As Filed with the Securities and Exchange Commission on April 23, 2001
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
Amendment No. 1 on
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Transition Period From _____ To ______
Commission File Number: 000-26020
APPLIED DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction of incorporation or organization)
43-1641533
(IRS Employer Identification Number)
400 Royal Palm Way
Suite 410
Palm Beach, Florida 33480
(561) 805-8000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on May 10, 2000:
Class Number of Shares
Common Stock; $.001 Par Value 50,405,739
EXPLANATORY NOTE
This Amendment No. 1 to Quarterly Report on Form 10-Q/A amends and
restates the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2000, filed by the Registrant on May 15, 2000.
APPLIED DIGITAL SOLUTIONS, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations -
Three Months ended March 31, 2000 and 1999 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Three Months ended March 31, 2000 (unaudited) 5
Consolidated Statements of Cash Flows -
Three Months ended March 31, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
3. Quantitative and Qualitative Disclosures About Market Risk 35
PART II - OTHER INFORMATION
1. Legal Proceedings 35
2. Changes In Securities 35
3. Defaults Upon Senior Securities 35
4. Submission of Matters to a Vote of Security Holders 35
5. Other Information 37
6. Exhibits and Reports on Form 8-K 37
SIGNATURE 38
EXHIBITS 39
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Assets
March 31,
2000 December 31,
(Unaudited) 1999
----------- ------------
Current Assets
Cash and cash equivalents $ 5,863 $ 5,138
Due from buyer of divested subsidiary -- 31,302
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $1,568 in 2000 and $1,698 in 1999) 47,647 52,170
Inventories 46,311 40,448
Notes receivable 3,988 3,822
Prepaid expenses and other current assets 8,976 6,001
--------- ----------
Total Current Assets 112,785 138,881
Property and Equipment, net 16,188 13,886
Notes Receivable 3,396 3,297
Goodwill, net 65,696 62,000
Other Assets 11,016 10,912
--------- ---------
$ 209,081 $ 228,976
========= =========
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable $ 10,952 $ 25,211
Current maturities of long-term debt 8,740 8,038
Due to shareholders of acquired subsidiary 10,000 15,000
Accounts payable 26,586 29,499
Accrued expenses 11,489 17,672
Other current liabilities 4,695 2,745
--------- ---------
Total Current Liabilities 72,462 98,165
Long-Term Debt 36,999 35,317
--------- ---------
Total Liabilities 109,461 133,482
--------- ---------
Commitments And Contingencies -- --
--------- ---------
Minority Interest 2,294 2,558
--------- ---------
Stockholders' Equity
Preferred shares:
Authorized 5,000 shares in 2000 and 1999 of $10 par value;
special voting, issued and outstanding 1 share in 2000
and 1999, Class B voting, issued and outstanding 1 share
in 2000 and 1999 -- --
Common shares:
Authorized 80,000 shares in 2000 and 1999, of $.001 par
value; 53,173 shares issued and 50,317 shares
outstanding in 2000 and 51,116 shares issued and
48,260 shares outstanding in 1999 50 48
Common and preferred additional paid-in capital 93,404 87,470
Retained earnings 11,492 12,664
Treasury stock (carried at cost, 2,856 shares) (7,310) (7,310)
Accumulated other comprehensive income (loss) (310) 64
--------- ---------
Total Stockholders' Equity 97,326 92,936
--------- ---------
$ 209,081 $ 228,976
========= =========
See the accompanying notes to consolidated financial statements.
3
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For The Three Months
Ended March 31,
---------------------------
2000 1999
---------------------------
Net operating revenue $ 85,153 $ 51,573
Cost of goods sold 63,910 33,176
-------- ---------
Gross profit 21,243 18,397
Selling, general and administrative expenses (20,355) (16,091)
Depreciation and amortization (2,090) (1,421)
Restructuring and unusual costs -- (2,550)
Interest income 197 134
Interest expense (1,118) (445)
-------- ---------
Loss before benefit for income
taxes and minority interest (2,123) (1,976)
Benefit for income taxes 598 575
-------- ---------
Loss before minority interest (1,525) (1,401)
Minority interest 353 (244)
-------- ---------
Net loss available to common stockholders $ (1,172) $ (1,645)
======== =========
Net loss per common share - basic $ (.02) $ (.04)
Net loss per common share - diluted $ (.02) $ (.04)
Weighted average number of common
shares outstanding - basic 49,012 41,236
Weighted average number of common
shares outstanding - diluted 49,012 41,236
See the accompanying notes to consolidated financial statements.
4
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Month Period Ended March 31, 2000
(In thousands)
(Unaudited)
Accumulated
Other
Preferred Stock Common Stock Additional Comprehensive Total
--------------- --------------- Paid-In Retained Treasury Income Stockholders'
Number Amount Number Amount Capital Earnings Stock (Loss) Equity
------ ------ ------ ------ ---------- -------- -------- -------------- -------------
Balance - December 31, 1999 -- $ -- 48,260 $ 48 $ 87,470 $12,664 $(7,310) $ 64 $ 92,936
Net loss -- -- -- -- -- (1,172) -- --
Comprehensive loss -
foreign currency translation -- -- -- -- -- -- -- (374)
Total comprehensive loss -- -- -- -- -- (1,172) -- (374) (1,546)
Issuance of common shares -- -- 1,316 2 3,944 -- -- -- 3,946
Issuance of common shares for
acquisition -- -- 423 -- 1,038 -- -- -- 1,038
Warrants redeemed for common shares -- -- 318 -- 952 -- -- -- 952
--- ---- ------ ---- -------- ------- ------- ------ --------
Balance - March 31, 2000 -- $ -- 50,317 $ 50 $ 93,404 $11,492 $(7,310) $ (310) $ 97,326
=== ==== ====== ==== ======== ======= ======= ====== ========
See the accompanying notes to consolidated financial statements.
5
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For The Three Months
Ended March 31,
------------------------------
2000 1999
------------------------------
Cash flows from operating activities
Net loss $ (1,172) $ (1,645)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,090 1,486
Minority interest (353) 244
Gain on sale of equipment (10) --
Non-cash loss on restructuring -- 205
Change in assets and liabilities:
(Increase) decrease in accounts receivable 4,523 (2,032)
Increase in inventories (5,863) (1,190)
Increase in prepaid expenses (2,975) (267)
Decrease in deferred tax asset 206 --
Increase (decrease) in accounts payable and
accrued expenses (9,471) 3,617
------- --------
Net cash provided by (used in) operating activities (13,025) 418
------- --------
Cash flows from investing activities
Decrease in due from buyer of divested subsidiary 31,302 --
(Increase) decrease in notes receivable (265) 130
Increase in other assets (585) (257)
Proceeds from sale of property and equipment 32 20
Payments for property and equipment (3,046) (757)
Payments for costs of asset and business
acquisitions (net of cash balances acquired) (6,636) (2,411)
------- --------
Net cash provided by (used in) investing activities 20,802 (3,275)
------- --------
Cash flows from financing activities
Net amounts paid on notes payable (14,259) (2,935)
Proceeds from long-term debt 4,566 2,331
Payments on long-term debt (2,367) (289)
Other financing costs -- (107)
Issuance of common shares 5,008 --
------- --------
Net cash used in financing activities (7,052) (1,000)
------- --------
Net increase (decrease) in cash and cash equivalents 725 (3,857)
Cash and cash equivalents - beginning of period 5,138 4,555
------- --------
Cash and cash equivalents - end of period $ 5,863 $ 698
========= ========
See the accompanying notes to consolidated financial statements.
6
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Applied
Digital Solutions, Inc. (the "Company") as of March 31, 2000 and December 31,
1999 and for the three months ended March 31, 2000 and 1999 have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of only normal recurring
adjustments) considered necessary to present fairly the consolidated financial
statements have been made.
The consolidated statement of operations for the three months ended
March 31, 2000 is not necessarily indicative of the results that may be expected
for the entire year. These statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 1999.
2. Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly owned and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. Inventory
Inventory at March 31, 2000 and December 31, 1999 consists of:
March 31, December 31,
2000 1999
---------- ------------
Raw materials $ 4,081 $ 4,648
Work in process 1,479 1,195
Finished goods 41,382 35,602
--------- ------------
46,942 41,445
Allowance for excess and
obsolescence (631) (997)
========== ============
$46,311 $40,448
========== ============
4. Financing Agreements
In August 1998, the Company entered into a $20 million line of credit
with State Street Bank and Trust Company secured by all of our domestic assets
at the prime lending rate or at the London Interbank Offered Rate, at our
discretion. In February 1999, the amount of the credit available under the
facility was increased to $23 million. On May 25, 1999, the Company entered into
a Term and Revolving Credit Agreement with IBM Credit Corporation (the "IBM
Agreement"). On May 26, 1999, the Company repaid the amount due to State Street
Bank and Trust Company. On July 30, 1999 and January 27, 2000, the IBM Agreement
was amended and restated. The IBM Agreement, as amended, provides for:
7
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
(a) a revolving credit line of up to $33.855 million, designated
as follows: (i) a USA revolving credit line of up to $30
million, and (ii) a Canadian revolving credit line of up to
$3.855 million,
(b) a term loan A of up $22 million,
(c) a term loan B of up to $36.405 million,
(d) a term loan C of up to $2.740 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 1.75% to 1.90% depending on the Company's leverage
ratio; the Canadian revolving credit line bears interest at the base rate as
announced by the Toronto-Dominion Bank of Canada each month plus 0.1707% to
.3207%, depending on the Company's leverage ratio. As of March 31, 2000, the
LIBOR rate was approximately 5.9% and approximately $10.3 million was
outstanding on the revolving credit line, which is included in notes payable.
