As filed with the Securities and Exchange Commission on April 24, 2001
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 on
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 43-1641533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At April 2, 2001, the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was approximately $206,347,412.
At April 2, 2001, 126,986,023 shares of our common stock were outstanding.
Documents Incorporated by Reference: None
Table of Contents
Item Description Page
PART I
1. Business 3
2. Properties 17
3. Legal Proceedings 18
4. Submission of Matters to a Vote of Security Holders 19
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 20
6. Selected Financial Data 22
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
7A. Quantitative and Qualitative Disclosures About Market Risk 45
8. Financial Statements and Supplementary Data 45
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 45
PART III
10. Directors and Executive Officers of the Registrant 47
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners and Management 58
13. Certain Relationships and Related Transactions 61
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures 62
2
PART I
ITEM 1. BUSINESS
GENERAL
Applied Digital Solutions, Inc. is an information management technology
company. We provide solutions to allow our customers' existing software and
hardware to integrate with our proprietary software. We call the solutions we
provide our "I3 Services Platform", with the I3 standing for "intelligent
integrated information". We deliver our solutions through three core business
segments, Applications, Services and Advanced Wireless, which work together to
achieve heightened efficiencies for Applied Digital and better offerings for our
customers.
The I3 Services Platform provides the following services:
o For our customers, the I3 Services Platform not only allows us to
offer integrated media solutions, it allows our customers to manage
the information carried by those media and to benefit from the
technological progress of our Advanced Wireless division.
o For our sales team, the I3 Services Platform encourages cross-selling
of our different products and services.
o For our financial performance, the I3 Services Platform furthers our
mission to reduce enterprise costs by eliminating redundancies and
inefficiencies.
The I3 Services Platform provides value by enabling our clients to collect,
organize, analyze, warehouse and disseminate information. Better information
leads to better decision-making. In today's ever-changing environment of
immediate information, the rigorous management of information across different
media allows our customers to react rapidly and intelligently to challenges.
More importantly, the I3 Services Platform allows our customers to proactively
improve their business to anticipate and stay ahead of challenges.
In March, 2001 our board of directors approved the sale of our Intellesale
business segment and all of our other non-core subsidiaries. Our results of
operations, financial condition and cash flows now reflect these operations as
"Discontinued" and prior periods have been restated.
We operate in three geographic areas: the United States, which comprises
the majority of our operations; Canada; and the United Kingdom. Our Canadian
operations were comprised of a telecommunications company, which we disposed of
in 1999, and an automotive manufacturing and engineering company. Our United
Kingdom operations are comprised of companies in our Applications segment,
described below. With the exception of a non-core manufacturing and engineering
company in Canada, the majority of our revenues and expenses in each geographic
area, both from continuing and discontinued operations, were generated in the
same currencies. Approximately 40%, 34% and 10% of the manufacturing and
engineering company's revenues were generated in U.S. dollars for the years
ended December 31, 2000, 1999 and 1998, respectively, while 100% of its expenses
were incurred in Canadian dollars during the same periods. We did not incur any
significant foreign currency gains or losses during the three years ended
December 31, 2000.
The majority of our current operations are the result of acquisitions
completed during the last five years. Our revenues from continuing operations
were $134.8 million, $129.1 million, $74.3 million, $41.6 million, and $14.1
million respectively, in 2000, 1999, 1998, 1997, and 1996. Since January 1,
1996, we have completed 51 acquisitions, and since January 1, 2000 we have
completed 10 acquisitions. Management employs an acquisition committee to assess
acquisition opportunities. The committee is comprised of several members of
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senior management on a corporate level with representation from key members from
the operating units. The committee uses various criteria including:
o the strategic importance to the I3 Service Platform.
o profitability over a selected time period.
o the strength of the balance sheet.
o the strength of the customer base, and
o management experience.
We are a Missouri corporation and were incorporated on May 11, 1993. Our
principal office is located at 400 Royal Palm Way, Suite 410, Palm Beach,
Florida 33480, and our phone number is (561) 366-4800.
Business Segments
Our business is currently organized into three industry groups or business
segments: the Applications Group, the Services Group, and the Advanced Wireless
Group. These three segments form the nucleus of our newly implemented I3
Services Platform. Each segment has, or is in the process of naming, a president
to whom a variety of operating companies report. Each segment president, in
turn, reports to our President.
Prior to January 2, 2001, our business was organized into four technology
groups or industry segments: Networking, Internet, Applications, and Telephony.
Combined, these groups formed the basis of the CTII strategy that was the
predecessor to our I3 Services Platform. With the arrival of our new President
and Chief Operating Officer, Mercedes Walton, our strategy has evolved to more
adequately promote our product and service offerings in the marketplace and to
more fully integrate our business units. In January 2001, we introduced the I3
Service Platform. Prior years segment information has been restated to reflect
our current business segments.
Prior to March 1999, our business was organized into four business groups,
or industry segments: the Services and Solutions Group (formerly the Retail
Group), the Computer Group, the Manufacturing Group and the International Group.
Each operating business was conducted through a separate subsidiary company
directed by its own management team, and each subsidiary company had its own
marketing and operations support personnel. Each management team originally
reported to our President, who was responsible for overall corporate control and
coordination, as well as financial planning.
On February 22, 2001, our senior management approved a plan to sell
Intellesale and all of our other non-core businesses. The plan was approved by
our board of directors on March 1, 2001. The results of operations, financial
condition and cash flows of Intellesale and all of our other non-core businesses
are now reported as discontinued operations in our financial statements and
prior periods have been restated See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Discontinued
Operations" beginning on page 38.
Our primary businesses are now organized into three business segments,
segment financial information for which is more fully disclosed in our financial
statements and notes thereto:
Applications -- Our Applications segment provides proprietary 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, including wireless hand-held
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devices. We equip our customers with the necessary tools and support services to
enable them to make a successful transition to implementing e-business
practices, Call Center Solutions, Enterprise Resource Planning (ERP) and
Customer Relationship Management (CRM) solutions, website design, and
application and internet access services to customers of our other divisions. We
are 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.
As of December 31, 2000, 1999 and 1998, revenues from this segment
accounted for 20.9%, 21.7% and 13.7%, respectively, of our total revenues.
Our Services segment is comprised of the following business groups:
Telephony -- Our Telephony group implements telecommunications and Computer
Telephony Integration (CTI) solutions for e-business. We integrate a wide range
of voice and data systems that transmit over the traditional telephone network
and over the Internet. We provide complete design, project management,
cable/fiber infrastructure, installation and on-going support for the customers
we support.
Networks -- Our Networks group 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
and mid-range computer solutions and network infrastructure for the development
of local and wide area networks as well as training and customer support
services.
As of December 31, 2000, 1999 and 1998, revenues from this segment
accounted for 61.6%, 67.0% and 73.4%, respectively, of our total revenues.
Advanced Wireless -- Our Advanced Wireless segment is engaged in the
business of developing and bringing to market technology used to locate, monitor
and identify animals, people and objects. The Company's advanced wireless
business, Digital Angel Corporation, has three divisions: the existing Animal
Tracking Business, the newly developed Digital Angel technology and the Digital
Angel Delivery System.
The Animal Tracking Business division uses simple technology solutions to
track and identify animals. It focuses on cattle, hogs, fish and household pets.
The tracking of cattle and hogs are crucial both for asset management and for
disease control and food safety. Some customers, for example, the U. S.
Department of Energy, track fish, such as salmon, to locate and protect spawning
pools and to track migratory patterns for research and fishing purposes. The
Animal Tracking Business' pet identification system is marketed in the U. S. by
Schering-Plough Pharmaceutical under the brand name Home Again(TM), in Europe by
Merial Pharmaceutical (Merck) and in Japan by Dainippon Pharmaceutical. The
Animal Tracking Business partners with a variety of other companies outside the
United States to market similar products. The Animal Tracking Business has an
established infrastructure with readers placed in approximately 6,000 domestic
animal shelters, or an estimated 70% of the market. Approximately 10,000
veterinary clinics, or an estimated 66% of US clinics, use its patented system
for pet identification. The principal technologies employed by the Animal
Tracking Business are electronic ear tags, e.Tags(TM), and implantable
microchips that use radio frequency transmission.
The Digital Angel business division develops and markets advanced
technology to gather location data and local sensory data and to communicate
that data to a ground station. As of December 31, 2000, products were in the
development stage and none had been sold. The Digital Angel technology is
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actually the novel combination of three technologies: wireless communication
(e.g. cellular), sensors (including bio-sensors) and position location
technology (including GPS and other systems). We plan to introduce this
technology into a variety of products to suit different applications ranging
from medical monitoring to asset management.
Following communication of data to the ground station, the Digital Angel
Delivery System (also called DADS) manages the data in an application-specific
format. For example, the medical applications gather bio-readings such as pulse
and temperature, and communicate that data, along with location data, to a
ground station or call center. If the readings suggest a critical health
situation, emergency aid could be dispatched through the services of Medical
Advisory Systems (AMEX: DOC), a company in which we have a 16.6% interest. For
the pet location applications, the location information is available via call
center or secure Internet site. DADS' main mission is to provide:
o an interface to wireless access,
o an immediate and effective response to variable conditions,
o an improved event decision-making, a storage of critical data,
o a secure authentication to data,
o an improved customer contact, and
o an application-specific logic for certain markets.
As of December 31, 2000, 1999 and 1998, revenues from this segment
accounted for 17.4%, 11.1% and 13.0%, respectively, of our total revenues.
Growth Strategy
Our growth strategy is focused on internal expansion and growth through
targeted, disciplined acquisitions. The key elements of our strategy include:
Implementing our I3 Services Platform. Our ability to affectively implement
our I3 Services Platform will depend on the following:
o Optimizing strategic interrelationships among the core businesses
while positioning Applied Digital Solutions to deploy innovative and
unique marketplace solutions.
o Launching expanded services driven by new products, global branding,
strategic alliances and acquisitions.
o Executing the strategy as a tightly-managed and focused enterprise,
following implementation of aggressive plans to reduce costs,
streamline organizations and divest non-strategic assets.
Deploying the Advanced Wireless segment's new Digital Angel products and
services.
Continuing to pursue acquisition opportunities. Since 1996, we have
completed 51 acquisitions, and since January 1, 2000, we have completed 10
acquisitions. Our acquisition committee assesses acquisition opportunities using
a disciplined approach driven by both strategic fit and financial value. The
committee is comprised of members of senior management and senior managers of
our operating units. The committee uses various criteria including the strategic
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importance to the I3 Service Platform, profitability over a selected time
period, the strength of the balance sheet and the strength of the customer base.
Customers
We deliver products and services across a multitude of industries,
including manufacturing, financial, utilities, retail, health, communications,
high tech, insurance, transportation and government. Some of our largest
customers include several agencies of the United States federal government,
Daimler Chrysler, Morgan Stanley, Compucon, Hackensack University Medical,
Goldman Sachs, Steve Madden, Polo Ralph Lauren, GAF Materials, PC Connection,
Castle Superstore, Wireless Facilities and Toyota Motor Sales. Other than
customary payment terms, we do not offer any financing to our customers.
Competitors
Some of our major competitors include Nova Coast, Corp Info, General
Networks, DataTransit, Data Systems West, Lucent, Convergent Technologies,
InterTel, Nortel, Fujitsu, Toshiba Dealer, All Star Communications, Kapp
Communications, Mitel, Prime Communications, A-Tek, All Pro Com, STS, NSB, JDA
Software, DataVantage, CRS, Astea, Vantive, Metrix, Siebel, Clarify (Nortel),
Service Systems International, Custom Development, ASP, Education Vertical,
Reliable Cash Register, Innovative Computer Systems, Cam Data, EZ4U, Retail
Soft, All Flex, Avid, Datamars, Sokymat, Cisco, Eshare, Apropos, Interactive
Intelligence, Entex, Alpha Net, TransNet, MTMC and More Direct. We believe each
segment of our business is highly competitive, and we expect that the
competitive pressures we face will not diminish. As a result of our product and
service mix, management experience, time to delivery, knowledge of local markets
and customer service, we believe the assessment of our ability to compete within
these segments is excellent. However, we understand that many of our competitors
have greater financial, technological, marketing, personnel and other resources
than we do, and, consequently, we may not be able to compete as successfully as
those companies.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 with respect
to our financial condition, results of operations and business, and include
statements relating to:
o our growth strategies including, without limitation, our ability to
deploy the Advanced Wireless segments new Digital Angel divisions
products and services;
o anticipated trends in our business and demographics;
o our ability to successfully integrate the business operations of
recently acquired companies and successfully complete the divestitures
of our discontinued operations;
o our future profitability and liquidity; and
o regulatory, competitive or other economic influences.
Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions also identify forward-looking
statements. These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially from estimates or forecasts contained in the
forward-looking statements. Some of these risks and uncertainties are beyond our
control.
7
Risk Factors
We cannot be certain of future financial results.
We incurred a loss of $33.9 million from continuing operations for the year
ended December 31, 2000. We reported income from continuing operations before
taxes of $3.7 million for the year ended December 31, 1999 which included a loss
from continuing operations of $16.3 million, offset by a gain of $20 million
from the sale of our Canadian subsidiary, TigerTel, Inc. In 1998, we reported a
loss of $0.6 million from continuing operations. Our business plan depends on
our attaining and maintaining profitability; however, we cannot predict whether
or when we will be profitable. Our profitability depends on many factors,
including the success of our marketing programs, the maintenance and reduction
of expenses and our ability to successfully coordinate the operations of our
business units. If we do become profitable, we may not be able to sustain or
increase profitability on a quarterly or annual basis. In addition, if we fail
to sustain or grow our profits within the time frame expected by investors, the
market price of our common stock may fall.
Our stock price may continue to be volatile, and shareholders may be unable
to resell their shares at or above the price at which they acquire them.
Since January 1, 2000, the price per share of our common stock has ranged
from a high of $18.00 to a low of $0.50. The price of our common stock has been,
and may continue to be, highly volatile and subject to wide fluctuations in
response to factors, including the following:
o significant changes to our business resulting from continued
acquisitions and expansions;
o quarterly fluctuations in our financial results or cash flows;
o changes in investor perception of us or the market for our products
and services;
o changes in economic and capital market conditions for other companies
in our market sector; and
o changes in general economic and market conditions.
In addition, the stock market in general, and The Nasdaq National Market
and stocks of technology companies in particular, have often experienced extreme
price and volume fluctuations. This volatility is often unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. Declines in the market price of
our common stock could also harm employee morale and retention, our access to
capital and other aspects of our business. If our share price is volatile, we
may be the target of securities litigation, which is costly and time-consuming
to defend. Historically, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
initiated against that company. Litigation of this type could result in
substantial costs and a diversion of management's attention and resources, which
would harm our business.
We may issue preferred stock, which will rank senior to our common stock
and which may delay or prevent a change in control of us.
Our board of directors has the right to issue additional preferred stock
without further shareholder approval, and the holders of such preferred stock
may have preferences over the holders of our common stock as to payments of
dividends, liquidation and other matters. As described under "Management's
8
Discussion and Analysis of Financial Condition and Results of Operations - 2000
and Recent Developments - Private Placement of Series C Preferred Stock and
Related Warrants" in Item 7 below, we issued a series of convertible preferred
stock in October 2000, and have granted the purchasers the right to require us
to issue additional shares of convertible preferred stock in the future. These
provisions could delay or prevent a change in control of us or limit the price
that investors might be willing to pay in the future for shares of our common
stock.
Future sales of shares of our common stock or the conversion of shares of
our Series C preferred stock into shares of our common stock could depress the
market price of our common stock.
As of December 31, 2000, there were 101,486,701 shares of our common stock
outstanding. Since January 1, 2000, we have issued an aggregate of 53,227,078
shares of common stock, of which 46,846,731 shares were issued in connection
with acquisitions of businesses and assets. We have effected, and will continue
to effect, acquisitions or contract for services through the issuance of common
stock or our other equity securities. In addition, we have agreed to "price
protection" provisions in prior acquisition agreements which may result in
additional shares of common stock being issued. Such issuances of additional
securities may be dilutive to the value of our common stock and may have an
adverse impact on the market price of our common stock.
Because the conversion of shares of our Series C preferred stock into
shares of our common stock depends upon the market value of our common stock, a
decline in the market value of our common stock would increase the number of
shares issued upon conversion which could depress the market price of our common
stock.
The conversion of our Series C preferred stock and the exercise of the
related warrants would result in a substantial number of additional shares being
issued, and such number would increase if the market price of our common stock
declines. The conversion price per share of common stock into which the Series C
preferred stock converts, as a percentage of then current market value, will
decrease the longer the holders of the Series C preferred stock wait to convert
their shares. In some cases, the conversion price could be as low as 50% of the
lowest closing price of our common stock during a specified period. If such
reduction in the conversion price occurs, it would more than double the number
of shares of common stock issuable on conversion. For a detailed discussion of
the effect of market price declines of our common stock as it relates to
conversion of the Series C preferred stock, please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations - 2000
and Recent Developments - Private Placement of Series C Preferred Stock and
Related Warrants" in Item 7 below.
Assuming a market price per share of our common stock of $1.47 per share,
our closing share price on April 2, 2001, and using the conversion rate most
favorable to the Series C preferred stockholders, those holders would receive a
total of 33,768,877 shares of our common stock on conversion of all Series C
preferred stock and exercise of related warrants. The issuance of those shares
would require us to obtain shareholder approval under Nasdaq Rule 4460. See "-
If we are required to delist our common stock, trading in our shares would
decrease and the market price of our shares would decline" on page 10. In
addition, the holders of the Series C preferred stock purchased the shares for
$20 million in the aggregate, which represents an effective purchase price of
$0.59 a share, or an approximate 60.0% discount from the assumed $1.47 closing
price. If we are required to issue those shares at such discount to the then
current market price, it would be likely to adversely affect the market price of
our common stock.
If our preferred stockholders exercise their option to require us to issue
more Series C preferred stock, our stock could be further diluted.
The holders of the Series C preferred stock may require us to issue up to
an additional $26 million in stated value of preferred stock, on terms similar
to the Series C preferred stock we currently have outstanding, for an aggregate
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purchase price of $20 million, at any time within 10 months after the
registration statement registering the shares underlying the first tranche of
Series C preferred stock has been declared effective. The additional preferred
stock would be accompanied by warrants to purchase up to an additional 800,000
shares of our common stock. If the holders of the Series C preferred stock
require us to issue the additional preferred stock and warrants, it could cause
further dilution and adversely affect the market price of our common stock.
We may be required to redeem the Series C preferred stock, which could harm
our financial position.
Upon the occurrence of events set forth in the certificate of designation
relating to our Series C preferred stock and described below under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - 2000
and Recent Developments- Private Placement of Series C Preferred Stock and
Related Warrants" in Item 7, we may be required to redeem the Series C preferred
stock at a redemption price equal to 130% of the stated value, or $34.1 million
at December 31, 2000, plus accrued dividends. We may also be required to redeem
the Series C preferred stock at a redemption price equal to 130% of the stated
value, plus accrued dividends, upon a change of control or other major
transactions. If we become obligated to effect such redemption, it could
adversely affect our financial condition. However, the credit agreement with IBM
Credit requires that we obtain IBM Credit's prior written consent to make such
payments.
If we are required to delist our common stock, trading in our shares could
decrease and the market price of our shares could decline.
The holders of the Series C preferred stock may require us to delist our
shares of common stock from the Nasdaq National Market if specific events occur.
In accordance with Nasdaq Rule 4460, which generally requires shareholder
approval for the issuance of securities representing 20% or more of an issuer's
outstanding listed securities, and under the terms of the agreement pursuant to
which we sold the Series C preferred stock and related warrants, we must solicit
shareholder approval of the issuance of the common stock issuable upon the
conversion of the Series C preferred stock and the exercise of the related
warrants, at a meeting of our stockholders which shall occur on or before June
30, 2001. If we obtain shareholder approval, the number of shares that could be
issued upon the conversion of the Series C preferred stock would not be limited
by the Nasdaq 20% limitation. If we do not obtain shareholder approval and are
not permitted to issue shares because of restrictions relating to Nasdaq Rule
4460, we may be required to pay a substantial penalty. In addition, in that
event, the holders of the Series C preferred stock may require us to voluntarily
delist our shares of common stock from the Nasdaq National Market.
Our ability to remain listed on the Nasdaq National Market also depends on
our ability to satisfy applicable Nasdaq criteria including our ability to
maintain at least $4 million in "net tangible assets" (defined as total assets
minus total liabilities, goodwill and redeemable securities) and a minimum bid
price of $1.00 per share. At December 31, 2000, our net tangible assets were
below the $4 million threshold although, subsequent to December 31, 2000, we
expect to exceed such threshold. Also, the market price for our common stock has
recently been near the minimum bid price required by Nasdaq. If we are unable to
continue to satisfy these criteria, Nasdaq may begin procedures to remove our
common stock from the Nasdaq National Market.
If we are delisted from the Nasdaq National Market, an active trading
market for our common stock may no longer exist. As a result, trading in our
shares of common stock could decrease substantially, and the price of our shares
of common stock may decline.
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Accretion of the discount on the Series C preferred stock will adversely
affect our earnings.
We will be required to accrete a portion of the discount on the Series C
preferred stock through equity, which will reduce the income available to common
stockholders and earnings per share. In addition, the value assigned to the
warrants issued in connection with the Series C preferred stock and the option
to acquire additional shares of the Series C preferred stock in a second tranche
will increase the discount on that stock.
Because the conversion rate of the Series C preferred stock is dependent on
the market price, it may encourage short sales of our common stock.
Because of the fluctuating conversion rates described above, investors may
engage in "short sales" of our common stock. Selling short is a technique used
by an investor to take advantage of an anticipated decline in the price of a
security, and a significant number of short sales can create a downward pressure
on the price of the security. If investors engage in short sales of our common
stock because of the anticipated effects of our issuance of the Series C
preferred stock upon conversion by the holders of the Series C preferred stock,
this could create a further downward pressure on the market price of our common
stock.
If we are required to issue additional shares of common stock in connection
with prior acquisitions, our stock may be further diluted.
As of December 31, 2000, there were 101,486,701 shares of our common stock
outstanding. Since January 1, 2000, we have issued an aggregate of 53,227,078
shares of common stock, of which 46,846,731 shares were issued in connection
with acquisitions of businesses and assets. We have effected, and will continue
to effect, acquisitions or contract for services through the issuance of common
stock or our other equity securities. In addition, we have agreed to "price
protection" provisions in prior acquisition agreements which may result in
additional shares of common stock being issued. Such issuances of additional
securities may be dilutive to the value of our common stock and may have an
adverse impact on the market price of our common stock.
Competition could reduce our market share and decrease our revenue.
Each of our business units is highly competitive, and we expect that
competitive pressures will continue in the future. 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. In response to
competitive pressures, we may be required to reduce prices or increase spending
in order to retain or attract customers or to pursue new market opportunities.
As a result, our revenue, gross profit and market share may decrease, each of
which could significantly harm our results of operations. In addition, increased
competition could prevent us from increasing our market share, or cause us to
lose our existing market share, either of which would harm our revenues and
profitability. We cannot assure you that we will have the financial, technical,
marketing and other resources required to successfully compete against current
and future competitors or that competitive pressures faced by us will not harm
our business, financial condition or results of operations.
Our plans call for us to grow rapidly, and our inability to manage this
growth could harm our business.
We have rapidly and significantly expanded our operations through a program
of acquisitions we consider complementary to our lines of business and expect to
continue to do so. Since January 1, 1996, we have made 51 acquisitions, and,
since January 1, 2000, we have made 10 acquisitions. This growth has placed, and
is expected to continue to place, a significant strain on our managerial,
operational and financial resources and information systems. Failure to manage
our growth effectively will harm our business, financial condition and operating
results. Furthermore, we retain existing management personnel of the companies
we acquire, under the overall supervision of our senior management. The success
of the operations of the businesses we acquire depend largely on the continued
efforts of existing management. If we are unable to retain members of existing
management of the businesses we have acquired, or may acquire in the future, our
results of operations could suffer, and we may have significant difficulty in
integrating those businesses with our current operations.
11
If we are unable to implement a new financial reporting system, our ability to
properly monitor our operating results may be impaired and we may not be
capable of complying with our financial reporting obligations.
The financial reporting systems maintained by many of the businesses we
have acquired since January 1, 1995 differ from one another and from the systems
we use on a consolidated basis. As a result, we do not properly maintain various
detailed operating and financial information systems which would allow us to
disclose separately net sales of tangible products and revenues from services,
and the associated cost of tangible goods sold and the cost of services
provided. As a result investors evaluating our financial performance will not be
able to compute the gross profit or gross profit percentage of product and
service revenues individually and this information may be important and material
to an investor in evaluating our performance.
In response to these limitations and to enable us to more quickly integrate
the financial reporting systems of businesses we may acquire in the future, we
have begun implementation of an enterprise-based financial reporting system
which we believe will be capable of properly maintaining the necessary financial
information and we believe we will be able to report product and service revenue
and their associated costs for all periods commencing with the interim reporting
period ended March 31, 2001. We believe the implementation will be completed in
the first half of 2001. However, this implementation may not be successful in
correcting the noted deficiencies, and we may experience similar deficiencies in
the future as we continue to expand our operations. If we are unable to
establish and maintain an effective financial reporting system, we will not be
able to timely and accurately account for and monitor the operations of our
business, and therefore we may not be able to properly execute our strategic
plan, which could have a material adverse effect on our business, results of
operations or financial condition.
We have entered into put and earnout agreements for companies that we have
acquired, which could require us to pay additional cash or stock consideration
to the sellers of these businesses.
We have entered into earnout arrangements under which sellers of some of
the businesses we acquired 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 $29.3 million in 2001, $18.7 million in 2002 and
$2.0 million in 2004, of which $1.0 million would be payable in cash and $49.0
million would be payable in shares of our common 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 acquired company
before income taxes for, generally, a two-year period ending on the effective
date of the put multiplied by a multiple ranging from four to five, or on some
other basis. The purchases under these put options are recorded as changes in
minority interest based upon current operating results. Based on the provisions
of the put agreements, at December 31, 2000, we are contingently liable for
additional consideration of approximately $1.2 million payable in shares of our
stock Assuming an aggregate obligation of $1.2 million and using the closing
price of our common stock on December 31, 2000, we would be required to issue
approximately 1.7 million shares to the holders of the put options. In addition,
the amount of these obligations would increase if the earnings of the acquired
companies increases.
In January 2001, we entered into an agreement with Marc Sherman and Edward
Cummings to terminate all put rights and employment agreements that each had
with or in respect of Intellesale. In exchange, we issued to Messrs. Sherman and
Cummings an aggregate of 6,616,522 shares of our common stock.
Goodwill amortization will reduce our earnings.
As a result of the acquisitions we have completed through December 31,
2000, we have approximately $166 million of goodwill, none of which is
deductible for tax purposes. We currently amortize the goodwill we have recorded
12
over periods ranging from 5 to 10 years at the rate of approximately $24 million
per year, which reduces our net income and earnings per share. Our business plan
calls for future acquisitions which may further increase the amount of goodwill
and annual amortization we record, further reducing net income and earnings per
share. As required by Statement of Financial Accounting Standards No. 121, we
periodically review the amount of goodwill we have recorded for impairment,
based on expected undiscounted cash flows. If we determine that an impairment
exists, our accounting policies require us to write down the amount of goodwill
accordingly, which would also reduce our earnings.
If we need additional capital for our ongoing operations, to fund growth or
to finance acquisitions and do not obtain it, we may not achieve our business
objectives.
We may require additional capital to fund growth of our current business as
well as to make future acquisitions. In addition, while we anticipate that funds
available from our ongoing operations and from our current credit agreement will
provide sufficient capital to fund our continuing operations for at least the
next twelve months, if unanticipated events occur we may require additional
capital for such ongoing operations. We may not be able to obtain capital from
outside sources. Even if we do obtain capital from outside sources, it may not
be on terms favorable to us. Our current credit agreement with IBM Credit may
hinder our ability to raise additional debt capital. In addition, the terms of
the Series C preferred stock and the sale of substantial amounts of our common
stock upon the conversion of the Series C preferred stock may make it more
difficult for us to raise capital through the sale of equity or equity-related
securities. If we raise additional capital by issuing equity securities, these
securities may have rights, preferences or privileges senior to those of our
common stockholders.
We may be unable to comply with restrictions imposed by our credit
facility, which could result in a default under that agreement, enabling IBM
Credit to declare amounts borrowed due and payable or otherwise result in
unanticipated costs.
We entered into an amended and restated credit agreement with IBM Credit on
October 17, 2000, which we amended on March 30, 2001, which contains various
financial and other restrictive covenants that, among other things, limit our
ability to borrow additional funds and declare and pay dividends, and requires
us to, among other things, maintain various financial ratios and comply with
various other financial covenants.
At December 31, 2000, we failed to comply with 2 of 3 financial debt
covenants contained in October 17, 2000 credit agreement, and we had a
collateral shortfall. At December 31, 2000 we were required to maintain a
minimum Tangible Net Worth (as defined in the credit agreement) of $(11.8)
million; our actual Tangible Net Worth was $(56.8) million. In addition, we were
required to achieve a minimum EBITDA (as defined in the credit agreement) of
$6.1 million for the quarter ended December 31, 2000; our actual EBITDA for the
quarter was $(15.1) million. Additionally, we had an Unpaid Shortfall Amount (as
defined in the credit agreement) of $4.0 million. This amount represents the
excess of advances under our revolving credit line over eligible collateral.
Our inability to meet these covenants was primarily as a result of charges
of $87.3 million taken during the year, of which $70.3 million were recorded in
the fourth quarter, consisting of impairment charges of approximately $56.3
million associated with the write down of impaired investments from both
continuing and discontinued operations, carrying costs of approximately $8.5
million related to future losses and charges expected to be incurred by
discontinued operations, as well as inventory, accounts receivable and other
charges at Intellesale of approximately $17 million in the second quarter of
2000 and approximately $5.5 million in the fourth quarter.
13
On March 30, 2001, we entered into a waiver and amendment to the Credit
Agreement with IBM Credit and others in which we obtained waivers for the
covenant and other defaults existing at December 31, 2000 and in which future
covenants were reset and other provisions amended or modified. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Debt,
Covenant Compliance and Liquidity" beginning on page 42 for a more detailed
discussion of the credit agreement with IBM Credit.
We cannot assure you that we will be able maintain compliance with our
covenants in the future. A failure to comply with these restrictions could
constitute a default under our credit agreement, allowing IBM Credit to
terminate its commitment to us and declare all amounts borrowed, together with
accrued interest and fees, immediately due and payable. If this were to occur,
we might not be able to pay these amounts, or we might be forced to seek a
further amendment to our credit agreement which could make the terms of the
agreement more onerous for us.
We depend on our small team of senior management, and we may have
difficulty attracting and retaining additional personnel.
We depend on the continued service of our executive officers and other key
personnel. We have entered into employment contracts ranging for periods of one
to five years through February 2006 with our key officers and employees. Some of
these employment contracts call for bonus arrangements based on earnings. There
can be no assurance, however, that we will be successful in retaining our key
employees or that we can attract and retain additional skilled personnel as
required. The loss of the services of any of our central management team could
harm our business, financial condition and results of operations. In addition,
the operations of any of our individual facilities could be adversely affected
if the services of the local managers should be unavailable.
