As filed with the Securities and Exchange Commission on May 15, 2001
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001
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: 0-26020
APPLIED DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1641533
(State or other jurisdiction of (IRS 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of business on May 10, 2001:
Class Number of Shares
Common Stock; $.001 Par Value 146,087,418
APPLIED DIGITAL SOLUTIONS, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets
March 31, 2001 (unaudited) and December 31, 2000 (unaudited) 3
Consolidated Statements of Operations -
Three Months ended March 31, 2001 and 2000 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Three Months ended March 31, 2001(unaudited) 5
Consolidated Statements of Cash Flows -
Three Months ended March 31, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
2. Management's Discussion and Analysis of Financial Condition 24
and Results of Operations
3. Quantitative and Qualitative Disclosures About Market Risk 49
PART II - OTHER INFORMATION
1. Legal Proceedings 50
2. Changes In Securities 51
3. Defaults Upon Senior Securities 52
4. Submission of Matters to a Vote of Security Holders 52
5. Other Information 52
6. Exhibits and Reports on Form 8-K 52
SIGNATURE 54
EXHIBITS 55
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Assets
(Unaudited)
March 31, December 31,
2001 2000
---------------------------------
Current Assets
Cash and cash equivalents $ 6,393 $ 8,039
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $903 in 2001 and $1,681 in 2000) 41,358 43,890
Inventories 12,187 12,311
Notes receivable 3,828 5,711
Current deferred tax asset 10,001 10,001
Other current assets 5,908 6,040
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 79,675 85,992
Net Assets Of Discontinued Operations 10,550 8,076
Property And Equipment, net 32,131 21,368
Notes Receivable 12,928 12,898
Goodwill, net 160,653 166,024
Investment In Affiliate 7,949 --
Other Assets 18,116 25,093
- ------------------------------------------------------------------------------------------------------------------------
$ 322,002 $ 319,451
========================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 615 $ 657
Current maturities of long-term debt 4,529 4,571
Accounts payable 14,749 16,945
Accrued expenses 18,563 16,361
Due to sellers of acquired subsidiary 9,465 9,465
Earnout and put accruals 3,884 18,245
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 51,805 66,244
Long-Term Debt And Notes Payable 69,741 69,146
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 121,546 135,390
- ------------------------------------------------------------------------------------------------------------------------
Commitments And Contingencies -- --
- ------------------------------------------------------------------------------------------------------------------------
Minority Interest 4,930 4,879
- ------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock - Series C 12,027 13,440
- ------------------------------------------------------------------------------------------------------------------------
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 2001 and 2000 of $10 par value;
special voting, no shares issued or outstanding in 2001 and 2000, Class B
voting, no shares issued or outstanding in 2001 and 2000 -- --
Common shares: Authorized 245,000 shares in 2001 and 2000, of $.001 par
value; 127,753 shares issued and 123,862 shares outstanding in 2001
and 103,063 shares issued and 101,847 shares outstanding in 2000 128 103
Common and preferred additional paid-in capital 310,097 266,573
Accumulated deficit (110,658) (99,478)
Common stock warrants 1,406 1,406
Treasury stock (carried at cost, 3,891 shares in 2001 and 1,216 shares in 2000) (7,403) (2,803)
Accumulated other comprehensive loss (1,741) (729)
Notes received for shares issued (13,510) (4,510)
- ------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock, Common Stock, and Other Stockholders' Equity 178,319 160,562
- ------------------------------------------------------------------------------------------------------------------------
$ 322,002 $ 319,451
========================================================================================================================
See the accompanying notes to consolidated financial statements.
3
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For The Three Months
Ended March 31,
---------------------------------------
2001 2000
---------------------------------------
Product revenue $ 34,383 $ 15,888
Service revenue 13,026 6,913
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 47,409 22,801
Cost of products sold 23,844 9,627
Cost of services sold 6,217 3,375
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 17,348 9,799
Selling, general and administrative expenses (19,058) (12,011)
Depreciation and amortization (6,739) (1,060)
Interest income 487 197
Interest expense (1,845) (1,067)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before provision (benefit) for income
taxes, minority interest and equity in net loss of affiliate (9,807) (4,142)
Provision (benefit) for income taxes 1,548 (932)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before minority interest
and equity in net loss of affiliate (11,355) (3,210)
- -------------------------------------------------------------------------------------------------------------------------
Minority interest (93) (30)
Equity in net loss of affiliate 131 --
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (11,393) (3,180)
- -------------------------------------------------------------------------------------------------------------------------
Income from discontinued operations, net of income taxes
of $51 in 2001 and $334 in 2000 213 2,008
- -------------------------------------------------------------------------------------------------------------------------
Net loss (11,180) (1,172)
Preferred stock dividends 238 --
Accretion of beneficial conversion feature of
redeemable preferred stock - series C 2,451 --
- -------------------------------------------------------------------------------------------------------------------------
Net loss available to common stockholders $ (13,869) $ (1,172)
=========================================================================================================================
Earnings per common share - basic
Loss from continuing operations $ (.13) $ (.06)
Income from discontinued operations -- .04
- -------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (.13) $ (.02)
=========================================================================================================================
Earnings per common share - diluted
Loss from continuing operations $ (.13) $ (.06)
Income from discontinued operations -- .04
- -------------------------------------------------------------------------------------------------------------------------
Net loss per common share - diluted $ (.13) $ (.02)
=========================================================================================================================
Weighted average number of common shares outstanding - basic 103,602 49,012
Weighted average number of common shares outstanding - diluted 103,602 49,012
- -------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
4
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF PREFERRED STOCK,
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
For The Three Month Period Ended March 31, 2001
(In thousands)
(Unaudited)
Preferred Stock Common Stock Additional Common
----------------------- ------------------ Paid-In Accumulated Stock Treasury
Number Amount Number Amount Capital Deficit Warrants Stock
---------------------------------------------------------------------------------------------
Balance - December 31, 2000 -- $ -- 103,063 $ 103 $ 266,573 $ (99,478) $ 1,406 $ (2,803)
Net loss -- -- -- -- -- (11,180) -- --
Comprehensive loss -
Foreign currency translation -- -- -- -- -- -- -- --
---------
Total comprehensive loss -- -- -- -- -- (11,180) -- --
Conversion of redeemable preferred
shares to common shares -- -- 800 1 2,237 -- -- --
Accretion of beneficial conversion feature
of redeemable preferred shares -- -- -- -- (2,451) -- -- --
Dividends accrued on redeemable
preferred stock -- -- -- -- (238) -- -- --
Beneficial conversion feature of
redeemable preferred stock -- -- -- -- 2,451 -- -- --
Penalty paid by issuance of redeemable
preferred stock -- -- -- -- (612) -- -- --
Issuance of common shares -- -- 469 1 526 -- -- --
Issuance of common shares for
software license purchase -- -- 6,278 6 10,195 -- -- --
Issuance of common shares for investment -- -- 3,322 3 8,070 -- -- --
Issuance of common shares
for settlement of put agreements -- -- 8,283 8 14,352 -- -- --
Common shares repurchased -- -- -- -- -- -- -- (4,600)
Notes receivable for shares issued -- -- 5,538 6 8,994 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 2001 -- $ -- 127,753 $ 128 $ 310,097 $(110,658) $ 1,406 $ (7,403)
====================================================================================================================================
Accumulated
Other Notes Total
Comprehensive Received For Stockholders'
Loss Shares Issued Equity
----------------------------------------------------
Balance - December 31, 2000 $ (729) $ (4,510) $ 160,562
Net loss -- -- (11,180)
Comprehensive loss -
Foreign currency translation (1,012) -- (1,012)
--------- ---------
Total comprehensive loss (1,741) -- (12,192)
Conversion of redeemable preferred
shares to common shares -- -- 2,238
Accretion of beneficial conversion feature
of redeemable preferred shares -- -- (2,451)
Dividends accrued on redeemable
preferred stock -- -- (238)
Beneficial conversion feature of
redeemable preferred stock -- -- 2,451
Penalty paid by issuance of redeemable
preferred stock -- -- (612)
Issuance of common shares -- -- 527
Issuance of common shares for
software license purchase -- -- 10,201
Issuance of common shares for investment -- -- 8,073
Issuance of common shares
for settlement of put agreements -- -- 14,360
Common shares repurchased -- -- (4,600)
Notes receivable for shares issued -- (9,000) --
- -----------------------------------------------------------------------------------------
Balance - March 31, 2001 $ (1,741) $ (13,510) $ 178,319
=========================================================================================
5
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For The Three Months
Ended March 31,
---------------------------------------
2001 2000
---------------------------------------
Cash flows from operating activities
Net loss $ (11,180) $ (1,172)
Adjustments to reconcile net loss to net cash
used in operating activities:
Income from discontinued operations (213) (2,008)
Depreciation and amortization 6,739 1,060
Deferred income taxes 2,299 126
Minority interest (93) (30)
Equity in net loss of affiliate 131 --
Loss (gain) on sale of equipment 85 (10)
Change in assets and liabilities:
Decrease in accounts receivable 2,531 1,261
Decrease (increase) in inventories 125 (518)
Decrease (increase) in other current assets 578 (1,204)
Decrease in accounts payable and
accrued expenses (720) (11,645)
Net cash (used in) provided by discontinued operations (520) 1,115
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (238) (13,025)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Decrease in due from buyer of divested subsidiary -- 31,302
Decrease (increase) in notes receivable 1,854 (956)
Increase in other assets (485) (580)
Proceeds from sale of property and equipment -- 32
Payments for property and equipment (1,879) (2,688)
Payments for costs of asset and business
acquisitions (net of cash balances acquired) -- (6,636)
Net cash (used in) provided by discontinued operations (1,359) 490
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,869) 20,964
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net amounts borrowed (paid) on notes payable 1,600 (14,506)
Proceeds from long-term debt -- 4,566
Payments on long-term debt (1,089) (2,273)
Other financing costs (25) --
Issuance of common shares 15 5,008
Proceeds from subsidiary issuance of common stock 126 --
Net cash (used in) provided by discontinued operations (166) 153
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 461 (7,052)
- ------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,646) 887
Cash and cash equivalents - beginning of period 8,039 2,181
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 6,393 $ 3,068
========================================================================================================================
See the accompanying notes to consolidated financial statements.