Term loan A, which was used to pay off State Street Bank and Trust
Company, bears interest at the 30-day LIBOR rate plus 1.75% to 1.90%, is
amortized in quarterly installments over six years and is repayable in full on
May 25, 2002. As of March 31, 2000, approximately $19.2 million was outstanding
on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75% to 1.90%, is amortized in quarterly installments
over six years and is repayable in full on May 25, 2002. As of March 31, 2000,
approximately $23.3 million was outstanding on this loan.
Term loan C, which was used by our 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 0.1707%, to 0.3207%, is amortized in quarterly
installments over six years and is repayable in full on May 25, 2002. As of
March 31, 2000, Toronto-Dominion's rate was approximately 6.75% and
approximately $2.4 million was outstanding on this loan.
The agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the declarations
and payment of dividends. As of March 31, 2000, the Company was in compliance
with, or had received waivers for compliance with, all debt covenants.
8
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
5. Restructuring and Unusual Charges
In the first quarter of 1999, a pre-tax charge of $2,550 was recorded
to cover restructuring costs of $2,236 and unusual charges of $314.
Restructuring Charge
As part of the Company's reorganization of its core business into four
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telephony and Applications business groups, and the associated
write-off of assets. The restructuring charge of $2,236 included asset
impairments, primarily software and other intangible assets, of $1,522, lease
terminations of $541, and employee separations of $173. The total charge reduced
net income by $1,588.
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through March 31, 2000:
Balance, Balance Balance
January 1, December 31, March 31,
Type of Cost 1999 Additions Deductions 1999 Deductions 2000
- -------------------- ---------- --------- ---------- ------------ ---------- ---------
Asset impairment $ -- $1,522 $1,522 $ -- $ -- $ --
Lease terminations -- 541 342 199 199 --
Employee separations -- 173 123 50 -- 50
====== ====== ====== ======= ======== =======
Total $ -- $2,236 $1,987 $ 249 $ 199 $ 50
====== ====== ====== ======= ======== =======
Unusual Items
During the first quarter of 1999, as part of the Company's core
business reorganization, the Company realigned certain operations within its
telephony division and has recognized impairment charges and other related costs
of $314. The total charge reduced net income by $223.
9
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
6. Loss Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted loss per share:
--------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
Numerator:
Net loss available to common stockholders $ (1,172) $ (1,645)
========= ==========
Denominator:
Denominator for basic loss per share -
Weighted-average shares(1) 49,012 41,236
========= ==========
Denominator for diluted loss per share(2) 49,012 41,236
========= ==========
Basic loss per share $ (0.02) $ (0.04)
========= ==========
Diluted loss per share $ (0.02) $ (0.04)
========= ==========
(1) Includes, for the three month periods ended March 31, 2000 and 1999, 0.5
and 136 shares of common stock, respectively, reserved for issuance to the
holders of ACT-GFX, Inc.'s exchangeable shares and for the three month
period ended March 31, 1999, 1,257 shares of common stock reserved for
issuance to the holders of TigerTel Services Limited's (formerly Commstar
Ltd.) exchangeable shares.
(2) The weighted average shares listed below were not included in the
computation of diluted loss per share because to do so would have been
anti-dilutive for the periods presented:
--------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
Employee stock options 5,004 380
Warrants 534 293
Contingent stock - acquisitions 117 --
------ ------
5,655 673
====== ======
10
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
7. Segment Information
The Company is organized into six operating segments. The
"eliminations" category includes all amounts recognized upon consolidation of
the Company's subsidiaries such as the elimination of intersegment revenues,
expenses, assets and liabilities and goodwill amortization expense. The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K filed for the year ended December 31, 1999, except that intersegment
sales and transfers are generally accounted for as if the sales or transfers
were to third parties at current market prices and segment data includes an
allocated charge for the corporate headquarters costs. It is on this basis that
management utilizes the financial information to assist in making internal
operating decisions. The Company evaluates performance based on stand-alone
segment operating income. Certain prior period information has been reclassified
for comparative purposes.
Following is the selected segment data as of and for the three months
ended March 31, 2000:
---------------------------------------------------------------------------------------------------------
Telephony Network Internet Applications Intellesale Non-Core Corporate Eliminations Consolidated
.com Overhead
---------------------------------------------------------------------------------------------------------
External revenue
$ 4,498 $7,245 $2,026 $ 8,933 $48,337 $14,016 $ 98 $ -- $ 85,153
Intersegment
revenue -- -- -- -- 2,500 -- -- (2,500) --
------- ------ ------ ------- ------- ------- -------- ------- --------
Total revenue 4,498 7,245 2,026 8,933 50,837 14,016 98 (2,500) 85,153
======= ====== ====== ======= ======= ======= ======== ======== ========
Income (loss) before
benefit for income taxes
and minority interest (462) 252 6 (28) 511 1,001 (2,603) (800) (2,123)
======= ====== ====== ======= ======= ======= ======== ======== ========
Total assets 10,482 6,786 2,944 21,661 65,639 27,545 196,109 (122,085) 209,081
======= ====== ====== ======= ======= ======= ======== ======== ========
Following is the selected segment data as of and for the three months
ended March 31, 1999:
---------------------------------------------------------------------------------------------------------
Telephony Network Internet Applications Intellesale Non-Core Corporate Eliminations Consolidated
.com Overhead
---------------------------------------------------------------------------------------------------------
External revenue
$ 9,012 $4,006 $ $997 $ 6,755 $15,574 $15,210 $ 19 $ -- $ 51,573
Intersegment
revenue -- -- -- -- 1,533 -- -- (1,533) --
------- ------ ------ ------- ------- ------- -------- -------- --------
Total revenue $ 9,012 4,006 997 6,755 17,107 15,210 19 (1,533) 51,573
======= ====== ====== ======= ======= ======= ======== ======== ========
Income (loss) before
benefit for income taxes
and minority interest 510 203 (49) (380) 2,289 197 (4,359) (387) (1,976)
======= ====== ====== ======= ======= ======= ======== ======== ========
Total assets 23,400 3,516 1,205 21,501 16,938 29,407 156,361 (120,264) 132,064
======= ====== ====== ======= ======= ======= ======== ======== ========
11
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
8. Mergers and Acquisitions
The following represents acquisitions which occurred in the first
quarter of 2000 and in 1999:
Value of
Cash Share Common
Date of Percent Acquisition Consid- Issued or Shares Goodwill
Acquisition Acquired Price eration Issuable Issued Acquired Business Description
- --------------------------- ----------- -------- ----------- ------- --------- ------ -------- -----------------------
First Quarter 2000
Acquisitions:
- ------------
None
1999 Acquisitions:
- -----------------
Port Consulting, Inc. 04/01/99 100% 1,292 1,292 621 303 800 Integrator of
information technology
application systems
Hornbuckle Engineering, 04/01/99 100% 5,103 180 4,446 631 4,912 Integrated voice and
Inc. data solutions provider
Lynch Marks & Associates, 04/01/99 100% 2,571 0 2,526 773 Network integration
Inc. company
STR, Inc. 04/01/99 100% 6,822 50 6,772 1,332 7,507 Software solutions
provider for retailers
Contour Telecom Management, 05/01/99 75% 5,627 5,627 --- --- 4,752 Provider of outsourced
Inc. (Divested effective telecommunications
12/31/99) management services
Bostek, Inc. & Affiliates 06/01/99 100% 27,466 26,966 --- --- 24,876 Seller of computer
systems and peripherals
In each of the above transactions, the value of the consideration paid by the
Company was in accordance with the acquisition agreement. Based on the
contractually agreed to amounts, the Company calculated the number of shares to
be issued to the sellers as of the closing date. The price of the Company's
common stock used to determine the number of shares issued was either the
closing price set on a fixed date or based on a formula as specified in the
agreements.
Earnout and Put Agreements
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements reflect the
results of operations of each company from the date of acquisition. The costs of
acquisitions include all payments according to the acquisition agreements plus
costs for investment banking services, legal services and accounting services,
that were direct costs of acquiring these assets. Goodwill resulting from these
acquisitions is being amortized on a straight-line basis, over twenty years.