We face the risks that the value of our inventory may decline before we
sell it or that we may not be able to sell the inventory at the prices we
anticipate.
We purchase and warehouse inventory, particularly at Intellesale, 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. In addition, in the course
of negotiations to sell Intellesale or any other non-core entity now classified
as discontinued, we may face pressure to sell any remaining inventory on hand at
a discount.
Because we will not pay dividends on our common stock for the foreseeable
future, stockholders must rely on stock appreciation for any return on their
investment in the common stock.
We do not have a history of paying dividends on our common stock, and we
cannot assure you that any dividends will be paid in the foreseeable future. Our
current credit agreement with IBM Credit places restrictions on the declaration
and payment of dividends which are described in more detail under "Market for
Registrant's Common Equity and Related Shareholder Matters - Dividends"
contained in Item 5 below. In addition, we may not pay dividends on our common
stock without the consent of the holders of a majority of the shares of the
Series C preferred stock. We intend to use any earnings which we generate to
finance the growth of our businesses, and, therefore, we do not anticipate
14
paying cash dividends in the future. As a result, only appreciation of the price
of our common stock will provide a return to our stockholders.
Provisions in our employment agreements may make it difficult for a third
party to acquire us, despite the possible benefits to our stockholders.
Our employment or other agreements with Richard Sullivan, Garrett Sullivan,
Mercedes Walton and Jerome Artigliere and SysComm International Corporation's
employment agreement with David Loppert include change of control provisions
under which the employees may terminate their employment within one year after a
change of control and are entitled to receive specified severance payments
and/or continued compensation payments for sixty months. The employment
agreements for Richard Sullivan and David Loppert 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 obligation 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.
We may not prevail in ongoing litigation and may be required to pay
substantial damages.
We are party to various legal actions as either plaintiff or defendant in
the ordinary course of business. While we believe that the final outcome of
these proceedings will not have a material adverse effect on our financial
position, cash flows or results of operations, we cannot assure the ultimate
outcome of these actions and the estimates of the potential future impact on our
financial position, cash flows or results of operations for these proceedings
could change in the future. In addition, we will continue to incur additional
legal costs in connection with pursuing and defending such actions.
Digital Angel may not be able to develop products from its technology.
Our wholly-owned subsidiary, Digital Angel Corporation has developed a
miniature digital receiver named "Digital Angel(TM)." This technology, which we
believe will be able to send and receive data and be located by global
positioning system technology to monitor at-risk patients, is not yet being sold
to customers and is still undergoing additional development. 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
functions. 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, operating results and financial condition.
15
Digital Angel is subject to restrictions imposed by government regulation.
Digital Angel is subject to federal, state and local regulation in the
United States and other countries, and it cannot predict the extent to which it
may be affected by future legislative and other regulatory developments
concerning its products and markets. In addition to the digital receiver
described above, Digital Angel also, following its acquisition of Destron
Fearing, develops, assembles and markets a broad line of electronic and visual
identification devices for the companion animal, livestock and wildlife markets.
Digital Angel is required to obtain regulatory approval before marketing most of
its products. Digital Angel's readers must and do comply with the FCC Part 15
Regulations for Electromagnetic Emissions, and the insecticide products
purchased and resold by Digital Angel have been approved by the U.S.
Environmental Protection Agency and are produced under EPA regulations. Sales of
insecticide products are incidental to Digital Angel's primary business and do
not represent a material part of its operations or revenues. Digital Angel's
products also are subject to compliance with foreign government agency
requirements. Digital Angel's contracts with its distributors generally require
the distributor to obtain all necessary regulatory approvals from the
governments of the countries into which they sell Digital Angel's products.
However, any such approval may be subject to significant delays. Some regulators
also have the authority to revoke approval of previously approved products for
cause, to request recalls of products and to close manufacturing plants in
response to violations. Any actions by these regulators could materially
adversely affect Digital Angel's business.
If the software we have sold to consumers has Year 2000 problems, we could
be exposed to lawsuits.
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, our management believes that it is not possible to determine with
complete certainty that all Year 2000 problems affecting our software products
have been 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 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 has led to, and could lead to
further lawsuits against us. The outcome of any such lawsuits and the impact on
us is 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 with achieving such compliance could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, a vendor's 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.
EMPLOYEES
At December 31, 2000, we and our subsidiaries employed approximately 1,620
employees.
16
BACKLOG
At December 31, 2000 and 1999, we and our subsidiaries had a backlog of
approximately $26.4 million and $7.5 million, respectively. We expect all of the
backlog at December 31, 2000 to be filled in 2001.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Federal, state, and local laws or regulations which have been enacted or
adopted regulating the discharge of materials into the environment have not had,
and under present conditions we do not foresee that they will have, a material
adverse effect on our capital expenditures, earnings, cash flows or our
competitive position. We will continue to monitor our operations with respect to
potential environmental issues, including changes in legally mandated standards.
ITEM 2. PROPERTIES
At December 31, 2000, we leased 688,138 square feet of operating
facilities, of which 287,214 square feet is for office facilities and 400,924
square feet is for factory and warehouse use. These leases expire at various
dates through October 2014. In addition, we own 145,000 square feet of office
and manufacturing facilities, of which 122,000 square feet is for manufacturing,
factory and warehouse use and 23,000 square feet is for office space.
The following table sets forth our properties by business divisions:
Factory /
Office Warehouse Total
--------------------------------------
(amounts in square feet)
Applications 112,350 14,054 126,404
Services -
Telephony 58,983 20,326 79,309
Networks 53,549 31,000 84,549
Advanced Wireless Services 41,111 105,000 146,111
Corporate 7,692 - 7,692
--------------------------------------
Continuing Operations 273,685 170,380 444,065
Discontinued Operations 36,529 352,544 389,073
--------------------------------------
Total 310,214 522,924 833,138
======================================
17
The following table sets forth the principal locations of our properties:
Factory /
Office Warehouse Total
--------------------------------------
(amounts in square feet)
Arizona 7,628 - 7,628
California 47,336 52,000 99,336
Canada 20,300 80,926 101,226
Florida 26,599 2,000 28,599
Illinois 19,486 5,400 24,886
Louisiana 1,500 - 1,500
Maryland 7,697 3,000 10,697
Massachusetts 2,281 4,641 6,922
Minnesota 12,000 65,000 77,000
Missouri 3,500 - 3,500
New Hampshire 19,200 5,464 24,664
New Jersey 29,626 211,450 241,076
New York 16,573 30,000 46,573
Ohio 16,900 5,000 21,900
Pennsylvania 13,948 7,453 21,401
Scotland 2,000 - 2,000
Singapore 1,000 - 1,000
Texas 1,400 - 1,400
United Kingdom 42,590 42,590 85,330
Virginia 18,500 8,000 26,500
--------------------------------------
Total 310,214 522,924 833,138
======================================
ITEM 3. 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 affect on our financial position, our cash
flows or our overall trends in results. The estimate of the potential impact on
our financial position, our overall results of operations or our cash flows for
these proceedings could change in the future.
On April 7, 2000, we and Intellesale filed a counterclaim against David
Romano and Eric Limont, the former owners of Bostek, Inc. and Micro Components
International Incorporated, two companies acquired by Intellesale in June 1999,
in the U.S. District Court for the District of Delaware for, generally, breach
of contract, breach of fiduciary duty and fraud. Messrs. Romano and Limont had
filed their claim generally alleging that their earnout payment from Intellesale
was inadequate. In July 2000, we and Intellesale amended our counterclaim in the
U.S. District Court for the District of Delaware to seek damages for, among
other things, securities law violations. In addition, on May 19, 2000,
Intellesale and two of its subsidiaries, Bostek, Inc. and Micro Components
International Incorporated, filed suits against Messrs. Romano and Limont in
Superior Court of Massachusetts to recover damages. In July 2000, Messrs. Romano
and Limont amended their complaint in the U.S. District Court for the District
of Delaware to add a claim for $10 million for the $10 million payment not made
to them. As of January 16, 2001, we, Intellesale, Bostek, Inc. and Micro
Components International Incorporated settled all claims with Messrs. Romano and
Limont. As part of the settlement agreement, Messrs. Romano and Limont agreed to
18
invest up to $6 million in shares of our common stock and to indemnify us
against various other litigation filed against Bostek, Inc. The purchase price
for the 2,955,665 shares of our common stock issued to Messrs. Roman and Limont
was paid in the form of non-recourse, non-interest bearing promissory notes
which are collateralized by the shares of common stock held by Messrs. Romano
and Limont. The settlement becomes final when the shares are included in a
registration statement which must be declared effective on or before June 15,
2001.
We are not subject to any environmental or governmental proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2000.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Our common stock trades on The Nasdaq Stock Market(R) under the symbol
"ADSX." The following table sets forth the high and low sale prices of our
common stock as reported by Nasdaq for each of the quarters during our last two
years.
High Low
---- ---
1999
First Quarter $ 4.19 $ 2.00
Second Quarter 3.50 2.00
Third Quarter 3.38 1.69
Fourth Quarter 16.00 1.63
2000
First Quarter $ 18.00 $ 6.50
Second Quarter 10.25 2.97
Third Quarter 5.22 2.59
Fourth Quarter 4.31 0.50
Holders
As of March 25, 2001, there were 1,361 holders of record of our common
stock.
Dividends
We have never paid cash dividends on our common stock. The decision whether
to apply legally available funds to the payment of dividends on our common stock
will be made by our board of directors from time to time in the exercise of its
business judgment. The credit agreement with IBM Credit provides that we may not
declare or pay any dividend, other than dividends payable solely in our common
stock, on any shares of any class of our capital stock or any warrants, options
or rights to purchase any such capital stock, or make any other distribution in
respect of such stock or other securities, whether in cash, property or other
obligations of us. In addition, the certificate of designation relating to our
Series C convertible preferred stock prohibits payment of dividends on our
common stock without the consent of the holders of a majority of the outstanding
shares of preferred stock.
20
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
between October 1, 2000 and December 31, 2000. These shares were issued (a) in
acquisition transactions to the selling stockholders in connection with the
acquisition of the indicated subsidiary or the stockholder's minority interest
in transactions directly negotiated by the stockholders 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, or (b) upon
exercise of stock options or warrants or by purchase under our Employee Stock
Purchase Plan. These shares were issued without registration in reliance upon
the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, or Rule 506 of Regulation D promulgated thereunder.
Name/Entity/Nature Number of Note Issued For Number of
Persons Common Shares
- --------------------------------------------------------------------------------------------------
Various 2 1 Warrants 415,685
ATEC Group, Inc. 2 2 Acquisition 2,674,934
Caledonian Venture Holdings, Ltd. 16 3 Acquisition 4,937,497
Charlie Phillips 1 4 Acquisition 13,333
McKinsey & Company 1 5 Services 37,994
Pacific Decision Sciences Corp. 22 6 Acquisition 8,568,532
SysComm International Corp. 3 3 Acquisition 1,699,715
----------
Total 18,347,690
===========
- ----------------------
<FN>
1. Represents shares issued in connection with the exercise of warrants.
2. Represents shares issued to the selling stockholders to acquire such
shareholder's interest in the company in a transaction directly negotiated
by the stockholders in connection with the sale of their business to us and
exempt from registration pursuant to Section 4(2) of the Act. The number of
common shares issued includes 2,077,150 shares initially issued and 597,784
"price protection" shares issued on February 28, 2001. The transaction
document included in an acknowledgment that the sale was not registered,
that the shareholder was acquiring the shares for investment and not for
resale, and that the shareholder acknowledged that he must hold the shares
until and unless registered or unless transferred in another transaction
exempt from registration. In addition, the certificates representing the
shares were legended to indicate that they were restricted.
3. Represents shares issued to the selling stockholders to acquire such
shareholder's interest in the company in a transaction directly negotiated
by the stockholders in connection with the sale of their business to us and
exempt from registration pursuant to Section 4(2) of the Act. The
transaction document included in an acknowledgment that the sale was not
registered, that the shareholder was acquiring the shares for investment
and not for resale, and that the shareholder acknowledged that he must hold
the shares until and unless registered or unless transferred in another
transaction exempt from registration. In addition, the certificates
representing the shares were legended to indicate that they were
restricted.
4. Represents shares issued in connection with the "earnout" provision of the
agreement of sale relating to a prior private transaction directly
negotiated by the stockholders in connection with the sale of their
businesses to us, which transactions were exempt from registration pursuant
to Section 4(2) of the Securities Act.
5. Represents shares issued for professional services.
6. Represents shares issued to the selling shareholders to acquire such
shareholder's interest in the company in a transaction directly negotiated
by the shareholders in connection with the sale of their business to us and
exempt from registration pursuant to Rule 506 of Regulation D promulgated
under the Act. The transaction document included an acknowledgment that the
sale was not registered, that the shareholder was acquiring the shares for
investment and not for resale, and that the shareholder acknowledged that
he must hold the shares until and unless registered or transferred in
another transaction exempt from registration. In addition, certificates
representing the shares were legended to indicate that they were
restricted.
</FN>
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
other financial information appearing elsewhere in this Annual Report. The
Summary of Operations data set forth below for each of the years in the
three-year period ended December 31, 2000 and the Summary of Balance Sheet Data
as of December 31, 2000 and 1999 are derived from, and qualified by reference
to, our financial statements appearing elsewhere in this Annual Report. The
Summary of Operations data for the years ended December 31, 1997 and 1996 and
the Summary of Balance Sheet Data as of December 31, 1998, 1997 and 1996 are
derived from audited financial statements not included herein.
2000 1999 1998 1997 1996
---------------------------------------------------------
(amounts in thousands except per share amounts)
SUMMARY OF OPERATIONS DATA
Net revenue $ 134,766 $ 129,064 $ 74,343 $ 41,616 $ 14,052
Cost of goods and services sold 82,475 74,299 39,856 19,709 7,220
---------------------------------------------------------
Gross profit 52,291 54,765 34,487 21,907 6,832
Selling, general and administrative expenses (64,500) (58,960) (32,120) (18,224) (5,851)
Depreciation and amortization (11,073) (6,560) (2,913) (1,219) (618)
Restructuring and unusual costs (6,383) (2,550) -- -- --
Gain on sale of Subsidiary 486 20,075 733 -- --
Interest Income 1,095 422 291 183 121
Interest Expense (5,901) (3,478) (1,070) (570) (167)
---------------------------------------------------------
(Loss) income from continuing operations before
provision for income taxes, minority
interest and extraordinary loss (33,985) 3,714 (592) 2,077 317
(Benefit) provision for income taxes (5,040) 1,180 670 600 15
---------------------------------------------------------
(Loss) income from continuing operations before
minority interest and extraordinary loss (28,945) 2,534 (1,262) 1,477 302
Minority interest 229 (46) 120 382 18
---------------------------------------------------------
(Loss) income from continuing operations (29,174) 2,580 (1,382) 1,095 284
(Loss) income from discontinued operations, net
of income taxes (75,702) 3,012 6,072 1,245 402
Loss on disposal of discontinued operations,
including provision for operating losses
during phase-out period, net of tax benefit (7,266) -- -- -- --
---------------------------------------------------------
(Loss) income before extraordinary loss (112,142) 5,592 4,690 2,340 686
Extraordinary loss (net of taxes of $89) -- (160) -- -- --
---------------------------------------------------------
Net (loss) income (112,142) 5,432 4,690 2,340 686
Preferred stock dividends (191) -- (44) (72) (60)
Accretion of beneficial conversion feature
of preferred stock (3,857) -- -- -- --
---------------------------------------------------------
Net (loss) income available to common stockholders $ (116,190) $ 5,432 $ 4,646 $ 2,268 $ 626
=========================================================
22
2000 1999 1998 1997 1996
-------------------------------------------------------
(amounts in thousands)
Net income (loss) per common share:
Continuing operations $ (0.52) $ 0.06 $ (0.05) $ 0.08 $ 0.07
Discontinued operations (1.30) 0.06 0.19 0.10 0.12
-------------------------------------------------------
Total $ (1.82) $ 0.12 $ 0.14 $ 0.18 $ 0.19
=======================================================
Average common shares outstanding:
Basic 63,825 46,814 32,318 12,632 3,329
Diluted 63,825 50,086 34,800 15,245 4,641
SUMMARY OF BALANCE SHEET DATA
Cash and cash equivalents $ 8,039 $ 2,181 $ 1,936 $ 5,957 $ 718
Due from buyers of divested subsidiary -- 31,302 -- -- --
Property and equipment 21,368 6,649 8,933 1,890 2,623
Goodwill 166,024 24,285 23,786 8,439 13,252
Net assets of discontinued operations 8,076 75,284 37,320 14,672 2,597
Total Assets 319,451 186,605 108,337 49,421 30,330
Long-term debt 69,146 33,260 1,864 1,010 876
Total Debt 74,374 62,915 26,055 7,825 5,799
Minority interest 4,879 1,292 1,300 639 44
Redeemable preferred stock and option 18,620 -- -- 900 10,900
Stockholders' equity 160,562 92,936 67,560 36,285 8,252
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the accompanying
financial statements and related notes included in this Annual Report. Certain
statements contained herein may contain forward-looking statements - see
"Cautionary Statement Regarding Forward-Looking Information" and "Risk Factors"
in Item 1.
RECENT DEVELOPMENTS
Discontinued Operations
On March 1, 2001, our board of directors approved the sale of Intellesale
and all of our other non-core businesses. In order to implement our I3 Services
Platform, we determined these businesses were not strategic or complementary to
our redefined core business segments and should be disposed. The results of
operations of these segments have been reclassified and reported as discontinued
operations for all periods presented. Our plan of disposal anticipates that
these entities will be disposed within 12 months from March 1, 2001, our defined
"measurement date". Proceeds from the sale of discontinued operations will be
used to pay down debt.
In the second quarter of 2000, Intellesale recorded a pre-tax charge of
$17.0 million. Included in this charge was an inventory reserve of $8.5 million
for products Intellesale expected to sell below cost (included in cost of goods
and services sold), $5.5 million related to specific accounts and other
receivables, and $3.0 million related to fees and expenses incurred in
connection with Intellesale's cancelled public offering and certain other
intangible assets. This charge reflects the segment's decreasing revenue trend,
lower quarterly gross profits and the expansion of Intellesale's infrastructure
into a major warehouse facility. In addition, a more competitive business
environment resulting from an overall slowdown in Intellesale's business
segment, and management's attention to the Bostek operational and legal issues,
discussed below under "Settlement of Litigation", contributed to the negative
results. The impact of the loss resulted in Intellesale restructuring its
overhead and refocusing its business model away from the Internet segment and
back to its traditional business lines. This restructuring was completed in the
fourth quarter of 2000.
During the fourth quarter of 2000, Intellesale refocused its business model
away from the Internet segment and is now concentrating on its traditional
business of technology asset management and brokerage services, and selling
refurbished and new desktop and notebook computers, monitors and related
components as a wholesale, business to business supplier. As a result, we wrote
down certain inventory to realizable market value resulting in an additional
charge of $5.5 million in order to quickly and effectively liquidate inventory
purchased for distribution through retail channels. Management believes that
this realignment, together with cost saving initiatives discussed below, will
make Intellesale an attractive acquisition candidate for a strategic or
financial buyer.
24
The following table sets forth the components of the various charges
recorded in the fourth quarter of 2000 in connection with the discontinued
operations:
Intellesale All Other Total
----------- --------- -----
(amounts in thousands)
Asset impairment charges $ 46,600 $ 3,619 $ 50,219
Estimated operating losses and carrying
costs during phase-out period 8,198 375 8,573
-------- ------- --------
Total $ 54,798 3,994 $ 58,792
======== ======= ========
Since December 31, 2000, as a result of the realignment and reorganization
of Intellesale's business, we have reduced the total number of employees from
197 employees to 125 employees as of March 30, 2001, some of whom may be rehired
as circumstances warrant, resulting in annual savings of approximately $3.0
million. In addition, in January 2001, we terminated or renegotiated the
employment agreements of several senior executives, resulting in annual savings
of approximately $785,000. As a result of withdrawing from the retail and "B to
C" (business to commerce) e-commence market, we have budgeted significant
savings in sales, sales support, advertising, warranty, and customer support
costs. We anticipate the annualized non personnel savings associated with our
withdrawal from this market to be approximately $2.2 million.
Private Placement of Series C Preferred Stock and Related Warrants
On October 26, 2000, we issued $26 million in stated value of our Series C
preferred stock, with an initial conversion price of $7.56 per share, to a
select group of institutional investors in a private placement. The aggregate
purchase price for the Series C preferred stock and the related warrants was $20
million. The initial conversion price of $7.56 in stated value per share was
reduced to $5.672 in stated value per share 91 days after issuance of the Series
C preferred stock.
The holders of the Series C preferred stock also received warrants to
purchase up to an additional 800,000 shares of our common stock over the next
five years. The exercise price of the warrants issued in connection with the
Series C preferred stock is $4.73 per share, subject to adjustment upon:
o the issuance of shares of common stock, or options or other rights to
acquire common stock, at an issuance price lower than the exercise
price under the warrants;
o the declaration or payment of a dividend or other distribution on our
common stock;
o issuance of any other of our securities on a basis which would
otherwise dilute the purchase rights granted by the warrants.
The exercise price may be paid in cash, in shares of common stock or by
surrendering other warrants.
Option to Acquire Additional Preferred Stock. The Series C preferred stock
investors may provide notice to purchase up to an additional $26 million in
stated value of Series C preferred stock and warrants with an initial conversion
price of $5.00 per share, for an aggregate purchase price of $20 million, at any
time up to ten months following the effective date of the registration statement
of the common shares underlying the initial tranche of Series C preferred stock.
The additional Series C preferred stock will have the same preferences,
qualifications and rights as the initial Series C preferred stock. If the
investors exercise their option to purchase such additional shares of Series C
preferred stock and related warrants, we have agreed to register the resale of
shares of our common stock issuable upon the conversion of such Series C
preferred stock and the exercise of such warrants.
25
The value of the warrants and the option were at issuance were $0.6 million
and $5.1 million, respectively.
As of December 31, 2000, there were 26,188.04 shares of Series C preferred
stock outstanding and issued. The stated value of the Series C preferred stock
is $1,000 per share, or an aggregate of $26.2 million, and the purchase price of
the Series C preferred stock and the related warrants was an aggregate of $20
million. The detailed terms of the Series C preferred stock are set forth in the
certificate of designation relating to the Series C preferred stock, which is an
exhibit to this Annual Report on Form 10-K.
The Series C preferred stock and the option to acquire the second tranche
of Series C preferred stock have been reflected in our balance sheets as
"Redeemable Preferred Stock - Series C" and "Redeemable Preferred Stock Options
- - Series C", respectively, while the warrants to acquire shares of our common
stock have been classified as part of "Stockholders' Equity".
Conversion; Conversion Rates. The Series C preferred stock is convertible
into shares of our common stock at a price per share of our common stock (which
we refer to as the "conversion price") of $5.672 in stated value per share. The
holders also have the option to use an "alternative conversion price," which is
the average closing price for the 10 trading days preceding the date of the
notice of conversion, multiplied by:
o 140%, where the date of the notice of conversion is prior to
March 25, 2001;
o 125%, where the date of the notice of conversion is on or after
March 25, 2001 but prior to April 25, 2001;
o 115%, where the date of the notice of conversion is on or after
April 25, 2001 but prior to June 24, 2001; or
o 110%, where the date of the notice of conversion is on or after
June 24, 2001.
Adjustment of the Conversion Price. The conversion price and the
alternative conversion price are each subject to adjustment based on any of the
following events:
o a stock dividend or distribution, stock split, reorganization,
recapitalization, consideration, merger or sale or stock option
issuance;
o the issuance of any security convertible into shares of our
common stock which are based on a formula that differs from the
formula described above, in which case the holders may elect to
substitute such new formula for the current formula for
calculating the number of shares into which the Series C
preferred stock is convertible; or
o the issuance of shares of common stock, or options or other
rights to acquire common stock, at a price lower than the "Base
Price," which we define below, at which time the conversion price
is reduced to a price determined by multiplying the conversion
price by the quotient of:
-- the sum of
o the number of shares of common stock outstanding immediately
prior to such sale, and
o the number of shares of common stock which the aggregate
consideration received by us would purchase at the Base
Price; and
-- the number of shares of common stock outstanding immediately
after such sale.
26
The "Base Price" means either (a) the conversion price of the Series C preferred
stock or (b) the market price of our common stock at the time.
In addition, the conversion price is subject to further adjustment after
the triggering events described below under "-Redemption."
Effect of Decline in Market Price of Our Common Stock. The holders of the
Series C preferred stock have the option to convert the shares of the preferred
stock to common stock at an alternative conversion rate starting at 125% and
declining to 110% of the average closing price for the 10 trading days preceding
the date of the notice of conversion. In addition, if a "triggering event"
described in the certificate of designation governing the Series C preferred
stock occurs, the holders would be entitled to convert the stated value of the
Series C preferred stock at a price per share of common stock equal to 50% of
the lowest closing price during the occurrence of such triggering event. The
following table illustrates the effect that declines of 25% and 50% to $1.469
per share (our closing stock price on April 2, 2001) would have on the number of
shares of common stock issuable upon conversion of the Series C preferred stock.
Shares Issuable Shares Shares
at Current Issuable upon Issuable upon
Conversion Rate Market Price 25% Decline 50% Decline
--------------- ------------ ----------- -----------
125% Alternative Conversion Rate 16,159,167 21,145,556 31,118,334
115% Alternative Conversion Rate 17,549,964 22,879,952 33,719,928
110% Alternative Conversion Rate 18,199,053 23,865,404 35,198,107
50% "Triggering Event" Conversion Rate 38,597,917 51,063,890 75,995,834
Accretion. The beneficial conversion feature (BCF) was computed as the
excess of the fair market value of the Company's common stock above the
accounting value per share of common stock at the date of issuance. The value
assigned to the BCF will increase the discount on the preferred stock. We will
be required to accrete the discount on the Series C preferred stock through
equity. The total accretion is $3.8 million. As of December 31, 2000, $3.8
million had been accreted. The BCF will be recomputed as the alternative
conversion rates become available.
Dividends. The holders of the Series C preferred stock are entitled to
receive annual dividends of 4% of the stated value, or 5.2% of the purchase
price, payable quarterly in arrears beginning on December 31, 2000 in either
cash or additional shares of Series C preferred stock.
Redemption. If any of the triggering events described below occurs with
respect to the Series C preferred stock, the holders may require us to redeem
the Series C preferred stock at a price per share equal to 130% of the stated
value, or an aggregate of $34.1 million as of December 31, 2000, plus accrued
and unpaid dividends. We require the written consent of IBM Credit to such
redemption. In addition:
o the holders of the Series C preferred stock may require us to
delist our common stock from The Nasdaq National Market;
o we must pay to each holder of Series C preferred stock an amount
in cash per share equal to 2% of the liquidation value of the
Series C preferred stock, such payments not to exceed $6 million
in the aggregate; and
o during the occurrence of a triggering event, the conversion price
per share of the Series C preferred stock would be reduced to 50%
of the lowest closing price of our common stock during such
period.
27
The triggering events include:
o failure to have the registration statement relating to the common
stock issuable on the conversion of the Series C preferred stock
declared effective on or prior to April 21, 2001, 180 days after
issuance of the Series C preferred stock or the suspension of the
effectiveness of such registration statement;
o notice of suspension in trading for a period of 5 consecutive
trading days or 30 trading days in a 365 day period;
o delisting for a period of 10 consecutive trading days or 30
trading days in a 365 day period;
o failure to obtain shareholder approval by June 30, 2001 for the
issuance of the common stock upon the conversion of the Series C
preferred stock and upon the exercise of the warrants; and
o defaults in payment of or acceleration of our payment obligations
under our credit agreement;
o failure to deliver shares of common stock within five days after
conversion notice; or
o failure to make payment upon another triggering event.
Significant Transactions. If we enter into any transaction involving a
consolidation or merger, the sale of all or substantially all of our assets or a
purchase of more than 50% of our outstanding common stock, or if we are subject
to any change in control, each holder has the right to convert the Series C
preferred stock into shares of common stock at the lesser of the conversion
price or the alternative conversion price described above, provided that:
o if the transaction occurs before April 24, 2001, each holder has
the right to convert at the lesser of the conversion price or the
alternative conversion price equal to 110% of the average closing
price of the common stock for the 10 days immediately preceding
the public announcement of the transaction or the conversion
date; and
o if we are unable to deliver the shares of common stock upon such
conversion, we must
o deliver as many shares as possible, and
o mandatorily redeem the remainder in cash at a price per share
equal to the product of (i) the aggregate number of shares of
common stock into which each share of Series C preferred stock
should be converted and (ii) the closing price of the common
stock on the date of delivery of the conversion notice.
In addition, if we are party to any consolidation, merger or other business
combination, we may require that all of the Series C preferred stock be redeemed
at a price per share equal to 130% of the stated value, plus all accrued but
unpaid dividends.
Settlement of Litigation
On April 7, 2000, we and Intellesale filed a counterclaim against David
Romano and Eric Limont, the former owners of Bostek, Inc. and Micro Components
International Incorporated, two companies acquired by Intellesale in June 1999,
in the U.S. District Court for the District of Delaware for, generally, breach
of contract, breach of fiduciary duty and fraud. Messrs. Romano and Limont had
28
filed their claim generally alleging that their earnout payment from Intellesale
was inadequate. In July 2000, we and Intellesale amended our counterclaim in the
U.S. District Court for the District of Delaware to seek damages for, among
other things, securities law violations. In addition, on May 19, 2000,
Intellesale and two of its subsidiaries, Bostek, Inc. and Micro Components
International Incorporated, filed suits against Messrs. Romano and Limont in
Superior Court of Massachusetts to recover damages. In July 2000, Messrs. Romano
and Limont amended their complaint in the U.S. District Court for the District
of Delaware to add a claim for $10 million for the $10 million payment not made
to them. As of January 16, 2001, we, Intellesale, Bostek, Inc. and Micro
Components International Incorporated settled all claims with Messrs. Romano and
Limont. As part of the settlement agreement, Messrs. Romano and Limont agreed to
invest up to $6 million in shares of our common stock and to indemnify us
against various other litigation filed against Bostek, Inc. The purchase price
for the 2,955,665 shares of our common stock issued to Messrs. Roman and Limont
was paid in the form of non-recourse, non-interest bearing promissory notes
which are collateralized by the shares of common stock held by Messrs. Romano
and Limont. The settlement becomes final when the shares are included in a
registration statement which must be declared effective on or before June 15,
2001.
Significant Acquisitions
Computer Equity Corporation
Effective June 1, 2000, we acquired all of the outstanding common shares of
Computer Equity Corporation. The aggregate purchase price was approximately
$24.7 million, $15.8 million of which was paid in shares of our common stock and
$8.9 million of which was paid in cash in August, 2000. On April 16, 2001, we
issued an additional 9.9 million shares valued at approximately $10.6 million as
"price protection" shares. Such additional consideration will be added to
goodwill in the second quarter of 2001. The total purchase price of Computer
Equity, including the liabilities assumed, was allocated to the identifiable
assets with the remainder of $15.3 million recorded as goodwill, which is being
amortized over 10 years. The transaction was accounted for under the purchase
method of accounting.
