SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 14, 2002
APPLIED DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 000-26020 43-1641533
-------- --------- ----------
(State or other (Commission File No.) (IRS Employer
jurisdiction of) Identification No.)
incorporation
400 ROYAL PALM WAY, SUITE 410
PALM BEACH, FLORIDA 33480
(Address of principal executive offices)
561-805-8000
(Registrant's telephone number, including area code)
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
(a) Previous independent accountants
By letter dated May 14, 2002, Grant Thornton LLP ("Grant Thornton")
resigned as the Registrant's outside auditing firm. The Registrant and Grant
Thornton had a disagreement on the proper accounting treatment with respect
to a non-cash item in connection with the merger (the "Merger") of a
subsidiary of Medical Advisory Systems, Inc. ("MAS") and Digital Angel
Corporation ("Old Digital Angel Corporation"), in which the Registrant held
a controlling interest. As a result of the nature of the disagreement as
outlined below, Grant Thornton communicated its resignation as the
Registrant's auditors. Grant Thornton advised ADS that its proposed
treatment of the non-cash item was inconsistent with the position taken in
MAS's definitive proxy statement dated February 14, 2002, related to the
Merger. Grant Thornton advised that the Registrant had not brought to Grant
Thornton's attention the change in accounting position and that it did not
believe it could rely upon future representations made by Registrant's
management. Grant Thornton also advised the Registrant that it had not
completed its review of the Registrant's quarterly report on Form 10-Q for
the first quarter of 2002.
The accounting item in question (about which the Registrant and
Grant Thornton LLP have had the disagreement) relates to options that MAS
was to assume or convert into MAS options under the terms of an agreement
and plan of merger, dated November 1, 2001, by and among MAS, an MAS
wholly-owned subsidiary, and Old Digital Angel Corporation, in which the
Registrant held a controlling interest. On March 27, 2002, the MAS
wholly-owned subsidiary was merged with and into Old Digital Angel
Corporation under the terms of the merger agreement. ADS also contributed
certain other subsidiaries in the merger. Old Digital Angel Corporation, as
the surviving corporation, became a wholly-owned subsidiary of MAS, which
has since been renamed Digital Angel Corporation ("New Digital Angel
Corporation"). Grant Thornton has also communicated by letter dated May 14,
2002, the termination of its auditor relationship with New Digital Angel
Corporation.
With respect to the dispute as to the proper accounting treatment
for these options, Grant Thornton's position is that the Registrant should
recognize in the first quarter of 2002 a one-time, non-cash, compensation
expense, in the amount of approximately $14.5 million, under the guidance
provided by Accounting Principles Board Opinion No. 25 (APB 25), as amended
by FASB Interpretation No. 44 and Emerging Issues Task Force Issue 00-23.
The Registrant is of the view that the cost of the assumed- or
to-be-converted options represents part of the merger consideration and
should be capitalized and reflected on the Registrant's balance sheet,
consistent with accounting for the transaction as a business combination
using the purchase method of accounting, in accordance with Accounting
Principles Board Opinion No. 16 (APB 16). The Registrant has contacted the
staff of the Securities and Exchange Commission with respect to this issue.
The audit committee of the board of directors was advised of
management's handling of the proposed accounting treatment for the stock
options by Grant Thornton. The Registrant has authorized Grant Thornton to
respond fully to inquiries of the successor accountant concerning the
subject matter of the foregoing disagreement.
The Registrant is presently in negotiations with a new independent
accounting firm with respect to the auditing of the Registrant's financial
statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
(16.1) Letter from Grant Thornton LLP with respect to this Form
8-K. (The letter from Grant Thornton LLP will be filed by
amendment to this Form 8-K).
SIGNATURES
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 hereunto duly authorized.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ Evan C. McKeown
--------------------------------------------
Name: Evan C. McKeown
Title: Chief Financial Officer
Dated: May 21, 2002