Certain acquisition agreements include additional consideration contingent on
12
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
profits of the acquired subsidiary. Upon earning this additional consideration,
the value will be recorded as additional goodwill. The acquisitions above
include contingent shares earned upon attainment of certain profits by
subsidiaries through March 31, 2000. Under these agreements, assuming all
earnout profits are achieved, the Company is contingently liable for additional
consideration of approximately $7.6 million in 2001, $1.8 million in 2002 and
$2.0 million in 2004, of which $1.0 million would be payable in cash and $10.4
million would be payable in stock.
The Company has entered into put options with the sellers of those
companies in which it acquired less than a 100% interest. These options require
the Company to purchase the remaining portion it does not own after periods
ranging from four to five years from the date of acquisition at amounts per
share generally equal to 10% to 20% of the average annual earnings per share of
the subsidiary company before income taxes for the two year period ending the
effective date of the put multiplied by a multiple ranging from four to five. In
the second quarter of 1999, the Company entered into agreements to pay $3.9
million to acquire put options in certain companies owned by the Company's
subsidiary, Intellesale.com. In addition, based on current earnings, assuming
all other put options are exercised, the Company is contingently liable for an
additional $6.3 million in the next two years. The contingent amounts for
earnouts and put options have not been recorded as liabilities in the financial
statements as it is uncertain whether the contingencies will be met.
There were 377 and 9,441 shares of common stock issued during the first
three months of 2000 and 1999, respectively, related to agreements with the
company's subsidiaries primarily for earnouts and to purchase minority
interests.
Major Acquisition
Effective June 1, 1999, the Company acquired all of the outstanding
common stock of Bostek, Inc. and affiliate (Bostek) in a transaction accounted
for under the purchase method of accounting. The aggregate purchase price was
approximately $27 million, of which $10.2 million was paid in cash at closing,
$5 million was paid in cash in January 2000 and $1.8 million for the 1999
earnout was paid in cash in February 2000. The earnout accrual was included in
the other current liabilities at December 31, 1999. Upon a successful initial
public offering of IntelleSale.com, $10 million will be payable in stock of
Intellesale.com to the former owners of Bostek. In the event that the initial
public offering does not occur, the $10 million will be payable in cash on June
30, 2000. An additional $3.2 million is contingent upon achievement of certain
earnings targets. The operating results of the Company include Bostek from its
acquisition date. The total purchase price of Bostek, including the liabilities,
was allocated to the identifiable assets with the remainder of $24.4 million
recorded as goodwill which is being amortized over 20 years.
Dispositions
Effective October 1, 1999, the Company entered into a Stock Purchase
Agreement for the sale of all outstanding shares of common stock of four
non-core subsidiaries. In consideration, the Company received a note for $2.5
million, and 2.8 million shares of the Company's common stock, recorded as
treasury stock in the amount of $7 million. No gain was recorded on this
transaction, because the shareholders of the purchaser of the divested assets
were deemed to be significant shareholders of the Company. The operating results
13
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
of these companies are properly included in the Company's financial statements
through the date of disposition.
Effective December 30, 1999, the Company sold its approximately 4.9
million shares in TigerTel, Inc., its Toronto-based telecommunications
subsidiary. The total proceeds were $31.3 million in cash, resulting in a
pre-tax gain of $20.1 million. Payment of the proceeds was received on January
10, 2000. The operating results of TigerTel are properly included in the
Company's financial statements through the date of disposition.
9. Recent Developments
On September 14, 1999, our subsidiary, IntelleSale.com, Inc., filed a
registration statement with the Securities and Exchange Commission in connection
with its proposed initial public offering (IPO). In addition to IntelleSale.com
selling primary shares, the Company expected to sell shares of IntelleSale.com's
common stock as a selling shareholder. On January 31, 2000, the Company
announced a postponement of the proposed IPO of IntelleSale.com's common stock
due to market conditions. Deferred IPO fees have been capitalized in
anticipation of completing the IPO within the next fiscal year.
On March 3, 2000, the Company announced, and on April 24, 2000, the
Company signed a definitive merger agreement to acquire Destron Fearing
Corporation, a Nasdaq listed company trading under the stock symbol "DFCO".
Destron Fearing is a leading developer, manufacturer and marketer of a broad
line of electronic and visual identification devices for companion animals,
livestock, laboratory animals and wildlife. In this proposed transaction, the
Company will issue shares of its common stock in exchange for shares of common
stock of Destron Fearing. The approximately $130 million transaction, which
could be less depending upon the final exchange ratio, is expected to close by
mid-June, 2000, subject to a number of conditions including the completion of
due diligence, approval of both the Company's and Destron Fearing's
shareholders, and approval of relevant government agencies. Under the agreement,
Destron Fearing would be merged into Digital Angel.net Inc., the Company's
wholly owned subsidiary.
On March 22, 2000, the Company filed a shelf registration statement to
sell, from time to time, up to 3 million shares of its common stock. Proceeds
from the sale will be used for general corporate purposes, including the funding
of future acquisitions. On April 5, 2000 the Company announced that it was
postponing the offering because of adverse market conditions.
10. Subsequent Events
On May 5, 2000, the Company signed a letter of intent to acquired 100%
of ATEC Group Inc. (ATEC), a Nasdaq listed company, in an all-stock transaction
valued at approximately $55.9 million. The letter of intent supersedes the prior
proposal announced on April 12, 2000 for the merger of the Company's subsidiary
IntelleSale.com and ATEC. The transaction, which is subject to a number of
conditions including the execution of a definitive acquisition agreement,
approval of both the Company's and ATEC's boards of directors, approval by
ATEC's shareholders and approval of relevant government agencies, is expected to
close in July 2000.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes in Item 1 of this report as
well as our Annual Report on Form 10-K for the year ended December 31, 1999.
Certain statements made in this report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see the Risk Factors sections later in this Item.
OUTLOOK
Applied Digital Solutions, Inc. is a leading edge, single-source
provider of e-business solutions. We differentiate ourselves in the marketplace
by enabling e-business through Computer Telephony Internet Integration
(CTII(TM)). Beginning in the fourth quarter of 1998 and continuing into 2000, we
reorganized to refocus our strategic direction, organizing into four core
business groups: Telephony, Network, Internet and Applications. With CTII we
provide the full range of services and skills companies need to conduct business
online.
Our objective is to continue to grow each of our core operating
segments internally and through acquisitions, both domestically and abroad. Our
strategy has been, and continues to be, to invest in and acquire businesses that
complement and add to our existing business base. We have expanded significantly
through acquisitions in the past and continue to do so. Our financial results
and cash flows are substantially dependent on not only our ability to sustain
and grow existing businesses, but to continue to grow through acquisition. We
expect to continue to pursue our acquisition strategy in 2000 and future years,
but there can be no assurance that management will be able to continue to find,
acquire, finance and integrate high quality companies at attractive prices.
As part of the reorganization of our core business into four reportable
business groups, we implemented a restructuring plan in the first quarter of
1999. The restructuring plan included the exiting of selected lines of business
within our Telephony and Applications business groups, and the associated
write-off of assets. In the first quarter of 1999, we incurred a restructuring
charge of $2,236 that included asset impairments, primarily software and other
intangible assets, of $1,522 lease terminations of $541, and employee
separations of $173. In addition, during the first quarter of 1999, as part of
our core business reorganization, we realigned certain operations within our
Telephony division and recognized impairment charges and other related costs of
$314.
RECENT DEVELOPMENTS
During the second quarter of 1999, we made several acquisitions. In
April 1999, we acquired:
(a) 100% of Port Consulting, Inc., an integrator of information
technology application systems and custom application development services based
in Jacksonville, Florida;
(b) 100% of Hornbuckle Engineering, Inc., an integrated voice and data
solutions provider based in Monterey, California;
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California; and
15
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio.
In May 1999, we entered into an agreement to merge our wholly owned
Canadian subsidiary, TigerTel Services Limited, with Contour Telecom Management,
Inc., a Canadian company. We received, in a reverse merger transaction, 19,769
shares of Contour's common stock, representing approximately 75% of the total
outstanding shares. In November 1999, TigerTel received an all cash bid for all
of its outstanding common shares from AT&T Canada, Inc. We entered into a
lock-up agreement with AT&T to tender the approximately 65% of the outstanding
shares we owned and, on December 30, 1999, AT&T purchased all of the shares
tendered. We recorded a pre-tax gain in the fourth quarter of 1999 of
approximately $20.1 million, and received gross proceeds of approximately $31.3
million in January 2000, which we applied against the outstanding balance on our
domestic revolving credit line.
In June 1999, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and affiliate (Bostek). Bostek is engaged in the
business of acquiring open-box and off-specification computer equipment and
selling such equipment, using the Internet and other selling channels.