Computer Equity is a network and telecommunications integration company
providing a full spectrum of information and networking products and services,
which are focused on the federal government marketplace, including all the
branches of the U.S. military.
Destron Fearing Acquisition
On September 8, 2000 we completed our acquisition of Destron Fearing
Corporation, through a merger of our wholly-owned subsidiary, Digital Angel
Corporation (fka Digital Angel.net Inc.), into Destron Fearing. As a result of
the merger, Destron Fearing is now our wholly-owned subsidiary and has been
renamed "Digital Angel Corporation"
In connection with the merger, each outstanding share of Destron Fearing
common stock was exchanged for 1.5 shares of our common stock, with fractional
shares settled in cash. In addition, outstanding options and warrants to
purchase shares of Destron Fearing common stock were converted into a right to
purchase that number of shares of our common stock as the holders would have
been entitled to receive had they exercised such options or warrants prior to
September 8, 2000 and participated in the merger. We issued 20,500,853 shares of
our common stock in exchange for all the outstanding common stock of Destron
Fearing and will issue up to 2,731,006 shares of our common stock upon the
exercise of the Destron Fearing options and warrants. The total purchase price
of Destron Fearing of approximately $84.6 million, including the liabilities
assumed, was allocated to the identifiable assets with the remainder of $74.9
29
million recorded as goodwill, which is being amortized over 10 years. The
transaction was accounted for under the purchase method of accounting.
Destron Fearing has been in the animal identification business since 1945.
For over 50 years, Destron Fearing has developed, manufactured and marketed a
broad range of individual animal identification products. Destron Fearing owns
patents worldwide in microchip technology and is a leader in the world evolution
of radio frequency animal identification.
Pacific Decision Sciences Corporation
Effective October 1, 2000, we acquired Pacific Decision Sciences
Corporation. In the merger transaction, we issued 8,568,532 shares of our common
stock valued at approximately $28.1 million. In addition, for each of the
twelve-month periods ending September 30, 2001 and September 30, 2002, the
former stockholders of Pacific Decision Sciences will be entitled to receive
earnout payments, payable in cash or in shares of our common stock, of
$9,662,947 plus 4.0 times earnings before income taxes, depreciation and
amortization, which we refer to as "EBITDA," in excess of $3,675,880, subject to
reduction by 4.0 times the shortfall from the projected EBITDA amount, as
defined in the merger agreement. Any such additional payments will increase the
purchase price and result in additional goodwill. The total purchase price of
Pacific Decision Sciences, including the liabilities assumed, was allocated to
the identifiable assets with the remainder of $25.2 million recorded as
goodwill, which is being amortized over 5 years. The transaction was accounted
for under the purchase method of accounting.
Pacific Decision Sciences is a provider of proprietary web-based customer
relationship management software. It develops, sells and implements software
systems that enable automated, single point of contact delivery of customer
service.
Other Recent Acquisitions
In addition to Computer Equity Corporation, Destron Fearing and Pacific
Decision Sciences, since January, 2000 we have acquired, in transactions
accounted for under the purchase method of accounting:
o 100% of the capital stock of Independent Business Consultants, a
network integration company based in Valley Village, California,
effective as of April 1, 2000;
o 100% of the capital stock of Timely Technology Corp., a software
developer and application service provider based in Riverside,
California, effective as of April 1, 2000;
o 100% of the capital stock of P-Tech, Inc., a software development
company based in Manchester, New Hampshire, effective as of April 1,
2000;
o 100% of the capital stock of WebNet Services, Inc., an internet
service provider, network integrator and website developer, effective
as of July 1, 2000;
o 54.7% of the capital stock of SysComm International Corporation
(OTC-BB: SYCM), a hardware and software network integration company,
effective as of December 1, 2000; and
o 100% of the capital stock of Caledonian Venture Holdings Limited
(Transatlantic Systems), a software development company based in the
United Kingdom, effective December 18, 2000.
30
All acquisitions were accounted for using the purchase method of
accounting. Total assets acquired, including goodwill, during 2000, are
summarized as follows:
Purchase price $163,604
Net assets acquired (30,136)
---------
Goodwill $133,468
=========
Other Transactions
In October, 2000, we entered into transactions with MCY.com, Inc.
(OTC-BB:MCYC) under which we agreed would sell to MCY a non-exclusive perpetual
worldwide license to use our recently-acquired Net-Vu product, an Internet-based
Automatic Contact Distributor, for $9 million in notes plus 615,000 shares of
MCY; and MCY would grant to us an exclusive perpetual license to MCY's digital
encryption and distribution systems, including its NETrax(TM)software, for use
in various non-entertainment business-to-business applications, in consideration
for 11.8 million shares of our common stock. All consideration was placed in
escrow pending resolution of certain contingencies which were satisfied or
waived on March 30, 2001 at which time the escrow was terminated and the
transactions closed. This transaction did not result in any revenue recognition.
As noted under "Risk Factors" beginning on page 8 and under the description of
our business beginning on page 3, Digital Angel's products and services are not
yet being sold to customers and are still undergoing additional development. The
transaction will be accounted at the fair value of the consideration paid to MCY
and the technology and software acquired from MCY will be capitalized as
internal use software. We will amortize the acquired technology and software
over five years, beginning in the second quarter of 2001. However, since our
Digital Angel products and services are not yet being sold and require
additional development, we may be required to write the carrying value of the
acquired technology and software down to fair value, in accordance with the
provisions of SOP 98-1 and SFAS 121, which could be zero.
On October 27, 2000, we acquired approximately 16% of the capital stock of
ATEC Group, Inc. (AMEX:TEC), in consideration for shares of our common stock
valued at approximately $7.2 million. Based in Commack, New York, ATEC is a
system integrator and provider of a full line of information technology products
and services. We determined that we would account for our investment in the ATEC
Group, Inc. using the equity method of accounting. Subsequent to December 31,
2000, we decided to dispose of this asset in conjunction with our decision to
sell and discontinue entirely the operations of Intellesale. On March 1, 2001,
we rescinded the stock purchase transaction in accordance with the rescission
provision in the common stock purchase agreement in consideration for a break-up
fee of $1.0 million which we paid by issuing 448,431 shares of our common stock.
As of December 31, 2000, the market value of ATEC's shares had decline
substantially from the market value on October 27, 2000 when we acquired our
investment. We have concluded that the decline in our investment in the ATEC
Group is "other than temporary" and, as of December 31, 2000, we recognized a
loss of impairment in value of approximately $3.6 million, which is included in
"Restructuring and Unusual Costs" in the accompanying financial statements.
On February 27, 2001 we acquired 16.6% of the capital stock of Medical
Advisory Systems, Inc. (AMEX: DOC), a provider of medical assistance and
technical products and services, in a transaction valued at approximately $8
million in consideration for 3.3 million shares of our common stock. We are now
the single largest shareholder and control 2 of the 7 board seats. We have
determined that we will account for this investment using the equity method of
accounting.
RESULTS OF CONTINUING OPERATIONS
Revenue
Revenue from continuing operations for 2000 was $134.8 million, an increase
of $5.7 million, or 4.3%, from $129.1 million in 1999. Revenue for 1999
represents an increase of $54.8 million, or 73.8%, from $74.3 million in 1998.
These significant increases are attributable to the growth of existing
businesses as well as to growth through acquisitions.
31
Revenue for each of the continuing operating segments was:
2000 1999 1998
---------------------------- --------------------------- --------------------------
Product Service Total Product Service Total Product Service Total
------- ------- ----- ------- ------- ----- ------- ------- -----
(amounts in thousands)
Applications $ 18,525 $ 9,587 $ 28,112 $14,829 $ 13,177 $ 28,006 $ 7,306 $ 2,857 $10,163
Services -
Telephony (1) 34,754 5,265 40,019 33,394 25,832 59,226 30,820 2,450 33,270
Networks 34,894 8,151 43,045 19,878 7,312 27,190 18,708 2,574 21,282
--------- --------- --------- --------- --------- --------- ------------------ --------
Total Services 69,648 13,416 83,064 53,272 33,144 86,416 49,528 5,024 54,552
Advanced Wireless 22,253 1,146 23,399 14,379 - 14,379 9,628 - 9,628
Corporate 191 - 191 263 - 263 - - -
--------- --------- --------- --------- --------- --------- ------------------ --------
Total $110,617 $ 24,149 $134,766 $82,743 $ 46,321 $129,064 $66,462 $ 7,881 $74,343
========== ========= ========= ========= ========= ========= ================== ========
- -----------------
<FN>
(1) Includes TigerTel's revenue of $39.2 million and $11.6 million in 1999 and
1998. TigerTel was sold on December 31, 1999. Changes during the years
were:
</FN>
Revenue from our Applications segment increased $0.1 million. Product
revenue increased by $3.7 million, or 25.0%, but service revenue declined by
$3.6 million, or 27.2%. The decline in service revenue was as a result of an
internal project to implement an enterprise based financial reporting system,
reducing the amount of billable revenue that that group could otherwise have
generated if services were performed for third parties. Revenue from our
Applications segment increased $17.8 million, or 175.6%, from 1998 to 1999.
Companies acquired in 1999 contributed all of the product and service growth in
this segment in 1999.
Our Services segment is divided into two business groups - Telephony and
Networks:
Our Telephony group's revenue decreased $19.2 million, or 32.4%, from 1999
to 2000. The decrease was due to the fact that 1999 includes $39.2 million of
revenue ($16.6 of product and $22.6 of services) from TigerTel which was sold on
December 31, 1999. Excluding TigerTel's 1999 revenue, 2000 revenue increased by
$20 million, or 100%, compared to 1999 revenue of $20 million, $18.2 million, or
91.0%, of which was contributed by companies acquired in 2000 and $1.8 million,
or 9.0%, of which was from internal growth. Revenue increased $26.0 million, or
78.0%, from 1998 to 1999 as a result of TigerTel's acquisition of Contour in May
1999. TigerTel's revenue was $39.2 million, or 66.2%, of 1999 revenue and $11.6
million, or 34.9%, of 1998's revenue.
Our Networks group's revenue increased $15.9 million, or 58.3%, from 1999
to 2000. Companies acquired in 2000 contributed $9.7 million, or 61.4%, of the
increase, while $6.1 million, or 38.6%, of the increase was from internal
growth. Both product and service revenue increased from internal growth and
acquisition. Revenue increased $5.9 million, or 27.8%, from 1998 to 1999.
Companies acquired in 1999 contributed $9.2 million of revenue in 1999,
representing 155.9% of 1999's revenue increase over 1998. The $3.3 million, or
15.5%, decline in existing business revenue from 1998 to 1999 reflects the
transition from lower margin product business to a higher margin service
business in 1999 compared to 1998.
Revenue from our Advanced Wireless segment increased $9.0 million, or
62.3%, from 1999 to 2000. Companies acquired in 2000 contributed $10.4 million,
or 115.6%, of this increase, while the existing business unit's revenue declined
$1.4 million, or 15.6%, of the increase, resulting from cut backs of military
spending in the United Kingdom. Revenue from this segment increased $4.8
million, or 49.3%, from 1998 to 1999 as improved wireless orders were received
in the United Kingdom.
32
Rules 5.03-2.1 and 2 of Regulation S-X require the Company disclose cost of
both product and service revenue. The Company is unable to comply with these
rules at this time. The Company is in the process of implementing an enterprise
based financial reporting system and will report product and services costs in
its March 31, 2001 interim financial statements.
Gross Profit and Gross Profit Margin
Gross profit from continuing operations for 2000 was $52.3 million, a
decrease of $2.5 million, or 4.6%, from $54.8 million in 1999. Gross profit for
1999 represents a $20.3 million, or 58.8%, increase over 1998's gross profit of
$34.5 million. As a percentage of revenue, the gross profit margin was 38.8%,
42.4% and 46.4% for the years ended December 31, 2000, 1999 and 1998,
respectively.
Gross profit from continuing operations for each operating segment was:
2000 1999 1998
---- ---- ----
(amounts in thousands)
Applications $16,513 $17,066 $ 6,894
Services -
Telephony (1) 14,759 22,386 19,071
Networks 11,073 8,635 3,863
-----------------------------
Total Services 25,832 31,021 22,934
Advanced Wireless 9,755 6,415 4,659
Corporate 191 263 -
-----------------------------
$52,291 $54,765 $34,487
=============================
- -----------
<FN>
(1) Includes TigerTel's gross profit of $14.9 million and $7.7 million in 1999
and 1998. TigerTel was sold on December 31, 1999. Gross profit margin from
continuing operations for each operating segment was:
</FN>
2000 1999 1998
---- ---- ----
% % %
Applications 58.7 60.9 67.8
Services -
Telephony (1) 36.9 37.8 57.3
Networks 25.7 31.8 18.2
-------------------------------
Total Services 31.1 35.9 42.0
Advanced Wireless 41.7 44.6 48.4
Corporate - - - -
-------------------------------
38.8 42.4 46.4
===============================
- -----------
<FN>
(1) Includes TigerTel's gross profit margin of 38.0% and 66.4% in 1999 and
1998. TigerTel was sold on December 31, 1999.
</FN>
Changes during the years were:
Gross profit from our Applications segment decreased $0.6 million from 1999
to 2000 and margins decreased to 58.7% from 60.9% in 2000 compared to 1999.
Companies acquired in 2000 contributed $4.5 million helping to sustain our
margin and gross profit percentage decline from loss of business at our United
Kingdom locations. Those locations suffered from the cancellation of military
orders which were in the pipeline but did not materialize. We also utilized the
services of our Applications segment to implement our enterprise based financial
reporting system in 2000, reducing the amount of billable revenue that segment
could otherwise have generated if services were performed for third parties,
33
further reducing gross profit. Gross profit increased $10.2 million, or 147.5%,
from 1998 to 1999 as a result of acquisitions made in 1999. The decline in gross
margin percentage from 1998 to 1999 reflected the additional product mix offered
by this segment in 1999 compared to 1998.
Our Services segment is divided into two business groups - Telephony and
Networks:
Our Telephony group's gross profit declined $7.6 million, or 34.1%, from
1999 to 2000. Results from 1999 include $14.9 million of TigerTel's gross
profit. Excluding TigerTel's gross profit for 1999, our Telephony group
experienced a $7.3 million, or 97.3%, gross profit increase from 1999 to 2000.
Of this amount, $5.3 million, or 72.6%, was generated from companies acquired in
2000 and the balance, $2.0 million, or 27.4%, was generated by internal growth.
Gross profits increased by $3.3 million, or 17.3%, for 1999, but margins
declined to 37.8% in 1999 from 57.3% in 1998. The increase in absolute dollars
resulted from the acquisition of Contour, but this acquisition also contributed
significantly lower overall gross margin. Contour's margins were historically
lower than those of the other entities within this group.
Our Network group's gross profit increased $2.4 million, or 28.2%, from
1999 to 2000. Of the improvement, $0.1 million was contributed through internal
growth and $2.3 million was contributed by companies acquired in 2000. Gross
margin percentage declined to 25.7% in 2000 from 31.8% in 1999. The poor
performance of the economy, and the technology sector in particular in the 4th
quarter of 2000 resulted in lower capital spending and increased incentives
which contributed to the decline in gross margin percentage. Gross profit
increased by $4.8 million, or 123.5%, for 1999. This 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. The companies acquired were more service oriented (e.g., help desk,
consulting services) than the only company that made up the Networks group in
1998, with most expenses being classified as selling, general and
administrative.
Gross profit from our Advanced Wireless segment increased by $3.3 million,
or 52.1%, from 1999 to 2000. Companies acquired in 2000 contributed $3.8 million
while gross margin from internal growth declined $0.5 million as a result of
lower revenue from this source. The gross margin percentage declined slightly
from 44.6% in 1999 to 41.7% in 2000. In 1999, gross profit increased by $1.8
million, or 39.1%, over 1998 as a result of increased wireless revenue in the
United Kingdom. Gross margin percentage declined slightly to 44.6% from 48.4%.
Selling, General and Administrative Expense
Selling, general and administrative expenses from continuing operations
were $64.5 million in 2000, an increase of $5.6 million, or 9.5%, over the $58.9
million reported in 1999. The 1999 expense represents an increase of $26.8
million, or 83.5%, over the $32.1 million reported in 1998. As a percentage of
revenue, selling, general and administrative expenses from continuing operations
have increased to 47.9% in 2000, from 45.7% in 1999 and 43.2% in 1998.
Starting towards the end of the fourth quarter of 2000, and commencing
January 1, 2001, we mandated strict and severe cost cutting procedures across
the organization. At the segment level, these measures include a complete review
and reduction of selling, general and administrative expenses by at least 10%.
At the corporate level, we have eliminated the levels of 2000 expenditures for
bonuses, annual corporate meetings, and professional fees and due diligence
expenses both of which were significant in 2000 as a result of litigation and
aborted acquisitions. We have also reviewed compensation and benefits,
automobile, travel and entertainment expenses, professional fees, office
expenses, insurance, facility and communications costs, and corporate marketing
and branding costs and expect savings of between $2.0 and $4.0 million in 2001.
34
Selling, general and administrative expense for each of the operating
segments was:
2000 1999 1998
---------- ------------- ------------
(amounts in thousands)
Applications $ 19,210 $ 14,387 $ 5,381
Services -
Telephony (1) 11,511 20,260 17,572
Networks 9,348 6,953 2,261
-------- -------- --------
Total Services 20,859 27,213 19,833
Advanced Wireless 10,580 6,856 3,507
Corporate 13,851 10,504 3,399
-------- -------- --------
$ 64,500 $ 58,960 $ 32,120
======== ======== ========
- --------------------
<FN>
(1) Includes TigerTel's selling, general and administrative expenses of
$11.4 million and $5.5 million in 1999 and 1998.
</FN>
Selling, general and administrative expense as a percentage of revenue for
each of the operating segments was:
2000 1999 1998
---- ---- ----
% % %
Applications 68.3 51.4 52.9
Services -
Telephony (1) 28.8 34.2 52.8
Networks 21.7 25.6 10.6
---- ---- ----
Total Services 25.1 31.5 36.4
Advanced Wireless 45.2 47.7 36.4
Corporate (2) 10.3 8.1 4.6
---- ---- ----
47.9 45.7 43.2
==== ==== ====
- --------------------
<FN>
(1) Includes, as a percentage of revenue, TigerTel's selling, general and
administrative expenses of 29.1% and 47.4% in 1999 and 1998.
(2) Corporate's percentage has been calculated as a percentage of total
revenue.
</FN>
Changes during the years were:
Our Applications segment's selling, general and administrative expenses
increased $4.8 million, or 33.5%, to $19.2 million in 2000 from $14.4 million in
1999. Companies acquired in 2000 contributed $4.0 of this increase, while $0.8
million was attributable to increased sales, marketing and travel expenses.
Selling, general and administrative expenses increased $9.0, or 167.4%, to $14.4
million in 1999 from $5.4 million in 1998. Companies acquired in 1999
contributed $8.6 million of this increase, while $0.4 million was attributable
to general overhead increases.
Services -
Our Telephony group's selling, general and administrative expenses declined
by $8.7 million, or 43.2%, to $11.5 million from $20.3 million in 1999. Included
in 1999's SG&A is $11.4 million attributable to TigerTel sold on December 31,
1999. Excluding TigerTel in 1999, selling, general and administrative expenses
increased $2.7 million, or 15.3%, to $20.3 million in 2000 from $17.6 million in
1998. This increase was primarily due to an acquisition made in the second
quarter of 2000 which contributed $2.3 million of this increase, and $0.4
million of which was attributable to higher payroll and insurance costs.
Selling, general and administrative expenses increased by $2.7 million, or
15.3%, to $20.3 million from $17.6 million in 1999. Included in 1998's selling,
general and administrative expenses is $5.5 million attributable to TigerTel
35
sold on December 31, 1999. Excluding TigerTel's selling, general and
administrative expenses of $11.4 million in 1999 and $5.5 million in 1998,
selling, general and administrative expenses declined $3.2, million or 26.4%, to
$8.9 million in 1999 from $12.1 million in 1998. This decrease was primarily due
to reductions in headcount and facilities costs as technical forces and
administrative staff were cut and operations consolidated.
Our Network group's selling, general and administrative expenses increased
$2.4 million, or 34.4%, to $9.4 million in 2000, from $7.0 million in 1999.
Increases in payroll, commissions, facility and general overhead, in line with
increases in revenue, accounted for $0.9 million of the increase while
acquisitions in 2000 contributed $1.5 million. Selling, general and
administrative expenses increased $4.7 million, or 204.3%, to $7.0 million in
1999 from $2.3 million in 1998. The increase was attributable to the two
acquisitions made in the second quarter of 1999 which accounted for $4.2 million
of the increase. Those companies are more service oriented and have a higher
selling, general and administrative expenses.
Selling, general and administrative expenses from our Advanced Wireless
segment increased $3.7 million, or 54.3%, to $10.6 million in 2000 from the $6.9
million reported in 1999. Acquisitions completed throughout the year contributed
$4.7, while $1.0 million was reduced at the one business comprising this group
at the beginning of 2000 in line with reduced revenue, selling, general and
administrative expenses increased $3.4 million, or 97.1%, to $6.9 million in
1999 from the $3.5 million reported in 1998. While revenue increased 50% in the
same period, the increase was primarily as a result of sales and marketing costs
incurred in the launch of a new product in the second half of 1999, the benefits
of which are now being realized in 2000.
Corporate selling, general and administrative expenses increased $3.3
million, or 31.9%, to $13.9 million in 2000 from the $10.5 million reported in
1999. Increases in corporate staff, a revised outside directors remuneration
program, higher insurance and professional fees all contributed to the increase.
selling, general and administrative expenses increased $7.1 million, or 208.8%,
to $10.5 million in 1999 from the $3.4 million reported in 1999. Included in
1999's amount were bonuses of $5.5 million, higher payroll and related benefits
due to increases in corporate staff, and increased facility, insurance and
professional fees.
Depreciation and Amortization
Depreciation and amortization expense from continuing operations for 2000
was $11.1 million, an increase of $4.5 million, or 68.2%, from $6.6 million in
1999. The 1999 expense represents an increase of $3.7 million, or 127.6%, over
the $2.9. million reported in 1998. As a percentage of revenue, depreciation and
amortization expense increased to 8.2% in 2000 from 5.1% in 1999 and 3.9% in
1998. The increase, despite higher revenues, is due to significantly higher
goodwill amortization resulting from acquisitions, as well as increased
depreciation expense in 2000 and 1999 resulting from higher capital expenditures
in both 2000 and 1999 compared to 1998.
In conjunction with our review for impairment of goodwill and other
intangible assets in the fourth quarter of 2000, we reviewed the useful lives
assigned to acquisitions and, effective October 1, 2001, changed the lives to
periods ranging from 5 to 10 years, down from periods ranging from 10 to 20
years to reflect current economic trends associated with the nature of recent
acquisitions made. This change in the fourth quarter of 2000 increased
amortization expense by $3.5 million over prior periods and decreased earnings
per share by $.05.
36
Depreciation and amortization expense for each of the operating segments
was:
2000 1999 1998
------- ------- --------
(amounts in thousands)
Applications $ 1,075 $ 1,781 $ 772
Services -
Telephony (1) 551 1,547 374
Networks 171 132 39
------- ------- -------
Total Services 722 1,679 413
Advanced Wireless 652 510 319
Corporate (including amounts incurred during
consolidation) (2) 8,624 2,590 1,409
------- ------- -------
$11,073 $ 6,560 $ 2,913
======= ======= =======
- --------------------
<FN>
(1) Includes TigerTel's depreciation and amortization of $1.2 million and $0.5
million in 1999 and 1998.
(2) Includes consolidation adjustments of $7,034, $1,610 and $1,272 in 2000,
1999 and 1998, respectively.
</FN>
The changes during the years reflect, in all segments, increased
depreciation from increased capital expenditures in 2000 over 1999 and 1999 over
1998, except that in 1999, in our Applications segment, we recognized intangible
asset impairment charges which were included in 1999's amortization expense,
thus increasing the expense in 1999 by approximately $0.8 million.
Corporate's depreciation and amortization increased by $6.0 million, or
230.8%, to $8.6 million in 2000 from $2.6 million in 1999. The 2000 charge
reflects additional goodwill amortization on additional goodwill of
approximately $133.5 million associated with companies acquired throughout 2000.
On an annual basis, we expect goodwill amortization to be approximately $24
million.
Restructuring and Unusual Charges
During the fourth quarter of 2000, we reviewed our goodwill and certain
other investments for impairment and concluded that certain assets were
impaired. At December 31, 2000, we recorded a charge of $6.4 million for
permanent asset impairment as more fully described in our financial statements.
As part of the reorganization of our core business in prior years, we
implemented a restructuring plan in the first quarter of 1999. The restructuring
plan included the exiting of selected lines of business within our Services and
Applications segments, and the associated write-off of assets. In the first
quarter of 1999, we incurred a restructuring charge of $2.2 million that
included asset impairments, primarily software and other intangible assets, of
$1.5 million, lease terminations of $0.5 million, and employee separations of
$0.2 million. In addition, during the first quarter of 1999, as part of our core
business reorganization, we realigned certain operations within our Services
segment and recognized impairment charges and other related costs of $0.3
million.
Gain on Sale of Subsidiaries
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, tendered our shares and, on December 30, 1999, AT&T purchased all of the
37
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.
Interest Income and Expense
Interest income was $1.1 million, $0.4 million and $0.3 million, for 2000,
1999 and 1998, respectively. Interest income is earned primarily from short-term
investments and notes receivable.
Interest expense was $5.9 million, $3.5 million and $1.1 million for 2000,
1999 and 1998, respectively. Interest expense is a function of the level of
outstanding debt and is principally associated with revolving credit lines,
notes payable and term loans.
Income Taxes
We had effective income tax rates of 14.8%, 31.8% and (113.2%) in 2000,
1999 and 1998, respectively. Differences in the effective income tax rate from
the statutory federal income tax rate arise from non-deductible goodwill
amortization associated with acquisitions, state taxes net of federal benefits
and the increase or reduction of valuation allowances related to net operating
loss carryforwards.
Extraordinary Loss
In 1999, we retired our line of credit with State Street Bank and Trust
Company and refinanced it with amounts borrowed under the credit agreement with
IBM Credit. Deferred financing fees associated with the State Street Bank and
Trust agreement were written off during the second quarter of 1999. The total
amount of the write-off recorded as an extraordinary loss was $160, net of
income taxes.
RESULTS OF DISCONTINUED OPERATIONS
The following discloses the results of Intellesale and all other non-core
businesses comprising discontinued operations for the years ended December 31,
2000, 1999 and 1998:
Discontinued Intellesale business:
Years Ended December 31,
-----------------------------------------
(amounts in thousands)
2000 1999 1998
---- ---- ----
Product revenue $ 95,666 $ 137,077 $ 55,151
Service revenue 6,826 5,909 5,726
-----------------------------------------
Total revenue 102,492 142,986 60,877
Cost of goods and services sold 109,711 116,182 48,011
-----------------------------------------
Gross profit (7,219) 26,804 12,866
Selling, general and administrative expenses 32,772 19,119 8,111
Gain on sale of subsidiary (5,145) - -
Depreciation and amortization 2,949 1,725 467
Interest, net - 60 155
Impairment of investments 46,600 - -
(Benefit) provision for income taxes (13,357) 2,452 757
Minority interest 140 417 73
-----------------------------------------
(Loss) income from discontinued Intellesale businesses $ (71,178) $ 3,031 $ 3,303
=========================================
38
Discontinued non-core businesses: Years Ended December 31,
-----------------------------------------
(amounts in thousands)
2000 1999 1998
---- ---- ----
Product revenue $ 42,235 $ 64,511 $ 70,212
Service revenue - 180 1,649
--------- --------- ---------
Total revenue 42,235 64,691 71,861
Cost of goods and services sold 33,428 51,309 55,026
--------- --------- ---------
Gross profit 8,807 13,382 16,835
Selling, general and administrative expenses 7,926 12,337 11,254
Loss on sale of subsidiary 528 - -
Depreciation and amortization 1,268 1,402 1,121
Interest, net 187 110 299
Impairment of investments 3,619 - -
(Benefit) provision for income taxes (257) (472) 1,161
Minority interest 61 25 231
---------- ---------- ---------
(Loss) income from discontinued non-core businesses $ (4,525) $ (20) $ 2,769
========== ========== =========
Total Discontinued Operations Years Ended December 31,
-----------------------------------------
(amounts in thousands)
2000 1999 1998
---- ---- ----
Product revenue $ 137,901 $ 201,588 $ 125,363
Service revenue 6,826 6,089 7,375
--------- --------- ---------
Total revenue 144,727 207,677 132,738
Cost of goods and services sold 143,139 167,491 103,037
--------- --------- ---------
Gross profit 1,588 40,186 29,701
Selling, general and administrative expenses 40,697 31,456 19,365
Gain on sale of subsidiary (4,617) - -
Depreciation and amortization 4,217 3,127 1,588
Interest, net 187 170 454
Impairment of investments 50,219 - -
(Benefit) provision for income taxes (13,614) 1,980 1,918
Minority interest 201 441 304
--------- --------- ---------
(Loss) income from discontinued operations $ (75,702) $ 3,012 $ 6,072
========== ========= =========
The above results do not include any allocated or common overhead expenses.
Included in Interest, net, above are interest charges based on the debt of these
businesses that we believe will be assumed by a purchaser when the business is
sold.
Intellesale has refocused its business model away from the Internet
segment and is now concentrating on its traditional business of asset management
and brokerage services and the sale of refurbished and new desktop and notebook
computers, monitors and related components as a wholesale, business to business
supplier. The transition resulted in significantly reduced revenues from its
Bostek business unit in the first half of 2000 compared to substantial sales
from this unit in the second half of 2000, contributing to the decline in
revenue from 1999 to 2000. Gross profit was significantly impacted by lower
margin business in the first half of 2000 coupled with an inventory charge of
$8.5 million, as discussed below.
39
In the second quarter of 2000, Intellesale recorded a pre-tax charge of
$17.0 million. Included in this charge was an inventory reserve of $8.5 million
for products Intellesale expected to sell below cost (included in cost of goods
sold), $5.5 million related to specific accounts and other receivables, and $3.0
million related to fees and expenses incurred in connection with Intellesale's
cancelled public offering and certain other intangible assets. This charge
reflects the segment's decreasing revenue trend, lower quarterly gross profits
and the expansion of Intellesale's infrastructure into a major warehouse
facility. In addition, a more competitive business environment resulting from an
overall slowdown in Intellesale's business segment, and management's attention
to the Bostek operational and legal issues, discussed above under "Settlement of
Litigation", contributed to the negative results. The impact of the loss
resulted in Intellesale restructuring its overhead and refocusing its business
model away from the Internet segment and back to its traditional business lines.
This restructuring was completed in the fourth quarter of 2000 and during that
quarter an additional $5.5 million of inventory acquired for retail distribution
was written down to realizable value.
Provision for operating losses and carrying costs during the phase-out
period include the estimated loss on sale of the business units as well as
operating and other disposal costs to be incurred in selling the businesses.
Carrying costs include the cancellation of facility leases and employment
contract buyouts. Carrying costs include the cancellation of facility leases and
employment contract buyouts. We do not anticipate a further loss on sale.