6
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Applied
Digital Solutions, Inc. (the "Company") as of March 31, 2001 and December 31,
2000 (the December 31, 2000 financial information included herein has been
extracted from the Company's audited financial statements included in the
Company's 2000 Annual Report on Form 10-K/A) and for the three months ended
March 31, 2001 and 2000 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities
Exchange Act of 1934. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, all
adjustments (consisting of only normal recurring adjustments) considered
necessary to present fairly the consolidated financial statements have been
made.
The consolidated statements of operations for the three months ended March
31, 2001 are not necessarily indicative of the results that may be expected for
the entire year. These statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in our
Annual Report on Form 10-K/A for the year ended December 31, 2000.
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 9.
Certain items in the consolidated financial statements for the 2000 period
have been reclassified for comparative purposes.
2. Principles of Consolidation
The financial statements include the accounts of the Company and its wholly
owned and majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Interest in less than
majority owned entities are accounted for using the equity method of accounting.
3. Inventory
March 31, December 31,
2001 2000
---------- ----------
Raw materials $ 1,817 $ 1,807
Work in process 341 499
Finished goods 11,290 11,505
-------- --------
13,448 13,811
Allowance for excess and obsolescence (1,261) (1,500)
-------- --------
Net inventory for continuing operations $ 12,187 $ 12,311
======== ========
7
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
4. Financing Agreements
On May 25, 1999, the Company entered into a Term and Revolving Credit
Agreement (the "IBM Agreement") with IBM Credit Corporation ("IBM Credit"). The
IBM Agreement was amended and restated on October 17, 2000, and further amended
on March 30, 2001, and currently provides for the following:
(a) a revolving credit line of up to $53.4 million, subject to
availability under a borrowing base formula, designated as follows:
(i) a USA revolving credit line of up to $49.5 million, and (ii) a
Canadian revolving credit line of up to $3.9 million,
(b) a term loan A of up to $25.0 million, and
(c) a term loan C of up to $2.7 million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and is
repayable in full on May 25, 2002. The USA revolving credit line bears interest
at the 30-day LIBOR rate plus 3.25%; the Canadian revolving credit line bears
interest at the base rate as announced by the Toronto-Dominion Bank of Canada
each month plus 1.67%. As of March 31, 2001, the LIBOR rate was approximately
5.52% and approximately $48.1 million was outstanding on the U.S. revolving
credit line, which is included in long-term debt and approximately $3.3 million
was outstanding on the Canadian revolving credit line, which is included in the
net assets of discontinued operations. Credit availability is subject to 75% of
eligible accounts receivable and 45% of eligible inventories.
Term loan A bears interest at the 30-day LIBOR rate plus 4.00%, is
amortized in quarterly installments over six years and is repayable in full on
May 25, 2002. As of March 31, 2001, approximately $21.8 million was outstanding
under this loan.
Term loan C, which was used by our discontinued 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 1.67%, is amortized in quarterly
installments over six years and is repayable in full on May 25, 2002. As of
March 31, 2001, the Toronto-Dominion's rate was approximately 7.25% and
approximately $1.9 million was outstanding under this loan, which is included in
the net assets of discontinued operations.
The IBM Agreement, 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)
8
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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 7,500,000
12/31/01 11,000,000
03/31/02 10,000,000
As of March 31, 2001, the Company was in compliance with all debt
covenants. On March 8, 2001, the Company notified IBM Credit that as of and for
the quarter ended December 31, 2000 the Company was not in compliance with the
covenants for Tangible Net Worth and Minimum EBITDA and that it had a collateral
shortfall. IBM Credit agreed to waive such non-compliance and, on March 30,
2001, the Company, IBM Credit and others entered into a waiver and amendment to
the credit agreement. In connection therewith the Company agreed to pay IBM
Credit a $0.4 million waiver fee, and the Company granted IBM Credit warrants to
acquire 2.9 million shares of the Company's common stock valued at $1.2 million
and 1.2 million shares of Digital Angel Corporation's common stock.
The Company currently expects to meet the amended debt covenants throughout
2001; however, if business conditions are other than 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 IBM 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.
9
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
5. Earnings (Loss) Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings (loss) per share:
-----------------------------------------
Three Months Ended March 31,
-----------------------------------------
2001 2000
---- ----
Numerator:
Loss from continuing operations $ (11,393) $ (3,180)
Preferred stock dividends (238) --
Accretion of beneficial conversion feature of redeemable preferred stock (2,451) --
Numerator for basic earnings (loss) per share -
--------- ----------
Net loss from continuing operations available to common shareholders (14,082) (3,180)
Net income from discontinued operations available to common shareholders 213 2,008
--------- ----------
Net loss available to common shareholders $ (13,869) $ (1,172)
========= ==========
Denominator:
Denominator for basic earnings (loss) per share -
Weighted-average shares 103,602 49,012
--------- ----------
Denominator for diluted earnings (loss) per share(1) 103,602 49,012
--------- ----------
Basic earnings (loss) per share:
Continuing operations $ (0.13) $ (0.06)
Discontinued operations -- 0.04
========= ==========
Total - Basic $ (0.13) $ (0.02)
========= ==========
Diluted earnings (loss) per share:
========= ==========
Continuing operations $ (0.13) $ (0.06)
========= ==========
Discontinued operations -- 0.04
========= ==========
Total - Diluted $ (0.13) $ (0.02)
========= ==========
10
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
(1 ) The weighted average shares listed below were not included in the
computation of diluted loss per share because to do so would have been
anti-dilutive for the periods presented:
--------------------------
Three Months
Ended March 31,
--------------------------
2001 2000
---- ----
Redeemable preferred stock 16,064 --
Employee stock options 3,444 5,004
Warrants -- 534
Contingent stock - acquisitions -- 117
------ ------
19,508 5,655
====== ======
11
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
6. Segment Information
The Company's business is currently organized into three business segments:
Applications, Services and Advanced Wireless. These three segments form the
nucleus of the Company's newly implemented I3 Services Platform. Prior to
January 2, 2001, the Company's 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 the current I3 Services Platform. With the arrival of the
Company's new President and Chief Operating Officer, Mercedes Walton, on January
2, 2001, the Company's strategy has evolved to more adequately promote its
product services offerings in the marketplace and to more fully integrate its
business units. The Company's "I3 Services Platform," with the I3 standing for
"intelligent, integrated information," delivers its solutions through three core
business segments, Applications, Services and Advanced Wireless, which work
together to achieve heightened efficiencies for the Company and better offerings
for its customers.
Additionally, the Company's previously reported Intellesale and "all other"
non-core business segments are now reported as discontinued operations. Prior
period information has been restated to present the Company's reportable
segments into its three operating segments. See Note 9 for further information
regarding discontinued operations.
The "eliminations" category includes all amounts recognized upon
consolidation of the Company's subsidiaries such as the elimination of
intersegment revenues, expenses, assets and liabilities and goodwill
amortization expense. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies in the
Company's Annual Report on Form 10-K/A filed for the year ended December 31,
2000, except that intersegment sales and transfers are generally accounted for
as if the sales or transfers were to third parties at current market prices and
segment data includes an allocated charge for the corporate headquarters costs.
It is on this basis that management utilizes the financial information to assist
in making internal operating decisions. The Company evaluates performance based
on stand-alone segment operating income.
