SCHEDULE 14A INFORMATION
(Rule 14a-101)
Information Required in Proxy Statement
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934.
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e) (2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
APPLIED DIGITAL SOLUTIONS, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6 (i) (1) and 0-11
(1) Title of each class of securities to which transaction applies;
(2) Aggregate number of securities to which transaction applies;
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was
determined);
(4) Proposed maximum aggregate value of transaction;
(5) Total Fee Paid.
( ) Fee paid previously with previous materials.
( ) Check box if any of the fee is offset as provided by Exchange Act Rule
0-11 (a) (2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid;
(2) Form, Schedule or Registration Statement No.;
(3) Filing Party;
(4) Date Filed.
[Applied Digital Solutions Logo]
MICHAEL E. KRAWITZ
Executive Vice President, General Counsel and Secretary
August 15, 2003
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
which will be held on September 10, 2003, at 8:00 a.m. Eastern Daylight
Time, at the West Palm Beach Marriott Hotel, 630 Clearwater Park Road, West
Palm Beach, Florida 33401.
The Special Meeting is being held regarding three business items. These
items and the vote the Board of Directors recommends are:
RECOMMENDED
ITEM VOTE
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1. Approval of the potential issuance of up to approximately 26,200,000 shares of FOR
the Company's common stock upon the conversion or redemption of the Company's
$10,500,000 aggregate principal amount of 8.5% Convertible Exchangeable Debentures
and 5,352,773 shares of the Company's common stock upon the exercise of related
Stock Purchase Warrants, subject to anti-dilution and other provisions contained
in the form of Debenture and form of Warrant, attached as Appendix A and
Appendix B, respectively;
2. Approval of the issuance of up to 30,000,000 shares of the Company's common stock FOR
after effectiveness of the Company's registration statement on Form S-1 (File No.
333-106300), which was filed with the Securities and Exchange Commission on June 20,
2003, which share amount when combined with the issuance of the Debentures, Warrants
and common stock issued pursuant to the Securities Purchase Agreements, represents
more than 20% of the outstanding common stock of the Company on a pre-transaction
basis; and
3. To approve the granting of discretionary authority to the Board of Directors, for a FOR
period of twelve months after the date the Company's shareholders approve this proposal,
to approve a reverse stock split in a ratio not to exceed 1-for-25, to determine the
effective date of the reverse stock split, and to file an amendment to the Company's
Third Restated Articles of Incorporation, as amended, effecting the reverse stock
split, or to determine not to proceed with the reverse stock split.
The Company has also included a Proxy Statement that contains more
information about these items and the meeting.
If you plan to attend the meeting, please mark the appropriate box on
your proxy card to help the Company plan for the meeting. You will need an
admission card to attend the meeting, which you can obtain as follows:
o If your shares are registered in your name, you are a shareholder
of record. Your admission card is attached to your proxy card, and
you will need to bring it with you to the meeting.
o If your shares are in the name of your broker or bank, your shares
are held in street name. Ask your broker or bank for an admission
card in the form of a legal proxy to bring with you to the
meeting. If you do not receive the legal proxy in time, bring your
brokerage statement with you to the meeting so that the Company
can verify your ownership of the Company's stock on the record
date and admit you to the meeting. However, you will not be able
to vote your shares at the meeting without a legal proxy.
Your vote is important regardless of the number of shares you own. The
Company encourages you to vote by proxy so that your shares will be
represented and voted at the meeting even if you cannot attend. All
shareholders can vote by written proxy card. Many shareholders also can vote
by proxy via touch-tone telephone from the U.S. and Canada, using the
toll-free number on your proxy card, or via the Internet using the
instructions on your proxy card. In addition, shareholders may vote in
person at the meeting, as described above.
EACH SHAREHOLDER IS URGED TO VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD, USING THE TELEPHONE VOTING SYSTEM, OR ACCESSING THE
WORLD WIDE WEB SITE INDICATED ON YOUR PROXY CARD TO VOTE VIA THE INTERNET.
IF A SHAREHOLDER DECIDES TO ATTEND THE MEETING, HE OR SHE MAY REVOKE THE
PROXY AND VOTE THE SHARES IN PERSON.