Expenses of sales of the businesses and anticipated operating losses represent
our best estimate of these items. Actual losses could differ from those
estimates and any adjustments will be reflected in our future financial
statements. At December 31, 2000, the estimated amounts were as follows:
Intellesale All Other Total
-----------------------------------------
(amounts in thousands)
Operating losses $ 1,619 $ -- $ 1,619
Carrying Costs (1) 6,579 375 6,954
Less: Benefit for income taxes (1,250) (57) (1,307)
-----------------------------------------
___________ $ 6,948 $ 318 $ 7,266
=========================================
(1) Carrying costs include all estimated costs to dispose of the discontinued
businesses including $4.1 million for future lease commitments, $1.6
million for severance and employment contract settlements, and $0.9 million
for selling costs, including professional fees and commissions
LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS
As of December 31, 2000, cash and cash equivalents totaled $8.0 million, an
increase of $5.8 million, or 263.6% from $2.2 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 $17.0 million at
December 31, 2000, up from $6.0 million at December 31, 1999. Cash used in
operating activities totaled $34.7 million, $13.1 million and $3.9 million in
2000, 1999 and 1998, respectively. In all three years, excluding assets and
liabilities acquired or assumed in connection with acquisitions, cash used was
due to increases in accounts and unbilled receivables, inventories, prepaid
assets and accounts payable and accrued expenses, after adjusting for the net
income and for non-cash expenses.
"Due from buyer of divested subsidiary" 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,
increased by $25.1 million or 133.5% to $43.9 million in 2000 from $18.8 million
in 1999. This increase was primarily as a result of businesses acquired in 2000.
As a percentage of 2000 and 1999 revenue, accounts and unbilled receivable were
32.6% and 14.6%, respectively.
40
Inventories increased by $4.5 million or 57.7% to $12.3 million in 2000
from $7.8 million in 1999. This increase was primarily as a result of businesses
acquired in 2000. As a percentage of 2000 and 1999 cost of goods sold,
inventories were 14.9% and 10.4%, respectively.
Other current assets increased by $12.3 million or 332.4% to $16.0 million
in 2000 from $3.7 million in 1999. This increase is primarily attributable to
increases in the current portion of our deferred tax asset and tax refunds
receivable.
Accounts payable increased by $10.2 million or 152.2% to $16.9 million in
2000 from $6.7 million in 1999. This increase was as a result of businesses
acquired in 2000. As a percentage of 2000 and 1999 cost of goods sold, accounts
payable were 20.5% and 9.0%, respectively.
Accrued expenses increased by $11.4 million or 228.0% to $16.4 million in
2000 from $5.0 million in 1999. The increase is attributable to additional
accrued expenses of companies acquired in 2000.
"Due to sellers of acquired subsidiary" represents the deferred purchase
price due to the Bostek Sellers which, upon satisfaction of contingencies
discussed in "Settlement of Litigation" above, will be forgiven.
Earnout and put accruals represent the estimated earnout and deferred
purchase price payments earned at December 31, 2000 and 1999, respectively. As
of March 30, 2001 all of the amounts payable at December 31, 2000 had been
settled by the issuance of shares of our common stock.
Investing activities provided cash of $16.7 million in 2000, and used cash
of $23.1 million in 1999 and $6.9 million in 1998. In 2000, we collected $31.3
million from the purchaser of TigerTel included in decreases in notes receivable
and $0.9 million from the sale of assets, offset by cash of $9.1 million used to
acquire businesses, $8.4 million of which was spent to acquire property and
equipment, and $1.0 million of which was used to increase other assets. In 1999,
cash of $16.9 million was used to acquire businesses, $3.8 million was spent to
acquire property and equipment and $2.4 million was used principally to increase
assets such as notes receivable and other assets, while $0.6 million was
received from the sale of assets. In 1998, cash of $1.5 million was used to
acquire businesses, $1.0 million was spent to acquire property and equipment and
$3.7 million was used principally to increase assets such as notes receivable
and other assets, while $0.4 million was received from the sale of assets.
Cash of $30.8 million, $40.6 million and $14.0 million was provided by
financing activities in 2000, 1999 and 1998 respectively. In 2000, $19.1 million
was received from the issuance of Series C preferred stock, $16.0 million was
obtained through long-term debt, $2.2 million was obtained from net increases in
notes payable and $6.0 million was obtained through the issuance of common
shares. Uses of cash in 2000 included payments of $11.6 million against
long-term debt, and $0.8 million for other financing costs. In 1999, $51.1
million was obtained through long-term debt and $5.2 million was obtained
through the issuance of common shares. Uses of cash in 1999 included net
repayments of $9.5 million and $3.3 million against long-term debt and notes
payable, respectively, and $2.8 million for other financing costs. In 1998,
$16.3 million was obtained through net borrowings under notes payable and $1.4
million was obtained through the issuance of common shares. Uses of cash in 1998
included repayments of $2.5 million on long-term debt, $0.9 million for the
redemption of preferred stock and $0.3 million for the repurchase of common
stock.
One of our stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength. However, due
41
to our significant growth rate, our investment needs have increased.
Consequently, we may continue, in the future, to use cash from operations and
may continue to finance this use of cash through financing activities such as
the sale of preferred or common stock and/or bank borrowing, if available.
Debt, Covenant Compliance and Liquidity
In August 1998, we entered into a $20.0 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 $23.0 million. On May 25, 1999, we entered into a Term and
Revolving Credit Agreement with IBM Credit and, on May 26, 1999 we repaid the
amount due to State Street Bank and Trust Company. On July 30, 1999, the credit
agreement with IBM Credit was amended and restated, and it was again amended on
January 27, 2000. On October 17, 2000, we entered into a Second Amended and
Restated Term and Revolving Credit Agreement with IBM Credit which we amended on
March 30, 2001. The credit agreement with IBM Credit provides for: (a) a
revolving credit line of up to $53.355 million, subject to availability under a
borrowing base formula, designated as follows: (i) a U.S. revolving credit line
of up to $49.500 million, (ii) a Canadian revolving credit line of up to $3.855
million, and (b) a term loan A of up to $25.0 million, and (c) 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 2.75% to 3.25% and the Canadian revolving credit
line bears interest at the base rate as announced by the Toronto-Dominion Bank
of Canada each month plus 1.17% to 1.67%. As of December 31, 2000, the LIBOR
rate was approximately 6.62% and approximately $46.4 million was outstanding on
the U.S. revolving credit line, which is included in long-term debt and
approximately $3.6 million was outstanding on the Canadian revolving credit
line, which is included in the net assets of discontinued operations.
Term loan A, which was used to pay off State Street Bank and Trust Company,
bears interest at the 30-day LIBOR rate plus 3.5% to 4.0%, is amortized in
quarterly installments of approximately $1.04 million over six years and is
repayable in full on May 25, 2002. As of December 31, 2000 approximately $23
million was outstanding on this loan. The installment due April 1, 2001 has been
deferred and is due with the installment due July 1, 2001.
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 1.17% to 1.67%, is amortized in quarterly installments
over six years and is repayable in full on May 25, 2002. As of December 31,
2000, Toronto-Dominion's rate was approximately 7.5% and approximately $2.0
million was outstanding on this loan, which is included in the net assets of
discontinued operations.
The credit agreement with IBM Credit, as amended on March 30, 2001,
contains standard debt covenants relating to our financial position and
performance, as well as restrictions on the declarations and payments of
dividends and redemption of preferred stock. Those covenants and the covenant
requirements are as follows:
Covenant Covenant Requirement
-------- --------------------
As of the following dates not less than:
----------------------------------------
(i) Tangible Net Worth 03/31/01 ( 57,000,000)
06/30/01 ( 47,000,000)
09/30/01 ( 35,000,000)
42
Covenant Covenant Requirement
-------- --------------------
As of the following dates not less than:
----------------------------------------
12/31/01 ( 34,500,000)
03/31/02 ( 20,000,000)
(ii) Current Assets to Current
Liabilities 03/31/01 1.45:1.0
06/30/01 0.6:1.0
09/30/01 0.8:1.0
12/31/01 0.8:1.0
03/31/02 1.0:1.0
(iii) Minimum Cumulative EBITDA 03/31/01 ($ 4,700,000)
06/30/01 $ 5,000,000
09/30/01 $ 7,000,000
12/31/01 $11,000,000
03/31/02 $10,000,000
At December 31, 2000, we failed to comply with 2 of 3 financial debt
covenants contained in the credit agreement, and we had a collateral shortfall.
At December 31, 2000 we were required to maintain a minimum Tangible Net Worth
(as defined in the credit agreement) of $(11.8) million; our actual Tangible Net
Worth was $(56.8) million and we were required to achieve a minimum EBITDA (as
defined in the credit agreement) of $6.1 million for the quarter ended December
31, 2000; our actual EBITDA for the quarter was $(15.1) million. Additionally,
we had an Unpaid Shortfall Amount (as defined in the credit agreement) of $4.0
million. This amount represents the excess of advances under our revolving
credit line over eligible collateral.
Our inability to meet these covenants was primarily as a result of charges
of $87.3 million taken during the year, of which $70.3 million were recorded in
the fourth quarter, consisting of impairment charges of approximately $56.3
million associated with the write down of impaired investments from both
continuing and discontinued operations, carrying costs of approximately $8.5
million related to future losses and charges expected to be incurred by
discontinued operations, as well as inventory, accounts receivable and other
charges at Intellesale of approximately $17 million in the second quarter of
2000 and approximately $5.5 million in the fourth quarter.
On March 8, 2001 we notified IBM Credit that as of and for the quarter
ended December 31, 2000 we were not in compliance with the covenants for
Tangible Net Worth and Minimum EBITDA and that we had a collateral shortfall.
IBM Credit agreed to waive such non-compliance and, on March 30, 2001, we, IBM
Credit and others entered into a waiver and amendment to the credit agreement.
In connection therewith we agreed to pay IBM Credit a $375,000 waiver fee, and
we granted IBM Credit a warrant to acquire 2.9 million shares of our common
stock and 1.2 million shares of Digital Angel Corporation's common stock.
Our business plan for 2001 anticipates compliance with our covenants
throughout the remaining term of the credit agreement. Our plan anticipates
significant year to year increases in revenues due to increased volumes,
improved working capital management, reduced capital spending, successful
implementation of on-going cost savings initiatives, improved operating
efficiencies, and the disposition of non-core businesses.
43
We currently expect to meet and be in compliance throughout 2001 with the
covenants in the credit agreement. However, if business conditions are other
than as anticipated or other unforeseen events or circumstances occur, these may
impact our ability to remain in compliance with the covenants. In the absence of
waiver or amendment to such financial covenants, such noncompliance would
constitute an event of default under the credit agreement, and IBM Credit would
be entitled to accelerate the maturity of all amounts we owe them. In the event
that such noncompliance appears likely, or occurs, we will seek to renegotiate
the covenants and/or obtain waivers, as required. There can be no assurance
however that we would be successful in negotiating such amendments or obtaining
such waivers.
Sources of Liquidity
Our sources of liquidity include, but are not limited to, funds from
operations and funds available under the credit agreement with IBM Credit. 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.
Outlook
Our objective is to continue to grow each of our 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 last twelve months and continue to do so. Our
financial results and cash flows are substantially dependent on not only our
ability to sustain and grow our existing businesses, but to continue to grow
through acquisition. We expect to continue to pursue our acquisition strategy in
2001 and future years, but there can be no assurance that our management will be
able to continue to find, acquire, finance and integrate high quality companies
at attractive prices.
We are constantly looking for ways to maximize shareholder value. As such,
we are continually seeking operational efficiencies and synergies within each of
our operating segments as well as evaluating acquisitions of businesses and
customer bases which complement our operations. These strategic initiatives may
include acquisitions, raising additional funds through debt or equity offerings,
or the divestiture of non-core business units that are not critical to our long
term strategy or other restructuring or rationalization of existing operations.
We will continue to review all alternatives to ensure maximum appreciation of
our stockholders' investments. There can be no assurance however that any
initiatives will be found, or if found, that they will be on terms favorable to
us.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS
133, Accounting for Derivative Instruments and Hedging Activities, which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement is effective
for fiscal years commencing after June 15, 2000. In June 2000, the FASB issued
FAS 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FAS statement 133, which addresses implementation
issues experienced by those companies that adopted FAS 133 early. We adopted
44
these statements as of January 1, 2001 and, because we have a minimal use of
derivative instruments, we do not believe that the adoption of these statements
will have any effect on our financial condition, results of operations or cash
flows.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 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. On June
26, 2000, the SEC staff issued SAB No. 101B, which delayed the implementation
date of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. We adopted this statement in the fourth
quarter of 2000 and such adoption did not have a material impact on our
financial condition, results of operations or cash flows.
In September 2000, the EITF reached a consensus in EITF Issues 00-10,
"Accounting for Shipping and Handling Fees and Costs," agreeing that shipping
and handling fees must be classified as revenues and comparable prior periods
should be restated. Further, they agreed that shipping and handling costs can be
classified anywhere in the statement of earnings, except they cannot be netted
against sales. If shipping and handling costs are not included in costs of goods
sold, the amount and classification of these expenses must be disclosed in the
footnotes to the financial statements. This consensus must be adopted no later
than the fourth quarter of fiscal years beginning after December 15, 1999. We
adopted EITF Issue 00-10 in the fourth quarter of 2000 and such adoption did not
have a material impact on our financial condition, results of operations or cash
flows.
ITEM 7A. 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 existing credit
agreement with IBM Credit bear interest at the London Interbank Offered Rate
which is adjusted monthly. Our interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of our
investments are in short-term investments.
Due to the nature of our borrowings and our short-term investments, we have
concluded that there is no material market risk exposure and, therefore, no
quantitative tabular disclosures are required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in
this Annual Report are listed in Item 14 and begin immediately after Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
45
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position Position Held Since
- ----------------------------- ---------- --------------------------------------------------- -------------------------
Richard J. Sullivan 62 Chairman, Chief Executive Officer, Secretary May 1993
Garrett A. Sullivan 66 Director, Vice Chairman January 2001
Mercedes Walton 47 President, Chief Operating Officer January 2001
Richard S. Friedland 50 Director October 1999
Arthur F. Noterman 59 Director February 1997
Daniel E. Penni 53 Director March 1995
Angela M. Sullivan 43 Director April 1996
Constance K. Weaver 48 Director July 1998
Jerome C. Artigliere 47 Senior Vice President, Chief Financial Officer, December 2000
Assistant Treasurer
David I. Beckett 49 Senior Vice President, General Counsel, December 2000
Assistant Secretary
Michael E. Krawitz 31 Senior Vice President, Assistant Secretary December 2000
David A. Loppert 46 Senior Vice President, Chief Executive December 2000
Officer, SysComm International Corporation
Following is a summary of the background and business experience of the
directors and executive officers:
Richard J. Sullivan: Mr. Sullivan, age 62, was elected to the board of
directors and named Chief Executive Officer in May 1993. He was appointed
Secretary in March 1996. Mr. Sullivan is currently Chairman of Great Bay
Technology, Inc. From August 1989 to December 1992, Mr. Sullivan was Chairman of
the board of directors of Consolidated Convenience Systems, Inc., in
Springfield, Missouri. He has been the Managing General Partner of The Bay
Group, a merger and acquisition firm in New Hampshire, since February 1985. Mr.
Sullivan was formerly Chairman and Chief Executive Officer of Manufacturing
Resources, Inc., an MRP II software company in Boston, Massachusetts, and was
Chairman and CEO of Encode Technology, a "Computer-Aided Manufacturing" Company,
in Nashua, New Hampshire from February 1984 to August 1986. Mr. Sullivan is
married to Angela M. Sullivan.
Garrett A. Sullivan: Mr. Sullivan, age 66, has served as Vice Chairman of
the Company since January 2001. From March 1995 until his appointment to Vice
Chairman, Mr. Sullivan served as President of the Company. He was elected to the
board of directors in August 1995. From March 1995 to December 2000, Mr.
Sullivan was President of the Company. He was acting secretary of the Company
from March 1995 to March 1996 and acting Chief Financial Officer from March 1995
to February 1997. From 1993 to 1994, he was an Executive Vice President of
Envirobusiness, Inc. From 1988 to 1993, he served as president and chief
operating officer of two companies in the electronics and chemical industries
which were owned by Philips North America. He was previously a partner in The
Bay Group, a merger and acquisition firm in New Hampshire, from 1988 to 1993.
From 1981 to 1988, Mr. Sullivan was President of Granada Hospital Group,
Burlington, Massachusetts. He earned a Bachelor of Arts degree from Boston
University in 1960 and an MBA from Harvard University in 1962. Mr. Sullivan is
not related to Richard J. Sullivan.
Mercedes Walton: Ms. Walton, age 47, has served as the President and Chief
Operating Officer of the Company since January 2001. Ms. Walton was employed by
AT&T from 1976 to 2000. From January 1999 to March 2000, Ms. Walton was employed
by AT&T as Vice President--Corporate Strategy and Business Development and,
46
from March 1996 to December 1998, as Business Development Vice
President--Corporate Strategy. Ms. Walton holds a Bachelor of Arts degree from
Smith College, a Masters of Education degree from Harvard University and a
Masters of Science degree from the Massachusetts Institute of Technology Sloan
School of Business. In addition, Ms. Walton graduated from the Executive
Development Program at Emory University, the Aspen Institute's Executive Program
and Northwestern University's Kellogg School of Business Executive Development
Program.
Richard S. Friedland: Mr. Friedland, age 50, was elected to the board of
directors in October 1999 and is Chairman of the Audit Committee and serves on
the Compensation Committee of the board of directors of the Company. He was
previously associated with General Instrument Corporation. During his 19-year
tenure, he held various executive positions, including Chief Financial Officer,
President and Chief Operating Officer. In 1995, he was appointed Chairman of the
Board and Chief Executive Officer. Mr. Friedland currently serves on the boards
of Zilog, Inc. and Video Network Communications, Inc., as well as several
development stage companies. He earned a Bachelor of Science degree in
Accounting from Ohio State University in 1972 and a Master of Business
Administration degree from Seton Hall University in 1985.
Arthur F. Noterman: Mr. Noterman, age 59, a Chartered Life Underwriter, has
served as a Director since February 1997, and serves on the Audit and
Compensation Committees of the board of directors of the Company. An operator of
his own insurance agency, Mr. Noterman is a registered NASD broker affiliated
with a Chicago, Illinois registered broker/dealer. Mr. Noterman attended
Northeastern University from 1965 to 1975 and obtained the Chartered Life
Underwriters Professional degree in 1979 from The American College, Bryn Mawr,
Pennsylvania.
Daniel E. Penni: Mr. Penni, age 53, has served as a Director since March
1995 and is Chairman of the Compensation Committee, and serves on the Audit
Committees of the board of directors of the Company. Since March 1998, he has
been an Area Executive Vice President for Arthur J. Gallagher & Co. (NYSE -
AJG). He has worked in many sales and administrative roles in the insurance
business since 1969. He is the managing member of the Norsman Group Northeast,
LLC, a private sales and marketing company focused on Internet based education
and marketing and serves as Treasurer and Chairman of the Finance Committee of
the Board of Trustees of the Massachusetts College of Pharmacy and Health
Sciences. Mr. Penni graduated with a Bachelor of Science degree in 1969 from the
School of Management at Boston College.
Angela M. Sullivan: Ms. Sullivan, age 43, has served as a Director since
April 1996. From 1988 to the present, Ms. Sullivan has been a partner in The Bay
Group, a private merger and acquisition firm, President of Great Bay Technology,
Inc., and President of Spirit Saver, Inc. Ms. Sullivan earned a Bachelor of
Science degree in Business Administration in 1980 from Salem State College. Ms.
Sullivan is married to Richard J. Sullivan.
Constance K. Weaver: Ms. Weaver, age 48, was elected to the board of
directors in July 1998 and serves on the Compensation and Audit Committees of
the board of directors of the Company. From 1996 to the present, Ms. Weaver has
been Vice President, Investor Relations and Financial Communications for AT&T
Corporation. From 1995 through 1996 she was Senior Director, Investor Relations
and Financial Communications for Microsoft Corporation. From 1993 to 1995 she
was Vice President, Investor Relations, and from 1991 to 1993 she was Director
of Investor Relations, for MCI Communications, Inc. Ms. Weaver is a director of
47
the National Investor Relations Institute (NIRI). She earned a Bachelor of
Science degree from the University of Maryland in 1975.
Jerome C. Artigliere: Mr. Artigliere, age 47, joined a subsidiary of the
Company as President in January 1998, and was appointed Vice President of the
Company in April 1998 and Treasurer in December 1999. In November 2000, Mr.
Artigliere was appointed Vice President and Chief Financial Officer of the
Company, and Senior Vice President, Chief Financial Officer and Assistant
Treasurer in December 2000. From 1996 to 1997, he was Regional Vice President at
General Electric Capital Corporation in Portsmouth, NH. Prior to that, from 1994
to 1996, he was State Vice President at First National Bank in Portsmouth, NH, a
commercial bank subsidiary of Peoples Heritage Bank of Portland, ME. He earned
an undergraduate degree in finance from Seton Hall University in 1977, and an
MBA from Fairleigh Dickinson University in 1980.
David I. Beckett: Mr. Beckett, age 49, joined the Company as General
Counsel in January 2000, and was appointed Senior Vice President-Business
Development in December 2000. Prior to joining the Company, Mr. Beckett was an
attorney with Akerman, Senterfitt & Eidson in Miami, and with Pavese, Haverfield
in Ft. Myers, Florida. Mr. Beckett was an attorney with Shearman & Sterling in
New York from 1980 to 1984 and has more than ten years of investment banking
experience, including positions with Salomon Brothers Inc and Gleacher & Co. in
New York. Mr. Beckett earned a Bachelor of Arts degree from University of
Florida in 1974, a juris doctorate from University of Florida College of Law in
1976 and a LL.M. from New York University School of Law in 1977.
Michael E. Krawitz: Mr. Krawitz, age 31, joined the Company as Assistant
Vice President and General Counsel in April 1999, and was appointed Vice
President and Assistant Secretary in December 1999, and Senior Vice President,
Strategic Initiatives and Assistant Secretary in December 2000. From 1994 to
April 1999, Mr. Krawitz was an attorney with Fried, Frank, Harris, Shriver &
Jacobson in New York. Mr. Krawitz earned a Bachelor of Arts degree from Cornell
University in 1991 and a juris doctorate from Harvard Law School in 1994.
David A. Loppert: Mr. Loppert, age 46, serves as Chief Executive Officer of
SysComm International Corporation, a subsidiary of the Company and, since
December 2000, as a Senior Vice President of, and prior to November 2000 was
Vice President, Chief Financial Officer and Assistant Secretary of the Company,
which he joined in February 1997. From 1996 to 1997, Mr. Loppert was Chief
Financial Officer of Bingo Brain, Inc. From 1994 to 1996, he was Chief Financial
Officer of both C.T.A. America, Inc., and Ricochet International, L.L.C. Prior
to that he was Senior Vice President, Acquisitions and Due Diligence, of
Associated Financial Corporation. Mr. Loppert started his financial career with
Price Waterhouse in 1978, in Johannesburg, South Africa, before moving to their
Los Angeles Office in 1980 where he rose to the position of Senior Manager. He
holds Bachelor degrees in both Accounting and Commerce, as well as a Higher
Diploma in Accounting, all from the University of the Witwatersrand,
Johannesburg. Mr. Loppert was designated a Chartered Accountant (South Africa)
in 1980.
Directorships
Ms. Walton is a director of CRYO-CELL International, Norstan, Inc. and
Medical Advisory Systems, Inc. Mr. Friedland currently serves on the boards of
directors of Zilog, Inc. and Video Network Communications, Inc. Mr. Garrett
Sullivan and Mr. Loppert currently serve on the board of directors of SysComm
International Corporation. Mr. Loppert also serves on the board of directors of
Medical Advisory Systems, Inc. No other directors hold directorships in any
other company which has a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
subject to the requirements of Section
48
15(d) of the Exchange Act or any company registered as an investment company
under the Investment Company Act of 1940.
Board Committees and Meetings
The Company has standing Audit and Compensation Committees of the board of
directors. The members of the committees are identified in the above-referenced
descriptions.
The Audit Committee recommends for approval by the board of directors a
firm of certified public accountants whose duty it is to audit the consolidated
financial statements of the Company for the fiscal year in which they are
appointed, and monitors the effectiveness of the audit effort, the Company's
internal and financial accounting organization and controls and financial
reporting. The Audit Committee held three meetings during 2000.
The Compensation Committee administers the Company's 1996 Non-Qualified
Stock Option Plan, the 1999 Flexible Stock Plan and the 1999 Employees Stock
Purchase Plan, including the review and grant of stock options to officers and
other employees under such plans, and recommends the adoption of new plans. The
Compensation Committee also reviews and approves various other Company
compensation policies and matters and reviews and approves salaries and other
matters relating to the executive officers of the Company. The Compensation
Committee reviews all senior corporate employees after the end of each fiscal
year to determine compensation for the subsequent year. Particular attention is
paid to each employee's contributions to the current and future success of the
Company along with their salary level as compared to the market value of
personnel with similar skills and responsibilities. The Compensation Committee
also looks at accomplishments which are above and beyond management's normal
expectations for their positions. The Compensation Committee met once during
2000 and acted by written consent nine times.
The board of directors held two meetings during 2000 and acted by written
consent 52 times during 2000. During the year, all Directors attended 75% or
more of the board of directors' meetings and the Committees to which they were
assigned.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the officers and directors of
the Company and persons who own more than 10% of the Company's Common Stock to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish copies of all such reports to the Company.
The Company believes, based on its stock transfer records and other information
available to it, that all reports required under Section 16(a) were timely filed
during 2000.
49
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
total remuneration paid in 2000 and the two prior fiscal years to the Company's
Chief Executive Officer, the Company's four other most highly compensated
executive officers and two other individuals for whom disclosures would be
required, or is anticipated to be required in 2001, but for the fact that the
individuals were not serving, or had not served, as executive officers of the
Company at December 31, 2000 or for the entire year then ended.
Summary Compensation Table
Long-Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- --------------------- --------------------
Other Annual Restricted Options/ LTIP All Other
Name and Principal Compen- Stocks SAR's Payouts Compen-
Position (1) Year Salary ($) Bonus ($)(2) sation ($)(3) Awards ($) (#)(4) (#) sation ($)
- -----------------------------------------------------------------------------------------------------------------------------
Richard J. Sullivan 2000 $ 450,000 $ 180,000 $ 936,672 -- 4,000,000 -- $ --
Chairman, CEO and 1999 457,500 3,000,000 9,115 -- 1,000,000 -- --
Secretary 1998 345,833 180,000 79,882 -- 1,500,000 -- --
Garrett A. Sullivan (5) 2000 165,000 90,000 27,832 -- 2,000,000 -- --
Director, Vice Chairman 1999 165,000 1,500,000 8,832 -- 500,000 -- --
1998 144,165 90,000 8,842 -- 475,000 -- --
Mercedes Walton (6 ) 2000 N/A N/A N/A N/A N/A N/A N/A
President and COO 1999 N/A N/A N/A N/A N/A N/A N/A
1998 N/A N/A N/A N/A N/A N/A N/A
Jerome C. Artigliere (7) 2000 134,616 35,000 3,100 -- 100,000 -- --
Senior Vice President, 1999 98,726 150,000 1,938 -- 100,000 -- --
Chief Financial Officer, 1998 85,000 25,000 1,938 -- 50,000 -- --
Assistant Treasurer
David I. Beckett (8) 2000 156,055 85,000 29,418 150,000 -- --
Senior Vice President, 1999 N/A N/A N/A N/A N/A N/A N/A
General Counsel, 1998 N/A N/A N/A N/A N/A N/A N/A
Assistant Secretary
Michael E. Krawitz (9) 2000 151,853 35,000 --- -- 100,000 -- --
Senior Vice President, 1999 94,027 150,000 1,541 -- 125,000 -- --
Assistant Secretary 1998 N/A N/A N/A N/A N/A N/A N/A
David A. Loppert (10) 2000 150,000 45,000 50,901 -- 1,000,000 -- --
Senior Vice President, 1999 150,000 750,000 19,775 -- 250,000 -- --
Chief Executive Officer 1998 123,537 40,000 15,925 -- 285,000 -- --
SysComm International
Corporation
- ----------------------------
<FN>
(1) See "Employment Contracts and Termination of Employment and
Change-In-Control Arrangements" below.
(2) The amounts in the Bonus column were discretionary awards granted by the
Compensation Committee in consideration of the contributions of the
respective named executive officers.
(3) Other annual compensation includes: (a) in 2000, for Richard J. Sullivan,
$936,672 of other compensation representing the fair value of property
distributed to Richard J. Sullivan, including the associated payment of
taxes on his behalf, pursuant to his employment agreement; (b)in 1998, to
Richard J. Sullivan for reimbursement of taxes (c) in 2000, to David I.
Beckett for moving expenses, other discretionary payments, and imputed
interest on an interest free loan from the Company, and (d) in 2000, to
David A. Loppert for discretionary payments, tuition reimbursement and
imputed interest on an interest free loan from the Company.
(4) Indicates number of securities underlying options.
(5) Mr. Sullivan served as President and Chief Operating Officer of the Company
from March 1995 until January 2001. Since January 2001, Mr. Sullivan has
been serving solely as Vice Chairman.
(6) Ms. Walton began her employment with the Company in January 2001 as
President and Chief Operating Officer.
(7) Mr. Artigliere began his employment with a subsidiary of the Company in
January 1998 and was appointed an officer of the Company in April, 1998.
Mr. Artigliere was appointed Chief Financial Officer in November 2000 and
Senior Vice President, Chief Financial Officer and Assistant Treasurer in
December 2000.
50
(8) David I. Beckett joined the Company in January 2000, and was appointed
Senior Vice President-Business Development in December 2000.
(9) Mr. Krawitz joined the Company in April 1999 , and was appointed Senior
Vice President, Strategic Operations, and Assistant Secretary in December
2000.
(10) Mr. Loppert was employed as Vice President, Treasurer, Chief Financial
Officer of the Company in February 1997. Since December 2000, he has served
in a dual role as Senior Vice President of the Company and as Chief
Executive Officer of SysComm International Corporation, a 55% subsidiary of
the Company.
</FN>
Option Grants in Last Fiscal Year
The following table contains information concerning the Company's grant of
stock options under the Company's 1999 Flexible Stock Plan and the 1996
Non-Qualified Stock Option Plan to the named executive officers during 2000:
Option Grants in the Last Fiscal Year
Individual Grants
- --------------------------------------------------------------------------------------------------------------------
Name Number of % of Total
Securities Options Granted Grant Date
Underlying Options to Employees in Exercise Present Value
Granted (#)(1) 2000 Price ($/Sh) Expiration Date ($) (2)
- ---------------------- ------------------------------------ --------------- ----------------- -----------------
Richard J. Sullivan 3,500,000 25.5% $ 2.75 September -06 $ 2,345,000
500,000 3.6 2.75 September -05 335,000
Garrett A. Sullivan 1,571,000 11.4 2.75 September -06 1,052,570
429,000 3.1 2.75 September -05 287,430
Mercedes Walton -- -- -- -- --
Jerome C. Artigliere 79,000 0.6 2.75 September -06 52,930
21,000 0.2 2.75 September -05 14,070
David I. Beckett 50,000 0.4 6.34 January -06 33,500
79,000 0.6 2.75 September -06 52,930
21,000 0.2 2.75 September -05 14,070
Michael E. Krawitz 79,000 0.6 2.75 September -06 52,930
21,000 0.2 2.75 September -05 14,070
David A. Loppert 786,000 5.7 2.75 September -06 526,620
214,000 1.6 2.75 September -05 143,380
- ---------------
<FN>
(1) Options granted under the 1996 Non-Qualified Stock Option Plan and the 1999
Flexible Stock Plan were granted at an exercise price equal to the fair
market value of the Company's common shares on the grant date. These
options are exercisable over a five-year period beginning with the first
anniversary of the grant date.