Following is the selected segment data as of and for the three months ended
March 31, 2001:
Segments
--------
Services
Advanced Corporate
Applications Telephony Networks Wireless Overhead Eliminations Consolidated
------------ ----------- ------------ ----------- ------------ ------------ ----------
Net revenue from external customers:
Product $ 4,605 $ 8,947 $ 11,108 $9,723 $-- $-- $ 34,383
Service 6,631 3,438 1,576 1,490 57 (166) 13,026
Intersegment revenue- Service (166) -- -- -- -- 166 --
------------ -------------------------------------------------------------- ------------
Total revenue $ 11,070 $ 12,385 $ 12,684 $ 11,213 $ 57 $ -- $ 47,409
=========================================================================== ============
Income (loss) from continuing
operations before provision for
income taxes and minority interest $ 367 $ 278 $ (401) $ 540 $ (3,924) $ (6,667) $ (9,807)
=========================================================================== ============
Total assets, exclusive of net
assets of discontinued operations $ 30,522 $ 29,732 $ 21,378 $ 23,794 $ 430,510 $(224,484) $ 311,452
=========================================================================== ============
12
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Following is the selected segment data as of and for the three months ended
March 31, 2000:
Segments
--------
Services
Advanced Corporate
Applications Telephony Networks Wireless Overhead Eliminations Consolidated
------------ ----------- ------------ ----------- ------------ ------------ ------------
Net revenue from external customers:
Product $ 3,498 $ 3,343 $ 5,124 $ 3,923 $ -- $ -- $ 15,888
Service 3,538 1,155 2,121 -- 99 -- 6,913
Intersegment revenue -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
Total revenue $ 7,036 $ 4,498 $ 7,245 $ 3,922 $ 99 $ -- $ 22,801
=======================================================================================
Income (loss) from continuing
operations before benefit for
income taxes and minority interest $ 70 $ (462) $ 252 $ (92) $ (2,603) $ (1,307) $ (4,142)
=======================================================================================
Total assets, exclusive of net
assets of discontinued operations $ 17,271 $ 10,483 $ 6,786 $ 7,335 $ 196,109 $(149,324) $ 88,660
=======================================================================================
13
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
7. Acquisitions
The Company did not make any acquisitions in the first three months of
2001. The following represents acquisitions which occurred during 2000:
Value
of
Shares,
Warrants
&
Options
Cash Issued
Date Percent Acquisition Consid- or Common/Preferred Goodwill
Company Acquired Acquired Acquired Price eration Issuable Shares Issued Acquired Business Description
- ------------------------ --------- -------- ---------- ------- -------- ---------------- -------- ----------------------
Independent Business 04/01/00 100% $ 5,547 $ 747 $ 4,800 958 $ 5,109 Network integration
Consultants company
P-Tech, Inc. 04/01/00 100% 4,830 80 4,750 1,404 4,643 Software development
company
Timely Technology Corp. 04/01/00 100% 1,240 375 865 215 913 Software developer
and application
service
provider
Computer Equity 06/01/00 100% 24,712 8,968 15,744 4,829 15,313 Communications
Corporation integration company
WebNet Services, Inc. 07/01/00 100% 958 58 900 268 828 Network integrator
and website developer
Destron Fearing 09/08/00 100% 84,646 1,376 83,270 20,821 74,818 Animal
Corporation identification and
microchip technology
company
Pacific Decision 10/01/00 100% 28,139 120 28,019 8,569 25,220 Developer and
Sciences Corporation implementer of
customer
relationship
management software
SysComm International 12/01/00 55% 4,975 2,221 2,754 1,700 -- Network and systems
Corporation integrator and
reseller of computer
hardware
Transatlantic Software 12/18/00 100% 8,561 266 8,295 4,937 6,624 Retail software
Corporation developer
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.
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements reflect the
results of operations of each company from the date of acquisition. The costs of
acquisitions include all payments according to the acquisition agreements plus
costs for investment banking services, legal and accounting services that were
direct costs of acquiring these assets. Goodwill resulting from these
acquisitions is being amortized on a straight-line basis over periods ranging
from five to ten years. In conjunction with the Company's review
14
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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, 2000, changed the lives to periods ranging from 5 to 10
years, down from periods ranging from 10 to 20 years.
Earnout and Put Agreements
Certain acquisition agreements include additional consideration, generally
payable in shares of the Company's common stock, contingent on profits of the
acquired subsidiary. Upon earning this additional consideration, the value will
be recorded as additional goodwill. The acquisitions above include shares earned
upon attainment of certain profits by subsidiaries through March 31, 2001. At
March 31, 2001, under these agreements, assuming all earnout profits are
achieved, the Company is contingently liable for additional consideration of
approximately $22.4 million in 2001, $20.7 million in 2002 and $2.0 million in
2004, of which all would be payable in shares of the Company's common stock.
The Company has entered into a put option with the selling shareholders of
a company in which the Company acquired less than a 100% interest. The option
requires the Company to purchase the remaining portion it does not own sometime
after four years from the date of acquisition at an amount per share equal to
20% of the average annual earnings per share of the acquired company before
income taxes for a two-year period ending on the effective date of the put
multiplied by a multiple of four. Based upon the provisions of the put
agreement, at March 31, 2001, the Company is contingently liable for additional
consideration of approximately $0.9 million payable in shares of the Company's
common stock. The contingent amount for the put option has not been recorded as
a liability in the financial statements as the put has not yet been exercised.
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 shareholder 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. In addition, during the three months ended March 31, 2001 and
2000, 1.7 million and 0.4 million shares of common stock, respectively, were
issued to satisfy earnouts and to purchase minority interests.
15
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Major Acquisitions
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 payable in cash and paid 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, was
allocated to the identifiable assets with the remainder of $15.3 million
recorded as goodwill, which is being amortized over ten years.
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 exercised such options and
warrants prior to September 8, 2000 and participated in the merger. The Company
issued 20.5 million shares of its common stock in exchange for all the
outstanding common 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, was allocated to the identifiable assets with the remainder of
$74.8 million recorded as goodwill, which is being amortized over ten years.
Effective October 1, 2000, the Company acquired all of the outstanding
common stock of Pacific Decisions 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 times EBITDA (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 five years.
Effective June 1, 1999, the Company acquired all of the outstanding common
stock of Bostek, Inc. and an 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 and $1.8 million for the 1999
earnout was paid in cash in February 2000 and $0.5 million of additional
acquisition costs were paid in 2000. Upon a successful initial public offering
of Intellesale, $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,
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 owners have agreed to purchase these shares at the
16
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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. See Note 9 regarding
discontinued operations, which includes the operations of Intellesale and
Bostek.
17
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Unaudited pro forma results of operations for the three months ended March
31, 2000 are included below. Such pro forma information assumes that each of the
above acquisitions had occurred as of January 1, 2000.
-----------------
Three Months
Ended
March 3l,
-----------------
2000
----
Net operating revenue from continuing operations $ 53,955
Loss from continuing operations (3,806)
Loss available to common stockholders from continuing operations (3,806)
Loss per common share from continuing operations -- basic ($ 0.04)
Loss per common share from continuing operations -- diluted ($ 0.04)
Other Investments
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, in a transaction valued at approximately $8.0
million in consideration for 3.3 million shares of our common stock. The Company
is now the single largest shareholder and controls two of the seven board seats.
The Company is accounting for this investment under the equity method of
accounting. The excess of the purchase price over the net book value acquired
was approximately $6.8 million and is being amortized on a straight-line basis
over five years.
8. Redeemable Preferred Stock
Preferred Shares -- Series C
The Preferred Stock. On October 26, 2000, the Company issued 26,000 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 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 was reduced to
$5.672 in stated value per share 91 days after issuance of the preferred stock.
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.
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, which was effective April 24, 2001, 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 ten
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;
18
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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 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 (5,180)
--------
Relative Fair Value of Preferred Shares $ 14,193
========
During the quarter ended March 31, 2001, certain alternative conversion
rates became available. The beneficial conversion feature ("BCF") was recomputed
using the available alternative conversion rates and increased by $2.5 million.
The BCF 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 on the date of
issuance as follows:
The face value of the preferred shares divided by the most beneficial
conversion price available during the quarter ($1.54) results in the number of
common shares that could be purchased on March 31, 2001. The fair value assigned
to the preferred shares divided by the number of common shares that could be
purchased on March 31, 2001 results in the accounting value per share ($1.23).
The accounting value per share is less than the fair market value of the
Company's common stock on March 31, 2001 by $0.31 resulting in a BCF.
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 additional alternate conversion rates become available.
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 $32.7 million at
March 31, 2001) 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
19
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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 $6.0 million in the aggregate. The
triggering events include (i) failure to maintain the effectiveness of the
registration statement, which was declared effective on April 24, 2001, relating
to the common stock issuable on conversion of the preferred stock, (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, and
(iv) certain defaults in payment of or acceleration of the Company's payment
obligations under the IBM Agreement.
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.
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 through February 18,
2002. The additional preferred stock will have the same preferences,
qualifications and rights as the initial preferred stock.
20
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
9. Discontinued Operations
On March 1, 2001, the Company's board of directors approved a plan to offer
for sale its Intellesale business segment and all of its other "non-core
businesses". Accordingly, the operating results of these entities have been
reclassified and reported as discontinued operations for all periods presented.
The Company expects to dispose of these businesses by March 1, 2002. Cash
proceeds will be used to reduce outstanding debt.