On September 14, 1999, our subsidiary, IntelleSale.com, Inc., filed a
registration statement with the Securities and Exchange Commission in connection
with its proposed initial public offering. In addition to IntelleSale.com
selling primary shares, we expected to sell shares of IntelleSale's common stock
as a selling shareholder. On January 31, 2000, we announced that we were
postponing the proposed initial public offering (IPO) of IntelleSale's common
stock due to market conditions. Deferred IPO fees have been capitalized in
anticipation of completing the IPO within the next fiscal year.
In October 1999, we disposed of the main business units comprising our
Communications Infrastructure division and dissolved this group. We had
concluded that the business units within this segment were no longer core to our
operations and we anticipate that we will dispose of the remaining three
business units that were within this segment during 2000. As consideration for
the sale, we received approximately 2.8 million shares of our common stock and a
note for $2.5 million. The treasury shares were recorded at the book value of
the divested assets, which resulted in no gain being recognized. The transaction
was reflected at book value because the shareholders of the purchaser of the
divested assets were collectively deemed to be significant shareholders of the
Company. The treasury stock was recorded at $2.54 per share.
In December 1999, our subsidiary, Digital Angel.net Inc., acquired the
patent rights to a miniature digital transceiver, which we named "Digital
Angel(TM)". While still in the development stage, we believe that this
technology may be available for a variety of purposes, such as providing a
tamper-proof means of identification for enhanced e-business security, locating
lost or missing individuals, tracking the location of valuable property and
monitoring the medical conditions of at-risk patients.
On March 3, 2000, we announced, and on April 24, 2000, we signed a
definitive merger agreement to acquire Destron Fearing Corporation, a Nasdaq
listed company trading under the stock symbol "DFCO". Destron Fearing is a
leading developer, manufacturer and marketer of a broad line of electronic and
visual identification devices for companion animals, livestock, laboratory
animals and wildlife. In this proposed transaction, we will issue shares of our
Common Stock in exchange for shares of common stock of Destron Fearing. The
approximately $130 million transaction, which could be less depending upon the
final exchange ratio, is expected to close by mid-June, 2000, subject to a
number of conditions, including the execution of a definitive acquisition
agreement, completion of due diligence, approval of both our and Destron
Fearing's board of directors and shareholders, and approval of relevant
government agencies. Under the agreement, Destron Fearing would be merged into
Digital Angel.net Inc.
16
On March 22, 2000, we filed a shelf registration statement to sell,
from time to time, up to 3 million shares of our common stock. Proceeds from the
sale will be used for general corporate purposes, including the funding of
future acquisitions. On April 5, 2000 we announced that we were postponing this
offering because of adverse market conditions.
On May 5, 2000, we signed a letter of intent to acquired 100% of ATEC
Group Inc. (ATEC), a Nasdaq listed company, in an all-stock transaction valued
at approximately $55.9 million. The letter of intent supersedes the prior
proposal announced on April 12, 2000 for the merger of our subsidiary
IntelleSale.com and ATEC. The transaction, which is subject to a number of
conditions including the execution of a definitive acquisition agreement,
approval of both our and ATEC's boards of directors, approval by ATEC's
shareholders and approval of relevant government agencies, is expected to close
in July 2000.
OUR BUSINESS
Beginning in the fourth quarter of 1998 and continuing into 2000, we
reorganized into six operating segments to more effectively and efficiently
provide integrated communications products and services to a broad base of
customers. During the second quarter of 1999, several adjustments were made to
the composition of the Telephony, Internet and Non-core divisions to better
align the strengths of the respective divisions with the objectives of those
divisions. In October 1999, we disposed of the main business units comprising
our Communication Infrastructure division and dissolved this group. Prior period
information has been restated to present our reportable segments.
Core Business
Our primary businesses, other than IntelleSale.com, the Non-Core Business Group,
and Digital Angel, are now organized into four business divisions:
o Telephony -- implements telecommunications and Computer Technology
Integration (CTI) solutions for e-business. We integrate a wide
range of voice and data solutions from communications systems to
voice over Internet Protocol and Virtual Private Networking (VPN).
We provide complete design, project management, cable/fiber
infrastructure, installation and ongoing support for the customers
we support. On December 30, 1999, as discussed above, we sold our
interest in our Canadian subsidiary, TigerTel, Inc. to concentrate
our efforts on our domestic CTI solutions.
o Network -- is a professional services organization dedicated to
delivering quality e-business services and support to our client
partners, providing e-business infrastructure design and
deployment, personal computer network infrastructure for the
development of local and wide area networks as well as site
analysis, configuration proposals, training and customer support
services.
o Internet -- equips our customers with the necessary tools and
support services to enable them to make a successful transition to
implementing e-business practices, Enterprise Resource Planning
(ERP) and Customer Relationship Management (CRM) solutions,
website design, and application and internet access services to
customers of our other divisions.
o Applications -- provides software applications for large retail
application environments, including point of sale, data
acquisition, asset management and decision support systems and
develops programs for portable data collection equipment,
17
including wireless hand-held devices. It is also involved in the
design, manufacture and support of satellite communication
technology including satellite modems, data broadcast receivers
and wireless global positioning systems for commercial and
military applications.
IntelleSale.com
IntelleSale.com, Inc. sells refurbished and new computer equipment and
related components online, through its website at www.IntelleSale.com, and
through other Internet companies, as well as through traditional channels, which
includes sales made by IntelleSale.com's sales force.
The Non-Core Business Group
This group is comprised of seven individually managed companies whose
businesses are as follows:
o Gavin-Graham Electronic Products is a custom manufacturer of
electrical products, specializing in digital and analog
panelboards, switchboards, motor controls and general control
panels. The company also provides custom manufacturing processes
such as shearing, punching, forming, welding, grinding, painting
and assembly of various component structures.
o Ground Effects, Ltd., based in Windsor, Canada, is a certified
manufacturer and tier one supplier of standard and specialized
vehicle accessory products to the automotive industry. The company
exports over 80% of the products it produces to the United States,
Mexico, South America, the Far East and the Middle East.
o Hopper Manufacturing Co., Inc. remanufactures and distributes
automotive parts. This primarily includes alternators, starters,
water pumps, distributors and smog pumps.
o Innovative Vacuum Solutions, Inc. designs, installs and
re-manufactures vacuum systems used in industry.
o Americom, STC Netcom and ACT Leasing are all involved in the
fabrication, installation and maintenance of microwave, cellular
and digital personal communication services towers.
We have previously announced our intention to divest, in the ordinary
course of business, these non-core businesses at such time and on such terms as
our Board of Directors determines advisable. There can be no assurance that we
will divest of any or all of these businesses or as to the terms of any
divestiture transaction.
18
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of net operating revenue for the three month periods ended March 31,
2000 and 1999 and is derived from the unaudited consolidated statements of
operations in Part I, Item, 1 of this report.
Relationship to Net Operating
Revenue
-----------------------------
Three Months Ended
March 31,
-----------------------------
2000 1999
---------- ------------
% %
Net operating revenue 100.0 100.0
Cost of goods sold 75.1 64.3
----- -----
Gross profit 24.9 35.7
Selling, general and administrative expenses 23.9 31.2
Depreciation and amortization 2.5 2.8
Restructuring and unusual charges -- 4.9
Interest income 0.2 0.3
Interest expense (1.3) (0.9)
----- -----
Loss before benefit for income taxes and
minority interest (2.5) (3.8)
Benefit for income taxes 0.7 1.1
------ -----
Loss before minority interest (1.8) (2.7)
Minority interest 0.4 (0.5)
------ -----
Loss available to common stockholders (1.4) (3.2)
====== =====
19
Company Overview
Revenue
Revenue for the three months ended March 31, 2000 was $85.2 million, an
increase of $33.6 million, or 65.1%, from $51.6 million for the three months
ended March 31, 1999. These significant increases are attributable to the growth
of existing businesses as well as to growth through acquisitions.
Revenue for each of the operating segments was:
(In thousands)
---------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
Telephony(1) $ 4,498 $ 9,012
Network 7,245 4,006
Internet 2,026 997
Applications 8,933 6,755
Intellesale.com 50,837 17,107
Non-Core(2) 14,016 15,210
Corporate (2,402) (1,514)
------- -------
Consolidated $85,153 $51,573
======= =======
- ---------
(1) Includes TigerTel's revenue of $5.0 million in the first quarter of
1999.
(2) Includes revenue from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Revenue for
these disposed entities included above amounted to $6.6 million in the
first quarter of 1999.
Changes during the quarter were:
o Telephony revenue decreased 50.1% for the quarter primarily as a result of
the sale of TigerTel in December 1999. Revenue from the remaining entities
increased by $.5 million in the first quarter of 2000 compared to the first
quarter of 1999.
o Network revenue increased 80.9% for the quarter as a result of the
acquisitions, in the second quarter of 1999, of Hornbuckle Engineering,
Inc. and Lynch Marks & Associates. These entities contributed $2.5 million
to revenue in the first quarter of 2000.
o Internet revenue increased by 103.2% in the quarter primarily as a result
of our acquisition of Port Consulting in the second quarter of 1999.
o Applications revenue increased by 32.2% in the quarter. This division
includes the revenue of STR Inc., an acquisition completed during the
second quarter of 1999. Revenue contributed by STR during the first quarter
amounted to $3.2 million or 145.3% of the increased revenue of this group.
