court for the District of Delaware to add a claim for $10 million for the $10 million payment not made to them. As of January 16, 2001, we, Intellesale, Bostek, Inc. and Micro Components International Incorporated settled all claims with Messrs. Romano and Limont. As part of the settlement agreement, Messrs. Romano and Limont agreed to invest up to $6 million in shares of our common stock and to indemnify us against various other litigation filed against Bostek, Inc. The settlement agreement provides for Messrs. Romano and Limont to purchase 3.0 million shares of our common stock. We have issued the common stock pending the closing of the transaction, which as of August 13, 2001, had not yet been consummated. As a condition of settlement, the 3.0 million shares were required to be included on a registration statement with an effective date on or before June 15, 2001. We were successful in meeting the June 15, 2001 deadline.
On June 28, 2000, we entered into an agreement and plan of merger with South Seas Data, Inc. Prior to completion of the transaction, we became aware of significant shortfalls in the earnings of South Seas and terminated the agreement. South Seas has filed a complaint alleging that we breached the agreement and demanding specific performance. We have asserted affirmative defenses and have filed a counterclaim against South Seas and a third-party complaint against an agent of South Seas. Trial has been set for November, 2001. We believe the claims made by South Seas are without merit and intend to vigorously defend them.
On June 8, 2001, three of our shareholders filed suit against us and four of our officers in the United States District Court for Delaware seeking equitable relief and damages. The plaintiffs had acquired their stock when the company in which they were then shareholders, Computer Equity Corporation, was merged into one of our subsidiaries in 2000. The suit alleged,inter alia, that, because of asserted violations of federal and state securities laws and breach of a contract by us, the merger transaction should be rescinded. The suit was not served until August 6, by which time, a First Amended Complaint had been filed. As amended, the suit now has eight plaintiff shareholders, all of whom had formerly owned stock in Computer Equity Corporation, and no longer seeks rescission. The various counts of the complaint, assert violations of federal and state securities laws for our alleged failure to register timely the shares issued in connection with the merger; breach of contract by us for allegedly failing to comply with a Registration Rights Agreement regarding the shares; and breach of a covenant of good faith and fair dealing arising from the same matters. In addition, in two counts the plaintiffs seek a declaratory judgment that any future payments due to them under the merger agreement, so called “earnout” payments, due on or before September 30, 2001 and 2002, must be made in cash instead of through issuance of stock, as is permitted in the agreement, because of our alleged failures with regard to registration of shares in the past. The damages sought are those which allegedly arose because of the claimed delay in the registration of the stock issued in connection with the merger in 2000 and are described in the First Amended Complaint as being “not less than $1 million.” No answer or other response to the First Complaint has yet been filed. The original three plaintiffs have also filed a request with the American Arbitration Association for mediation with respect to alleged breach of the Registration Rights Agreement, as required thereby, and a mediator is expected to convene a meeting of the parties in September, 2001. We believe the claims made by these shareholders are without merit and intend to vigorously defend them.
34
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by us between April 1, 2001 and June 30, 2001. These shares were issued in acquisition or financing transactions to the persons or entities indicated in connection with the acquisition of the indicated subsidiary or the stockholder’s minority interest or to investors in transactions directly negotiated by the stockholders in connection with the sale of their business or interests to us and pursuant to the “price protection” or “earnout” provisions of the agreement of sale, or by the investors. These shares were issued without registration in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, or Rule 506 of Regulation D promulgated thereunder.
Name/Entity/Nature
|
| Number of
Persons
|
| Note
|
| Issued For
|
| Number of
Common Shares
|
| Sudiar Limited | | 1 | | 1 | | Acquisition | | | 492,940 | |
| Caledonian Venture Holdings, Limited, Inc. | | 6 | | 2 | | Acquisition | | | 7,481,016 | |
| Perimeter Technology, Inc. | | 5 | | 3 | | Acquisition | | | 8,508,400 | |
| Computer Equity, Corp. | | 79 | | 3 | | Acquisition | | | 14,732,200 | |
| Computer Equity, Corp. | | 79 | | 2 | | Acquisition | | | 9,884,249 | |
| Timely Technology, Inc. | | 1 | | 3 | | Acquisition | | | 7,109,000 | |
| IBM Credit Corp. | | 1 | | 4 | | Warrants | | | 1,241,500 | |
| IBM Credit Corp. | | 1 | | 5 | | Warrants | | | 2,894,714 | |
| Kelly Burst | | 1 | | 6 | | Acquisition | | | 463,293 | |
| Datapath Corp. | | 2 | | 3 | | Acquisition | | | 1,319,592 | |
| Matt Hayden | | 1 | | 7 | | Services | | | 74,302 | |
| Doug Baker | | 1 | | 8 | | Services | | | 14,012 | |
| David Romano | | 1 | | 9 | | Agreement | | | 1,477,832 | |
| Eric Limont | | 1 | | 9 | | Agreement | | | 1,477,832 | |
| SysComm International Corp. | | 3 | | 2 | | Acquisition | | | 873,686 | |
| Various | | 3 | | 10 | | Employee Stock Options | | | 43,000 | |
| Total | | | | | | | |
|
58,087,568
|
|