The following discloses the results of Intellesale and all other non-core
businesses comprising discontinued operations for the period from January 1,
2001 through March 1, 2001 and the three months ended March 31, 2000:
January 1 Three Months Ended
through March 1 March 31,
-------------------------------------------
(In thousands)
2001 2000
---- ----
Product revenue $ 13,039 $ 59,438
Service revenue 846 2,915
-----------------------------------------
Total revenue 13,885 62,353
Cost of products sold 10,499 50,906
Cost of services sold 259 963
-----------------------------------------
Total cost of products and services sold 10,758 51,869
-----------------------------------------
Gross profit 3,127 10,484
Selling, general and administrative expenses 2,534 7,384
Depreciation and amortization 264 1,030
Interest, net 29 51
Provision for income taxes 34 334
Minority interest 53 (323)
-----------------------------------------
Income from discontinued operations $ 213 $ 2,008
=========================================
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.
Assets and liabilities of discontinued operations are as follows at
March 31, 2001 and December 31, 2000.
March 31, 2001 December 31, 2000
----------------------------------------
(In thousands)
Current Assets
Cash and cash equivalents $ 983 $ --
Accounts receivable and unbilled receivables, net 9,988 10,290
Inventories 18,622 17,950
Prepaid expenses and other current assets 238 336
-----------------------------
Total Current Assets 29,831 28,576
21
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
March 31, 2001 December 31, 2000
----------------------------------------
(In thousands)
Property and equipment, net 6,099 6,536
Other assets 1,939 1,212
-----------------------------
$37,869 $36,324
=============================
Current Liabilities
Notes payable $ 130 $ 4
Current maturities of long-term debt 495 519
Accounts payable 12,275 10,691
Accrued expenses 8,816 10,908
-----------------------------
Total Current Liabilities 21,716 22,122
Long-term debt 4,956 5,224
Minority interest 647 902
-----------------------------
27,319 28,248
=============================
Net Assets of Discontinued Operations $10,550 $ 8,076
=============================
22
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The Company recorded a provision for operating losses and carrying costs
during the phase-out period including operating and other disposal costs to be
incurred in selling the businesses. Carrying costs primarily include the
cancellation of facility leases and employment contract buyouts. The following
table sets forth the roll forward of the liabilities for operating losses and
carrying costs from January 1, 2001 through March 31, 2001. The deductions
represent activity from March 1, 2001, the measurement date, to March 31, 2001:
Balance, Balance
Type of Cost January 1, 2001 Additions Deductions March 31, 2001
- ----------------------- ----------------- ------------------ ----------------------- ---------------
Operating losses $1,619 $-- $ 153 $1,466
Carrying Costs 6,954 -- 521 6,433
--------------------------------------------------------------------------
Total $8,573 $-- $ 674 $7,899
==========================================================================
10. Subsequent Events
Effective May 10, 2001, the Company sold its wholly-owned subsidiary
Innovative Vacuum Solutions, Inc. ("IVS"). IVS's operations are included in
discontinued operations and the sale was part of the Company's plan of disposal
of its discontinued companies. Proceeds on the sale approximated the expected
proceeds recorded as of December 31, 2000.
23
ITEM 2. 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 Item 1 of this report as well
as our 2000 Annual Report on Form 10-K/A.
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 us and better offerings for our customers.
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
Services Platform. Prior period segment information has been restated to reflect
our current business segments.
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.
We operate in three geographic areas: the United States, which comprises
the majority of our operations, Canada and the United Kingdom. Our Canadian
operation is comprised of a non-core automotive manufacturing and engineering
company, which is included in discontinued operations. Our United Kingdom ("UK")
operations are comprised of companies in our Applications and Advanced Wireless
segments. With the exception of one company in our Applications segment, which
was acquired in December 2000, and the 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 60% of the revenues and expenses from our UK Applications
company were generated in Canadian dollars for the three months ended March 31,
2001. Approximately 40% and 45% of the Canadian manufacturing and engineering
company's revenues were generated in U.S. dollars for the three months ended
March 31, 2001 and 2000, respectively, while approximately 95% of its expenses
24
were incurred in Canadian dollars during the same periods. We did not incur any
significant foreign currency gains or losses during the three-month periods
ended March 31, 2001 and 2000.
Our objective is to continue to grow each of our three core operating
segments internally and through acquisitions, both domestically and abroad. The
majority of our current operations are the result of acquisitions completed
during the last five years. Our financial results and cash flows are
substantially dependent on not only our ability to sustain and grow existing
businesses, but to continue to grow through acquisition. We expect to continue
to pursue our acquisition strategy in 2001 and future years, but there can be no
assurance that management will be able to continue to find, acquire, finance and
integrate high quality companies at attractive prices.
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 certain operational and legal issues,
contributed to the negative results.
Intellesale has 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, in the fourth quarter of 2000, 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. We believe that this
realignment, together with the cost saving initiatives discussed below, will
make Intellesale an attractive acquisition candidate for a strategic or
financial buyer.
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 31, 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-commerce 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.
25
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, as more fully
discussed in Note 8 to the unaudited financial statements included in Part I,
Item 1. of this 10-Q. The aggregate purchase price for the Series C preferred
stock and the related warrants was $20 million. 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.
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 through February 18, 2002. The additional preferred stock
will have the same preferences, qualifications and rights as the initial
preferred stock.
For a more complete description of the terms and conditions of the Series C
preferred stock, see Note 8 to the unaudited consolidated financial statements
included in this report.
Other Transactions
In October, 2000, we entered into transactions with MCY.com, Inc.
(OTC-BB:MCYC) under which we agreed to 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 a stock subscription 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. The technology and software acquired from MCY has been
integrated into the Digital Angel business division's products. As noted in the
risk factor section of this 10-Q, Digital Angel's products and services are not
yet being sold to customers and are still undergoing additional development. The
transaction was accounted for at the fair value of the consideration paid to MCY
and the technology and software acquired from MCY was 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
developments, 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 0.4 million shares of our common
stock. As of December 31, 2000, the market value of ATEC's shares had declined
substantially from the market value on October 27, 2000 when we acquired our
investment. We concluded that the decline in our investment in the ATEC Group
was "other than temporary" and, as of December 31, 2000, we recognized a loss of
impairment in value of approximately $3.6 million. The rescission in March 2001,
was recorded in the
26
first quarter of 2001 as a increase in treasury stock and a write-down of the
investment in the amount of $4.6 million, the remaining investment value after
the impairment recognized.
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 are
accounting for this acquisition under the equity method of accounting. The
excess of the purchase price over the net book value acquired was approximately
$6.8 million and is being amortized on a straight-line basis over five years.
Effective May 10, 2001, we sold our wholly-owned subsidiary Innovative
Vacuum Solutions, Inc. ("IVS"). IVS's operations are included in discontinued
operations and the sale was part of our plan of disposal of our discontinued
companies. Proceeds on the sale approximated the expected proceeds at December
31, 2000, when the assets of IVS were impaired.
OUR BUSINESS
Our primary businesses are organized into three business segments:
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
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.
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 solutions from communications 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 our customers.
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.
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.
27
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 March 31, 2001, products were in the
development stage and none had been sold. See Risk Factors "Digital Angel may
not be able to develop products from its technology." The Digital Angel
technology is 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,
o 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.
28
RESULTS OF CONTINUING OPERATIONS
The following table summarizes our results of operations as a percentage of
net operating revenue for the three month periods ended March 31, 2001 and 2000
and is derived from the unaudited consolidated statements of operations in Part
I, Item 1 of this report.
Relationship to
Revenue
----------------------------
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
% %
- -
Product revenue 72.5 69.7
Service revenue 27.5 30.3
----------------------------
Total revenue 100.0 100.0
Cost of goods sold 69.3 60.6
Cost of services sold 47.7 48.8
----------------------------
Total cost of goods and services sold 63.4 57.0
----------------------------
Gross profit 36.6 43.0
Selling, general and administrative expenses (40.2) (52.7)
Depreciation and amortization (14.2) (4.6)
Interest income 1.0 0.8
Interest expense (3.9) (4.7)
----------------------------
Loss from continuing operations before benefit for income taxes and minority (20.7) (18.2)
interest
Benefit for income taxes (3.3) (4.1)
----------------------------
Loss from continuing operations before minority interest (24.0) (14.1)
Minority interest (0.2) (0.2)
Equity in net loss of affiliate 0.2 --
----------------------------
Loss from continuing operations (24.0) (13.9)
Income from discontinued operations, net of income taxes 0.4 8.8
----------------------------
Net loss (23.6) (5.1)
Preferred stock dividends 0.5 --
Accretion of beneficial conversion feature of redeemable preferred stock --
series C 5.2 --
----------------------------
Net loss available to common shareholders (29.3) (5.1)
============================
Revenue
Revenue from continuing operations for the first quarter of 2001 was $47.4
million, an increase of $22.6 million, or 99.1%, from $22.8 million in the first
quarter of 2000. The growth is attributable to the acquisitions made in the last
nine months of 2000.