The decrease in revenue from existing businesses is the result of our
planned exit from certain lines of business within this division.
20
o Intellesale.com's revenue increased 197.2% for the quarter. Bostek, which
was acquired in June 1999, contributed $28.4 million in the first quarter
or 84.3% of the increase for the quarter, while existing businesses
contributed the difference.
o Non-core revenue, which includes revenue from the former Communications
Infrastructure group, decreased $1.2 million or 7.9% in the first quarter.
Four entities in this segment were sold during 1999 and their revenue is no
longer included, and certain lines of business within this segment continue
to suffer from competition and lost market share, partially offset by the
increase in Ground Effect's revenue due to increased business.
Gross Profit and Gross Margin Percentage
Gross profit for the three months ended March 31, 2000 was $21.2
million, an increase of $2.8 million, or 15.2%, from $18.4 million for the three
months ended March 31, 1999. As a percentage of revenue, the gross margin was
24.9% and 35.7% for the three months ended March 31, 2000 and 1999,
respectively.
Gross profit for each of the operating segments was:
(In thousands)
---------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
Telephony(1) $ 1,967 $ 5,135
Network 2,295 820
Internet 1,859 275
Applications 4,540 3,620
Intellesale.com 7,037 5,123
Non-Core(2) 3,447 3,404
Corporate 98 20
------- -------
Consolidated $21,243 $18,397
======= =======
- ---------
(1) Includes TigerTel's gross profit of $3.6 million in the first quarter
of 1999.
(2) Includes gross profit from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Gross profit
for these disposed entities included above amounted to $1.2 million in
the first quarter of 1999.
21
Gross margin percentage for each of the operating segments was:
---------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
% %
--- ---
Telephony(1) 43.7 57.0
Network 31.7 20.5
Internet 91.8 27.6
Applications 50.8 53.6
Intellesale.com 13.8 29.9
Non-Core(2) 24.6 22.4
----- -----
Consolidated 24.9 35.7
===== =====
- ---------
(1) Includes TigerTel's gross profit margin of 72.0% in the first quarter
of 1999.
(2) Includes gross profit margin from the Communications Infrastructure
group of companies, the majority of which were disposed of in 1999.
Gross profit margin for these disposed entities included above amounted
to 18.2% in the first quarter of 1999.
Changes during the quarters were:
o Telephony's gross profit decreased by 61.7% for the quarter, and margin
declined to 43.7% from 57.0% for the quarter. The decrease in gross profit
and margin is as a result of the sale of TigerTel in December 1999.
o Network's improvement is attributable to the acquisitions during the second
quarter of 1999 and a small improvement in existing business margin
resulting from the shift from product sales to services.
o Internet's increase is due to the inclusion of Port Consulting, acquired in
the second quarter of 1999. Gross profit and margin are higher in this
division as it is service oriented and most of its operating costs are
recorded in selling, general and administrative expense.
o Applications gross profit increased $0.9 million or 25.4% primarily due to
the acquisition of STR but declined as a percentage of revenue as we
continue to implement our planned exit from a once highly profitable but
declining modem and communications market in the United Kingdom.
o Intellesale.com's dollar gross profit increased $1.9 million or 37.4% as a
result of internal growth and increased revenue from Bostek, but our
margin declined as we continued our expansion and focused our business on
Internet and business to business e-commerce.
o Non-core's gross profit and margin increased slightly despite the sale of
four businesses during 1999 due to improvements in existing business margin
resulting from the increased revenue and improved business conditions at
Ground Effects.
22
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended
March 31, 2000 was $20.4 million, an increase of $4.3 million, or 26.7%, from
$16.1 million for the three months ended March 31, 1999. As a percentage of
revenue, selling, general and administrative expense was 23.9% and 31.2% for the
three months ended March 31, 2000 and 1999, respectively.
Selling, general and administrative expense for each of the operating
segments was:
(In thousands)
---------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
Telephony(1) $ 2,211 $ 4,306
Network 1,998 585
Internet 1,794 291
Applications 4,125 3,259
Intellesale.com 5,432 2,662
Non-Core(2) 1,952 2,904
Corporate 2,843 2,084
------- -------
Consolidated $20,355 $16,091
======= =======
- ---------
(1) Includes TigerTel's SG&A of $2.6 million in the first quarter of 1999.
(2) Includes SG&A from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. SG&A for
these disposed entities included above amounted to $1.3 million in the
first quarter of 1999.
Selling, general and administrative expense as a percentage of revenue
for each of the operating segments was:
---------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
% %
--- ---
Telephony(1) 49.2 47.8
Network 27.6 14.6
Internet 88.5 29.2
Applications 46.2 48.2
Intellesale.com 10.7 15.6
Non-Core(2) 13.9 19.1
----- -----
Consolidated 23.9 31.2
===== =====
- ---------
(1) Includes TigerTel's SG&A of 52.0% in the first quarter of 1999.
(2) Includes SG&A from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. SG&A for
these disposed entities included above amounted to 19.7% in the first
quarter of 1999.
23
Changes during the quarter were:
o Telephony decreased $2.1 million or 48.7% in the first quarter of 2000
due to the sale of TigerTel in December 1999. As a percentage of
revenue, SG&A expense in this division has not increased significantly
over the first quarter of 1999.
o Network increased significantly over the first quarter of 1999 as a
result of acquisitions made in the second quarter of 1999. These
companies are more service oriented and have higher SG&A expenses.
o Internet increased $1.5 million or 516.5% a significant increase over
the first quarter of 1999 as a result of the switch in entities
comprising this group from a hardware oriented company with higher cost
of goods sold and lower SG&A expenses to a service oriented company
with lower cost of goods sold but higher SG&A expenses.
o Applications increased $0.9 million or 26.6% over the first quarter of
1999 due to an acquisition in the second quarter of 1999. As a
percentage of revenue, SG&A expense in this division has decreased
slightly over the first quarter of 1999.
o Intellesale.com's SG&A expenses increased in dollar terms as a result
of the acquisition of Bostek in June 1999 and the increase of Internet
related business and the consolidation of operations into one facility.
As a percentage of sales, SG&A expense in this division has declined
slightly from the first quarter of 1999.
o Non-core SG&A decreased in dollar terms and as a percentage of sales as
a result of the sale of four entities during 1999.
o Corporate SG&A increased $0.8 million or 36.5% over the first quarter
of 1999 due to higher personnel related expenses.
24
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March
31, 2000 was $2.1 million, an increase of $0.7 million, or 50.0%, from $1.4
million for the three months ended March 31, 1999.
Depreciation and amortization expense for each of the operating
segments was:
(In thousands)
---------------------------
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ----------
Telephony(1) $ 94 $262
Network 38 5
Internet 32 7
Applications 278 336
Intellesale.com 169 89
Non-Core(3) 360 219
Corporate 1,119 503
------ ------
Consolidated $2,090 $1,421
====== ======
- ---------
(1) Includes TigerTel's depreciation and amortization of $0.2 million in
the first quarter of 1999.
(2) Includes depreciation and amortization from the Communications
Infrastructure group of companies, the majority of which were disposed
of in 1999. Depreciation and amortization for these disposed entities
included above amounted to $0.07 million in the first quarter of 1999.
(3) Includes consolidation adjustments of $0.8 million and $0.4 million in
the first quarters of March 31, 2000 and 1999, respectively.
Changes during the quarter were:
o Telephony decreased primarily as a result of the sale of TigerTel in
December 1999.
o Network increased due to the two acquisitions completed in the second
quarter of 1999.
o Internet increased due to the increase in depreciable assets in this
division during 1999 and the first quarter of 2000.
o Applications decreased due primarily to the sale of an entity in this
division during 1999.
o Intellesale.com increased as a result of the increase in depreciable
assets during 1999 and the first quarter of 2000 associated with the
consolidation of the businesses into one facility.
o Non-core increased in the first quarter of 2000 due primarily to assets
purchased by Ground Effects during 1999 and the first quarter of 2000.
On an annual basis, goodwill amortization will be approximately $3.5 million for
goodwill recorded as of March 31, 2000.
25
Restructuring and Unusual Charges
As part of the reorganization of our core business in the first quarter
of 1999, we implemented a restructuring plan. The restructuring plan included
the exiting of selected lines of business within our Telephony and Applications
business groups, and the associated write-off of assets. The restructuring
charge of $2,236 included asset impairments, primarily software and other
intangible assets, of $1,522, lease terminations of $541, and employee
separations of $173. In addition, during the first quarter of 1999, as part of
our core businesses reorganization, we realigned certain operations within the
Telephony division and recognized impairment charges and other related costs of
$314.