1. | Represents shares issued to a creditor of Caledonian Venture Holdings Limited, Inc., in the acquisition of CVH and exempt from registration pursuant to Rule 4(2) of the Securities Act. The transaction document included an acknowledgment that the sale was not registered, that the shareholder was acquiring the shares for investment and not for resale, and that the shareholder acknowledged that he must hold the shares until and unless registered or transferred in another transaction exempt from registration. In addition, certificates representing the shares were legended to indicate that they were restricted |
2. | Represents shares issued in connection with the "price protection" provision of the agreement of sale relating to a prior private transaction directly negotiated by the stockholders in connection with the sale of their businesses to us, which transactions were exempt from registration pursuant to Section 4(2) of the Securities Act. The transaction document included an acknowledgment that the sale was not registered, that the shareholder was acquiring the shares for investment and not for resale, and that the shareholder acknowledged that he must hold the shares until and unless registered or transferred in another transaction exempt from registration. In addition, certificates representing the shares were legended to indicate that they were restricted |
3. | Represents shares issued in connection with the "earnout" provision of the agreement of sale relating to a prior private transaction directly negotiated by the stockholders in connection with the sale of their business to us, which transactions were exempt from registration pursuant to Section 4(2) of the Securities Act. The transaction document included an acknowledgment that the sale was not registered, that the shareholder was acquiring the shares for investment and not for resale, and that the shareholder acknowledged that he must hold the shares until and unless registered or transferred in another transaction exempt from registration. In addition, certificates representing the shares were legended to indicate that they were restricted |
4. | Represents shares issued in connection with the issuance of warrants which are exercisable into shares of common stock of Applied Digital Solutions, Inc. |
5. | Represents shares issued in connection with the issuance of warrants which are exercisable into shares of common stock of Digital Angel Corporation. |
6. | Represents shares issued in connection with the exercise of put options granted to the shareholders in connection with our acquisition of the Americom Group, Inc., a prior private transaction directly negotiated by the shareholders in connection with the sale of their interests to us, which transaction was exempt from registration pursuant to Section 4(2) of the Act. |
7. | Represents shares issued to Mr. Hayden as a transaction fee in connection with our acquisition of an approximately 17% interest in Medical Advisory Services, Inc. (AMEX:DOC), a prior private transaction directly negotiated by the shareholders in connection with the sale of their interests to us, which transaction was exempt from registration pursuant to Section 4(2) of the Act. |
8. | Represents shares issued to Mr. Baker as a transaction fee in connection with our acquisition of an approximately 100% interest in Perimeter Technology, Inc., a prior private transaction directly negotiated by the shareholders in connection with the sale of their interests to us, which transaction was exempt from registration pursuant to Section 4(2) of the Act. |
9. | Represents shares issued in connection with settlement of litigation against David Romano and Eric Limont, the former owners of Bostek. |
10. | Represents shares issued under the 1999 Flexible Stock Option Plan which have not been registered. |
35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders of Applied Digital was held on June 23, 2001 to:
(a) Elect three directors, each to hold office until the 2004 annual meeting of shareholders, or in each case until their respective successors have been elected or appointed. Other directors whose term of office continued after the meeting include Richard S. Freidland, Arthur F. Noterman, Daniel E, Penni, Angela M. Sullivan and Constance K. Weaver. The results of the vote to elect the three directors were as follows:
| | | | Votes Received | | |
| | Name
| | For
|
| Against
|
| Abstentions
| |
| | Richard J. Sullivan | | 97,650,920 | | — | | 4,880,751 | |
| | Garrett A. Sullivan | | 97,026,145 | | — | | 5,505,526 | |
| | Mercedes Walton | | 99,974,271 | | — | | 2,557,400 | |
(b) Ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of Applied Digital for the 2001 calendar year. The proposal received 100,350,486 votes for, 1,988,817 votes against, and 192,368 abstentions.
(c) Approval of certain amendments to Applied Digital's 1999 Flexible Stock Plan and ratification of the options granted thereunder. The proposal received 29,289,418 votes for, 12,437,149 votes against, and 12,321,569 abstentions.
(d) Ratify options granted under Applied Digital's 1996 Non Qualified Stock Option Plan. The proposal received 89,791,256 votes for, 12,219,554 votes against, and 520,861 abstentions.
(e) Ratify options granted under Applied Digital's 1999 Employees Stock Purchase Plan. The proposal received 90,252,938 votes for, 11,853,145 votes against, and 425,588 abstentions.
(f) Approval of the possible issuance of more than 29,217,483 shares of Applied Digital's common stock upon the conversion of shares of Applied Digital's Series C preferred stock, which share amount of 29,217,483 represents at least 20% of the outstanding common stock of Applied Digital. The proposal received 45,472,967 votes for, 8,263,018 votes against, and 312,151 abstentions.
(g) Approval of the amendment to Applied Digital's Second Restated Articles of Incorporation, as amended, to increase the number of authorized shares of common stock of Applied Digital by 100,000,000. The proposal received 86,962,896 votes for, 15,281,125 votes against, and 287,650 abstentions.