29
Revenue for each of the continuing operating segments was:
Three Months Ended March 31,
(In thousands)
-----------------------------------------------------------------------------------------
2001 2000
---- ----
-----------------------------------------------------------------------------------------
Product Service Total Product Service Total
------- ------- ----- ------- ------- -----
Applications
$ 4,605 $ 6,465 $11,070 $ 3,498 $ 3,538 $ 7,036
Services -
Telephony 8,947 3,438 12,385 3,343 1,155 4,498
Networks 11,108 1,576 12,684 5,124 2,121 7,245
-------------------------------------------- --------------------------------------------
Total Services 20,055 5,014 25,069 8,467 3,276 11,743
Advanced Wireless 9,723 1,490 11,213 3,923 -- 3,923
Corporate -- 57 57 -- 99 99
--------------------------------------------- -------------------------------------------
Total
$34,383 $13,026 $47,409 $15,888 $ 6,913 $22,801
============================================== ==========================================
Changes during the quarter were:
Revenue from our Applications segment increased $4.0 million. Product
revenue increased by $1.1 million, or 31.6%, and service revenue increased by
$2.9 million, or 82.7%. $3.6 million of the increase in service revenue was the
result of several acquisitions during 2000, partially offset by a reduction in
service revenue from existing businesses of $0.7 million. We utilized the
services of our Applications segment to implement an enterprise based financial
reporting system, reducing the amount of billable revenue that the segment could
otherwise have generated if services were performed for third parties.
Our Services segment is divided into two business groups - Telephony and
Networks:
Our Telephony group's revenue increased $7.9 million, or 175.3%, in the
first quarter of 2001 compared to the first quarter of 2000 due primarily to the
acquisition of Computer Equity Corporation in the second quarter of 2000.
Our Networks group's revenue increased $5.4 million, or 75.1%, in the first
quarter of 2001. Companies acquired in 2000 contributed approximately $5.6
million, or 103.7%, of the increase, while revenue from existing business
decreased by $0.2 million.
Revenue from our Advanced Wireless segment increased $7.3 million, or
185.9%, in the first quarter of 2001. Companies acquired in 2000 contributed
$8.5 million, or 116.0% of this increase, while the existing business unit's
revenue declined $1.2 million, resulting from cut backs of military spending in
the United Kingdom.
Gross Profit and Gross Profit Margin
Gross profit from continuing operations for the quarter ended March 31,
2001 was $17.4 million, an increase of $7.6 million, or 77.6%, from $9.8 million
in 2000. As a percentage of revenue, our gross profit margin was 36.6% and 43.0%
for the three months ended March 31, 2001 and 2000, respectively.
Gross profit from continuing operations for each operating segment was:
30
Three Months Ended March 31,
(In thousands)
--------------------------------------------------------------
2001 2000
---- ----
--------------------------------------------------------------
Product Service Total Product Service Total
------- ------- ----- ------- ------- -----
Applications
$2,927 $3,411 $6,338 $1,991 $1,756 $3,747
Services -
Telephony 1,781 1,689 3,470 1,640 327 1,967
Networks 1,912 869 2,781 939 1,356 2,295
-------------------------------- -----------------------------
Total Services 3,693 2,558 6,251 2,579 1,683 4,262
Advanced Wireless 3,919 783 4,702 1,691 -- 1,691
Corporate -- 57 57 -- 99 99
--------------------------------- ----------------------------
Total 10,539 $6,809 $17,348 $6,261 $3,518 $9,799
================================= ============================
Gross profit margin from continuing operations for each operating segment
was:
Three Months Ended March 31,
--------------------------------------------------------------
2001 2000
---- ----
--------------------------------------------------------------
Product Service Total Product Service Total
------- ------- ----- ------- ------- -----
% % % % % %
------- ------- ----- ------- ------- -----
Applications 63.6 52.8 57.3 56.9 49.6 53.3
Services -
Telephony 19.9 49.1 28.0 49.1 28.3 43.7
Networks 17.2 55.1 21.9 18.3 63.9 31.7
--------------------------------- ----------------------------
Total Services 18.4 51.0 24.9 30.5 51.4 36.3
Advanced Wireless 40.3 52.6 41.9 43.1 -- 43.1
Corporate -- 100.0 100.0 -- 100.0 100.0
--------------------------------- ----------------------------
Total 30.7 52.3 36.6 39.4 50.9 43.0
================================= ============================
Changes during the quarter were:
Gross profit from our Applications segment increased $2.6 million in the
first quarter of 2001 and margins increased to 57.3% from 53.3% in the first
quarter of 2000. Companies acquired in 2000 contributed $3.4 million of the
increase, offset by reductions in margins from our existing businesses. We
utilized the services of our Applications segment to implement an enterprise
based financial reporting system, reducing the amount of billable revenue that
the segment could otherwise have generated if services were performed for third
parties.
Our Services segment is divided into two business groups - Telephony and
Networks:
Our Telephony group's gross profit increased $1.5 million, or 76.4%, in the
first quarter of 2001. Of the increase, $1.7 million, or 113.3%, was generated
from companies acquired in 2000 offset by a reduction in gross margin from
existing business of $0.2 million.
Our Network group's gross profit increased $0.5 million, or 21.2%, during
the first quarter of 2001 contributed by companies acquired in 2000. Gross
margin percentage declined to 21.9% in the first quarter of 2001 from 31.7% in
2000. The poor performance of the economy, and the technology sector in
particular, in the first quarter of 2001 resulted in lower capital spending and
increased incentives, which contributed to the decline in gross margin
percentage.
Gross profit from our Advanced Wireless segment increased by $3.0 million,
or 178.1%, during the first quarter of 2001. Companies acquired in 2000
contributed $3.4 million, while gross margin from existing business declined
$0.4 million as a result of lower revenue from this source. The gross margin
percentage declined slightly to 41.9% in the first quarter of 2001 from 43.1% in
the first quarter of 2000.
31
The decline in gross profit of existing businesses was primarily due to the loss
of business at our United Kingdom location resulting from the cancellation of
military orders.
Selling, General and Administrative Expense
Selling, general and administrative expenses from continuing operations
were $19.1 million in the first quarter of 2001, an increase of $7.1 million, or
59.2%, over the $12.0 million reported in the first quarter of 2000. As a
percentage of total revenue, selling, general and administrative expenses from
continuing operations decreased to 40.2% in the first quarter 2001, from 52.7%
in the first quarter of 2000.
Selling, general and administrative expense increased primarily due to
acquisitions during the last nine months of 2000. Starting towards the end of
the fourth quarter of 2000, and commencing January 1, 2001, we mandated strict
and severe cost cutting measures throughout the organization. At the segment
level, these measures included 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. These cost cutting measures
have contributed to the reduction in selling, general and administrative
expenses as a percentage of revenue noted below.
Selling, general and administrative expense for each of the operating
segments was:
Three Months Ended March 31,
(In thousands)
----------------------------------
2001 2000
---- ----
Applications $ 5,260 $ 3,312
Services -
Telephony 3,022 2,211
Networks 2,901 1,998
----------------------------------
Total Services 5,923 4,209
Advanced Wireless 3,794 1,647
Corporate 4,081 2,843
----------------------------------
Total $19,058 $12,011
==================================
32
Selling, general and administrative expense as a percentage of revenue for
each of the operating segments was:
Three Months Ended March 31,
2001 2000
--------------------------------
% %
--- ---
Applications 47.5 47.1
Services -
Telephony 24.4 49.2
Networks 22.9 27.6
--------------------------------
Total Services 23.6 35.8
Advanced Wireless 33.8 42.0
Corporate (1) 9.9 12.5
--------------------------------
Total 41.5 52.7
================================
(1) Corporate's percentage has been calculated as a percentage of total
revenue.
Changes during the quarter were:
Our Applications segment's selling, general and administrative expenses
increased $2.0 million, or 60.6%, to $5.3 million in the first quarter of 2001
from $3.3 million in the first quarter of 2000. Companies acquired in 2000
contributed $2.2 million of this increase.
Services --
Our Telephony group's selling, general and administrative expenses
increased by $0.8 million, or 36.4%, to $3.0 million from $2.2 million in the
first quarter of 2000. This increase was due to an acquisition made in the
second quarter of 2000.
Our Network group's selling, general and administrative expenses increased
$0.9 million, or 45.0%, to $2.9 million in the first quarter of 2001, from $2.0
million in the first quarter of 2000. Acquisitions during 2000 contributed $1.1
million of the increase offset by a reduction of $0.2 million due to cost
savings from the consolidation of two of our existing companies within this
group.
Selling, general and administrative expenses from our Advanced Wireless
segment increased $2.2 million, or 137.5%, to $3.8 million in the first quarter
of 2001 from $1.6 million in the first quarter of 2000. Acquisitions completed
throughout the last nine months of 2000 contributed $2.5 million, offset by a
reduction of $0.3 million due to the cost saving initiatives of existing
businesses.