(2) Based on the grant date present value of $0.67 per option share which was
derived using the Black-Scholes option pricing model in accordance with
rules and regulations of the Securities Exchange Commission and not
intended to forecast future appreciation of the Company's common share
price. The Black-Scholes model was used with the following assumptions:
dividend yield of 0%; expected volatility of 53.32%; risk-free interest
rate of 4.98%; and expected lives of 5 years.
</FN>
51
Option Exercises and Fiscal Year-End Values
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during 2000 and
unexercised options held on December 31, 2000:
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Exercised in 2000 Number of Securities Value of Unexercised In-The
Underlying Unexercised Money Options at Year End 2000
Options at Year End 2000(#) ($) (2)
------------------------------- --------------------------------------------------------------
Name Shares Acquired Value Realized
Upon Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------- --------------------------------------------------------------
Richard J. Sullivan 500,000 $ --- 4,185,000 7,685,000 $ --- $ ---
Garrett A. Sullivan 461,500 300,950 1,382,500 2,953,500 --- ---
Mercedes Walton --- --- --- --- --- ---
Jerome C. Artigliere 46,000 168,888 75,000 154,000 --- ---
David I. Beckett 21,000 --- 16,667 112,333 --- ---
Michael E. Krawitz 71,000 610,963 75,000 154,000 --- ---
David A. Loppert 322,400 931,260 448,600 1,384,600 --- ---
- -----------------------
<FN>
(1) The values realized represents the aggregate market value of the shares
covered by the option on the date of exercise less the aggregate exercise
price paid by the executive officer, but do not include deduction for taxes
or other expenses associated with the exercise of the option or the sale of
the underlying shares.
(2) The value of the unexercised in-the-money options at December 31, 2000
assumes a fair market value of $0.688, the closing price of the Company's
common stock as reported on The Nasdaq Stock Market on December 29, 2000.
The values shown are net of the option exercise price, but do not include
deduction for taxes or other expenses associated with the exercise of the
option or the sale of the underlying shares.
</FN>
Compensation Pursuant to Plans
Cash and Stock Incentive Compensation Programs. To reward performance, the
Company provides its executive officers and its divisional executive officers
with additional compensation in the form of a cash bonus and/or stock awards. No
fixed formula or weighting is applied by the Compensation Committee to corporate
performance versus individual performance in determining these awards. The
amounts of such awards are determined by the Compensation Committee acting in
its discretion. Such determination, except in the case of the award for the
Chairman, is made after considering the recommendations of the Chairman and
President and such other matters as the Compensation Committee deems relevant.
The Compensation Committee, acting in its discretion, may determine to pay a
lesser award than the maximum specified. The amount of the total incentive is
divided between cash and stock at the discretion of the Compensation Committee.
For 2001, the Committee has authorized a bonus pool of up to $1.0 million
upon the sale by the Company of at least $100 million of Company assets (other
than transactions in the ordinary course of business).
Stock Options Granted under the 1996 Non-Qualified Stock Option Plan and
the 1999 Flexible Stock Plan. The 1996 Non-Qualified Stock Option Plan and the
1999 Flexible Stock Plan are long-term plans designed to link rewards with
shareholder value over time. Stock options are granted to aid in the retention
of employees and to align the interests of employees with shareholders. The
value of the stock options to an employee increases as the price of the
Company's stock increases above the fair market value on the grant date, and the
employee must remain in the Company's employ for the period required for the
stock option to be exercisable, thus providing an incentive to remain in the
Company's employ.
52
These Plans allow grants of stock options to all employees of the Company,
including executive officers. Grants to executive officers of the Company and to
officers of the Company's subsidiaries are made at the discretion of the
Compensation Committee. The Compensation Committee may also make available a
pool of options to each subsidiary to be granted at the discretion of such
subsidiary's president.
Stock Options Granted under the 1999 Employees Stock Purchase Plan. The
1999 Employees Stock Purchase Plan, which is intended to qualify as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code, provides
eligible employees with an opportunity to accumulate, through payroll
deductions, funds to be used toward the purchase of Company stock pursuant to
options granted under the Plan. Options granted in connection with an offering
under the plan, permit the option holder to purchase Company stock at a price
per share equal to 85% of the fair market value of the stock on (i) the date on
which the option is granted (i.e., the first business day of the offering) and
(ii) the date on which the option is exercised (i.e., the last business day of
the offering), whichever is less. Section 423 of the Internal Revenue Code also
provides certain favorable tax consequences to the option holder, provided that
(i.e., the last business day of the offering)the stock acquired under the plan
is held for a specified minimum period of time.
Other than as otherwise disclosed herein, the Company has no plans pursuant
to which cash or non-cash compensation was paid or distributed during the last
fiscal year, or is proposed to be paid or distributed in the future, to the
individuals described above.
Compensation of Directors
Prior to the fourth quarter of 1998, non-employee directors of the Company
received a fee of $250 per meeting, for their attendance at meetings of the
Company's Board of Directors. Beginning in the fourth quarter of 1998, the
non-employee director compensation was changed to fixed quarterly fees in the
amount of $5,000 per non-employee director. In addition, non-employee directors
receive a quarterly fee in the amount of $1,000 for each committee on which they
are a member. Reasonable travel expenses are reimbursed when incurred.
Individuals who become directors of the Company are automatically granted an
initial option to purchase 25,000 shares of Common Stock on the date they become
directors. Each of such options is granted pursuant to the Company's 1996
Non-Qualified Stock Option Plan or the 1999 Flexible Stock Plan on terms and
conditions determined by the Board of Directors. In addition, each of Messrs.
Friedland, Noterman, Penni and Weaver received (a) an option to purchase 400,000
shares at $2.75 per share on September 27, 2000, 86,000 of which were
immediately exercised in consideration for an interest bearing note and the
balance are exercisable for a period of five years after September 27, 2001, and
(b) a bonus of $35,000. Directors who are not also executive officers are not
eligible to participate in any other benefit plan of the Company.
Compensation Committee Interlocks and Insider Participation
None.
53
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
The Company, or its subsidiary, has entered into an employment agreement
with the following named executive officers:
Name Length Commencing Base Salary
- --------------------------- -------------- ------------------ ---------------
Richard J. Sullivan 5 Years (1) March 1, 2000 $ 450,000 (2)
Garrett A. Sullivan 5 Years (1) March 1, 2000 165,000
Mercedes Walton 3 Years (3) January 1, 2001 300,000 (4)
Jerome C. Artigliere 5 Years (1) November 22, 2000 175,000
David I. Beckett 3 Years January 10, 2000 160,000
Michael E. Krawitz 5 Years April 12, 1999 160,000 (5)
David A. Loppert 5 Years (1) March 1, 2000 250,000 (6)
- ---------------------------
<FN>
(1) Automatically renewed for successive additional one-year terms on each
anniversary.
(2) Provides for a minimum annual bonus of $140,000.
(3) Automatically renews for successive additional one-year terms on each
anniversary commencing January 1, 2004.
(4) Provides for options to purchase up to 1,750,000 shares of the Company's
common stock at an exercise price equal to 85% of the fair market value of
the Company's common stock on January 1, 2001, as determined pursuant to
the Company's 1999 Flexible Stock Plan, and options to purchase up to
300,000 shares of common stock of Digital Angel Corporation at an exercise
price equal to 85% of the fair market value of the Company's common stock
on January 1, 2001 as determined pursuant to the Digital Angel Corporation
Flexible Stock Plan.
(5) Effective April 1, 2000.
(6) Effective January 1, 2001, with SysComm International Corporation, a
subsidiary of the Company.
</FN>
In 1997, the Company entered into employment agreements with Richard J.
Sullivan, Chairman, and Garrett A. Sullivan. These agreements were amended and
restated effective March 1, 2000. In addition, during 2000, the Company entered
into employment agreements with Mercedes Walton and Jerome Artigliere. Such
employment agreements include certain "change of control" provisions. Upon a
change of control all unvested stock options become immediately exercisable.
Also, at the employee's option, he or she may terminate his or her employment
under the agreement at any time within one year after such change of control. In
such event, the Company shall pay to the employee a severance payment equal to
the maximum amount which would not result in such payment being an excess
parachute payment as defined in the Internal Revenue Code of 1986, as amended
(the "Code") which would be subject to an excise tax. Additionally, upon
termination of employment for any reason other than for breach under the
agreement, Garrett Sullivan and David Loppert shall be entitled to receive from
the Company 60 equal monthly payments of 8.333% of his compensation from the
Company over the 12-month period for which his compensation was the greatest,
and Mr. Richard Sullivan shall receive 60 monthly payments of $37,500 each.
These payments are reduced by any severance payments. Such employment agreements
also provide that, if any payments from the Company are subject to the excise
tax described above, the Company will make a gross up payment in an amount which
covers the excise tax due plus the excise and income taxes payable on the gross
up payment. Mr. Richard Sullivan's agreement provides that he may elect to
receive a percentage of his salary for each 12-month period in the Company's
Common Stock. For the twelve-month period commencing January 1, 2000, Mr.
Sullivan did not elect to receive any of his compensation in stock. In addition,
the Company agreed to transfer to Richard Sullivan certain other property valued
at approximately $0.5 million upon his relocation to the Palm Beach, Florida
area. The Company would also be required to make a gross up payment that covers
all U.S. federal and state income taxes payable by Mr. Sullivan, if any, as a
result of the transfer.
Additionally, the agreements for both Richard Sullivan and Garrett Sullivan
provide for certain "triggering events" which include a change in control of the
Company, the termination of Richard Sullivan's employment other than for a
material breach of the terms of his employment agreement, or if Richard Sullivan
54
ceases to hold his current positions with the Company for any reason other than
a material breach of the terms of his employment agreement. Within ten days of
the occurrence of a triggering event, the Company shall pay, in cash or in
stock, or in a combination thereof, $12.1 million and $3.5 million,
respectively, to Richard Sullivan and to Garrett Sullivan.
In January 2001, the Company entered into an employment agreement with
Mercedes Walton, President and Chief Operating Officer. The employment agreement
includes certain "change of control" provisions. Upon a change of control, all
options granted to Ms. Walton immediately become vested and exercisable. Also,
at Ms. Walton's option, she may terminate her employment under the agreement at
any time within one year after such change of control. In the event that Ms.
Walton's employment is terminated by the Company other than for "cause" within
one year following a change of control or in the event that Ms. Walton
terminates her employment with "good reason" in anticipation of a change of
control, the Company shall pay to Ms. Walton a severance payment equal to three
times the sum of Ms. Walton's base compensation and target annual bonus, which
amount shall be payable to Ms. Walton in a lump sum within thirty days of the
date of termination. The employment agreement also provides that, if any
payments from the Company are subject to the excise tax on excess parachute
payments, the Company will make a gross up payment in an amount which covers the
excise tax due plus the excise, income and payroll taxes payable on the gross up
payment. Additionally, upon termination of Ms. Walton's employment either by the
Company for any reason other than cause or by Ms. Walton for good reason, Ms.
Walton will be entitled to receive her base compensation for the period that
commences on the date of termination and terminates on the later of (i) the
expiration of the then effective "employment term" and (ii) one year following
the date of termination plus an amount equal to her target annual bonus and a
pro rata portion of her annual bonus for the year of termination.
In 1997, the Company entered into an employment agreement with David A.
Loppert, Senior Vice President, and Chief Executive Officer of SysComm
International Corporation. This agreement was amended and restated effective
March 1, 2000, and was amended again on December 14, 2000. The employment
agreement, as amended, provides that Mr. Loppert is to serve as SysComm's Chief
Executive Officer and continue to serve the Company on a part-time basis (but in
no event more than 10% of Mr. Loppert's business time). The employment agreement
includes certain "change of control" provisions. Upon a change of control of the
Company, all unvested stock options become immediately exercisable. Also, at Mr.
Loppert's option, he may terminate his employment under the agreement at any
time within one year after such change of control. In such event, SysComm shall
pay to Mr. Loppert a severance payment equal to the maximum amount that would
not result in such payment being an excess parachute payment as defined in the
Code that would be subject to an excise tax. Additionally, upon termination of
employment for any reason other than for breach under the agreement, Mr. Loppert
shall be entitled to receive from SysComm 60 equal monthly payments of 8.333% of
his compensation from the Company and SysComm over the 12-month period for which
his compensation was the greatest. These payments are reduced by any severance
payments. The employment agreement also provides that, if any payments from the
Company and SysComm are subject to the excise tax described above, SysComm will
make a gross up payment in an amount which covers the excise tax due plus the
excise and income taxes payable on the gross up payment.
In November 2000, the Company entered into an employment agreement with
Jerome C. Artigliere, Senior Vice President, Chief Financial Officer and
Assistant Treasurer. The employment agreement includes certain "change of
control" provisions. Upon a change of control of the Company, all unvested stock
options become immediately vested exercisable. Also, at Mr. Artigliere's option,
he may terminate his employment under the agreement at any time within one year
after such change of control. In such event, the Company shall pay to Mr.
55
Artigliere a severance payment equal to three times Mr. Artigliere's "base
amount" as defined in Section 280G of the Code minus one dollar. The employment
agreement also provides that, if any payments from the Company are subject to
the excise tax on excess parachute payments, the Company will make a gross up
payment in an amount which covers the excise tax due plus the excise and income
taxes payable on the gross up payment.
In January 2000, the Company entered into an employment agreement with
David I. Beckett, Senior Vice President, General Counsel, and Assistant
Secretary. The agreement provides that in the event Mr. Beckett's employment is
terminated either by the Company other than for "cause" or by Mr. Beckett for
"good reason," Mr. Beckett will continue to receive his base compensation and
other benefits for the remainder of the employment term under the agreement as
if such termination had not occurred.
In March 1999, the Company entered into an employment agreement with
Michael Krawitz, Senior Vice President, Strategic Initiatives, and Assistant
Secretary. The agreement was amended in June 1999 and in April 2000. The
agreement provides that in the event Mr. Krawitz's employment is terminated
either by the Company other than for "cause" or by Mr. Krawitz for "good
reason," Mr. Krawitz will continue to receive his base compensation for the
remainder of the employment term under the agreement as if such termination had
not occurred. Upon any such termination, the payment of any other benefits will
be determined by the Board in accordance with the Company's plans, policies and
practices.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Ownership of Equity Securities in the Company
The following table sets forth information regarding beneficial ownership
of the Company's common stock by each director and by each executive officer
named in the Summary Compensation Table and by all the directors and executive
officers as a group as of December 31, 2000:
Name Aggregate Number of Percent of Outstanding
Shares Beneficially Shares
Owned(1)
- --------------------------------------- -------------------- ----------------------
Richard J. Sullivan 6,097,724 (2) 6.0%
Garrett A. Sullivan 1,813,468 1.8%
Richard S. Friedland 236,000 *
Arthur F. Noterman 556,000 *
Daniel E. Penni 1,020,065 1.0%
Angela M. Sullivan 1,608,475 (2) 1.6%
Constance K. Weaver 379,000 *
Mercedes Walton --- ---
Jerome C. Artigliere 97,311 *
David I. Beckett 37,667 *
Michael E. Krawitz 100,224 *
David A. Loppert 712,310 *
All Directors and Executive Officers as 13,032,086 12.8%
a Group (20 Persons)
- -----------------------
<FN>
* Represents less than 1% of the issued and outstanding shares of Common
Stock of the Company.
(1) This table includes presently exercisable stock options. The following
directors and executive officers hold the number of exercisable options set
forth following their respective names: Richard J. Sullivan - 4,185,000;
Garrett A. Sullivan - 1,382,500; Richard S. Friedland - 150,000; Arthur F.
Noterman - 375,000; Daniel E. Penni - 375,000; Angela M. Sullivan -
350,000; Constance K. Weaver - 285,000; Mercedes Walton -0; Jerome C.
Artigliere - 75,000; David I. Beckett - 16,667; Michael E. Krawitz -
75,000; David A. Loppert - 448,600; and all directors and executive
officers as a group - 7,976,100.
(2) Includes 259,598 shares owned by The Bay Group and 367,177 shares owned by
Great Bay Technology, Inc. The Bay Group is controlled by Richard J.
Sullivan and Angela M. Sullivan. Great Bay Technology, Inc. is controlled
by Richard J. Sullivan, Angela M. Sullivan and Stephanie Sullivan.
</FN>
57
The following table sets forth information concerning warrants to purchase
shares of the Company's common stock which are owned beneficially by directors
and the named executive officers of the Company, individually and as a group, as
of December 31, 2000:
Name Class of Number of Percent of Class Exercise price Per
Warrants Warrants (1) Share
- ------------------------------- ------------ ------------ ---------------- ------------------
Richard J. Sullivan (2) Class K 250,000 100% $ 5.31
Class S 376,700 100 2.00
Garrett A. Sullivan --- --- --- ---
Richard S. Friedland --- --- --- ---
Arthur F. Noterman --- --- --- ---
Daniel E. Penni --- --- --- ---
Angela M. Sullivan (2) Class K 250,000 100 5.31
Class S 376,700 100 2.00
Constance K. Weaver --- --- --- ---
Mercedes Walton --- --- --- ---
Jerome C. Artigliere --- --- --- ---
David I. Beckett --- --- --- ---
Michael E. Krawitz --- --- --- ---
David A. Loppert --- --- --- ---
All Directors and Executive
Officers as a Group Class K 250,000 100 5.31
(20 Persons) Class S 376,700 100 2.00
- ---------------------
<FN>
(1) Pursuant to Rule 13d-3 under the Exchange Act, beneficial ownership of a
security consists of sole or shared voting power (including the power to
vote or direct the voting) and/or sole or shared investment power
(including the power to dispose or direct a disposition) with respect to a
security whether through a contract, arrangement, understanding,
relationship or otherwise. Unless otherwise indicated, each person
indicated above has sole power to vote, or dispose or direct the
disposition of all shares beneficially owned, subject to applicable
community property laws.
(2) Represents warrants owned by Great Bay Technology, Inc. Great Bay
Technology, Inc. is controlled by Richard J. Sullivan, Angela M. Sullivan
and Stephanie Sullivan.
</FN>
Principal Stockholders
Set forth in the table below is information as of December 31, 2000 with
respect to persons known to the Company (other than the directors and executive
officers shown in the preceding table) to be the beneficial owners of more than
five percent of the Company's issued and outstanding Common Stock:
Name and Address Number of Shares Percent Of Class
Beneficially Owned
- ------------------------------ ------------------ ----------------
None
Changes in Control
On October 26, 2000, the Company issued $26 million in stated value of its
Series C preferred stock, with an initial conversion price of $7.56 per share,
to a select group of institutional investors in a private placement. The
conversion price has been reduced to $5.672 in accordance with the Certificate
of Designation related to the Series C preferred stock. In addition, the
investors have the option to convert at an "alternative conversion price", which
is a percentage of the average closing price for the 10 trading days preceding
the date of notice of conversion. The initial percentage was 140% of the average
closing price and declines, in stages, ending at 110% on June 24, 2001. It is
currently at 125%. Furthermore, if a "triggering event" occurs, as more fully
described in Item 7 under "Recent Developments - Private Placement of Series C
Preferred Stock and Related Warrants", the holders would be entitled to convert
at a price per share equal to 50% of the lowest closing price during the
occurrence of such triggering event. The investors also have the option to
purchase up to an additional $26 million in stated value of Series C preferred
stock for an aggregate purchase price of $20 million, for a period of ten months
following the effectiveness of the registration statement related to the
Company's common stock into which the Series C preferred stock is convertible.
As a result of the foregoing, the conversion of the Series C preferred
stock into shares of the Company's common stock may cause the issuance of a
number of shares of our common stock large enough to constitute a change of
control.
58
Based on the current market value of the Company's common stock and the
current applicable alternative conversion price, the conversion of the Series C
preferred stock into shares of the Company's common stock would not constitute a
change of control. However, should the investors exercise their option to
purchase additional shares of Series C preferred stock, or should the Company's
stock price decline or should a triggering event occur, the conversion of the
Series C preferred stock could result in a change in control of the Company.
Except as discussed above in relation to the conversion of the
Company's Series C preferred stock, there are no arrangements known to the
Company, including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change in control of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
Daniel E. Penni, a member of the Company's board of directors, has executed
a revolving line of credit promissory note in favor of Applied Digital Solutions
Financial Corp., a subsidiary of the Company, in the amount of $450,000. The
promissory note is payable on demand, with interest payable monthly on the
unpaid principal balance at the rate equal to one percentage point above the
base rate announced by State Street Bank and Trust Company (which interest rate
shall fluctuate contemporaneously with changes in such base rate). As of
December 31, 2000, $420,000 had been advanced under this note.
David I. Beckett, the Company's Senior Vice President, has executed a
promissory note in favor of the Company in the amount of $115,000. The
promissory note is due on demand, non-interest bearing and is secured by a
mortgage on real property. As of December 31, 2000 $115,000 was outstanding.
Imputed interest is included in the "Summary Compensation Table" above in the
"Other Annual Compensation" column.
David A. Loppert, the Company's Senior Vice President, has executed a
promissory note in favor of the Company in the amount of $260,000. The
promissory note is non-interest bearing and was executed as consideration for
the purchase by Mr. Loppert of 100,000 shares of the Company's Common Stock. As
of December 31, 2000 $90,000 was outstanding. Imputed interest is included in
the "Summary Compensation Table" above in the "Other Annual Compensation"
column.
On September 27, 2000, the following named executive officers exercised
options granted to them under the Company's 1999 Flexible Stock Plan to purchase
shares of the Company's common stock. Under the terms of the grant, the named
executive officers each executed a delivered an interest bearing promissory note
and stock pledge agreement to the Company in consideration for the purchase of
the shares, as follows:
Named Executive Officer Amount Interest Rate Due Date
- ----------------------- ------ ------------- --------
Richard J. Sullivan $1,375,000 6.0% September 27,2003
Garrett A. Sullivan 1,179,750 6.0 September 27,2003
Jerome C. Artigliere 57,750 6.0 September 27,2003
David I. Beckett 57,750 6.0 September 27,2003
Michael E. Krawitz 57,750 6.0 September 27,2003
David A. Loppert 588,500 6.0 September 27,2003
59
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) The financial statements and financial statement schedule listed
below are included in this report
Report of Management
Reports of Independent Accountants
Financial Statements
Consolidated Balance Sheets
Consolidated Statements Of Operations
Consolidated Statements Of Stockholders' Equity
Consolidated Statements Of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule of Valuation and Qualifying Accounts
(a)(2) Financial statement schedules have been included in Item 14(a)(1)
above.
(a)(3) Exhibits
See Index to Exhibits filed as part of this annual report on Form
10-K.
(b) Reports on Form 8-K
(i) 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.
(ii) 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.
(iii) 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.
(iv) On December 5, 2000, we filed a Current Report on Form 8-K
which included a copy of the an acquisition agreement
between the Company and MCY.com dated as of October 19,
2000.
(v) On December 29, 2000, we filed a Current Report on Form
8-K/A which amended the Form 8-K filed on November 1, 2000
to include financial statements and pro forma financial
information.
(vi) 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.
(vii) 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.
(viii) 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.
(c) Exhibits - Included in Item 14(a)(3) above.
60
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the
accompanying financial statements and related information. The statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, and include amounts that are based on our best
judgments with due consideration given to materiality.
Management maintains a system of internal accounting controls monitored by a
staff of professionally trained internal auditors who travel worldwide. The
system is designed to provide reasonable assurance, at reasonable cost, that
assets are safeguarded and that transactions and events are recorded properly.
The internal accounting control system is augmented by appropriate reviews by
management, written policies and guidelines, careful selection and training of
qualified personnel and a written Code of Business Conduct adopted by the
Company's Board of Directors, applicable to all employees of the Company and its
subsidiaries. In our opinion, the Company's internal accounting controls provide
reasonable assurance that assets are safeguarded against material loss from
unauthorized use or disposition and that the financial records are reliable for
preparing financial statements and other data and for maintaining accountability
of assets.
PricewaterhouseCoopers LLP, the Company's independent accountants, are
recommended by the Audit Committee of the Board of Directors, selected by the
Board of Directors and ratified by the Company's shareholders.
PricewaterhouseCoopers LLP maintains an understanding of internal controls and
conducts such tests and other auditing procedures considered necessary in the
circumstances to express their opinion in the report that follows.
The Audit Committee of the Company's Board of Directors, composed entirely of
independent Directors who are not officers of the Company, meets with the
independent auditors, management and internal auditors periodically to discuss
internal accounting controls and auditing and financial reporting matters. The
Committee reviews with the independent auditors, the scope and results of the
audit effort. The Committee also meets periodically with the independent
auditors and the director of internal audit without management present to ensure
that the independent auditors and the director of internal audit have free
access to the Committee.