Interest Income and Expense
Interest income was $0.2 million and $0.1 million for the three months
ended March 31, 2000 and 1999, respectively. Interest income is earned primarily
from short-term investments and notes receivable.
Interest expense was $1.1 million and $0.4 million for the three months
ended March 31, 2000 and 1999, respectively. Interest expense is principally
associated with revolving credit lines, notes payable and term loans.
Income (Loss) Before Benefit for Income Taxes and Minority Interest
Loss before benefit for income taxes and minority interest for the
three months ended March 31, 2000 and 1999 was $2.1 million and $2.0 million,
respectively. Changes in loss before benefit for income taxes and minority
interest are a result of the factors discussed above. Excluding the $2.6 million
restructuring and unusual charges mentioned above, income before benefit for
income taxes and minority interest for the three months ended March 31, 1999 was
$0.6 million.
Income Taxes
We had an effective tax benefit rate of 28.2% and 29.1% for the three
months ended March 31, 2000 and 1999, respectively. The income tax benefits are
the result of losses arising in the periods. The effective tax benefit rates
differed from the statutory federal income tax rate of (34%) primarily as a
result of non-deductible goodwill amortization associated with acquisitions,
state taxes net of federal benefits and in the first quarter ended March 31,
1999, the reduction of valuation allowances related to net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, cash and cash equivalents totaled $5.9 million,
an increase of $0.8 million, or 15.7% from $5.1 million at December 31, 1999. We
utilize a cash management system to apply excess cash on hand against our
revolving credit facility for which we had availability of $23.5 million at
March 31, 2000, up from $11.8 million at December 31, 1999. Cash used by
operating activities totaled $13.0 million in the first three months of 2000 as
compared to cash provided by operating activities of $0.4 million in the first
three months of 1999. In the first quarter of 2000, cash of $5.9 was used to
acquire inventory, $3.0 million was used to increase prepaid expenses and $9.5
million was used to reduce accounts payable and accrued expenses. Partially
offsetting these uses was cash of $4.5 received from the collection of accounts
receivable. In the first quarter of 1999, excluding assets and liabilities
26
acquired or assumed in connection with acquisitions, cash provided was due to
increases in accounts payable and accrued expenses, after adjusting for the net
loss and for non-cash expenses.
"Due from buyer of divested subsidiary" at December 31, 1999 represents
the net proceeds due from AT&T Canada, Inc. on the sale of TigerTel, Inc. This
amount was paid in January 2000, and we applied the proceeds against our
domestic line of credit.
Accounts and unbilled receivables, net of allowance for doubtful
accounts, decreased by $4.6 million or 8.8% to $47.6 million at March 31, 2000
from $52.2 million at December 31, 1999. This decrease was primarily
attributable to collection of additional sales generated in the fourth quarter
of 1999.
Inventories increased by $5.9 million or 14.6% to $46.3 million at
March 31, 2000 from $40.4 million at December 31, 1999. This increase was
primarily attributable to large inventory purchases at our Intellesale unit at
the end of the quarter to take advantage or favorable pricing offered by vendors
at the end of the quarter.
Prepaid expenses and other current assets increased by 50.0% or $3.0
million to $9.0 million at March 31, 2000 from $6.0 million at December 31,
1999. This increase is attributable to increased prepayment of expenses,
primarily insurance, which is being expensed over the periods benefited.
"Due to shareholders of acquired subsidiary" decreased by $5.0 million
or 33.3% to $10.0 million at March 31, 2000 from $15.0 million at December 31,
1999. This balance represents the deferred purchase price due to the Bostek
sellers. $5.0 million of this amount was paid in January 2000.
Accounts payable decreased by $2.9 million or 9.8% to $26.6 million at
March 31, 2000 from $29.5 million at December 31, 1999. This decrease was
primarily attributable to a reduction of higher payables incurred in the fourth
quarter of 1999 to support year end sales.
Accrued expenses decreased by $6.2 million or 35.0% to $11.5 million at
March 31, 2000 from $17.7 million at December 31, 1999 due to the payment of
expenses accrued in the fourth quarter of 1999 during the first quarter of 2000.
Other current liabilities represent accrued earnout payments of $4.7
million at March 31, 2000 and $2.7 million at March 31, 1999.
Investing activities provided cash of $20.8 million in the first three
months of 2000, and used cash of $3.3 million in the first three months of 1999.
In the first quarter of 2000, cash proceeds of $31.3 million were collected on
the sale of TigerTel, while cash of $6.6 million was used in connection with
acquired businesses, $3.0 million was spent to acquire property and equipment,
$0.3 million was advanced against notes receivable and $0.6 was used to increase
other assets. In the first quarter of 1999, cash of $2.4 million was used to
acquire businesses, $0.8 million was spent to acquire property and equipment.
$0.3 million was used to increase other assets, while $0.1 was received from the
collection of notes receivable.
Cash of $7.1 million and $1.0 million was used by financing activities
in the first three months of 2000 and 1999, respectively. In the first quarter
of 2000, $14.3 million was used to repay notes payable, $2.4 million was repaid
and $4.6 million was borrowed on long-term debt, while $5.0 million was obtained
27
through the issuance of common shares. In the first quarter of 1999, $2.3
million was borrowed and $0.3 million was repaid on long-term debt, while $2.9
million was used to repay borrowings under notes payable and $0.1 million was
used for other financing costs.
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 will continue, in the future, to use cash from operations and
will continue to finance this use of cash through financing activities such as
the sale of common stock and/or bank borrowing, if available.
In August 1998, we entered into a $20 million line of credit with State
Street Bank and Trust Company secured by all of our domestic assets at the prime
lending rate or at the London Interbank Offered Rate, at our discretion. In
February 1999, the amount of the credit available under the facility was
increased to $23 million. On May 25, 1999, we entered into a Term and Revolving
Credit Agreement with IBM Credit Corporation (the "IBM Agreement") and, on May
26, 1999, we repaid the amount due to State Street Bank and Trust Company. The
IBM Agreement, as amended and restated on July 20, 1999 and January 27, 2000,
provides for: (a) a revolving credit line of up to $33.855 million, designated
as follows: (i) a U.S. revolving credit line of up to $30 million, (ii) a
Canadian revolving credit line of up to $3.855 million, and (b) a term loan A of
up to $22 million, (c) a term loan B of up to $36.405 million and (d) a Canadian
term loan C of up to $2.740 million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and is
payable in full on May 25, 2002. The U.S. revolving credit line bears interest
at the 30-day LIBOR rate plus 1.75% to 1.90% depending on our leverage ratio and
the Canadian revolving credit line bears interest at the base rate as announced
by the Toronto-Dominion Bank of Canada each month plus 0.1707% to 0.3207%,
depending on our leverage ratio. As of March 31, 2000, the LIBOR rate was
approximately 5.9% and approximately $10.3 million was outstanding on the
revolving credit line which is included in notes payable.
Term loan A, which was used to pay off State Street Bank and Trust
Company, bears interest at the 30-day LIBOR rate plus 1.75% to 1.90%, is
amortized in quarterly installments over six years and is repayable in full on
May 25, 2002. As of March 31, 2000 approximately $19.2 million was outstanding
on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75% to 1.90%, is amortized in quarterly installments
over six years and is repayable in full on May 25, 2002. As of March 31, 2000,
approximately $23.3 million was outstanding on this loan.
Term loan C, which was used by our Canadian subsidiary to pay off its
bank debt, bears interest at the base rate as announced by the Toronto-Dominion
Bank of Canada each month plus 0.1707%, to 0.3207%, is amortized in quarterly
installments over six years and is repayable in full on May 25, 2002. As of
March 31, 2000, Toronto-Dominion's rate was approximately 6.75% and
approximately $2.4 million was outstanding on this loan.
The agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the declarations
and payment of dividends. As of March 31, 2000, the Company was in compliance
with all debt covenants except for the following covenants, for which waivers
were obtained as described below.
28
Based on the financial statements for the year ended December 31, 1999
and on the pro forma financial statements for the quarter ended March 31, 2000,
the Company concluded that the ratio of its Total Liabilities to Tangible Net
Worth exceeded the maximum amounts permitted by the Credit Agreement, or 6.5:1.0
and 4.0:1.0 for the year ended December 31, 1999 and for the quarter ended March
31, 2000, respectively. Consequently, on March 29, 2000, the Company and IBM
Credit Corporation entered into an agreement wherein the Company acknowledged
its non-compliance with the above-mentioned financial covenant and IBM Credit
Corporation agreed to waive such non-compliance. Subsequently, in letters from
the Company to IBM Credit Corporation, dated March 31, 2000 and May 12, 2000,
the Company confirmed its compliance with the Credit Agreement, as amended by
the March 29, 2000 waiver, for the year ended December 31, 1999 and for the
quarter ended March 31, 2000.