Corporate selling, general and administrative expenses increased $1.3
million, or 46.4%, to $4.1 million in the first quarter of 2001 from the $2.8
million reported in the first quarter of 2000. Contributing to the increase were
increases in corporate staff to support the acquisitions in the last nine months
of 2000 and higher professional fees.
Depreciation and Amortization
Depreciation and amortization expense from continuing operations for the
first quarter of 2001 was $6.7 million, an increase of $5.6 million, or 509.1%,
from $1.1 million in the first quarter of 2000. As a percentage of revenue,
depreciation and amortization expense increased to 14.2% in the first quarter of
2001 from 4.6% in the first quarter of 2000. The increase is due primarily to
significantly higher goodwill amortization resulting from acquisitions and the
change in useful lives, as well as increased depreciation expense in 2001
resulting from increased capital expenditures.
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,
33
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. The impact in the first quarter of 2001
of this change was an increase in the amortization of $2.8 million.
Depreciation and amortization expense for each of the operating segments
was:
Three Months Ended March 31,
(In thousands)
--------------------------------
2001 2000
---- ----
Applications $ 363 $ 188
Services --
Telephony 109 94
Networks 179 38
--------------------------------
Total Services 288 132
Advanced Wireless 313 122
Corporate (1) 5,775 618
--------------------------------
Total $6,739 $1,060
================================
(1) Includes consolidation adjustments for goodwill amortization of $5.2 million
and $0.3 million in 2001 and 2000, respectively.
The changes during the quarters reflect, in all segments, increased
depreciation from increased capital expenditures during the last nine months of
2000 and in the first quarter of 2001.
Corporate's depreciation and amortization increased by $5.2 million, or
834.5%, to $5.8 million in the first quarter of 2001 from $0.6 million in the
first quarter of 2000. The increase reflects additional goodwill amortization on
additional goodwill of approximately $133.5 million associated with companies
acquired throughout the last nine months of 2000 as well as a reduction in the
lives assigned to goodwill from 10 to 20 years to 5 and 10 years beginning in
the fourth quarter of 2000.
On an annual basis, we expect goodwill amortization associated with our
existing businesses to be approximately $24 million.
Interest Income and Expense
Interest income was $0.5 million and $0.2 million, for the first quarter of
2001 and 2000, respectively. Interest income is earned primarily from short-term
investments and notes receivable.
Interest expense was $1.8 million and $1.1 million for the first quarters
of 2001 and 2000, 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 rate of 15.8% in the first quarter of 2001 and
an effective benefit rate of 22.5% in the first quarter of 2000. Differences in
the effective income tax rate from the statutory federal income tax rate arise
primarily from non-deductible goodwill amortization associated with acquisitions
and state taxes net of federal benefits. In addition, the rate for the first
quarter of 2001 is impacted by our projection of taxable income with a book loss
from continuing operations for the year ended December 31, 2001.
34
RESULTS OF DISCONTINUED OPERATIONS
The following discloses the results of Intellesale and all other non-core
businesses comprising discontinued operations for the period January 1, to March
1, 2001 and the three months ended March 31, 2000:
Discontinued Intellesale business: January 1 through Three Months Ended
March 1, March 31,
----------------------------------------------
(In thousands)
2001 2000
---- ----
Product revenue $ 7,965 $ 46,084
Service revenue 370 2,253
-----------------------------------------
Total revenue 8,335 48,337
Cost of products sold 6,974 40,669
Cost of services sold -- 631
-----------------------------------------
Total cost of products and services sold 6,974 41,300
-----------------------------------------
Gross profit 1,361 7,037
Selling, general and administrative expenses 1,602 5,432
Depreciation and amortization 121 626
Interest, net -- --
(Benefit) provision for income taxes (151) 28
Minority interest (11) (370)
-----------------------------------------
(Loss) income from discontinued Intellesale businesses $ (200) $ 1,321
=========================================
Discontinued non-core businesses: January 1 through Three Months Ended
March 1, March 31,
----------------------------------------------
(In thousands)
2001 2000
---- ----
Product revenue $ 5,074 $ 13,354
Service revenue 476 662
-----------------------------------------
Total revenue 5,550 14,016
Cost of products sold 3,525 10,237
Cost of services sold 259 332
-----------------------------------------
Total cost of products and services sold 3,784 10,569
-----------------------------------------
Gross profit 1,766 3,447
Selling, general and administrative expenses 932 1,952
Depreciation and amortization 143 404
Interest, net 29 51
Provision for income taxes 185 306
Minority interest 64 47
-----------------------------------------
Income from discontinued non-core businesses $ 413 $ 687
=========================================
Total discontinued operations January 1 through Three Months Ended
March 1, March 31,
--------------------------------------------
(In thousands)
2001 2000
---- ----
Product revenue $ 13,039 $ 59,438
Service revenue 846 2,915
-----------------------------------------
Total revenue 13,885 62,353
35
Total discontinued operations January 1 through Three Months Ended
March 1, March 31,
--------------------------------------------
(In thousands)
2001 2000
---- ----
Cost of products sold 10,499 50,906
Cost of goods sold 259 963
-----------------------------------------
Total of products and services sold 10,758 51,869
-----------------------------------------
Gross profit 3,127 10,484
Selling, general and administrative expenses 2,534 7,384
Depreciation and amortization 264 1,030
Interest, net 29 51
Provision for income taxes 34 334
Minority interest 53 (323)
-----------------------------------------
Income from discontinued operations $ 213 $ 2,008
=========================================
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 quarter of 2001 compared to substantial sales
from this unit in the first quarter of 2000. Gross profit was significantly
impacted by lower margin business in the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS
As of March 31, 2001, cash and cash equivalents totaled $6.4 million, a
decrease of $1.6 million, or 20%, from $8.0 million at December 31, 2000. We
utilize a cash management system to apply excess cash on hand against our
revolving credit facility for which we had availability of $2.0 million at March
31, 2001, down from $17.0 million at December 31, 2000. The Second Amended and
Restated Term and Revolving Credit Agreement with IBM Credit, as amended on
March 30, 2001, reduced the total availability on the revolver from $67.3 at
December 31, 2000 to $53.4 million at March 30, 2001.
Cash used in operating activities totaled $0.2 million and $13.0 million in
the first three months of 2001 and 2000, respectively. In the first three months
of 2001, cash was used primarily to decrease accounts payable and accrued
expenses, after adjusting for the net loss, the income from discontinued
operations and for non-cash charges. Partially offsetting the uses of cash were
increases in cash from the collection of accounts receivable, decreases in
inventory and other current assets and cash provided by discontinued operations.
In the three months of 2000, cash was used primarily to decrease accounts
payable and accrued expenses and to increase inventories and other current
assets, after adjusting for the net loss, the income from discontinued
operations and for non-cash charges. Partially offsetting the uses of cash were
increases in cash from the collection of accounts receivable and cash provided
by discontinued operations.
Accounts and unbilled receivables, net of allowance for doubtful accounts,
decreased by $2.5 million, or 5.7%, to $41.4 million at March 31, 2000 from
$43.9 million at December 31, 2000. This decrease was primarily as a result of
increased collection efforts during the first quarter of 2001.
Inventory levels remained relatively constant at $12.2 million at March 31,
2001 compared to $12.3 million at December 31, 2000.
Other current assets remained relatively constant at $5.9 million at March
31, 2001 compared to $6.0 million at December 31, 2000.
36
Accounts payable decreased by $2.2 million, or 13.0%, to $14.7 million at
March 31, 2001 from $16.9 million at December 31, 2000. This decrease was
primarily attributable to a reduction of higher payables incurred in the fourth
quarter of 2000 to support year-end sales.
Accrued expenses decreased by $0.9 million, or 5.5%, to $15.5 million at
March 31, 2001 from $16.4 million at December 31, 2000. The decrease is
attributable to the payment during the first quarter of 2001 of various accrued
expenses accrued in the fourth quarter of 2000.
"Due to sellers of acquired subsidiary" represents the deferred purchase
price due to the Bostek sellers, which upon satisfaction of contingencies
discussed in Part II, Item 1. Legal Proceedings, will be forgiven and the
extinguishment of the $9.5 million payable will be recorded as an extraordinary
gain.
Earnout and put accruals represent the accrued earnout and deferred
purchase price payments earned at March 31, 2001 and December 31, 2000,
respectively. The reduction of $14.4 million at March 31, 2001, represents
amounts payable at December 31, 2000 subsequently settled by the issuance of
shares of our common stock.
Investing activities used cash of $1.9 million in the first quarter of
2001, and provided cash of $21.0 million in the first quarter of 2000. In the
first quarter of 2001, $1.9 million was spent to acquire property and equipment,
$0.5 million was used to increase other assets and $1.4 million was used by
discontinued operations. Partially offsetting the uses was $1.9 million in
collection of notes receivable. In the first quarter of 2000, $31.3 million was
collected from the purchaser of TigerTel and $0.5 million was provided by
discontinued operations, offset by cash of $6.6 million used to acquire
businesses, $2.7 million used to acquire property and equipment, $1.0 million
advanced against notes receivable and $0.6 million used to increase other
assets.