RICHARD J. SULLIVAN MERCEDES WALTON JEROME C. ARTIGLIERE
Chairman, Board of Directors and President and Senior Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
March 19, 2001
61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Applied Digital Solutions, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Applied Digital Solutions, Inc. and its subsidiaries at
December 31, 2000 and December 31, 1999, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(1), presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The Company has suffered significant losses from continuing operations and
discontinued operations in 2000 and expects to incur a net loss from continuing
operations for 2001 with positive earnings in 2001 before amortization and
depreciation. The Company was in violation of certain covenants of its debt
agreement as of December 31, 2000. As of March 30, 2001 the Company amended its
term and revolving credit agreement which matures May 2002. The Company's plan
for providing adequate liquidity during fiscal year 2001 is set forth in Note 2
to the financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 19, 2001
Except as to Notes 2 and 13
which are as of March 30, 2001
62
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
DECEMBER 31,
PRO FORMA
(unaudited)
----------------------------------
2000 1999 2000
----------------------------------
(Note 28)
CURRENT ASSETS
Cash and cash equivalents $ 8,039 $ 2,181 $ 8,341
Due from buyer of divested subsidiary -- 31,302 --
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $1,681 in 2000 and $1,047 in 1999) 43,890 18,789 43,890
Inventories 12,311 7,751 12,311
Notes receivable 5,711 2,984 5,711
Other current assets 16,041 3,713 16,041
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 85,992 66,720 86,294
NET ASSETS OF DISCONTINUED OPERATIONS 8,076 75,284 8,076
PROPERTY AND EQUIPMENT, NET 21,368 6,649 31,054
NOTES RECEIVABLE 12,898 3,298 12,898
GOODWILL, NET 166,024 24,285 166,024
OTHER ASSETS 25,093 10,369 33,102
- -----------------------------------------------------------------------------------------------------------------------
$ 319,451 $ 186,605 $337,448
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 657 $ 22,139 $ 657
Current maturities of long-term debt 4,571 7,516 4,571
Accounts payable 16,945 6,707 16,945
Accrued expenses 16,361 5,010 16,361
Due to sellers of acquired subsidiary 9,465 15,000 9,465
Earnout and put accruals 18,245 2,745 --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 66,244 59,117 47,999
LONG-TERM DEBT AND NOTES PAYABLE 69,146 33,260 69,146
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 135,390 92,377 117,145
- -----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES 2, 3, 17, AND 21)
- -----------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 4,879 1,292 4,879
- -----------------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK - SERIES C 13,440 -- 9,344
- -----------------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK OPTIONS - SERIES C 5,180 -- 5,180
- ------------------------------------------------------------------------------------------------------ ----------------
PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Preferred shares:
Authorized 5,000 shares in 2000 and 1999 of $10 par value; special
voting, no shares issued and outstanding in 2000 and 1 share issued
and outstanding in 1999, Class B voting, no shares issued or outstanding
in 2000 and 1 share issued and outstanding in 1999 -- --
Common shares:
Authorized 245,000 shares in 2000 and 80,000 shares in 1999 of $.001 par
value; 103,063 shares issued and 101,847 shares outstanding in 2000
and 51,116 shares issued and 48,260 shares outstanding in 1999 and
143,719 shares issued and 138,188 shares outstanding in Pro Forma 2000 103 51 144
Additional paid-in capital 266,573 87,470 311,824
(Accumulated deficit) retained earnings (99,478) 12,664 (100,832)
Common stock warrants 1,406 -- 1,406
Treasury stock (carried at cost, 1,216 shares in 2000, 2,856 shares in 1999,
5,531 shares in Pro Forma 2000) (2,803) (7,313) (6,403)
Accumulated other comprehensive (loss) income (729) 64 (729)
Notes received from shares issued (4,510) -- (4,510)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY 160,562 92,936 200,900
- -----------------------------------------------------------------------------------------------------------------------
$ 319,451 $ 186,605 337,448
=======================================================================================================================
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
63
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
PRODUCT REVENUE $ 110,617 $ 82,743 $ 66,462
SERVICE REVENUE 24,149 46,321 7,881
- ------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 134,766 129,064 74,343
COSTS OF GOODS AND SERVICES SOLD 82,475 74,299 39,856
- ------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 52,291 54,765 34,487
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (64,500) (58,960) (32,120)
DEPRECIATION AND AMORTIZATION (11,073) (6,560) (2,913)
RESTRUCTURING AND UNUSUAL COSTS (6,383) (2,550) --
GAIN ON SALE OF SUBSIDIARIES 486 20,075 733
INTEREST INCOME 1,095 422 291
INTEREST EXPENSE (5,901) (3,478) (1,070)
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES AND MINORITY INTEREST (33,985) 3,714 (592)
(BENEFIT) PROVISION FOR INCOME TAXES (5,040) 1,180 670
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (28,945) 2,534 (1,262)
MINORITY INTEREST 229 (46) 120
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (29,174) 2,580 (1,382)
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES (BENEFIT)
OF $(13,614) IN 2000, $1,980 IN 1999, AND $1,918 IN 1998 (75,702) 3,012 6,072
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, CONSISTING
OF $8,573 FOR OPERATING LOSSES DURING THE PHASE-OUT PERIOD,
NET OF TAX BENEFIT OF $1,307 (7,266) -- --
- ------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE EXTRAORDINARY LOSS (112,142) 5,592 4,690
EXTRAORDINARY LOSS (NET OF TAXES OF $89) -- 160 --
- ------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (112,142) 5,432 4,690
PREFERRED STOCK DIVIDENDS 191 -- 44
ACCRETION OF BENEFICIAL CONVERSION FEATURE OF REDEEMABLE PREFERRED
STOCK - SERIES C 3,857
- ------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $ (116,190) $ 5,432 $ 4,646
========================================================================================================================
EARNINGS PER COMMON SHARE - BASIC
(LOSS) INCOME FROM CONTINUING OPERATIONS $ (.52) $ .06 $ (.05)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (1.30) .06 .19
EXTRAORDINARY LOSS -- -- --
- ------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME PER COMMON SHARE - BASIC $ (1.82) $ .12 $ .14
========================================================================================================================
EARNINGS PER SHARE - DILUTED
(LOSS) INCOME FROM CONTINUING OPERATIONS $ (.52) $ .05 $ (.05)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (1.30) .06 .17
EXTRAORDINARY LOSS -- -- --
- ------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME PER COMMON SHARE - DILUTED $ (1.82) $ .11 $ .12
========================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 63,825 46,814 32,318
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 63,825 50,086 34,800
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
64
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PREFERRED STOCK,
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
PAGE 1 OF 2
For the Years Ended December 31, 2000, 1999, and 1998
(In thousands)
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS COMMON
----------------- ------------------- PAID-IN (ACCUMULATED STOCK TREASURY
NUMBER AMOUNT NUMBER AMOUNT CAPITAL DEFICIT) WARRANTS STOCK
---------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 -- $-- 20,672 $ 21 $ 33,680 $ 2,586 $-- $ --
Net income -- -- -- -- -- 4,690 -- --
Comprehensive income -
foreign currency translation -- -- -- -- -- -- -- --
-------
Total comprehensive income -- -- -- -- -- 4,690 -- --
Issuance of common shares -- -- 50 -- 100 -- -- --
Issuance of common shares
for acquisitions -- -- 12,511 12 18,770 -- -- --
Issuance of preferred shares -- -- -- -- 6,020 -- -- --
Conversion of preferred
shares to common shares -- -- 1,600 2 (2) -- -- --
Warrants redeemed for common shares -- -- 850 1 1,949 -- -- --
Preferred dividends paid -- -- -- -- -- (44) -- --
Common shares repurchased -- -- -- -- -- -- -- (337)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 -- -- 35,683 36 60,517 7,232 -- (337)
Net income -- -- -- -- -- 5,432 -- --
Comprehensive income
Foreign currency translation -- -- -- -- -- -- -- --
Unrealized gain on securities -- -- -- -- -- -- -- --
-------
Total comprehensive income -- -- -- -- -- 5,432 -- --
Issuance of common shares -- -- 2,808 3 3,683 -- -- --
Issuance of common shares
for acquisitions -- -- 11,701 11 19,016 -- -- --
Warrants redeemed for common shares -- -- 924 1 2,429 -- -- --
Tax effect of exercise of
non-qualified stock options -- -- -- -- 1,825 -- -- --
Common shares repurchased -- -- -- -- -- -- -- (6,976)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999
(CARRIED FORWARD) -- -- 51,116 51 87,470 12,664 -- (7,313)
65
ACCUMULATED
OTHER NOTES TOTAL
COMPREHENSIVE RECEIVED FOR STOCKHOLDERS'
INCOME(LOSS) SHARES ISSUED EQUITY
----------------------------------------------
BALANCE - DECEMBER 31, 1997 $ (2) $-- $ 36,285
Net income -- -- 4,690
Comprehensive income -
foreign currency translation 114 -- 114
-------- --------
Total comprehensive income 114 -- 4,804
Issuance of common shares -- -- 100
Issuance of common shares
for acquisitions -- -- 18,782
Issuance of preferred shares -- -- 6,020
Conversion of preferred
shares to common shares -- -- --
Warrants redeemed for common shares -- -- 1,950
Preferred dividends paid -- -- (44)
Common shares repurchased -- -- (337)
- ----------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 112 -- 67,560
Net income -- -- 5,432
Comprehensive income
Foreign currency translation (36) -- (36)
Unrealized gain on securities (12) -- (12)
-------- --------
Total comprehensive income (48) -- 5,384
Issuance of common shares -- -- 3,686
Issuance of common shares
for acquisitions -- -- 19,027
Warrants redeemed for common shares -- -- 2,430
Tax effect of exercise of
non-qualified stock options -- -- 1,825
Common shares repurchased -- -- (6,976)
- ----------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999
(CARRIED FORWARD) 64 -- 92,936
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
66
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PREFERRED STOCK,
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
PAGE 2 OF 2
For the Years Ended December 31, 2000, 1999, and 1998
(In thousands)
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS COMMON
----------------- ------------------- PAID-IN (ACCUMULATED STOCK TREASURY
NUMBER AMOUNT NUMBER AMOUNT CAPITAL DEFICIT) WARRANTS STOCK
-------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999
(BROUGHT FORWARD) -- $ -- 51,116 $ 51 $ 87,470 $ 12,664 $ -- $ (7,313)
Net loss -- -- -- -- -- (112,142) -- --
Comprehensive loss -
Foreign currency translation -- -- -- -- -- -- -- --
----------
Total comprehensive loss -- -- -- -- -- (112,142) -- --
Issuance of warrants attached to
redeemable preferred shares -- -- -- -- -- -- 627 --
Accretion of beneficial conversion
feature of redeemable preferred
shares -- -- -- -- (3,857) -- -- --
Dividends accrued on redeemable
preferred stock -- -- -- -- (191) -- -- --
Beneficial conversion feature of
redeemable preferred stock -- -- -- -- 3,857 -- -- --
Issuance of common shares -- -- 1,862(1) 2 4,838 -- -- --
Issuance of common shares for
investment -- -- 3,123 3 7,997
Issuance of common shares for
acquisitions -- -- 46,226 46 160,273 -- -- --
Issuance of common stock warrants
for acquisition -- -- -- -- -- -- 1,656 --
Warrants redeemed for common shares -- -- 736 1 2,118 -- (877) --
Notes receivable for shares issued -- -- -- -- -- -- -- 4,510(2)
Tax effect of exercise of non-qualified
stock options -- -- -- -- 4,068 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000 -- $ -- 103,063 $ 103 $ 266,573 $ (99,478) $ 1,406 $ (2,803)
================================================================================================================================
67
ACCUMULATED
OTHER NOTES TOTAL
COMPREHENSIVE RECEIVED FOR STOCKHOLDERS'
INCOME(LOSS) SHARES ISSUED EQUITY
---------------------------------------------
BALANCE - DECEMBER 31, 1999
(BROUGHT FORWARD) $ 64 -- $ 92,936
Net loss -- -- (112,142)
Comprehensive loss -
Foreign currency translation (793) -- (793)
------- ---------
Total comprehensive loss (793) -- (112,935)
Issuance of warrants attached to
redeemable preferred shares -- -- 627
Accretion of beneficial conversion
feature of redeemable preferred
stock -- -- (3,857)
Dividends accrued on redeemable
preferred stock -- -- (191)
Beneficial conversion feature of
redeemable preferred stock -- -- 3,857
Issuance of common shares -- -- 4,840
Issuance of common shares for
investment -- -- 8,000
Issuance of common shares for
acquisitions -- -- 160,319
Issuance of common stock warrants
for acquisition -- -- 1,656
Warrants redeemed for common shares -- -- 1,242
Notes receivable for shares issued -- (4,510) --
Tax effect of exercise of non-qualified
stock options -- -- 4,068
- ---------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000 $ (729) $ (4,510) $ 160,562
=============================================================================================
<FN>
(1) Includes 208 shares exercised under the employee stock purchase plan and 37
shares issued for services.
(2) Includes 1,640 shares for options exercised.
</FN>
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
68
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (112,142) $ 5,432 $ 4,690
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Loss (income) from discontinued operations 82,968 (3,012) (6,072)
Depreciation and amortization 11,073 6,560 2,913
Deferred income taxes (16,639) (1,618) 372
Minority interest 229 (46) 120
Gain on sale of subsidiary (486) (20,075) (733)
(Gain) loss on sale of assets (466) 160 (48)
Reserve on investments -- 1,000 --
Non-cash portion of restructuring cost 6,383 1,522 --
Net change in operating assets and liabilities (5,577) (3,046) (5,180)
Net cash (used in) provided by discontinued operations (8,761) (1,256) 1,327
- -----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (43,418) (14,379) (2,611)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable 31,457 (685) (1,202)
Proceeds from sale of assets 939 592 429
Proceeds from sale of subsidiaries 2,821 -- --
Payments for property and equipment (8,391) (3,776) (1,008)
Payment for asset and business acquisition (net of cash balances acquired) (9,141) (16,917) (1,483)
Increase in other assets (963) (2,362) (3,676)
Net cash provided by (used in) discontinued operations 1,708 (4,447) (820)
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 18,430 (27,595) (7,760)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on notes payable 2,234 (3,332) 16,346
Proceeds on long-term debt 15,971 51,143 --
Payments for long-term debt (11,553) (9,536) (2,459)
Other financing costs (835) (2,863) --
Issuance of common shares 5,957 5,237 1,354
Issuance of preferred shares, related options and warrants 19,056 -- --
Repurchase of common stock -- -- (337)
Redemption of preferred shares -- -- (900)
Preferred stock dividends paid -- -- (44)
Net cash provided by (used in) discontinued operations 16 1,570 (7,610)
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,846 42,219 6,350
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 5,858 245 (4,021)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,181 1,936 5,957
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 8,039 $ 2,181 $ 1,936
=======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 660 $ 226 $ 1,862
Interest paid 5,722 3,177 1,021
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
69
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Applied Digital Solutions, Inc. and subsidiaries (the Company) is an
information management technology company. The Company delivers
Intelligent Integrated Information solutions through its "I(3) Services
Platform." Solutions are delivered through three core business units,
Applications, Services and Advanced Wireless. The I(3) Services
Platform is the next generation of CTII(TM), or computer, telephony and
Internet integration. The I(3) Services Platform provides value by
enabling our clients to collect, organize, analyze, warehouse and
disseminate information.
In March 2001, the Company's board of directors approved the sale of
the Company's IntelleSale business segment and all of the Company's
other non-core businesses. Results of operations, financial condition
and cash flows now reflect these operations as "Discontinued
Operations" and prior periods have been restated. See Note 6.
The Company is currently organized into three segments as follows:
APPLICATIONS - provides proprietary 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, including wireless
hand-held devices. We equip our customers with the necessary tools and
support services to enable them to make a successful transition to
implementing e-business practices, Call Center Solutions, Enterprise
Resource Planning (ERP) and Customer Relationship Management (CRM)
solutions, website design, and application and internet access services
to customers of our other divisions. We are 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.
SERVICES is comprised of two business units:
TELEPHONY - implements telecommunications and Computer Telephony
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 on-going support for the customers
we support.
NETWORKS - 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 and mid-range computer solutions and network
infrastructure for the development of local and wide area networks
as well as site analysis, configuration proposals, training and
customer support services.
ADVANCED WIRELESS - is engaged in the business of developing and
bringing to market technology used to locate, monitor and identify
animals, people and objects. The Company's advanced wireless business,
Digital Angel Corporation, has three segments: the existing Animal
Tracking Business, the newly developed Digital Angel technology and the
Digital Angel Delivery System.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Applied
Digital Solutions, Inc. and its wholly owned and majority owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
As further discussed in Note 3, the Company acquired businesses during
2000 and 1999 all of which have been accounted for under the purchase
method of accounting.
USE OF ESTIMATES
The preparation of the financial statements requires management to make
certain estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the
Company may undertake in the future, they may ultimately differ from
actual results.
70
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
FOREIGN CURRENCIES
The Company's foreign subsidiaries use their local currency as their
functional currency. Results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities
are translated at end of period exchange rates. Translation adjustments
resulting from this process are included in accumulated other
comprehensive (loss) income in the statement of preferred stock, common
stock and other stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional
currency, are included in the results of operations as incurred. These
amounts are not material to the financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
UNBILLED RECEIVABLES
Unbilled receivables consist of certain direct costs and profits
recorded in excess of amounts billable pursuant to contract provisions
in connection with system installation projects and software licensing.
Unbilled receivables included in accounts receivable was $0.4 million
in 2000 and $0.5 million in 1999.
INVENTORIES
Inventories consist of raw materials, work in process and finished
goods. Inventory is valued at the lower of cost or market, determined
by the first-in, first-out method. The Company closely monitors and
analyzes inventory for potential obsolescence and slow-moving items
based upon the aging of the inventory and the inventory turns by
product. Inventory items designated as obsolete or slow-moving are
reduced to net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation and amortization computed using straight-line and
accelerated methods. Building and leasehold improvements are
depreciated and amortized over periods ranging from 10 to 40 years and
equipment is depreciated over periods ranging from 3 to 10 years.
Repairs and maintenance, which do not extend the useful life of the
asset, are charged to expense as incurred. Gains and losses on sales
and retirements are reflected in income.
GOODWILL AND OTHER INTANGIBLE ASSETS
In conjunction with the Company's review for impairment of goodwill and
other intangible assets in the fourth quarter of 2000, the Company
reviewed the useful lives assigned to acquisitions and effective
October 1, 2001, changed the lives to periods ranging from 5 to 10
years, down from periods ranging from 10 to 20 years. The impact in
2000 of this change was an increase in amortization of $3.5 million and
a decrease in earnings per share of $.05. Goodwill and other intangible
assets are stated on the cost basis and are amortized, principally on a
straight-line basis, over the estimated future periods to be benefitted
(ranging from 5 to 10 years). The Company reviews goodwill and other
intangible assets quarterly for impairment whenever events or changes
in business circumstances indicate that the remaining useful life may
warrant revision or that the carrying amount of the long-lived asset
may not be fully recoverable. Included in factors to be considered are
significant customer losses, changes in profitability due to sudden
economic or competitive factors, change in managements' strategy for
the business unit, or other factors arising in the quarterly period.
The Company annually performs undiscounted cash flows analyses by
business unit to determine if an impairment exists. For purposes of
these analyses, earnings before interest, taxes, depreciation and
amortization is used as the measure of cash flow. If an impairment is
determined to exist, any related impairment loss is calculated based on
fair value. Fair value is determined based on discounted cash flows.
The discount rate utilized by the Company would be the rate of return
expected from the market or the rate of return for a similar investment
with similar risks.
71
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
PROPRIETARY SOFTWARE IN DEVELOPMENT
In accordance with Statement of Financial Accounting Standards (FAS)
86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed, the Company has capitalized certain computer
software development costs upon the establishment of technological
feasibility. Technological feasibility is considered to have occurred
upon completion of a detailed program design which has been confirmed
by documenting and tracing the detail program design to product
specifications and has been reviewed for high-risk development issues,
or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization is provided based on
the greater of the ratios that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for
that product, or the straight-line method over the estimated useful
life of the product. The estimated useful life for the straight-line
method is determined to be 2 to 5 years.
ADVERTISING COSTS
The Company generally expenses production costs of print advertisements
the first date the advertisements take place. Advertising expense,
included in selling, general and administrative expenses, was $0.4
million in 2000, $0.2 million in 1999 and $0.2 million in 1998.
REVENUE RECOGNITION
For programming, consulting and software licensing services and
construction contracts, the Company recognizes revenue based on the
percent complete for fixed fee contracts, with the percent complete
being calculated as either the number of direct labor hours in the
project to date divided by the estimated total direct labor hours or
based upon the completion of specific task orders. It is the Company's
policy to record contract losses in their entirety in the period in
which such losses are foreseeable. For non fixed fee jobs, revenue is
recognized based on the actual direct labor hours in the job times the
standard billing rate and adjusted to realizable value, if necessary.
For product sales, the Company recognizes revenue at the time products
are shipped and title has transferred, provided that a purchase order
has been received or a contact has been executed, there are not
uncertainties regarding customer acceptance, the sales price is fixed
and determinable amd collectability is deemed probable. If
uncertainties regarding customer acceptence exist, revenue is
recognized when such uncertainties are resolved. Revenue from
royalties is recognized when licensed products are shipped. There are
no significant post-contract support obligations at the time of
revenue recognition. The Company's accounting policy regarding vendor
and post-contract support obligations is based on the terms of the
customers' contract, billable upon the occurrence of the post-sale
support. Costs of goods sold are recorded as the related revenue is
recognized. The Company does not experience significant product
returns, and therefore, management is of the opinion that no allowance
for sales returns is necessary. The Company has no obligation for
warranties on new hardware sales, because the warranty is provided by
the manufacturer. The Company does not offer a warranty policy for
services to customers.
72
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
SOFTWARE REVENUE RECOGNITION
For those arrangements where the Company's contract calls only for the
delivery of software with no additional obligations, revenue is
recognized at the time of delivery, provided that there is a signed
contract, delivery of the product has taken place, the fee is fixed by
the contract and collectability is considered probable. For multiple
element arrangements such as a contract that includes the delivery of
software and a service arrangement, revenues allocated to the sale of
the software are recognized when the software is delivered to the
customer. Revenues allocated to the sale of the service agreement are
recognized ratably over the term of the service agreement. A value is
ascribed to each of the elements sold. This value is based on vendor
specific objective evidence of fair value, regardless of any separate
prices that may be stated in the contract. Vendor specific objective
evidence of fair value is the price charged when the elements are sold
separately. If an element is not yet being sold separately, the fair
value is the price established by management having the relevant
authority to do so. It is considered probable that the price
established by management will not change before the separate
introduction of the element. If the contract includes a discount, the
discount is applied to the components of the contract which
specifically apply. For those contracts where the discount is a fixed
amount for the entire contract (i.e. not specifically identifiable with
any of the contract elements), a proportionate amount of the discount
is allocated to each element of the contract based on that element's
fair value without regard to the discount. The Company's contracts do
not include unspecified upgrades and enhancements. For those
arrangements where the Company's contract to deliver software requires
significant production modification or customization of the software,
revenues are recognized using percentage of completion
accounting. The service element of these contracts are essential to the
functionality of other elements in the contract and are not accounted
for separately. The cost to complete and extent of progress towards
completion of these contracts can be reasonably ascertained based on
the detailed tracking and recording of labor hours expended. Progress
payments on these contracts are required and progress is measured using
the efforts expended input measure.
COST OF GOODS AND SERVICES SOLD
Rules 5.03-2.1 and 2 of regulation S-X require the Company disclose
costs of both product and service revenue. The Company is unable to
comply with these rules at this time. The Company is in the process of
implementing an enterprise based financial reporting system and will
report product and service costs in its March 31, 2001 consolidated
financial statements.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
approach for the financial accounting and reporting for income taxes.
Deferred taxes are recorded based upon the tax impact of items
affecting financial reporting and tax filings in different periods. A
valuation allowance is provided against net deferred tax assets where
the Company determines realization is not currently judged to be more
likely than not. Income taxes include U.S. and international taxes. The
Company and its 80% or more owned U.S. subsidiaries file a consolidated
federal income tax return.
EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Income available to common stockholders has been adjusted to reflect
preferred stock dividends and the accretion to the redemption value and
beneficial conversion charge associated with the redeemable preferred
stock - series C for the purpose of calculating earnings per share.
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed giving effect to
all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental shares
issuable upon exercise of stock options and warrants, conversion of
preferred stock outstanding and contingently issuable shares.
73
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
COMPREHENSIVE INCOME
The Company's comprehensive income consists of foreign currency
translation adjustments and unrealized gains on securities, and is
reported in the consolidated statements of preferred stock, common
stock and other stockholders' equity.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
FAS 133, Accounting for Derivative Instruments and Hedging Activities,
which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The
statement is effective for fiscal years commencing after June 15, 2000.
In June 2000, the FASB issued FAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
FAS statement 133, which addresses implementation issues experienced by
those companies that adopted FAS 133 early. The Company adopted these
statements as of January 1, 2001 and, because of the Company's minimal
use of derivative instruments, the Company does not believe that the
adoption of these statements will have any effect on its results of
operations, cash flows and financial condition.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 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. On June 26, 2000, the SEC staff issued SAB No. 101B, which
delayed the implementation date of SAB 101 until no later than the
fourth quarter of fiscal years beginning after December 15, 1999. The
Company adopted this statement in the fourth quarter 2000 and such
adoption did not have a material impact on the Company's results of
operations, cash flows and financial condition.
74
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
2. DEBT COVENANT COMPLIANCE AND LIQUIDITY
The Company generated a significant loss from operations in 2000. As a
result, the Company was not in compliance with certain financial
covenants of its loan agreement as of December 31, 2000. The Company's
Term and Revolving Credit Agreement (Debt Agreement) with IBM Credit
was amended and restated on October 17, 2000 and further amended on
March 30, 2001. As of the date of the latest amendment, the Company was
in compliance with the revised covenants.
The Company's Debt Agreement contains certain quarterly financial
covenants, which become more restrictive during 2001. The Company
anticipates that they will continue to comply in 2001 with the
quarterly financial covenants in the Debt Agreement. Management's
current business plans for the Company anticipates significant year to
year increases in revenues due to increased volumes, improved working
capital management, reduced capital spending, successful implementation
of on-going cost savings initiatives, improved operating efficiencies,
and the disposition of non-core businesses.
The Company currently expects to meet the amended Debt Agreement
covenants throughout 2001, however, if business conditions are other
than as anticipated or other unseen events occur, these may impact the
Company's ability to remain in compliance. In the absence of a waiver
or amendment to such financial covenants, such non-compliance would
constitute a default under the applicable Debt Agreement, and IBM
Credit would be entitled to accelerate the maturity of the indebtedness
outstanding thereunder. In the event that such non-compliance appears
likely, or occurs, the Company will seek IBM Credit's approval to
renegotiate financial covenants and/or obtain waivers, as required.
However, there can be no assurance that future amendments or waivers
will be obtained. See footnote 13.
75
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
3. ACQUISITIONS AND DISPOSITIONS
The following represents acquisitions which occurred in 2000 and 1999:
VALUE OF
SHARES,
WARRANTS COMMON/
& OPTIONS PREFERRED
DATE OF PERCENT ACQUISITION CASH ISSUED OR SHARES GOODWILL
ACQUISITION ACQUIRED PRICE CONSIDERATION ISSUABLE ISSUED ACQUIRED
-------------------------------------------------------------------------------
2000 ACQUISITIONS
Independent Business Consultants 04/01/00 100% $ 5,547 $ 747 $ 4,800 958 $ 5,109
P-Tech, Inc. 04/01/00 100% 4,830 80 4,750 1,404 4,643
Timely Technology Corp. 04/01/00 100% 1,240 375 865 215 913
Computer Equity Corporation 06/01/00 100% 24,712 8,968 15,744 4,829 15,313
WebNet Services, Inc. 07/01/00 100% 958 58 900 268 828
Destron Fearing Corporation 09/08/00 100% 84,646 1,376 83,270 20,821 74,818
Pacific Decision Sciences
Corporation 10/01/00 100% 28,139 120 28,019 8,569 25,220
SysComm International Corporation 12/01/00 55% 4,975 2,221 2,754 1,700 --
Transatlantic Software Corporation 12/18/00 100% 8,561 266 8,295 4,937 6,624
1999 ACQUISITIONS
Port Consulting, Inc. 04/01/99 100% $ 1,292 $ 671 $ 621 303 $ 800
Hornbuckle Engineering 04/01/99 100% 5,103 2,605 2,498 631 4,912
Lynch Marks & Associates, Inc. 04/01/99 100% 2,531 156 2,375 773 1,364
STR, Inc. 04/01/99 100% 6,823 73 6,750 1,332 7,507
Contour Telecom Management, Inc. 05/01/99 75% 5,627 5,627 -- -- 4,752
(Divested effective 12/31/99)
Bostek, Inc. & affiliate 06/01/99 100% 27,466 27,466 -- -- 24,876
BUSINESS DESCRIPTION
------------------------------------------------------------------------
2000 ACQUISITIONS
Independent Business Consultants Network integration company
P-Tech, Inc. Software development company
Timely Technology Corp. Software developer and application service provider
Computer Equity Corporation Communications integration company
WebNet Services, Inc. Network integrator and website developer
Destron Fearing Corporation Animal identification and microchip technology company
Pacific Decision Sciences
Corporation Developer and implementer of customer relationship management software
SysComm International Corporation Network and systems integrator and reseller of computer hardware
Transatlantic Software Corporation Retail software developer
1999 ACQUISITIONS
Port Consulting, Inc. Integrator of information technology application systems
Hornbuckle Engineering Integrated voice and data solutions provider
Lynch Marks & Associates, Inc. Network integration company
STR, Inc. Software solutions provider for retailers
Contour Telecom Management, Inc. Provider of outsourced telecommunications management services
(Divested effective 12/31/99)
Bostek, Inc. & affiliate 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 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.
76
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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, legal
and accounting services, that were direct costs of acquiring these net
assets. Goodwill resulting from these acquisitions is being amortized
on a straight-line basis, over periods ranging from 5 to 10 years.
Prior to 2000, the Company amortized goodwill over various lives not
exceeding 20 years. In the fourth quarter of 2000, the Company lowered
the estimated lives to 5 to 10 years, depending upon the entity. This
change in estimate was necessitated by the significant business changes
initiated in the fourth quarter of 2000. See Note 6. Certain
acquisition agreements include additional consideration (generally
payable in shares of the Company's common stock) contingent on profits
of the acquired business. Upon earning these additional shares, the
value will be recorded as additional goodwill. The acquisitions above
include contingent shares earned upon attainment of certain profits by
subsidiaries through December 31, 2000. At December 31, 2000 and 1999,
the Company accrued $18.2 million and $2.7 million in connection with
earnouts and puts. Under these agreements, assuming all earnout profits
are achieved, the Company is contingently liable for additional
consideration of approximately $29.3 million in 2001, $18.7 million in
2002, and $2.0 million in 2004, of which $1.0 million would be payable
in cash and $49.0 million would be payable in stock. See Note 26 for
unaudited pro forma information for the above acquisitions that
occurred in 2000 and 1999.
The Company has entered into put options with the selling shareholders
of various companies in which the Company 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 dates of acquisition at amounts per share generally equal to
10% to 20% of the average annual earnings per share of the acquired
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. Based on the provisions of the put agreements, at December 31,
2000, the Company is contingently liable for additional consideration
of $1.2 million payable in shares of the Company's common stock over
the next two years. The contingent amounts for put options have not
been recorded as liabilities in the financial statements as it is
uncertain whether the contingencies will be met.
There were 2.5 million and 9.4 million shares of common stock issued
during 2000 and 1999, respectively, related to agreements with the
former majority shareholders of the Company's subsidiaries, primarily
for earnouts and to purchase minority interests.
MAJOR ACQUISITIONS
On September 8, 2000, the Company completed the acquisition of Destron
Fearing Corporation through a merger of its wholly-owned subsidiary,
Digital Angel Corporation (formerly known as Digital Angel.net Inc.),
into Destron Fearing Corporation. As a result of the merger, Destron
Fearing is now a wholly-owned subsidiary of the Company and has been
renamed "Digital Angel Corporation"
In connection with the merger, each outstanding share of Destron
Fearing common stock was exchanged for 1.5 shares of the Company's
common stock, with fractional shares settled in cash. In addition,
outstanding options and warrants to purchase shares of Destron Fearing
common stock were converted into a right to purchase that number of
shares of the Company's common stock as the holders would have been
entitled to receive had they participated in the merger. The Company
issued 20.5 million shares of its common stock in exchange for all the
outstanding stock of Destron Fearing and 0.3 million shares of its
common stock as a transaction fee. The Company will issue up to 2.7
million shares of its common stock upon the exercise of the Destron
Fearing options and warrants. The aggregate purchase price of
approximately $84.6 million, including the liabilities assumed, was
allocated to the identifiable assets with the remainder of $74.8
million recorded as goodwill, which is being amortized over 10 years.
77
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Effective June 1, 2000, the Company acquired all of the outstanding
common stock of Computer Equity Corporation. The aggregate purchase
price was approximately $24.7 million, $15.8 million of which was paid
in shares of the Company's common stock and $8.9 million of which was
paid in cash in August, 2000. An additional $10.3 million is contingent
upon achievement of certain earnings targets during the two years ended
June 30, 2002. The total purchase price of Computer Equity Corporation,
including the liabilities assumed, was allocated to the identifiable
assets with the remainder of $15.3 million recorded as goodwill, which
is being amortized over 10 years.
Effective October 1, 2000, the Company acquired all of the outstanding
common stock of Pacific Decision Sciences Corporation (PDSC). The
aggregate purchase price was approximately $28.1 million, which was
paid in shares of the Company's common stock. In addition, for each of
the twelve month periods ended September 30, 2001 and 2002, the former
stockholders of PDSC will be entitled to receive earnout payments,
payable in cash or in shares of the Company's common stock, of $9.7
million plus 4.0 time EBITDA (as defined in the merger agreement) in
excess of $3.7 million, subject to reduction by 4.0 times the shortfall
from the projected EBITDA amount (as defined in the merger agreement).
The total purchase price of PDSC, including the liabilities assumed,
was allocated to the identifiable assets with the remainder of $25.2
million recorded as goodwill, which is being amortized over 5 years.
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 $27.5 million, of which $10.2 million
was paid in cash at closing, $5 million was paid in cash in January
2000, $1.8 million for the 1999 earnout was paid in cash in February
2000 and $.5 million of additional acquisition costs paid in 2000. The
earnout accrual is included in other current liabilities at December
31, 1999. Upon a successful initial public offering of IntelleSale,
$9.5 million was to be payable in stock of IntelleSale to the former
owners of Bostek. In the event that the initial public offering did not
occur, the $9.5 million was to be payable in cash. As the result of
settling certain disputes between the Company and the former owners of
Bostek, Inc., the parties agreed to eliminate the remaining $9.5
million payable if the Company registers approximately 3.0 million
common shares by June 15, 2001. The former Bostek, Inc. owners have
agreed to purchase these shares at the market price when the
registration statement becomes effective. If the Company is successful
in meeting this deadline, the extinguishment of the $9.5 million
payable will be recorded as an extraordinary gain. The operating
results of the Company include Bostek from its acquisition date. The
total purchase price of Bostek, including the liabilities assumed, was
allocated to the identifiable assets with the remainder of $24.9
million recorded as goodwill which was originally being amortized over
20 years. See footnote 6 regarding discontinued operations, which
includes the operations of IntelleSale and Bostek.
See footnote 26 for the pro forma effect of the acquisitions.
78
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
DISPOSITIONS
Effective October 31, 2000, the Company entered into a Stock Purchase
Agreement for the sale of all outstanding shares of common stock of its
wholly-owned subsidiary, STC Netcom, Inc. In consideration, the Company
received $1.0 million in cash, and a note for $2.3 million. The total
proceeds were $3.3 million, resulting in a pre-tax loss of $0.5
million. The operating results of STC Netcom, Inc. are included in the
Company's financial statements through the date of disposition.
Effective December 29, 2000, the Company entered into an Agreement For
Sale of Stock for the sale of all outstanding shares of common stock of
its wholly-owned subsidiary, Port Parties, Ltd. In consideration, the
Company received $0.4 million in cash, paid in January, 2001, and a
note for $9.3 million. The total proceeds were $9.7 million, resulting
in a pre-tax gain of $5.1 million, which is reflected in the results of
discontinued operations. The operating results of Port Parties, Ltd.
are included in the Company's financial statements through the date of
disposition.
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 stock,
recorded as treasury stock in the amount of $7 million. No gain or loss
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 of these companies
are 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 telecommunication
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.