As of March 31, 2000, there were 50.3 million shares of Common Stock
outstanding. In addition, 5 hundred shares of Common Stock are reserved for
issuance in exchange for certain exchangeable shares issued by our Canadian
subsidiary. Since January 1, 2000, we have issued an aggregate of 2.1 million
shares of Common Stock, of which 0.4 million shares of Common Stock were issued
as earnout payments in acquisitions, 46 thousand shares were issued in exchange
for the exchangeable shares of our Canadian subsidiary and the exchangeable
shares of our former Canadian subsidiary, TigerTel Services Limited, 26 thousand
shares of Common Stock were issued for acquisitions, 1.2 million shares were
issued upon the exercise of options, 0.3 million shares were issued upon the
exercise of warrants, and 0.1 million shares were issued under our Employee
Stock Purchase Program.
We have entered into earnout arrangements with certain sellers under
which they are entitled to additional consideration for their interests in the
companies they sold to us. Under these agreements, assuming that all earnout
profits are achieved, we are contingently liable for additional consideration of
approximately $7.6 million in 2001, $1.8 million in 2002 and $2.0 million in
2004, of which $1.0 million would be payable in cash and $10.4 million would be
payable in stock.
We have entered into put options with the sellers of those companies in
which we acquired less than a 100% interest. These options require us to
purchase the remaining portion we do not own after periods ranging from four to
five years from the dates of acquisition at amounts per share generally equal to
10% to 20% of the average annual earnings per share of the subsidiary company
before income taxes for a two-year period ending on the effective date of the
put multiplied by a multiple ranging from four to five. In the second quarter of
1999, we entered into agreements to pay $3.9 million to acquire put options in
certain companies owned by our subsidiary, IntelleSale,com. In addition, based
upon current earnings, assuming all other put options were exercised, we are
contingently liable for an additional $6.3 million in the next two years. The
contingent amounts for earnouts and put options have not been recorded as
liabilities in the financial statements as it is uncertain whether the
contingencies will be met.
Our sources of liquidity include, but are not limited to, funds from
operations and funds available under the IBM Agreement. We may be able to use
additional bank borrowings, proceeds from the sale of non-core 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. 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. We
believe that we have the financial resources to meet our future business
requirements for at least the next twelve months.
29
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements in this Form 10-Q, 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.
Applied Digital Solutions intends 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 achievement expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
our continued ability to sustain our growth through product development and
business acquisitions; the successful completion and integration of future
acquisitions; the ability to hire and retain key personnel; the continued
development of technical, manufacturing, sales, marketing and management
capabilities, relationships with and dependence on third-party suppliers;
anticipated competition; 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; changes in our capital structure and cost of capital; and uncertainties
inherent in international operations and foreign currency fluctuations. 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.
Risk Factors
In addition to the other information contained herein, the following
factors should be considered carefully in evaluating our company and its
business.
Uncertainty of Future Financial Results
While we have been profitable for the last three fiscal years, future
financial results are uncertain. There can be no assurance that we will continue
to be operated in a profitable manner. Profitability depends upon many factors,
including the success of our various marketing programs, the maintenance or
reduction of expense levels and our ability to successfully coordinate the
efforts of the different segments of our business.
Future Sales of and Market for our Shares of Common Stock
Although we previously announced that we intend to limit the use of
stock in future acquisitions, and to focus on cash transactions, we have
effected, and will continue to effect, acquisitions or contract for certain
services through the issuance of Common Stock or our other equity securities, as
we have typically done in the past. In addition, we have agreed to certain
"price protection" provisions in acquisition agreements which may result in
additional shares of common stock being issued to selling shareholders as of the
effective date of the registration of the shares such selling shareholder
previously received as consideration from us. Such issuance of additional
securities may be dilutive of the value of the Common Stock in certain
circumstances and may have an adverse impact on the market price of the Common
Stock.
30
Competition
Each segment of our business is highly competitive, and we expect that
competitive pressures will continue. Many of our competitors have far greater
financial, technological, marketing, personnel and other resources than us. The
areas which we have identified for continued growth and expansion are also
target market segments for some of the largest and most strongly capitalized
companies in the United States, Canada and Europe. There can be no assurance
that we will have the financial, technical, marketing and other resources
required to complete successfully in this environment in the future.
Risks Associated with Acquisitions and Expansion
We have engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to our lines of business,
and we anticipate that such acquisitions will continue to occur. Our total
assets were approximately $209 million as of March 31, 2000 and $229 million,
$124 million, $61 million, $33 million and $4 million as of December 31, 1999,
1998, 1997, 1996 and 1995, respectively. Net operating revenue was approximately
$85.2 million and $51.6 million for the three months ended March 31, 2000 and
1999, respectively, and $337 million, $207 million, $103 million, $20 million
and $2 million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. Managing these dramatic changes in the scope of our business will
present ongoing challenges to management, and there can be no assurance that our
operations as currently structured, or as affected by future acquisitions, will
be successful.
It is our policy to retain existing management of acquired companies,
under the overall supervision of our senior management. The success of the
operations of these subsidiaries will depend, to a great extent, on the
continued efforts of the management of the acquired companies.
We have entered into earnout arrangements with certain sellers under
which they are entitled to additional consideration for their interests in the
companies they sold to us. Under these agreements, assuming that all earnout
profits are achieved, we are contingently liable for additional consideration of
approximately $7.6 million in 2001, $1.8 million in 2002 and $2.0 million in
2004, of which $1.0 million would be payable in cash and $10.4 million would be
payable in stock.
We have entered into put options with the sellers of those companies in
which we acquired less than a 100% interest. These options require us to
purchase the remaining portion we do not own after periods ranging from four to
five years from the dates of acquisition at amounts per share generally equal to
10% to 20% of the average annual earnings per share of the subsidiary company
before income taxes for a two-year period ending on the effective date of the
put multiplied by a multiple ranging from four to five. In the second quarter of
1999, we entered into agreements to pay $3.9 million to acquire put options in
certain companies owned by our subsidiary, IntelleSale.com. In addition, based
upon current earnings, assuming all other put options were exercised, we are
contingently liable for an additional $6.3 million in the next two years.
Goodwill write-off's will reduce our earnings
As a result of the acquisitions we have done to date, we have
approximately $65.7 million of goodwill, $24.4 million of which is deductible
for tax purposes, which is currently being amortized over 20 years at the rate
of approximately $3.5 million per year, which reduces our net income and our
earnings per share. In addition, future acquisitions may also increase our
31
existing goodwill and the amount of annual amortization, further reducing net
income and earnings per share. As required by Statement of Financial Accounting
Standards No. 121, we will periodically review our goodwill for impairment based
on expected future discounted cash flows. If we determine that there is such
impairment, we would be required to write down the amount of goodwill
accordingly, which would also reduce our earnings.
Need for Additional Capital
We may require additional capital to fund growth of our current
business as well as to make future acquisitions. However, we may not be able to
obtain capital from outside sources. Even if we obtain capital from outside
sources, it may not be on terms favorable to us. Our current credit agreement
with IBM Credit Corporation may hinder our ability to raise additional debt
capital. If we raise additional capital by issuing equity securities, these
securities may have rights, preferences or privileges senior to those of our
common stockholders.
Dependence on Key Individuals
Our future success is highly dependent upon our ability to attract and
retain qualified key employees. We are organized with a small senior management
team, with each of our separate operations under the day-to-day control of local
managers. If we were to lose the services of any members of our central
management team, our overall operations could be adversely affected, and the
operations of any of our individual facilities could be adversely affected if
the services of the local managers should be unavailable. We have entered into
employment contracts with our key officers and employees and certain
subsidiaries. The agreements are for periods of one to ten years through June
2009. Some of the employment contracts also call for bonus arrangements based on
earnings.
Risks that the Value of Our Inventory May Decline
We purchase and warehouse inventory, much of which is refurbished or
excess inventory of personal computer equipment. As a result, we assume
inventory risks and price erosion risks for these products. These risks are
especially significant because personal computer equipment generally is
characterized by rapid technological change and obsolescence. These changes
affect the market for refurbished or excess inventory equipment. Our success
will depend on our ability to purchase inventory at attractive prices relative
to its resale value and our ability to turn our inventory rapidly through sales.
If we pay too much or hold inventory too long, we may be forced to sell our
inventory at a discount or at a loss or write down its value, and our business
could be materially adversely affected.
Lack of Dividends on Common Stock; Issuance of Preferred Stock
We do not have a history of paying dividends on our Common Stock, and
there can be no assurance that such dividends will be paid in the foreseeable
future. Pursuant to certain restrictions under our Amended and Restated Term and
Revolving Credit Agreement dated as of July 30, 1999 with IBM Credit
Corporation, as amended, there are restrictions on the declaration and payment
of dividends. We intend to use any earnings which may be generated to finance
the growth of our businesses. Our Board of Directors has the right to authorize
the issuance of preferred stock, without further shareholder approval, the
holders of which may have preferences over the holders of the Common Stock as to
payment of dividends.