Cash of $0.5 million was provided by financing activities in the first
quarter of 2001 while cash of $7.1 million was used by financing activities in
the first quarter of 2000. In the first quarter of 2001, $1.1 million was repaid
against long-term debt and $1.6 million was borrowed on notes payable. Uses of
cash in the first quarter of 2000 included payments of $14.5 million and $2.3
million against notes payable and long-term debt, respectively. Partially
offsetting the uses were borrowings of $4.6 million against long-term debt and
$5.0 million in proceeds from the issuance of common shares.
One of our stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength. However, due
to our significant growth rate, our investment needs have increased.
Consequently, we may continue in the future to use cash from operations and may
continue to finance this use of cash through financing activities such as the
sale of preferred or common stock and/or bank borrowing, if available.
Debt, Covenant Compliance and Liquidity
On May 25, 1999, the Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation (the "IBM Agreement"). The IBM Agreement
was amended and restated on October 17, 2000, and further amended on March 30,
2001, and currently provides for the following:
(a) a revolving credit line of up to $53.4 million, subject to
availability under a borrowing base formula, designated as follows:
(i) a USA revolving credit line of up to $49.5 million, and (ii) a
Canadian revolving credit line of up to $3.9 million,
(b) a term loan A of up $25.0 million, and
(c) a term loan C of up to $2.7 million.
37
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and is
repayable in full on May 25, 2002. The USA revolving credit line bears interest
at the 30-day LIBOR rate plus 3.25%; the Canadian revolving credit line bears
interest at the base rate as announced by the Toronto-Dominion Bank of Canada
each month plus 1.67%. As of March 31, 2001, the LIBOR rate was approximately
5.52% and approximately $48.1 million outstanding on the U.S. revolving credit
line, which is included in long-term debt and approximately $3.3 million was
outstanding on the Canadian revolving credit line, which is included in the net
assets of discontinued operations. Credit availability is subject to 75% of
eligible accounts receivable and 45% of eligible inventories.
Term loan A bears interest at the 30-day LIBOR rate plus 4.00%, is
amortized in quarterly installments over six years and is repayable in full on
May 25, 2002. As of March 31, 2001, approximately $21.8 million was outstanding
on this loan.
Term loan C, which was used by our discontinued Canadian subsidiary to pay
off their bank debt, bears interest at the base rate as announced by the
Toronto-Dominion Bank of Canada each month plus 1.67%, is amortized in quarterly
installments over six years and is repayable in full on May 25, 2002. As of
March 31, 2001, the Toronto-Dominion's rate was approximately 7.25% and
approximately $1.9 million was outstanding on this loan, which is included in
the net assets of discontinued operations.
The IBM Agreement, 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 ($57,000,000)
06/30/01 ( 47,000,000)
09/30/01 ( 35,000,000)
12/31/01 ( 34,500,000)
03/31/02 ( 20,000,000)
(ii) Current Assets to Current Liabilities 03/31/01 1.45:1.0
06/30/01 0.6:1.0
09/30/01 0.8:1.0
12/31/01 0.8:1.0
03/31/02 1.0:1.0
(iii) Minimum Cumulative EBITDA 03/31/01 ($ 4,700,000)
06/30/01 5,000,000
09/30/01 7,500,000
12/31/01 11,000,000
03/31/02 10,000,000
At March 31, 2001, we were in compliance with all debt covenants. 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
38
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
warrants to acquire 2.9 million shares of our common stock valued at $1.2
million and 1.2 million shares of Digital Angel Corporation's common stock.
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.
We currently expect to meet and be in compliance with the covenants in the
IBM Agreement throughout the remainder of 2001. 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 a waiver or amendment to such financial covenants, such noncompliance
would constitute an event of default under the IBM 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 IBM Agreement. We may be able to use
additional bank borrowings, proceeds from the sale of non-core businesses,
proceeds from the sale of common and preferred shares, proceeds from the
exercise of stock options and warrants, and the raising of other forms of debt
or equity through private placement or public offerings. There can be no
assurance however, that these options will be available, or if available, on
favorable terms. Our capital requirements depend on a variety of factors,
including but not limited to, the rate of increase or decrease in our existing
business base; the success, timing, and amount of investment required to bring
new products on-line; revenue growth or decline; and potential acquisitions. We
believe that we have the financial resources to meet our future business
requirements for at least the next twelve months.
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.
39
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
Risk Factors
You should carefully consider the risk factors listed below. These risk
factors may cause our future earnings to be less or our financial condition to
be less favorable than we expect. You should read this section together with the
other information contained herein.
Forward -Looking Statements and Associated Risk.
This Form 10-Q contains forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 with respect
to our financial condition, results of operations and business, and include
statements relating to:
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.
We cannot be certain of future financial results.
We incurred losses from continuing operations of $11.4 million and $3.2
million for the first quarters of 2001 and 2000, respectively. 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 income 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. 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;
40
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. 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 March 31, 2001, there were 123.9 million shares of our common stock
outstanding. Since January 1, 2001, we have issued an aggregate of 24.7 million
shares of common stock, of which 23.5 million shares were issued in connection
with acquisitions of businesses and assets. We have also repurchased 2.7 million
shares of our common stock. 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
41
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.
Assuming a market price per share of our common stock of $0.97 per share,
our closing share price on May 9, 2001, and using the conversion rate most
favorable to the Series C preferred stockholders, those holders would receive a
total of 53,443,158 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." 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 39.2% discount from the assumed $0.97 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
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 0.8
million 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 , we may be required to redeem the
Series C preferred stock at a redemption price equal to 130% of the stated
value, or $32.7 million at March 31, 2001, 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
42
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 March 31, 2001, our net tangible assets were above
the $4 million 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.
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 March 31, 2000, there were 123.9 million shares of our common stock
outstanding. Since January 1, 2001 we have issued an aggregate of 24.7 million
shares of our common stock, of which 23.4 million 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
43
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
successes 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.
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. At March 31, 2001, under these
agreements, assuming all earnout profits are achieved, we contingently liable
for additional consideration of approximately $22.4 million in 2001, $20.7
million in 2002 and $2.0 million in 2004, of which all would be payable in the
shares of our common stock.
We has entered into a put option with the selling shareholders of a company
in which the Company acquired less than a 100% interest. The option requires the
us to purchase the remaining portion it does not own sometime after four years
from the date of acquisition at an amount per share equal to 20% of the average
annual earnings per share of the acquired company before income taxes for a two
year period ending on the effective date of the put multiplied by a multiple of
four. Based upon the provisions of the put agreement, at March 31, 2001, we is
contingently liable for additional consideration of $0.9 million payable in
shares of our common stock. Assuming an aggregate obligation of $0.9 million and
using the closing price of our common stock on March 31, 2001, we would be
required to issue approximately 0.5 million shares to the holders of the put
options. In addition, the amount of this obligation would increase if the
earnings of the acquired company increase.
In January 2001, we entered into an agreement with the minority
shareholders of Intellesale to terminate all put rights and employment
agreements that they had with or in respect of Intellesale. In exchange, we
issued to each minority shareholder 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 March 31, 2001,
we have approximately $160.7 million of goodwill, none of which is deductible
for tax purposes. We currently amortize the goodwill we have recorded 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,
44
further reducing net income and earnings per share. As required by GAAP, 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. The IBM Agreement 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.
The IBM Agreement dated October 17, 2000, which we amended on March 30,
2001, 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.
Although we were in compliance with our financial debt covenants at March
31, 2001, 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 the IBM 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.
Our failure to successfully implement the plan of disposition with respect
to our discontinued operations could adversely affect our financial position and
results of operations.
45
On March 1, 2001, our board of directors approved a plan to sell our
Intellesale business segment and all of our other "non-core businesses." The
success of this plan depends upon our ability to identify buyers for these
businesses willing to pay an amount acceptable to us and to do so within the
timeframe set by our board of directors. There can be no assurance, however,
that we will be successful in implementing our plan of disposition. In fact, we
may be unable to completely dispose of these businesses by March 1, 2002, which
could result in additional costs and expenses and which may require us to devote
substantial managerial, operational and financial resources. Also, during the
discontinuation period, these businesses may generate significant losses in
excess of what we anticipated and accrued at December 31, 2000. Even if we do
find a buyer for these businesses, we may incur considerably greater costs in
disposing of these businesses than we had previously planned or we may not
receive the amount of proceeds we originally expected. Consequently, our
inability to successfully implement our plan of disposition could harm our
business, financial condition and results of operations.
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. 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
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
46
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.
47
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.
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
48
fiscal years commencing after June 15, 2000. In June 2000, the FASB issued FAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FAS statement 133, which addresses implementation
issues experienced by those companies that adopted FAS 133 early. We adopted
these statements as of January 1, 2001 and, because we have a minimal use of
derivative instruments, the adoption of these statements did not have any effect
on our financial condition, results of operations or cash flows.
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.