79
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
4. 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 five
reportable business groups, the Company implemented a restructuring
plan in 1999. The restructuring plan included the exiting of selected
lines of business within the Company's Services 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 December 31, 2000:
BALANCE BALANCE BALANCE
JANUARY 1, DECEMBER 31, DECEMBER 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 $ 249 $ --
===============================================================================================================
UNUSUAL ITEMS
During the fourth quarter of 2000, the Company reviewed its goodwill
and certain other investments for impairment and concluded that certain
assets were impaired. The amount of the impairment was based upon
estimated realizable value of the assets. Accordingly, at December 31,
2000, the Company recorded a charge of $6,383 for permanent asset
impairment as follows:
Investment in ATEC common stock $ 3,565
Investment in Burling Instruments preferred stock 2,000
Investment in Signal Processors, Ltd. 818
--------------------------------------------------------------------
$ 6,383
====================================================================
The Company acquired a 16% interest in ATEC as of October 27, 2000. The
Company issued 2,077,150 shares of its stock in exchange for its
investment in ATEC. As of October 27, 2000 the Company's investment in
ATEC was valued at $7.2 million. Due to a continued decline in the
value of ATEC's common stock from October 27, 2000 to December 31,
2000, the Company determined its investment in ATEC had experienced a
decline in value that was other than temporary. As such, the Company
reduced the value of its investment in ATEC by $3.6 million.
Included in discontinued operations is an IntelleSale pre-tax charge of
$17.0 million recorded in the second quarter of 2000. Included in this
charge was an inventory reserve of $8.5 million for products
IntelleSale expected to sell below cost (included in cost of goods and
services sold), $5.5 million related to specific accounts and other
receivables, and $3.0 million related to fees and expenses incurred in
connection with IntelleSale's cancelled IPO and certain other
intangible assets.
During the first quarter of 1999, as part of the Company's core
business reorganization, the Company realigned certain operations
within its Services division and has recognized impairment charges and
other related costs of $314. The total charge reduced net income by
$223.
80
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
5. EXTRAORDINARY LOSS
In connection with the early retirement of the Company's line of credit
with State Street Bank and Trust Company and its simultaneous
refinancing with IBM Credit, deferred financing fees associated with
the State Street Bank and Trust agreement were written off during the
second quarter of 1999. The total amount of the write-off recorded as
an extraordinary loss was $160, net of income taxes of $89.
6. DISCONTINUED OPERATIONS
On March 1, 2001, the Company's board of directors approved a plan to
offer for sale its IntelleSale business segment and several other
non-core businesses. Accordingly, these operating results have been
reclassified and reported as discontinued operations for all periods
presented. The Company expects to dispose of these businesses within
the next twelve months. Cash proceeds will be used to reduce
outstanding debt.
The following discloses the results of the discontinued operations for
the years ended December 31, 2000, 1999 and 1998:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
Product revenue $ 137,901 $ 201,588 $ 125,363
Service revenue 6,826 6,089 7,375
----------------------------------------------------
Total revenue 144,727 207,677 132,738
Cost of goods and services sold 143,139 167,491 103,037
----------------------------------------------------
Gross profit 1,588 40,186 29,701
S,G&A 40,697 31,456 19,365
Gain on sale of subsidiaries (4,617) -- --
Depreciation and amortization 4,217 3,127 1,588
Interest, net 187 170 454
Impairment of assets 50,219 -- --
(Benefit) provision for income taxes (13,614) 1,980 1,918
Minority interest 201 441 304
----------------------------------------------------
(Loss) income from discontinued operations $ (75,702) $ 3,012 $ 6,072
====================================================
The above results do not include any allocated or common overhead
expenses. Included in Interest, net, above are interest charges based
on the debt of these businesses that the Company believes will be
assumed by a purchaser when the business is sold.
81
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Provision for operating losses and carrying costs during the phase-out
period include operating and other disposal costs to be incurred in
selling the businesses. Carrying costs include the cancellation of
facility leases and employment contract buyouts. The Company does not
anticipate a further loss on sale. Expenses of sales of the businesses
and anticipated operating losses represent the Company's best estimate
of these items. Actual losses could differ from those estimates and
will be reflected as adjustments in future financial statements. At
December 31, 2000, the estimated amounts were as follows:
Operating losses $ 1,619
Carrying costs 6,954
Less: Benefit for income taxes (1,307)
--------------------------------------------------------------------
$ 7,266
====================================================================
Assets and liabilities of discontinued operations are as follows at
December 31, 2000 and 1999:
2000 1999
---- ----
Current Assets
Cash and cash equivalents $ -- $ 2,957
Accounts receivable and unbilled receivables 10,290 33,381
Inventories 17,950 32,697
Notes receivable -- 757
Prepaid expenses and other current assets 336 2,288
---------------------------------------------------------------------------------------------------------
Total Current Assets 28,576 72,080
Property and equipment, net 6,536 7,237
Notes receivable -- 80
Goodwill -- 37,715
Other assets 1,212 543
---------------------------------------------------------------------------------------------------------
$ 36,324 $117,655
=========================================================================================================
Current Liabilities
Notes payable $ 4 $ 3,072
Current maturities of long-term debt 519 522
Accounts payable 10,691 22,792
Accrued expenses 10,908 12,662
---------------------------------------------------------------------------------------------------------
Total Current Liabilities 22,122 39,048
Long-term debt 5,224 2,057
Minority interest 902 1,266
---------------------------------------------------------------------------------------------------------
28,248 42,371
=========================================================================================================
Net Assets Of Discontinued Operations $ 8,076 $ 75,284
=========================================================================================================
82
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
7. INVENTORIES
2000 1999
---------------------------
Raw materials $ 1,807 $ 2,183
Work in process 499 420
Finished goods 11,505 6,064
------------------------------------------------------------------------------------------------
13,811 8,667
Less: Allowance for excess and obsolescence 1,500 916
------------------------------------------------------------------------------------------------
$ 12,311 $ 7,751
================================================================================================
8. NOTES RECEIVABLE
2000 1999
---------------------------
Due from purchaser of subsidiary, secured by pledge of rights
to distributions from a joint venture of the purchaser and an
unrelated entity, bears interest at the London Interbank
Offered Rate plus 1.65%, payable in quarterly installments of
principal and interest totaling $332 $ 9,612 $ --
Due from purchaser of four non-core subsidiaries, bears interest at
5%, interest payable quarterly, principal due
October 2004 2,500 2,531
Due from purchaser of subsidiary, secured by pledge of investment
securities, bears interest at prime, interest payable
semi-annually, principal due November 2004 2,328 --
Due from purchaser of cellular assets, personally guaranteed by
company owners, bears interest at 6.5%, $350 due January 1999,
remaining payable in monthly installments of $25 including interest
starting July 1999. In 2001, the Company
received a $900 payment on this note 950 950
Due from officers, directors and employees of the Company, unsecured,
bear interest at varying interest rates, due on
demand 1,303 1,077
Due from individuals and corporations, bear interest at rates above
prime, secured by business assets, personal varying guarantees, and
securities, due various dates through July
2001 1,523 1,205
Due from purchaser of business assets, secured by maker's assets,
bears interest at 8.7% and provides for monthly payments of principal
and interest equal to 10% of the maker's net cash revenue for each
preceding month, balance due
October 2001 393 519
------------------------------------------------------------------------------------------------
18,609 6,282
Less: Current portion 5,711 2,984
------------------------------------------------------------------------------------------------
$ 12,898 $ 3,298
================================================================================================
These notes receivable have been pledged as collateral under the
Company's debt agreements. See Note 13.
83
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
9. OTHER CURRENT ASSETS
2000 1999
----------------------------
Deferred tax asset $ 10,001 $ --
Prepaid expenses 3,665 3,512
Income tax refund receivable 1,926 --
Other 449 201
-----------------------------------------------------------------------------------------------
$ 16,041 $ 3,713
===============================================================================================
10. PROPERTY AND EQUIPMENT
2000 1999
----------------------------
Land $ 1,379 $ 664
Building and leasehold improvements 8,067 2,695
Equipment 21,416 11,023
-----------------------------------------------------------------------------------------------
30,862 14,382
Less: Accumulated depreciation 9,494 7,733
-----------------------------------------------------------------------------------------------
$ 21,368 $ 6,649
===============================================================================================
Included above are vehicles and equipment acquired under capital lease
obligations in the amount of $1,338 and $1,715 at December 31, 2000 and
1999, respectively. Related accumulated depreciation amounted to $637
and $626 at December 31, 2000 and 1999, respectively.
Depreciation charged against income amounted to $2,099, $2,062 and
$1,159 for the years ended December 31, 2000, 1999 and 1998,
respectively. Accumulated depreciation related to disposals of property
and equipment amounted to $338 in 2000.
84
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
11. GOODWILL
Goodwill consists of the excess of cost over fair value of tangible and
identifiable intangible assets of companies purchased. The Company
applies the principles of Accounting Principles Board Opinion No. 16,
Business Combinations, and uses the purchase method of accounting for
acquisitions of wholly owned and majority owned subsidiaries.
2000 1999
----------------------------
Original balance $ 177,219 $ 28,172
Accumulated amortization (11,195) (3,887)
-----------------------------------------------------------------------------------------------
Carrying value $ 166,024 $ 24,285
===============================================================================================
Amortization expense amounted to $7,525, $1,766 and $955 for the years
ended December 31, 2000, 1999, and 1998, respectively. Accumulated
amortization of goodwill related to subsidiaries sold during 2000
amounted to $217.
The Company has entered into various earnout arrangements with the
selling shareholders of certain acquired subsidiaries. These
arrangements provide for additional consideration to be paid in future
years if certain earnings levels are met. These amounts are added to
goodwill as earned.
12. OTHER ASSETS
2000 1999
----------------------------
Proprietary software $ 9,600 $ 7,270
Loan acquisition costs 3,725 2,890
Other assets 588 302
-----------------------------------------------------------------------------------------------
13,913 10,462
Less: Accumulated amortization 6,930 4,332
-----------------------------------------------------------------------------------------------
6,983 6,130
Investment in preferred stock (fully impaired in 2000) -- 2,000
Other investments 4,601 --
Deferred tax asset 11,784 1,618
Other 1,725 621
-----------------------------------------------------------------------------------------------
$ 25,093 $ 10,369
===============================================================================================
The Company has provided a valuation allowance on certain of its
investments in preferred stock to reflect current fair market values.
Amortization of other assets charged against income amounted to $1,449,
$2,692 and $799 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Other investments include the Company's equity interest in ATEC Group,
Inc. which was sold subsequent to year end.
85
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
13. NOTES PAYABLE AND LONG TERM DEBT
On May 25, 1999, the Company entered into a Term and Revolving Credit
Agreement with IBM Credit (the "IBM Agreement"). On May 26, 1999, the
Company repaid the amount due on the previous revolving line of credit.
The IBM Agreement, was amended and restated on October 17, 2000, and
further amended on March 30, 2001, and provides for the following: (1)
a revolving credit line of up to $53,335, subject to availability under
a borrowing base formula, designated as follows: (i) a USA revolving
credit line of up to $49,500, (ii) a Canadian revolving credit line of
up to $3,855; (2) Term Loan A of up to $25,000 and (3) Term Loan C of
up to $2,740. The previous IBM agreement contained provisions for a
Term Loan B, which was terminated and transferred into the revolving
credit line on October 17, 2000.
The IBM Agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the
declarations and payment of dividends. At December 31, 2000, the
Company failed to comply with 2 of 3 financial debt covenants contained
in the October 17, 2000 credit agreement, and had a collateral
shortfall. At December 31, 2000 the Company was required to maintain a
minimum Tangible Net Worth (as defined in the credit agreement of
$(11.8) million, to achieve a minimum EBITDA (as defined in the credit
agreement) of $6.1 million for the quarter ended December 31, 2000 and
to maintain a minimum current ratio of 1.0:1.0. The collateral
shortfall represents the excess of advances under the Company's
revolving credit line over eligible collateral.
On March 30, 2001, the Company entered into an "Acknowledgement, Waiver
and Amendment No. 1 to the Second Amended and Restated Term and
Revolving Credit Agreement" with IBM Credit in which the Company
obtained waivers for the covenant and other defaults and in which
future covenants were reset and other provisions amended or modified.
The Company believes that it will be in compliance with the covenants
associated with the "Acknowledgment, Waiver and Amendment No. 1 to the
Second Amended and Restated Term and Revolving Credit Agreement"
throughout 2001.
As part of the amended agreement with IBM Credit, the Company paid bank
fees of $375 and issued warrants to IBM Credit valued at $1,115. The
fair value of the warrants was estimated using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0%,
expected volatility of 53.32% and a risk free interest rate of 4.6%.
The bank fees and fair value of the warrants will be reflected as
deferred financing fees in March 2001 and amortized over the life of
the debt as interest expense.
The new covenants for 2001 are as follows:
COVENANT COVENANT REQUIREMENT
--------------------------------------------
Tangible Net Worth As of the following dates not less than:
March 31, 2001 $(57,000)
June 30, 2001 (47,000)
September 30, 2001 (35,000)
December 31, 2001 (34,500)
March 31, 2002 (20,000)
Current Assets to Current Liabilities March 31, 2001 1.45:1.0
June 30, 2001 0.6:1.0
September 30, 2001 0.8:1.0
December 31, 2001 0.8:1.0
March 31, 2002 1.0:1.0
Minimum Cumulative EBITDA March 31, 2001 $ (4,700)
June 30, 2001 5,000
September 30, 2001 7,000
December 31, 2001 11,000
March 31, 2002 10,000
86
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
As of December 31, 2000, the outstanding balance was $74,978, including
amounts borrowed by a discontinued Canadian subsidiary, and the
availability was $20,022, including approximately $1,010 of
availability related to a discontinued Canadian subsidiary.
The weighted average interest rate was 8.5% and 6.9% for the years
ended December 31, 2000 and 1999, respectively. The London Interbank
Offered Rate and Toronto-Dominion Bank of Canada interest rates at
December 31, 2000 were 6.6% and 7.5%, respectively.
Notes payable consists of the following:
2000 1999
-------------------------
Note payable - bank, collateralized by business assets of a
subsidiary. Interest is payable monthly at rates varying from the
London Interbank Offered Rate plus 1.5% to 3.5% in 2000 $ 645 $ 665
Notes payable - other, unsecured, due on demand 12 74
---------------------------------------------------------------------------------------------------
$ 657 $ 739
===================================================================================================
Long-Term Debt consists of the following:
2000 1999
-------------------------
Revolving credit line - IBM Credit, collateralized by all domestic
assets of the Company and a pledge of the stock of the Company's
subsidiaries, bearing interest at the 30 day London Interbank Offered
Rate plus 2.75% in 2000, due in May 2002. (1) $ 46,435 $ 21,400
Term Loan - IBM Credit, collateralized by all domestic assets of
Company and a pledge of the stock of the Company's subsidiaries, the
bearing interest at the 30 day London Interbank Offered Rate plus in
2000, payable in quarterly principal installments of $1,041 plus 3.5%
interest, due in May 2002 22,958 39,747
Mortgage notes payable, collateralized by land and building, payable
in monthly installments of principal and interest totaling $35,
bearing interest at rates ranging from 7.16% to 8.18% in 2000, due
through
November 2010 3,486 343
Term loans, payable in monthly or quarterly installments, bearing
interest at rates ranging from 4% to 10%, due through April 2009 297 --
Note payable - bank, collateralized by business assets, payable in
monthly installments of principal and interest totaling $2, bearing
interest at prime plus 2% in 1999, repaid in 2000 -- 22
Capital lease obligations 541 664
---------------------------------------------------------------------------------------------------
73,717 62,176
Less: Current maturities 4,571 7,516
---------------------------------------------------------------------------------------------------
$ 69,146 $ 54,660
===================================================================================================
<FN>
(1) The revolving credit was classified as current in 1999.
</FN>
87
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The scheduled maturities of long-term debt at December 31, 2000 are as
follows:
YEAR AMOUNT
--------------------------------------------------------------------
2001 $ 4,571
2002 66,578
2003 112
2004 69
2005 62
Thereafter 2,325
--------------------------------------------------------------------
$ 73,717
====================================================================
Interest expense on the long and short-term notes payable amounted to
$5,901, $3,478 and $1,070 for the years ended December 31, 2000, 1999
and 1998, respectively.
Certain of the Company's subsidiaries included in discontinued
operations also have notes payable and long term debt that the Company
believes will be assumed by the buyers of these subsidiaries. Until
these sales are complete, the Company is still liable for these notes
payable and long term debt. See footnote 6.
2000 1999
--------------------------
Notes payable - other $ 4 $ 79
===============================================================================================
Revolving credit line - IBM Credit, collateralized by all domestic
assets of the Company and a pledge of the stock of the Company's
subsidiaries, bearing interest at the base rate as announced by the
Toronto-Dominion Bank of
Canada plus 1.17% in 2000, due in May 2002. (1) $ 3,587 $ 2,993
Term Loan - IBM Credit, collateralized by all Canadian assets of the
Company and a pledge of two-thirds of the stock of the Company's
Ground Effects, Ltd. subsidiary, bearing interest at the base rate as
announced by the Toronto-Dominion Bank of Canada plus 1.17% in 2000,
payable in quarterly principal installments of $113 plus
interest, due in May 2002 2,003 2,489
Term loans, other 79 56
Capital lease obligations 74 34
-----------------------------------------------------------------------------------------------
5,743 5,572
Less: Current maturities 519 522
-----------------------------------------------------------------------------------------------
$ 5,224 $ 5,050
===============================================================================================
<FN>
(1) The revolving credit was classified with notes payable in 1999.
</FN>
88
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short
maturity of those instruments.
NOTES RECEIVABLE
The carrying value of the notes approximate fair value because either
the interest rates of the notes approximate the current rate that the
Company could receive on a similar note, or because of the short-term
nature of the notes.
NOTES PAYABLE
The carrying amount approximates fair value because of the short-term
nature of the notes and the current rates approximate market rates.
LONG-TERM DEBT
The carrying amount approximates fair value because either the stated
interest rates fluctuate with current market rates or the interest
rates approximate the current rates at which the Company could borrow
funds on a similar note.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value.
REDEEMABLE PREFERRED STOCK
The accreted value approximates fair value based upon the current value
of the common stock into which the preferred stock will convert at
December 31, 2000.
89
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
15. INCOME TAXES
The provision for income taxes, excluding the $89 of tax benefit
related to the extraordinary loss in 1999, consists of:
2000 1999 1998
-----------------------------------------
Current:
United States at statutory rates $ (1,675) $ 2,832 $ (131)
International -- 16 930
Current taxes covered by net operating
loss -- -- --
----------------------------------------------------------------------------------------------------
Current income tax provision (credit) (1,675) 2,848 799
----------------------------------------------------------------------------------------------------
Deferred:
United States (3,005) (1,668) (126)
International (360) -- (3)
----------------------------------------------------------------------------------------------------
Deferred income taxes provision (credit) (3,365) (1,668) (129)
----------------------------------------------------------------------------------------------------
$ (5,040) $ 1,180 $ 670
====================================================================================================
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred tax assets and liabilities
consist of the following:
2000 1999
------------------------
Deferred Tax Assets:
Liabilities and reserves $ 4,962 $ 836
Net operating loss carryforwards 39,772 1,655
----------------------------------------------------------------------------------------------------
Gross deferred tax assets 44,734 2,491
Valuation allowance (15,850) --
----------------------------------------------------------------------------------------------------
28,884 2,491
----------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Accounts receivable 599 71
Notes receivable 370 361
Installment sales 4,882 --
Property and equipment 352 61
Intangible assets 895 380
----------------------------------------------------------------------------------------------------
7,098 873
----------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 21,786 $ 1,618
====================================================================================================
The current and long-term components of the deferred tax asset are as
follows:
2000 1999
------------------------
Current deferred tax asset $ 10,001 $ --
Long-term deferred tax asset 11,785 1,618
----------------------------------------------------------------------------------------------------
$ 21,786 $ 1,618
====================================================================================================
The valuation allowance for deferred tax asset increased by $15,850 in
2000, due mainly to the generation of net operating losses and
decreased by $2,904 in 1999 due to management determining it was more
likely than not the net operating loss carryforwards will be utilized
in future periods. The valuation allowance was provided for net
deferred tax assets that exceeded the Company's available carryback,
the level of existing deferred tax liabilities and projected pre-tax
income.
90
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Approximate domestic and international income from continuing
operations before provision for income taxes consists of:
2000 1999 1998
------------------------------------------
Domestic $ (32,661) $ 4,065 $ (3,178)
International (1,324) (351) 2,586
----------------------------------------------------------------------------------------------------
$ (33,985) $ 3,714 $ (592)
====================================================================================================
At December 31, 2000, the Company had aggregate net operating loss
carryforwards of approximately $99 million for income tax purposes
which expire in various amounts through 2020. Approximately $9 million
of the net operating loss carryforwards were acquired in connection
with various acquisitions and are limited as to use in any particular
year based on Internal Revenue Code sections related to separate return
year and change of ownership restrictions.
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
2000 1999 1998
----------------------------------------
% % %
----------------------------------------
Statutory rate 34 34 34
Non-deductible goodwill amortization (8) 28 (41)
State income taxes, net of federal benefits 7 13 (24)
International tax rates different from the
the statutory US federal rate -- -- 9
Change in deferred tax asset valuation
allowance (16) (43) (74)
Other (2) -- (17)
-----------------------------------------------------------------------------------------------
15 32 (113)
===============================================================================================
91
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
16. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of basic and diluted
EPS is provided as follows:
2000 1999 1998
------------------------------------------
NUMERATOR:
Income (loss) from continuing operations $ (29,174) $ 2,580 $ (1,382)
Preferred stock dividends (191) -- (44)
Accretion of beneficial conversion feature of
preferred stock (3,857) -- --
--------------------------------------------------------------------------------------------------
Numerator for basic earnings per share -
Net income (loss) from continuing operations
available to common stockholders (33,222) 2,580 (1,426)
Net income (loss) from discontinued operations
available to common stockholders (82,968) 3,012 6,072
Extraordinary loss -- (160) --
Net income (loss) available to common stockholders (116,190) 5,432 4,646
Effect of dilutive securities(1):
Preferred stock dividends 191 -- 44
Accretion of beneficial conversion feature of
preferred stock 3,857 -- --
--------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share -
net income available to common stockholders $ (112,142) $ 5,432 $ 4,690
==================================================================================================
DENOMINATOR:
Denominator for basic earnings per
share - weighted-average shares outstanding 63,825 46,814 32,318
--------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Redeemable preferred stock -- -- 85
Warrants -- 280 477
Employee stock options -- 2,992 266
Contingent stock - acquisitions -- -- 1,654
--------------------------------------------------------------------------------------------------
Dilutive potential common shares -- 3,272 2,482
--------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions 63,825 50,086 34,800
==================================================================================================
BASIC EARNINGS PER SHARE
Continuing operations $ (.52) $ .06 $ (.05)
Discontinued operations $ (1.30) $ .06 $ .19
--------------------------------------------------------------------------------------------------
TOTAL - BASIC $ (1.82) $ .12 $ .14
==================================================================================================
DILUTED EARNINGS PER SHARE
Continuing operations $ (.52) $ .05 $ (.05)
Discontinued operations $ (1.30) $ .06 $ .17
--------------------------------------------------------------------------------------------------
TOTAL - DILUTED $ (1.82) $ .11 $ .12
==================================================================================================
<FN>
(1) The weighted average shares listed below were not included in the
computation of diluted loss per share for the year ended December
31, 2000 because to do so would have been anti-dilutive.
Redeemable preferred stock 617
Warrants 301
Employee stock options 2,741
Contingent stock - acquisitions 29
-----------------------------------------------------------
3,688
===========================================================
</FN>
The total number of potentially dilutive shares including stock
options, warrants and the conversion of preferred stock to common
stock total approximately 28 million shares.
92
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
17. COMMITMENTS AND CONTINGENCIES
Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $2.9 million, $3.4 million and $2.7 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
The approximate minimum payments required under operating leases and
employment contracts that have initial or remaining terms in excess of
one year at December 31, 2000 are:
MINIMUM EMPLOYMENT
YEAR RENTAL PAYMENTS CONTRACTS
--------------------------------------------------------------------------------
2001 $ 3,684 $ 8,200
2002 2,956 6,900
2003 2,106 3,700
2004 1,701 1,600
2005 1,449 900
Thereafter 920 100
--------------------------------------------------------------------------------
$ 12,816 $ 21,400
================================================================================
The Company has entered into employment contracts with key officers and
employees of the Company. The agreements are for periods of one to five
years through February 2006. Some of the employment contracts also call
for bonus arrangements based on earnings of a particular subsidiary.
The employment agreements with five of the 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 two of 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 two officers provide for
certain "triggering events" which include a change in control. Upon the
occurrence of a triggering event, the Company will pay, in cash and/or
in stock, $12.1 million and $3.5 million, respectively, to these two
officers, 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.
18. PROFIT SHARING PLAN
The Company has a 401(k) Plan for the benefit of eligible United States
employees. The Company has made no contributions to the 401(k) Plan.
The Company's International subsidiaries operate certain defined
contribution pension plans. The Company's expense relating to the plans
approximated $215 and $286 for the years ended December 31, 2000 and
1999.
93
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
19. REDEEMABLE PREFERRED STOCK
In March 1996, the Company issued nine thousand 8% convertible
preferred shares at $100 per share, in exchange for 80% of Burling
Instruments, Inc. If, and to the extent, the preferred shares had not
been converted to common stock by the second anniversary of the initial
issuance of the shares, the Company was required to redeem the
preferred shares by paying $100 per share. Each holder of the preferred
shares had the ability to convert their preferred shares into common
shares by dividing the redemption price ($100) by $5.75 per common
share. The shares were redeemed in 1998.
PREFERRED SHARES - SERIES C
On October 26, 2000, the Company issued 26 thousand shares of Series C
convertible preferred stock to a select group of institutional
investors in a private placement. The stated value of the preferred
stock is $1,000 per share, or an aggregate of $26.0 million, and the
purchase price of the preferred stock and the related warrants and
options was an aggregate of $20.0 million. The preferred stock is
convertible into shares of the Company's common stock initially at a
rate of $7.56 in stated value per share, which is reduced to $5.672 in
stated value per share 91 days after issuance of the preferred stock.
At the earlier of 90 days after the issuance of the preferred stock or
upon the effective date of the Company's registration statement
relating to the common stock issuable on the conversion of the initial
series of preferred stock, the holders also have the option to convert
the stated value of the preferred stock to common stock at an
alternative conversion rate which is the average closing price for
the 10 trading days preceding the date of the notice of conversion,
multiplied by:
o 140%, where the date of the notice of conversion is prior to March
25, 2001;
o 125%, where the date of the notice of conversion is on or after
March 25, 2001 but prior to April 25, 2001;
o 115%, where the date of the notice of conversion is on or after
April 25, 2001 but prior to June 24, 2001; or
o 110%, where the date of the notice of conversion is on or after June
24, 2001.
The conversion price and the alternative conversion price are subject
to adjustment based on certain events, including the Company's issuance
of shares of common stock, or options or other rights to acquire common
stock, at an issuance price lower than the conversion price of the
preferred stock, or issuance of convertible securities that have a more
favorable price adjustment provision than the preferred stock. The
proceeds upon issuance were allocated to the preferred stock, the
warrants and the option based upon their relative fair values. The
value assigned to the warrants and option increased the discount on
preferred stock as follows:
Face Value of Preferred Stock $26,000
Discount on Preferred Stock (6,000)
Relative Fair Value of Warrants (627)
Relative Fair Value of Option (5,100)
--------
Relative Fair Value of Preferred Shares $14,273
========
The beneficial conversion feature (BCF), in the amount of $3,857, was
computed using the excess of the fair market value of the Company's
common stock above the accounting value per share of common stock at
the date of issuance as follows:
The face value of the preferred shares divided by the most beneficial
conversion price available at the date of issuance ($5.67) results in
the number of common shares that could be purchased on the date of
issuance. The fair value assigned to the preferred shares divided by
the number of common shares that could be purchased on the date of
issuance results in the accounting value per share ($3.11). The
accounting value per share is less than the fair market value of the
Company's common stock at the date of issuance ($4.06).
The BCF was recorded as a reduction in the value assigned to the
preferred stock and an increase in additional paid in capital. The
Company recorded the accretion of the BCF over the period from the
date of issuance to the earliest beneficial conversion date available
through equity, reducing the income available to common stockholders
and earnings per share. The BCF will be recomputed as the alternate
conversion rates become available. The holders of the preferred stock
are entitled to receive annual dividends of 4% of the stated value (or
5.2% of the purchase price) payable in either cash or additional
shares of preferred stock.
If certain triggering events occur in respect of the preferred stock,
the holders may require the Company to redeem the preferred stock at a
price per share equal to 130% of the stated value (or an aggregate of
$33.8 million) plus accrued dividends, as long as such redemption is
not prohibited under the Company's credit agreement. In addition, under
certain circumstances during the occurrence of a triggering event, the
conversion price per share of the preferred stock would be reduced to
50% of the lowest closing price of the Company's common stock during
such period. In addition, the holders of the Series C preferred stock
may require the Company to delist its common stock from the Nasdaq
National Market and pay to each holder of the Series C preferred stock
an amount in cash per share equal to 2% of the liquidation value of the
Series C preferred stock, such payments not to exceed $6 million in the
aggregate. The triggering events include (i) failure to have the
registration statement relating to the common stock issuable on the
conversion of the preferred stock declared effective on or prior to 180
days after issuance of the preferred stock or the suspension of the
effectiveness of such registration statement, (ii) suspensions in
trading of or failure to list the common stock issuable on conversion
of the preferred stock, (iii) failure to obtain shareholder approval at
least by June 30, 2001 for the issuance of the common stock upon the
conversion of the preferred stock and upon the exercise of the
warrants, (iv) change in control, and (v) certain defaults in payment
of or acceleration of the Company's payment obligations under the
Company's credit agreement.
94
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Warrants:
The holders of the preferred stock have also received 0.8 million
warrants to purchase up to 0.8 million shares of the Company's common
stock over the next five years. The exercise price is $4.73 per share,
subject to adjustment for various events, including the issuance of
shares of common stock, or options or other rights to acquire common
stock, at an issuance price lower than the exercise price under the
warrants. The exercise price may be paid in cash, in shares of common
stock or by surrendering warrants. See footnote 20 for the valuation
and related assumptions.
Option to Acquire Additional Preferred Stock:
The investors may purchase up to an additional $26.0 million in stated
value of Series C convertible preferred stock and warrants with an
initial conversion price of $5.00 per share, for an aggregate purchase
price of $20.0 million, at any time up to ten months following the
effective date of the Company's registration statement relating to the
common stock issuable on conversion of the initial series of the
preferred stock. The additional preferred stock will have the same
preferences, qualifications and rights as the initial preferred stock.
The fair value of the option was estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of
0%, expected volatility of .40% and a risk free interest rate of 5.5%.
20. PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
PREFERRED SHARES
The Company has authorized 5 million shares of preferred stock, $10.00
par value, to be issued from time to time on such terms as is specified
by the board of directors.