32
Possible Volatility of Stock Price
Our Common Stock is quoted on the Nasdaq Stock Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of our Common
Stock without regard to our operating performance. In addition, we believe that
factors such as the significant changes to our business resulting from continued
acquisitions and expansions, quarterly fluctuations in our financial results or
cash flows, shortfalls in earnings or sales below expectations, changes in the
performance of other companies in our same market sectors and the performance of
the overall economy and the financial markets could cause the price of our
Common Stock to fluctuate substantially. During the 12 month period prior to
March 31, 2000, the price per share of our Common Stock has ranged from a high
of $18.00 to a low of $1.625.
Termination Payments
Our employment agreements with three of our executive officers include
"change of control" provisions, under which the employees may terminate their
employment within one year after a change of control, and be entitled to receive
specified severance payments and/or continued compensation payments for sixty
months. The employment agreements also provide that these executive officers are
entitled to supplemental compensation payments for sixty months upon termination
of employment, even if there is no change in control, unless their employment is
terminated due to a material breach of the terms of the employment agreement.
Also, the agreements for both Richard Sullivan and Garrett Sullivan provide for
certain "triggering events" which include a change in control, the termination
of Richard Sullivan's employment other than for cause, or if Richard Sullivan
ceases to hold his current positions with us for any reason other than a
material breach of the terms of his employment agreement. In that case, we would
be obligated to pay, in cash and/or in stock, $12.1 million and $3.5 million,
respectively, to Richard Sullivan and to Garrett Sullivan, in addition to
certain other compensation. Finally, the employment agreements provide for a
gross up for excise taxes which are payable by these executive officers if any
payments upon a change of control are subject to such taxes as excess parachute
payments.
Our obligations to make the payments described in this section could
adversely affect our financial condition or could discourage other parties from
entering into transactions with us which might be treated as a change in control
or triggering event for purposes of these agreements.
Digital Angel May Not Be Able to Develop Products from Its Unproven Technology
In December 1999, Digital Angel acquired the patent rights to a
miniature digital receiver named "Digital Angel (TM)." This technology is still
in the development stage. Digital Angel's ability to develop and commercialize
products based on its proprietary technology will depend on its ability to
develop its products internally on a timely basis or to enter into arrangements
with third parties to provide these function. If Digital Angel fails to develop
and commercialize products successfully and on a timely basis, it could have a
material adverse effect on Digital Angel's business, results of operations or
cash flows.
33
Year 2000 Compliance
We have not experienced any significant Year 2000 related problems.
During 1998 and 1999, we implemented a company wide program to ensure that we
would be compliant prior to the Year 2000 failure dates. We did not experience
problems on either January 1, 2000 or February 29, 2000. However we cannot make
any assurances that unforeseen problems many not arise in the future.
Software Sold to Consumers. During 1998 and 1999 we identified what we
believe to be all potential Year 2000 problems with any of the software products
we develop and market. However, management believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting our
software products have been or will be identified or corrected due to the
complexity of these products. In addition, these products interact with other
third party vendor products and operate on computer systems which are not under
our control. For non-compliant products, we have provided and are continuing to
provide recommendations as to how an organization may address possible Year 2000
issues regarding that product. Software updates or other solutions are available
for most, but not all, known issues. Such information is the most currently
available concerning the behavior of our products and is provided "as is"
without warranty of any kind. However, variability of definitions of
"compliance" with the Year 2000 and of different combinations of software,
firmware and hardware could possibly lead to lawsuits against us. The outcome of
any such lawsuits and the impact on us are not estimable at this time.
We do not believe that the Year 2000 problem has had or will continue
to have a material adverse effect on our business, results of operations or cash
flows. The estimate of the potential impact on our financial position, overall
results of operations or cash flows for the Year 2000 problem could change in
the future. Our ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review. The discussion of our efforts, and
management's expectations, relating to Year 2000 compliance are forward-looking
statements.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board 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. We do not believe that FAS 133 will have a
material impact on our results of operations, cash flows and financial
condition.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements. This Staff Accounting Bulletin
summarizes certain of the staff's views on applying Generally Accepted
Accounting Principles to revenue recognition in financial statements. We will be
required to adopt this statement no later than the second quarter of 2000. We
have not completed the analysis to determine the impact of this statement on our
consolidated financial statements; however the impact is not expected to be
material.
34
Quantitative And Qualitative Disclosures About Market Risk
With our Canadian and United Kingdom subsidiaries, we have operations
and sales in various 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.
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 IBM Agreement are 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 have concluded that there is no material market risk exposure and,
therefore, no quantitative tabular disclosures are required.
35
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 the opinion of management, these
proceedings will not have a material adverse effect on the financial position,
cash flows or overall trends in our results. The estimate of the potential
impact on our financial position, overall results of operations or cash flows
for these proceedings could change in the future. We are not subject to any
environmental or governmental proceedings.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by us from
January 1, 2000 through March 31, 2000. These acquisition shares were issued to
the selling shareholders in connection with the acquisition of the indicated
subsidiary or the shareholder's minority interest in transactions directly
negotiated by the shareholders in connection with the sale of their business or
interests to the Company and pursuant to the "price protection" or "earnout"
provisions of the agreement of sale. These share were issued without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Number of
Number of Issued Common
Name/Entity/Nature Persons Note For Shares
- ------------------ --------- ---- --- ------
The Americom Group 1 1 Acquisition 48,333
Innovative Vaccuum Solutions, Inc. 3 2 Acquisition 25,881
Port Consulting, Inc. 3 1 Acquisition 302,891
Various 3 3 Warrants 317,500
---------
Total 694,605
=========
- -----------
<FN>
1. Represents shares issued in connection with the "earnout"
provision of the agreement of sale relating to a prior private
transaction directly negotiated by the shareholder(s) in
connection with the sale of their business(es) to the Company,
which transactions were exempt from registration pursuant to
Section 4(2) of the Act.
2. Represents shares issued in connection with the agreement of
sale related to prior private transactions directly negotiated
by the selling shareholders of Innovative Vaccuum and MVAK
Technologies in connection with the sale of their interests to
the Company, which transactions were exempt from registration
pursuant to Section 4(2) of the Act.
3. Represents shares issued in connection with the exercise of
warrants.
</FN>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
36
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company
between January 1, 2000 and the date of this report:
(1) On January 11, 2000, we filed a Current Report on Form
8-K/A reporting the completion of the sale of our subsidiary
TigerTel, Inc. to AT&T Canada Corp.
(2) On April 13, 2000, we filed a Current Report on Form 8-K
which included a copy of our press release announcing that we had
signed a letter of intent to sell our subsidiary, Intellesale.com,
Inc. to ATEC Group, Inc.
(3) On May 1, 2000, we filed a Current Report on Form 8-K which
included a copy of the Agreement and Plan of Merger, dated April
24, 2000, between Digital Angel.net Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, and Destron Fearing
Corporation, a Delaware corporation.
(4) On July 14, 2000, we filed a Current Report on Form 8-K which
included a copy of the Agreement and Plan of Merger, dated as of
June 30, 2000, between the Registrant and Computer Equity
Corporation.
(5) On September 11, 2000, we filed a Current Report on Form 8-K/A
which included the financial statements and pro forma financial
information in connection with the acquisition of Computer Equity
Corporation.
(6) On September 21, 2000, we filed a Current Report on Form 8-K
which included the financial statements and pro forma financial
information in connection with the acquisition of Destron Fearing
Corporation on September 8, 2000.
(7) On October 24, 2000, we filed a Current Report on Form 8-K
which included a copy of the Second Amended and Restated Term and
Revolving Credit Agreement dated October 17, 2000 between IBM
Credit Corporation, the Company, and others.
(8) On October 26, 2000, we filed a Current Report on Form 8-K
which included a copy of the Certificate of Designation of
Preferences, Form of Warrant, Registration Rights Agreement and
the Securities Purchase Agreement in connection with the issuance
of 26,000 shares of our Series C Convertible Preferred Stock and
related Warrants to institutional investors in a private
placement.
(9) On November 1, 2000, we filed a Current Report on Form 8-K
which included a copy of the Agreement and Plan of Merger, dated
as of October 18, 2000, between the Company and Pacific Decision
Sciences Corporation.
(10) On December 5, 2000, we filed a Current Report on Form 8-K
which included a copy of the MCY Agreement executed in connection
with our acquisition of license rights to use certain systems
developed by MCY.com.
(11) On December 29, 2000, we filed a Current Report on Form 8-K/A
which included the financial statements and pro forma financial
information in connection with the acquisition of Pacific Decision
Sciences Corporation.
(12) 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.
(13) On April 23, 2001, we filed a Current Report on Form 8-K/A
which amended our Current Report on Form 8-K filed on September
21, 2000.
(14) 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.
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: April 23, 2001 By: /S/ JEROME C. ARTIGLIERE
---------------------------------
Jerome C. Artigliere
Chief Financial Officer
38