49
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, and certain of our subsidiaries, are parties to various legal actions
as either plaintiff or defendant. In our opinion , these proceedings will not
have a material adverse affect on our financial position, our cash flows or our
overall trends in results. The estimate of the potential impact on our financial
position, our overall results of operations or our cash flows for these
proceedings could change in the future.
On April 7, 2000, we and Intellesale filed a counterclaim against David
Romano and Eric Limont, the former owners of Bostek, Inc. and Micro Components
International Incorporated, two companies acquired by Intellesale in June 1999,
in the U.S. District Court for the District of Delaware for, generally, breach
of contract, breach of fiduciary duty and fraud. Messrs. Romano and Limont had
filed their claim generally alleging that their earnout payment from Intellesale
was inadequate. In July 2000, we and Intellesale amended our counterclaim in the
U.S. District Court for the District of Delaware to seek damages for, among
other things, securities law violations. In addition, on May 19, 2000,
Intellesale and two of its subsidiaries, Bostek, Inc. and Micro Components
International Incorporated, filed suits against Messrs. Romano and Limont in
Superior Court of Massachusetts to recover damages. In July 2000, Messrs. Romano
and Limont amended their complaint in the U.S. District Court for the District
of Delaware to add a claim for $10 million for the $10 million payment not made
to them. As of January 16, 2001, we, Intellesale, Bostek, Inc. and Micro
Components International Incorporated settled all claims with Messrs. Romano and
Limont. As part of the settlement agreement, Messrs. Romano and Limont agreed to
invest up to $6 million in shares of our common stock and to indemnify us
against various other litigation filed against Bostek, Inc. The purchase price
for the 3.0 million 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.
50
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
between January 1, 2001 and March 31, 2001. These shares were issued in
acquisition or financing transactions to the persons or entities indicated in
connection with the acquisition of the indicated subsidiary or the stockholder's
minority interest or to investors in transactions directly negotiated by the
stockholders in connection with the sale of their business or interests to the
Company and pursuant to the "price protection" or "earnout" provisions of the
agreement of sale, or by the investors. These shares were issued without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, or Rule 506 of Regulation D promulgated
thereunder.
Number of Number of
Name/Entity/Nature Persons Note Issued For Common Shares
- --------------------------------------------------------------------------------------------------------------
Conversion of
Elliott Management Corporation 2 1 Preferred Stock 800,000
Advanced Telecommunications, Inc. 2 2 Acquisition 1,666,667
ATEC Group, Inc. 2 3 Acquisition 448,431
Intellesale, Inc. 2 4 Acquisition 6,616,522
Medical Advisory Services, Inc. 5 5 Acquisition 3,322,313
Charles Newman 1 6 Services 182,836
Mpact Communications 1 7 Services 95,528
Dino Liso 1 8 Services 56,648
MCY.com, Inc. 1 9 Asset Purchase 11,816,141
--------------
Total 25,005,086
==============
1. Represents shares issued in connection with the conversion of the Series C
preferred stock offered by us to a select group of institutional investors
in a prior private transaction directly negotiated by the investors and
exempt from registration pursuant to Section 4(2) of the Act. The
transaction document included an acknowledgment that the sale was not
registered, that the shareholders were acquiring the shares for investment
and not for resale, and that the shareholders acknowledged that they 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. For a description of the terms and conditions of the Series C
preferred stock- see Note 8 to the unaudited financial statements filed in
Part I , Item 1 of this report.
2. Represents shares issued in connection with the exercise of put options
granted to the shareholders in connection with our acquisition of Advanced
Telecommunications, Inc., a prior private transaction directly negotiated
by the shareholders in connection with the sale of their business to us,
which transaction was exempt from registration pursuant to Section 4(2) of
the Act.
3. Represents shares issued in connection with the rescission of our
acquisition of an approximately 16% interest in ATEC Group, Inc. (AMEX:
TEC). We originally acquired such shareholder's interest in the company in
a transaction directly negotiated by the shareholders in connection with
the sale of their interest to us and exempt from registration pursuant to
Section 4(2) of 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 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 exercise of put options
granted to the shareholders in connection with our acquisition of
Intellesale, Inc., a prior private transaction directly negotiated by the
shareholders in connection with the sale of their business to us, which
transaction was exempt from registration pursuant to Section 4(2) of the
Act.
5. Represents shares issued in connection with our acquisition of an
approximately 17% interest in Medical Advisory Services, Inc. (AMEX: DOC),
a prior private transaction directly negotiated by the shareholders in
connection with the sale of their interests to us, which transaction was
exempt from registration pursuant to Section 4(2) of the Act.
6. Represents shares issued for consulting services rendered by Mr. Newman.
7. Represents shares issued for services rendered by Mpact Communications.
8. Represents shares issued to Mr. Liso as a transaction fee in connection
with our acquisition of an approximately 16% interest in ATEC Group, Inc.,
a prior private transaction directly negotiated by the shareholders in
connection with the sale of their interests to us, which transaction was
exempt from registration pursuant to Section 4(2) of the Act.
9. Represents shares issued in connection with our acquisition of internal use
software from MCY.com, Inc.
51
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Second Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 4.1 to the Registrant's Post-Effective
Amendment No. 1 on Form S-1 to Registration Statement (Form S-3 File No.
333-64605) filed with the Commission on June 23, 1999)
4.2 Amendment of Articles of Incorporation of the Registrant filed with the
Secretary of State of the State of Missouri on September 5, 2000
(incorporated herein by reference to Exhibit 4.3 to the Registrant's
Post-Effective Amendment No. 3 on Form S-3 to Registration Statement on
Form S-4 (File No. 333-38420-02) filed with the Commission on September 29,
2000)
4.3 Certificate of Designation of Preferences of Series C Convertible Preferred
Stock (incorporated herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K filed with the Commission on October 26, 2000)
4.4 Amended and Restated Bylaws of the Registrant dated March 31, 1998
(incorporated herein by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
10.1 Securities Purchase Agreement, dated as of October 24, 2000, relating to
the Registrant's Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed with the Commission on October 26, 2000)
10.2 Form of warrant to purchase common stock of the Registrant issued to the
holders of the Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
filed with the Commission on October 26, 2000)
52
10.3 Registration Rights Agreement between the Registrant and the holders of the
Series C Convertible Preferred Stock (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on October 26, 2000)
10.4 Acknowledgement, Waiver and Amendment No. 1 to the Second Amended and
Restated Term and Revolving Credit Agreement dated March 30, 2001 between
the Company and IBM Credit Corporation, and others (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed
with the Commission on April 10, 2001,
(b) Reports on Form 8-K
(i) On April 23, 2001, we filed a Current Report on Form 8-K/A which
amended our Current Report on Form 8-K/A filed on September 11, 2000.
On April 24, 2001, we filed a Form 8-K/A further amending our Current
Report on Form 8-K/A filed on April 23, 2001.
(ii) On April 23, 2001, we filed a Current Report on Form 8-K/A which
amended our Current Report on Form 8-K/A filed on September 21, 2000.
On April 24, 2001, we filed a Form 8-K/A further amending our Current
Report on Form 8-K/A filed on April 23, 2001.
(iii)On April 23, 2001, we filed a Current Report on Form 8-K/A which
amended our Current Report on Form 8-K/A filed on December 29, 2000.
On April 24, 2001, we filed a Form 8-K/A further amending our Current
Report on Form 8-K/A filed on April 23, 2001.
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED DIGITAL SOLUTIONS, INC.
(Registrant)
Dated: May 15, 2001 By: /S/ JEROME C. ARTIGLIERE
-----------------------------
Jerome C. Artigliere
Senior Vice President, Chief Financial
Officer
54
EXHIBITS
4.1 Second Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 4.1 to the Registrant's Post-Effective
Amendment No. 1 on Form S-1 to Registration Statement (Form S-3 File No.
333-64605) filed with the Commission on June 23, 1999)
4.2 Amendment of Articles of Incorporation of the Registrant filed with the
Secretary of State of the State of Missouri on September 5, 2000
(incorporated herein by reference to Exhibit 4.3 to the Registrant's
Post-Effective Amendment No. 3 on Form S-3 to Registration Statement on
Form S-4 (File No. 333-38420-02) filed with the Commission on September
29, 2000)
4.3 Certificate of Designation of Preferences of Series C Convertible
Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K filed with the Commission on
October 26, 2000)
4.4 Amended and Restated Bylaws of the Registrant dated March 31, 1998
(incorporated herein by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
10.1 Securities Purchase Agreement, dated as of October 24, 2000, relating to
the Registrant's Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed with the Commission on October 26, 2000)
10.2 Form of warrant to purchase common stock of the Registrant issued to the
holders of the Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
filed with the Commission on October 26, 2000)
10.3 Registration Rights Agreement between the Registrant and the holders of
the Series C Convertible Preferred Stock (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with
the Commission on October 26, 2000)
10.4 Acknowledgement, Waiver and Amendment No. 1 to the Second Amended and
Restated Term and Revolving Credit Agreement dated March 30, 2001 between
the Company and IBM Credit Corporation, and others (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K
filed with the Commission on April 10, 2001)
55