In May 1998, in connection with the Company's acquisition of Commstar
Limited, an Ontario corporation ("Commstar"), the board of directors
authorized the issuance of one share of the Company's Preferred Stock
($10.00 par value) designated as the Company's Special Voting Preferred
Stock (the "Special Preferred Share") to secure the rights of
exchangeable shares issued to the sellers. The Special Preferred Share
was entitled to a number of votes equal to the number of outstanding
shares of Commstar not owned by the Company that could be exchanged for
the Company's common shares. All of Commstar's exchangeable shares have
been exchanged for shares of the Company's Common Stock, and the
Special Preferred Share was cancelled in June 2000.
PREFERRED SHARES - CLASS B
In June 1998, in connection with the Company's acquisition of Ground
Effects Limited, an Ontario corporation ("Ground Effects"), the board
of directors authorized the issuance of one share of the Company's
Preferred Stock ($10.00 par value) designated as the Company's Class B
Voting Preferred Stock (the "Class B Special Preferred Share") to
secure the rights of exchangeable shares issued to the sellers. The
Class B Special Preferred Share was entitled to a number of votes equal
to the number of outstanding shares of Ground Effects not owned by the
Company that could be exchanged for the Company's common shares. All
exchangeable shares of Ground Effects have been exchanged for shares of
the Company's Common Stock, and the Special Preferred Share was
cancelled in June 2000.
95
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
WARRANTS
The Company has issued warrants convertible into shares of common stock
for consideration, as follows (in thousands, except exercise price):
CLASS OF EXERCISE EXERCISABLE
WARRANTS AUTHORIZED ISSUED EXERCISED PRICE DATE OF ISSUE PERIOD
-----------------------------------------------------------------------------------------------------------------
Class K 250 250 -- 5.31 September 1996 5 years
Class L 125 125 123 3.00 October 1996 5 years
Class N 800 800 800 3.00 August 1997 5 years
Class P 520 520 480 3.00 September 1997 5 years
Class R 125 125 125 3.00 October 1997 5 years
Class S 600 600 223 2.00 April 1998 5 years
Class U 250 250 -- 8.38 November 1998 5 years
Class V 828 828 429 .67 - 3.32 September 2000 5 years
Class W 800 800 -- 4.73 October 2000 Up to 3.6 years
---------------------------------------------
4,298 4,298 2,180
=============================================
Warrants in classes K through U were issued at the then-current market
value of the common stock in consideration for investment banking
services provided to the Company.
Class V warrants were issued in connection with the merger of the
Company's wholly owned subsidiary, Digital Angel.net, Inc. into Destron
Fearing. These warrants were valued at $1.66 million, included as part
of the initial purchase price.
Class W warrants were issued in connection with the preferred stock
issuance. These warrants were valued at $627 thousand, and were
recorded as a discount on the preferred stock at issuance.
The valuation of warrants utilized the following assumptions in the
Black-Scholes model:
WARRANT SERIES DIVIDEND YIELD VOLATILITY EXPECTED LIVES RISK FREE RATES
K & L 0% 44.03% 1.69 8.5%
N, P & R 0% 44.03% 1.69 8.5%
S & U 0% 43.69% 1.69 8.5%
V 0% 43.41% 0.10 6.4%
W 0% 43.41% 1.69 6.4%
96
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
STOCK OPTION PLANS
During 1996, the Company adopted a non-qualified stock option plan (the
Option Plan). During 1999, the Company adopted a non-qualified Flexible
Stock Plan (the Flexible Plan). With the 2000 acquisition of Destron
Fearing, the Company acquired two additional stock option plans, an
Employee Stock Option Plan and Non-employee Director Stock Option Plan.
The names of the plans were changed to Digital Angel.Net Inc. Stock
Option Plan (the Employee Plan) and the Digital Angel.Net Inc.
Non-Employee Director Stock Option Plan (the Director Plan).
Under the Option Plan, options for ten million common shares were
authorized for issuance to certain officers and employees of the
Company at December 31, 2000, 1999, and 1998 respectively, of which 9.7
million have been issued through December 31, 2000. The options may not
be exercised until one to three years after the options have been
granted, and are exercisable for a period of five years.
Under the Flexible Plan, the number of shares which may be issued or
sold, or for which options, Stock Appreciation Rights (SARs) or
Performance Shares may be granted to certain officers and employees of
the Company is 28.4 million at December 31, 2000, of which 15.9 million
options have been issued through December 31, 2000. Some of the options
may not be exercised until one to three years after the options have
been granted, and are exercisable over a period of five years.
Under the Employee Plan, the Plan authorizes the grant of options to
the employees to purchase 1.6 million shares of common stock at
December 31, 2000, of which 1.6 million options have been issued
through December 31, 2000. The Plan provides for the grant of incentive
stock options, as defined in the Internal Revenue Code, and
non-incentive options. The Plan has been discontinued with respect to
any future grant of options.
Under the Director Plan, the Plan authorizes the grant of options to
the non-employee directors to purchase .3 million shares of common
stock at December 31, 2000, of which .3 million options have been
issued through December 31, 2000. The Plan has been discontinued with
respect to any future grant of options.
A summary of stock option activity for 2000, 1999 and 1998 is as
follows:
2000 1999 1998
------------------- -------------------- ------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding on January 1 12,172 $ 3.01 9,105 $ 3.55 3,835 $ 4.39
Granted 13,725 2.76 4,968 2.07 5,367 2.80
Exercised (3,257) 2.89 (1,000) 2.53 -- --
Forfeited (183) 3.28 (901) 3.26 (97) 4.79
----------------------------------------------------------------------------------------------------------------
Outstanding on December 31 22,457 2.87 12,172 3.01 9,105 3.55
----------------------------------------------------------------------------------------------------------------
Exercisable on December 31 11,821 2.87 6,663 3.56 2,885 4.48
----------------------------------------------------------------------------------------------------------------
Shares available on December 31
for options that may be granted 12,878 1,178 450
----------------------------------------------------------------------------------------------------------------
97
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The following table summarizes information about stock options at
December 31, 2000:
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
------------------------------------------------ -------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
---------------------------------------------------------------------------------------------------------
$0.01 to $1.00 266 8.40 $ .85 266 $ .85
$1.01 to $2.00 1,563 5.50 1.71 1,413 1.68
$2.01 to $3.00 15,133 5.20 2.56 5,575 2.25
$3.01 to $4.00 3,248 3.60 3.56 2,638 3.58
$4.01 to $5.00 1,279 2.20 4.45 1,184 4.43
$5.01 to $8.00 968 4.14 5.68 745 5.53
------------- -------------- -------------------------------
$0.01 to $8.00 22,457 $ 2.87 11,821 $ 2.87
============= ============== ===============================
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for all the plans. Accordingly, no compensation cost has
been recognized under these plans. Had compensation cost for these
plans been determined based on the fair value at the grant dates for
awards under these plans, consistent with the alternative method set
forth under FAS 123, Accounting for Stock-Based Compensation, the
Company's net income applicable to common stockholders and earnings per
common and common equivalent share would have been reduced. The pro
forma amounts are indicated below:
2000 1999 1998
------------------------------------------
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS
As reported $ (33,222) $ 2,580 $ (1,426)
Pro forma $ (35,901) $ (314) $ (3,664)
EARNINGS PER COMMON SHARE - BASIC
As reported $ (.52) $ .06 $ (.05)
Pro forma $ (.56) $ (.01) $ (.11)
EARNINGS PER COMMON SHARE - DILUTED
As reported $ (.52) $ .05 $ (.05)
Pro forma $ (.56) $ (.01) $ (.11)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2000, 1999, and 1998:
dividend yield of 0% for the three years; expected volatility of
53.32%, 43.41%, and 43.69%; risk-free interest rate of 4.98%, 6.36%,
and 8.5%; and expected lives of five years for the three years. The
weighted-average fair value of options granted was $.67, $1.17, and
$1.27 for the years ended December 31, 2000, 1999, and 1998,
respectively. The number of options granted for the year ended December
31, 2000 includes 1,903 stock options acquired in conjunction with the
Destron Fearing acquisition.
98
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
During 1999, the Company adopted a qualified Employee Stock Purchase
Plan (the Stock Purchase Plan). Under the Stock Purchase Plan, options
are granted at an exercise price of the lesser of 85% of the fair
market value on the date of grant or 85% of the fair market value on
the exercise date. Under the Stock Purchase Plan, options for 1.5
million common shares were authorized for issuance to substantially all
full-time employees of the Company, of which 168 thousand shares have
been issued and exercised through December 31, 2000. Each participant's
options to purchase shares will be automatically exercised for the
participant on the exercise dates determined by the board of directors.
21. LEGAL PROCEEDINGS
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material adverse
affect on the financial position or overall trends in results of the
Company. The estimate of potential impact on the Company's financial
position, overall results of operations or cash flows for the above
legal proceedings could change in the future.
22. SUPPLEMENTAL CASH FLOW INFORMATION
The changes in operating assets and liabilities are as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(Increase) decrease in accounts receivable
and unbilled receivables $ (6,359) $ (1,298) $ 387
(Increase) decrease in inventories 607 1,805 (1,233)
(Increase) decrease in prepaid expenses 843 (1,707) (409)
Decrease in accounts payable
and accrued expenses (668) (1,846) (3,925)
--------------------------------------------------------------------------------------------------
$ (5,577) $ (3,046) $ (5,180)
==================================================================================================
In the years ended December 31, 2000, 1999, and 1998, the Company had
the following noncash investing and financing activities:
2000 1999 1998
------------------------------------------
Assets acquired for common stock $ 168,319 $ 19,027 $ 25,408
Due from buyer of divested subsidiary -- 31,302 --
Due to shareholders of acquired subsidiary -- 15,000 --
Common stock issued for services 125 -- --
Assets acquired for long-term debt and capital leases 2,201 100 1,926
Sale of assets for preferred stock -- -- 3,000
Other -- -- 132
99
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
23. SEGMENT INFORMATION
Prior to 2001, the Company's business was organized into six reportable
business segments. The Company's core group comprised four technology
groups or industry segments: Applications, Telephony, Networks, and
Internet. Combined, these groups formed the basis of the Company's
Computer Telephony Internet Integration (CTII) strategy that was the
Company's business model. Beginning in 2001 the Company further refined
its business model and strategy to more adequately promote its product
and services and to more fully integrate its business units. Through
this strategy, known as the I(3) Service Platform, the Company delivers
intelligent integrated information solutions through its three newly
organized core business groups of Applications, Services and Advanced
Wireless. Additionally, the Company's previously reported IntelleSale
and other non-core business segments are now reported as discontinued
operations. Prior years information has been restated to present the
Company's reportable segments into three operating segments, whose
principal products and services are as follows:
======================================================================================================
OPERATING SEGMENT PRINCIPAL PRODUCTS AND SERVICES
------------------------------------------------------------------------------------------------------
Applications * Retail software applications
* Point of sale
* Data acquisition
* Asset management
* Decision support
* Portable data collection
* Call center solutions
* Enterprise resource planning
* Customer relationship management
* Website design
* Application and internet access
* Global positioning systems
* Satellite communication technology
* Corporate enterprise access
* Decision support
* Voice/data technology
------------------------------------------------------------------------------------------------------
Services - comprised of
Telephony * Computer telephony integration
* Telephone systems and services
* Voice and data solutions
* Voice over Internet Protocol (VOIP)
* Virtual Private Networking
* Project management
* Cable/fiber infrastructure
Networks * e-Business infrastructure design and deployment,
services and support
* Personal and mid-range computer solutions
* Network infrastructures, local and wide area
networks and
virtual private networks
* Site analysis and configuration
* Training and customer support services
------------------------------------------------------------------------------------------------------
Advanced Wireless * Animal Tracking Business
* Digital Angel technology
* Digital Angel Delivery System
------------------------------------------------------------------------------------------------------
100
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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, except that intersegment sales and transfers are
generally accounted for as if the sales or transfers were to third
parties at current market prices; 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.
2000 (IN THOUSANDS)
------------------------------------------------------------------------------------------------
SERVICES
---------------------- ADVANCED CORPORATE
APPLICATIONS TELEPHONY NETWORKS WIRELESS OVERHEAD ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------------------
Net revenue from external
customers $ 28,112 $ 40,019 $ 43,045 $ 23,399 $ 191 $ -- $ 134,766
Intersegment net revenue 5,142 -- -- -- -- (5,142) --
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 33,254 $ 40,019 $ 43,045 $ 23,399 $ 191 $ (5,142) $ 134,766
================================================================================================================================
Depreciation and amortization $ 1,075 $ 551 $ 171 $ 652 $ 1,590 $ 7,034 $ 11,073
Restructuring and unusual costs 818 -- -- -- 5,565 -- 6,383
Interest income 28 135 (560) 9 8,300 (6,817) 1,095
Interest expense 859 391 191 99 11,178 (6,817) 5,901
Income (loss) from continuing
operations before provision
for income taxes, minority
interest and extraordinary
loss (3,179) 2,442 803 (1,567) (17,903) (14,581) (33,985)
Segment assets 29,335 30,023 20,972 21,728 $ 411,553 (202,236) 311,375
Expenditures for property
and equipment 954 135 249 766 6,287 -- 8,391
1999 (IN THOUSANDS)
------------------------------------------------------------------------------------------------
SERVICES
---------------------- ADVANCED CORPORATE
APPLICATIONS TELEPHONY NETWORKS WIRELESS OVERHEAD ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------------------
Net revenue from external
customers $ 28,006 $ 59,226 $ 27,190 $ 14,379 $ 263 $ -- $ 129,064
Intersegment net revenue -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 28,006 $ 59,226 $ 27,190 $ 14,379 $ 263 $ -- $ 129,064
================================================================================================================================
Depreciation and amortization $ 1,781 $ 1,547 $ 132 $ 510 $ 980 $ 1,610 $ 6,560
Restructuring and unusual costs 376 825 -- -- 1,349 -- 2,550
Interest income 11 144 31 -- 2,957 (2,721) 422
Interest expense 463 622 126 41 4,947 (2,721) 3,478
Income (loss) from continuing
operations before provision
for income taxes, minority
interest and extraordinary
loss 47 220 1,456 (990) 5,833 (2,852) 3,714
Segment assets 20,438 11,325 6,686 7,672 207,829 (142,629) 111,321
Expenditures for property
and equipment 673 2,177 179 231 516 -- 3,776
101
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
1998 (IN THOUSANDS)
------------------------------------------------------------------------------------------------
SERVICES
---------------------- ADVANCED CORPORATE
APPLICATIONS TELEPHONY NETWORKS WIRELESS OVERHEAD ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------------------
Net revenue from external
customers $ 10,163 $ 33,270 $ 21,282 $ 9,628 $ -- $ -- $ 74,343
Intersegment net revenue -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 10,163 $ 33,270 $ 21,282 $ 9,628 $ -- $ -- $ 74,343
================================================================================================================================
Depreciation and amortization $ 772 $ 374 $ 39 $ 319 $ 137 $ 1,272 $ 2,913
Interest income 47 129 14 686 (585) 291
Interest expense 157 531 144 35 788 (585) 1,070
Income (loss) from continuing
operations before provision
for income taxes, minority
interest and extraordinary
loss 633 723 1,433 798 (3,161) (1,018) (592)
Segment assets 12,594 21,989 5,528 9,633 147,518 (125,649) 71,613
Expenditures for
property and equipment 113 231 46 -- 619 -- 1,009
Segment assets do not include net assets of discontinued operations of
$8,076, $75,284, and $37,320, in 2000, 1999, and 1998, respectively.
Revenues are attributed to geographic areas based on the location of
the assets producing the revenues. Information concerning principal
geographic areas as of and for the years ended December 31, was as
follows (in thousands):
UNITED
UNITED STATES CANADA KINGDOM CONSOLIDATED
---------------------------------------------------------------------
2000
Net revenue $118,849 $ 766 $ 15,151 $ 134,766
Long-lived assets 20,044 -- 1,324 21,368
------------------------------------------------------------------------------------------------
1999
Net revenue $ 71,423 $ 39,270 $ 18,371 $ 129,064
Long-lived assets 5,269 -- 1,380 6,649
------------------------------------------------------------------------------------------------
1998
Net revenue $ 50,041 $ 11,607 $ 12,695 $ 74,343
Long-lived assets 3,092 3,943 1,898 8,933
------------------------------------------------------------------------------------------------
102
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
24. Related Party Transactions
In connection with the acquisitions which took place in 1998, the
Company paid a related party $0.6 million for investment banking
services. These payments were included in the total cost of assets
purchased and are being amortized over the life of the related assets.
In 1998, the Company sold its investment in a subsidiary company to a
related party for two thousand shares of preferred stock.
25. SUBSEQUENT EVENTS
In January 2001, the Company and its subsidiary, IntelleSale, settled
claims against the former owners of Bostek, Inc. and Micro Components
International Incorporated (Bostek and affiliate), two companies
acquired by IntelleSale in June 1999. The settlement agreement calls
for the former owners of Bostek and affiliate to purchase 3.0 million
shares of the Company's common stock. The purchase price for the shares
was paid in the form of non-recourse, non-interest bearing promissory
notes which are collateralized by the shares of common stock issued. In
addition, the former owners of Bostek and affiliate will release the
Company from its liability for the deferred purchase price of $9.5
million, upon registration of the aforementioned shares by June 15,
2001.
In January 2001, the Company entered into an agreement with the
minority shareholders of IntelleSale to terminate all put rights and
employment agreements that each had with or in respect of IntelleSale.
In exchange, the Company issued an aggregate of 6.6 million shares of
the Company's common stock.
On February 27, 2001, the Company acquired 16.6% of the capital stock
of Medical Advisory Systems, Inc. (AMEX: DOC), a provider of medical
assistance and technical products and services.
103
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
26. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma consolidated information of the Company for the
years ended December 31, 2000 and 1999 gives effect to the
acquisitions, disclosed in Note 3, as if they were effective at January
1, 1999. The statement gives effect to the acquisitions under the
purchase method of accounting.
The pro forma information may not be indicative of the results that
would have actually occurred if the acquisitions had been effective on
the dates indicated or of the results that may be obtained in the
future. The pro forma information should be read in conjunction with
the consolidated financial statements and notes thereto of the Company.
PRO FORMA
(IN THOUSANDS)
DECEMBER 31,
------------------------
2000 1999
------------------------
Net operating revenue from continuing operations $ 206,532 $ 288,552
Net (loss) income from continuing operations (33,457) 407
Net (loss) income available to common stockholders from continuing operations (37,504) 247
Earnings (loss) per common share from continuing operations - basic (.40) .01
Earnings (loss) per common share from continuing operations - diluted (.40) .01
104
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
27. SUMMARIZED QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
--------------------------------------------------------
2000
NET OPERATING REVENUE $ 22,801 $ 33,770 $ 40,972 $ 37,223 $ 134,766
GROSS PROFIT 10,062 13,958 15,757 12,514 52,291
NET INCOME (LOSS) FROM CONTINUING OPERATIONS(1) (3,180) (3,053) (2,388) (20,553) (29,174)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS(2) 2,008 (14,675) 648 (70,949) (82,968)
BASIC NET INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS(3) (0.06) (0.06) (0.04) (0.27) (0.52)
DILUTED NET INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS(3) (0.06) (0.06) (0.04) (0.27) (0.52)
BASIC NET INCOME (LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS(3) 0.04 (0.29) 0.01 (0.78) (1.30)
DILUTED NET INCOME (LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS(3) 0.04 (0.29) 0.01 (0.78) (1.30)
--------------------------------------------------------------------------------------------------------------
1999
Net operating revenue $ 20,789 $ 32,107 $ 38,779 $ 37,389 $ 129,064
Gross profit 9,870 15,680 15,473 13,742 54,765
Net income (loss) from continuing operations(4) (3,089) 259 (1,271) 6,681 2,580
Net income (loss) from discontinued operations 1,444 242 1,717 (391) 3,012
Basic net income (loss) per share from
continuing operations(3) (0.07) 0.01 (0.03) 0.14 0.06
Diluted net income (loss) per share from
continuing operations(3) (0.07) 0.01 (0.03) 0.13 0.05
Basic net income (loss) per share from
discontinued operations(3) 0.04 0.01 0.04 (0.01) 0.06
Diluted net income (loss) per share from
discontinued operations(3) 0.03 0.01 0.04 (0.01) 0.06
--------------------------------------------------------------------------------------------------------------
<FN>
(1) Fourth quarter 2000 loss from continuing operations includes permanent asset impairment of $6,383.
(2) Second quarter 2000 loss from discontinued operations includes a $17,000 unusual charge.
(3) Earnings per share are computed independently for each of the quarters presented. Therefore,
the sum of the quarterly net earnings per share will not necessarily equal the total for the year.
(4) First quarter 1999 loss from continuing operations includes one time restructuring charges of $2,550.
</FN>
105
28. UNAUDITED PRO FORMA BALANCE SHEET
Subsequent to December 31, 2000 and through April 16, 2001, the Company
has issued an additional 37,981,333 shares of its common stock as
follows:
Employee stock purchase plan 190,366
Conversion of series C redeemable preferred stock 1,300,239
Settlement of earnout and put accruals 10,066,074
Recission of ATEC transaction ( 2,169,855)
Acquisition of 16.6% of capital stock of Medical
Advisory Systems, Inc. 3,396,615
Acquisition of technology and software from
MCY.com, Inc. 11,816,141
Escrow for investment in Connect Intelligence 3,205,128
Price protection shares in regard to the acquisition of
Computer Equity Corporation 9,884,249
Other 292,376
----------
Total 37,981,333
==========
The unaudited pro forma balance sheet gives effect to the preceding
transactions as if they had been completed on December 31, 2000. See note
20 to these financial statements for a description of the employee stock
purchase plan. See note 19 to these financial statements for a
description of the redeemable preferred stock and its conversion
features. See note 3 to these financial statements for a description of
the earnout and put agreements. See note 4 for a discussion of the
Company's investment in ATEC as of December 31, 2000. On March 1, 2001,
the Company rescinded the stock purchase transaction in accordance with
the recission provision in the common stock purchase agreement in
consideration of a $1.0 million termination which was payable through the
issuance of the Company's common stock.
On February 27, 2001 the Company acquired 16.6% of the capital stock of
Medical Advisory Services, Inc., a provider of medical assistance and
technical products and services. The Company issued approximately 3.4
million of its common stock to consummate the transaction.
On March 30, 2001 the Company placed approximately 3.2 million shares of
its stock in escrow in regard to an investment in Connect Intelligence.
This transaction is not complete and the final ownership interest and
structure will be resolved in the future.
See note 3 to these financial statements for a description of the
Computer Equity Corporation transaction that was consummated on June 1,
2000. The stock purchase agreement required the Company to ensure that
the price of the Company's common stock issued to consummate the
transaction on June 1, 2000 did not decline in value until it was
registered. As of April 16, 2001, the Company was required to issue
approximately 9.9 million shares due to the decline in value of the
Company's stock from June 1, 2000 to April 15, 2001.
On March 30, 2001, the Company acquired internal use software from
MCY.com for approximately 11.8 million shares of its common stock.
106
Valuation and Qualifying Accounts (in thousands)
Additions
-----------------------
Balance at Charged to Valuation Balance at
beginning cost and accounts end of
Description of period expenses acquired Deductions period
- --------------------------------------------------------------------------------------------------------------------------------
Valuation reserve deducted in the balance
sheet from the asset to which it applies:
Accounts receivable:
2000 Allowance for doubtful accounts $1,047 $ 823 $ 766 $ 955 $ 1,681
1999 Allowance for doubtful accounts 574 448 239 214 1,047
1998 Allowance for doubtful accounts 527 652 189 794 574
Inventory:
2000 Allowance for excess and obsolescence 916 345 460 221 1,500
1999 Allowance for excess and obsolescence 1,374 139 - 597 916
1998 Allowance for excess and obsolescence 907 716 - 249 1,374
Deferred Taxes:
2000 Valuation reserve - 15,850 - - 15,850
1999 Valuation reserve 2,994 - - 2,994 -
1998 Valuation reserve 3,494 - - 500 2,994
Reserves not deducted from assets:
2000 Warranty reserve 50 163 - 50 163
1999 Warranty reserve - - 50 - 50
1998 Warranty reserve - - - - -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the city of Palm
Beach, State of Florida, on April 23, 2001.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ Mercedes Walton
-------------------------------------
Mercedes Walton
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard J. Sullivan Chairman of the Board of Directors,
- ---------------------------- Chief Executive Officer and
(Richard J. Sullivan) Secretary (Principal Executive April 23, 2001
Officer)
/s/ Mercedes Walton
- ---------------------------- President and Chief Operating
(Mercedes Walton) Officer (Principal Operating April 23, 2001
Officer)
/s/ Jerome C. Artigliere
- ---------------------------- Chief Financial Officer (Principal
(Jerome C. Artigliere) Financial Officer and Principal April 23, 2001
Accounting Officer)
/s/ Richard S. Friedland
- ---------------------------- Director
(Richard S. Friedland) April 23, 2001
/s/ Arthur F. Noterman
- ---------------------------- Director
(Arthur F. Noterman) April 23, 2001
/s/ Daniel E. Penni
- ---------------------------- Director
(Daniel E. Penni) April 23, 2001
/s/ Angela M. Sullivan
- ---------------------------- Director
(Angela M. Sullivan) April 23, 2001
/s/ Garrett A. Sullivan
- ---------------------------- Director
(Garrett A. Sullivan) April 23, 2001
/s/ Constance K. Weaver
- ---------------------------- Director
(Constance K. Weaver) April 23, 2001
List Of Exhibits
(Item 14 (c))
Exhibit
Number Description
------- -----------
2.1 Agreement of Purchase and Sale dated as of June 4, 1999 by and among
Intellesale.com, Inc., Applied Cellular Technology, Inc., David Romano
and Eric Limont (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed with the Commission on June
11, 1999, as amended on August 12, 1999).
2.2 Amendment No. 1 to the Agreement of Purchase and Sale, dated as of June
9, 1999 by and among Intellesale.com, Inc., Applied Cellular Technology,
Inc., David Romano and Eric Limont (incorporated by reference to Exhibit
99.2 to the Company's Current Report on Form 8-K filed with the
Commission on June 11, 1999, as amended on August 12, 1999).
2.3 Agreement and Plan of Merger, dated April 24, 2000, by and among the
Company, Digital Angel.net Inc. and Destron Fearing Corporation
(incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K filed with the Commission on May 1, 2000).
2.4 Agreement dated as of November 28, 1999 by and among AT&T Canada Corp.
and TigerTel, Inc. (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed with the Commission on
December 13, 1999, as amended on December 22, 1999 and January 11, 2000).
2.5 Agreement and Plan of Merger dated as of June 30, 2000 by and among the
Company and Compec Acquisition Corp. and Computer Equity Corporation and
John G. Ballenger, Christopher J. Ballenger and Frederick M. Henschel
(incorporated by reference to Exhibit 2 to the Company's Current Report
on Form 8-K filed with the Commission on July 14, 2000, as amended on
September 11, 2000).
2.6 Agreement and Plan of Merger dated as of October 18, 2000 by and among
the Company and PDS Acquisition Corp., and Pacific Decision Sciences
Corporation, and H&K Vasa Family 1999 Limited Partnership, H&K Vasa
Family 2000 Limited Partnership, David Dorret, and David Englund
(incorporated by reference to Exhibit 2 to the Company's Current Report
on Form 8-K filed with the Commission on November 1, 2000, as amended on
December 29, 2000).
2.7 MCY Agreement dated as of October 19, 2000 by and between MCY.com, Inc
and the Company (incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K filed with the Commission on December 5,
2000).
4.1 Second Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Form S-3 File No. 333-64605) filed with the
Commission on June 23, 1999).
4.2 Amendment of Articles of Incorporation of the Company filed with the
Secretary of State of the State of Missouri on September 5, 2000
(incorporated herein by reference to Exhibit 4.3 to the Company's
Post-Effective Amendment No. 3 on Form S-3 to Registration Statement on
Form S-4 (File No. 333-38420-02) filed with the Commission on September
29, 2000).
4.3 Certificate of Designation of Preferences of Series C Convertible
Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed with the Commission on October
26, 2000).
4.4 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998).
10.1* 1996 Non-Qualified Stock Option Plan of Applied Cellular Technology,
Inc., as amended through June 13, 1998 (incorporated herein by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed
with the Commission on December 2, 1999 (Commission File Number
333-91999)).
10.2* Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as
amended through September 23, 1999 (incorporated herein by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File
No. 333-88421) filed with the Commission on October 4, 1999).
10.3* Applied Digital Solutions, Inc. 1999 Flexible Stock Plan (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 333- 92327) filed with the Commission on
December 8, 1999).
10.4 Credit Agreement between the Company and State Street Bank and Trust
Company dated as of August 25, 1998 (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with
the Commission on November 16, 1998 )
10.5 First Amendment to Credit Agreement between the Company and State Street
Bank and Trust Company dated as of February 4, 1999 (incorporated by
reference to Exhibit 10.3 the Company's Annual Report on Form 10-K filed
with the Commission on March 31, 1999)
10.6 Second Amended and Restated Term and Revolving Credit Agreement, dated
October 17, 2000, between the Company and IBM Credit Corporation, and
others (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Commission on October 24, 2000)
10.7 Acknowledgement, Waiver and Amendment No. 1 to the Second Amended and
Restated Term and Revolving Credit Agreement dated March 30, 2001 between
the Company and IBM Credit Corporation, and others (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K
filed with the Commission on April 10, 2001)
10.8* Richard J. Sullivan Employment Agreement **
10.9* Garrett A. Sullivan Employment Agreement **
10.10* David A. Loppert Employment Agreement **
10.11* Jerome C. Artigliere Employment Agreement (incorporated by reference to
the corresponding Exhibit to the Company's Annual Report on Form 10-K
filed with the Commission on April 10, 2001)
10.12* Mercedes Walton Employment Agreement (incorporated by reference to
the corresponding Exhibit to the Company's Annual Report on Form 10-K
filed with the Commission on April 10, 2001)
10.13* David I. Beckett Employment Agreement (incorporated by reference to
the corresponding Exhibit to the Company's Annual Report on Form 10-K
filed with the Commission on April 10, 2001)
10.14* Michael E. Krawitz Employment Agreement (incorporated by reference to
the corresponding Exhibit to the Company's Annual Report on Form 10-K
filed with the Commission on April 10, 2001)
10.15 Securities Purchase Agreement, dated as of October 24, 2000, relating to
the Registrant's Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed with the Commission on October 26, 2000)
10.16 Form of warrant to purchase common stock of the Registrant issued to the
holders of the Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
filed with the Commission on October 26, 2000)
10.17 Registration Rights Agreement between the Registrant and the holders of
the Series C Convertible Preferred Stock (incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with
the Commission on October 26, 2000)
10.18 Lock-Up Agreement dated as of November 28, 1999 by and among AT&T Canada
Corp. and the Company (incorporated by reference to the Exhibit 99.2 to
the Company's Current Report on Form 8-K filed with the Commission on
December 13, 1999, as amended on December 22, 1999 and January 11, 2000).
10.19 Voting Agreement by and among the Company and certain securityholders of
Destron Fearing Corporation (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed with the Commission on May
1, 2000).
21.1 List of Subsidiaries of Applied Digital Solutions, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
- -------
* - Management contract or compensatory plan.
** - Incorporated herein by reference to Exhibits 10.8, 10.9 and 10.10,
respectively, to the Company's Annual Report on Form 10-K filed with
the Commission on March 30, 2000.