ITEM 5. OTHER INFORMATION
None
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Exhibits
|
| 4.1 | Second Restated Articles of Incorporation of the Registrant (incorporated herein by reference to Exhibit 4.1 to the Registrant's Post-Effective Amendment No. 1 on Form S-1 to Registration Statement (Form S-3 File No. 333-64605) filed with the Commission on June 23, 1999)
|
| 4.2 | Amendment of Articles of Incorporation of the Registrant filed with the Secretary of State of the State of Missouri on September 5, 2000 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Post-Effective Amendment No. 3 on Form S-3 to Registration Statement on Form S-4 (File No. 333-38420-02) filed with the Commission on September 29, 2000)
|
| 4.3 | Amendment of Second Restated Articles of Incorporation of the Registrant filed with the Secretary of State of the State of Missouri on July 18, 2001
|
| 4.4 | Certificate of Designation of Preferences of Series C Convertible Preferred Stock (incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 4.5 | Amended and Restated Bylaws of the Registrant dated March 31, 1998 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-3 (File No. 333-51067) filed with the Commission on April 27, 1998)
|
| 10.1 | Securities Purchase Agreement, dated as of October 24, 2000, relating to the Registrant's Series C Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 10.2 | Form of warrant to purchase common stock of the Registrant issued to the holders of the Series C Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 10.3 | Registration Rights Agreement between the Registrant and the holders of the Series C Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 10.4 | Acknowledgement, Waiver and Amendment No. 1 to the Second Amended and Restated Term and Revolving Credit Agreement dated March 30, 2001 between the Company and IBM Credit Corporation, and others (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed with the Commission on April 10, 2001)
|
| 10.5 | Letter dated July 1, 2001 from IBM Credit Corporation amending the Second Amended and Restated and Revolving Credit Agreement, as amended |
| (b) | Reports on Form 8-K
|
| | (i) | On April 23, 2001, we filed a Current Report on Form 8-K/A which amended our Current Report on Form 8-K/A filed on September 11, 2000. On April 24, 2001, we filed a Form 8-K/A further amending our Current Report on Form 8-K/A filed on April 23, 2001.
|
| | (ii) | On April 23, 2001, we filed a Current Report on Form 8-K/A which amended our Current Report on Form 8-K/A filed on September 21, 2000. On April 24, 2001, we filed a Form 8-K/A further amending our Current Report on Form 8-K/A filed on April 23, 2001.
|
| | (iii) | On April 23, 2001, we filed a Current Report on Form 8-K/A which amended our Current Report on Form 8-K/A filed on December 29, 2000. On April 24, 2001, we filed a Form 8-K/A further amending our Current Report on Form 8-K/A filed on April 23, 2001.
|
| | (iv) | On June 5, 2001, we filed a Current Report on Form 8-K which described potential claims by a shareholder against the Company.
|
| | (v) | On July 11, 2001, we filed a Current Report on Form 8-K which described potential covenant violations under the Company's IBM Credit Agreement and the notification from Nasdaq regarding continued listing requirements.
|
37
SIGNATURE
Pursuant to the requirements 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.
| | APPLIED DIGITAL SOLUTIONS, INC.
(Registrant)
|
| Dated: August 16, 2001 | By: | /s/ JEROME C. ARTIGLIERE
|
| | | Jerome C. Artigliere
Senior Vice President, Chief Financial Officer |
38
EXHIBITS
| 4.1 | Second Restated Articles of Incorporation of the Registrant (incorporated herein by reference to Exhibit 4.1 to the Registrant's Post-Effective Amendment No. 1 on Form S-1 to Registration Statement (Form S-3 File No. 333-64605) filed with the Commission on June 23, 1999)
|
| 4.2 | Amendment of Articles of Incorporation of the Registrant filed with the Secretary of State of the State of Missouri on September 5, 2000 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Post-Effective Amendment No. 3 on Form S-3 to Registration Statement on Form S-4 (File No. 333-38420-02) filed with the Commission on September 29, 2000)
|
| 4.3 | Amendment of Second Restated Articles of Incorporation of the Registrant filed with the Secretary of State of the State of Missouri on July 18, 2001
|
| 4.4 | Certificate of Designation of Preferences of Series C Convertible Preferred Stock (incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 4.5 | Amended and Restated Bylaws of the Registrant dated March 31, 1998 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-3 (File No. 333-51067) filed with the Commission on April 27, 1998)
|
| 10.1 | Securities Purchase Agreement, dated as of October 24, 2000, relating to the Registrant's Series C Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 10.2 | Form of warrant to purchase common stock of the Registrant issued to the holders of the Series C Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 10.3 | Registration Rights Agreement between the Registrant and the holders of the Series C Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on October 26, 2000)
|
| 10.4 | Acknowledgement, Waiver and Amendment No. 1 to the Second Amended and Restated Term and Revolving Credit Agreement dated March 30, 2001 between the Company and IBM Credit Corporation, and others (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed with the Commission on April 10, 2001)
|
| 10.5 | Letter dated July 1, 2001 from IBM Credit Corporation amending the Second Amended and Restated and Revolving Credit Agreement, as amended |
* Filed herewith
39