Sincerely,
MICHAEL E. KRAWITZ
Executive Vice President, General Counsel and Secretary
[Applied Digital Solutions Logo]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF
APPLIED DIGITAL SOLUTIONS, INC.:
A Special Meeting of Shareholders of Applied Digital Solutions, Inc., a
Missouri corporation (the "Company"), will be held at the West Palm Beach
Marriott Hotel, 630 Clearwater Park Road, West Palm Beach, Florida 33401, on
September 10, 2003, at 8:00 a.m. Eastern Daylight Time, for the following
purposes:
1. To approve the potential issuance of up to approximately 26,200,000
shares of the Company's common stock upon the conversion or
redemption of the Company's $10,500,000 aggregate principal amount
of 8.5% Convertible Exchangeable Debentures and 5,352,773 shares of
the Company's common stock upon the exercise of related Stock
Purchase Warrants, subject to anti-dilution and other provisions
contained in the form of Debenture and form of Warrant, attached as
Appendix A and Appendix B, respectively;
2. To approve the issuance of up to 30,000,000 shares of the
Company's common stock after effectiveness of the Company's
registration statement on Form S-1 (File No. 333-106300), which
was filed with the Securities and Exchange Commission on June 20,
2003, which share amount when combined with the issuance of the
Debentures, Warrants and common stock issued pursuant to the
Securities Purchase Agreements, represents more than 20% of the
outstanding common stock of the Company on a pre-transaction
basis; and
3. To approve the granting of discretionary authority to the Board of
Directors, for a period of twelve months after the date the
Company's shareholders approve this proposal, to approve a reverse
stock split in a ratio not to exceed 1-for-25, to determine the
effective date of the reverse stock split, and to file an
amendment to the Company's Third Restated Articles of
Incorporation, as amended, effecting the reverse stock split of
the Company's common stock, or to determine not to proceed with
the reverse stock split.
The Board of Directors has set July 22, 2003 as the record date for the
meeting. This means that owners of the Company's common stock at the close
of business on that date are entitled to (1) receive notice of the meeting
and (2) vote, or exercise voting rights through a voting trust, as the case
may be, at the meeting and any adjournments or postponements of the meeting.
The Company will make available a list of holders of record of the Company's
common stock as of the close of business on July 22, 2003, for inspection
during normal business hours at the offices of the Company, 400 Royal Palm
Way, Suite 410, Palm Beach, Florida 33480 for ten business days prior to the
meeting. This list will also be available at the meeting.
By Order of the Board of Directors
MICHAEL E. KRAWITZ
Executive Vice President,
General Counsel and Secretary
Palm Beach Florida
August 15, 2003
[Applied Digital Solutions Logo]
400 ROYAL PALM WAY, SUITE 410
PALM BEACH, FLORIDA 33480
August 15, 2003
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 10, 2003
The Board of Directors of Applied Digital Solutions, Inc., a Missouri
corporation (the "Company"), furnishes you with this Proxy Statement to
solicit proxies on its behalf to be voted at the Special Meeting of
Shareholders of the Company. The meeting will be held at the West Palm Beach
Marriott Hotel, 630 Clearwater Park Road, West Palm Beach, Florida 33401, on
September 10, 2003, at 8:00 a.m. Eastern Daylight Time, subject to
adjournment or postponement thereof (the "Meeting"). The proxies also may be
voted at any adjournments or postponements of the Meeting. This Proxy
Statement and the accompanying form of Proxy are first being mailed to the
shareholders of the Company on or about August 15, 2003.
Voting and Revocability of Proxies
All properly executed written proxies and all properly completed
proxies voted by telephone or via the Internet and delivered pursuant to
this solicitation (and not revoked later) will be voted at the Meeting in
accordance with the instructions of the shareholder. Below is a list of the
different votes shareholders may cast at the Meeting pursuant to this
solicitation.
In voting on (1) the approval of the potential issuance of up to
approximately 26,200,000 shares of the Company's common stock upon the
conversion or redemption of the Company's $10,500,000 aggregate principal
amount of 8.5% Convertible Exchangeable Debentures and 5,352,773 shares of
the Company's common stock upon the exercise of related Stock Purchase
Warrants, subject to anti-dilution and other provisions contained in the
form of Debenture and form of Warrant, attached as Appendix A and Appendix
B, respectively; (2) the approval of the issuance of up to 30,000,000 shares
of the Company's common stock after effectiveness of the Company's
registration statement on Form S-1 (File No. 333-106300), which was filed
with the Securities and Exchange Commission on June 20, 2003, which share
amount when combined with the issuance of the Debentures, Warrants and
common stock issued pursuant to the Securities Purchase Agreements,
represents more than 20% of the outstanding common stock of the Company on a
pre-transaction basis; (3) the approval of the granting of discretionary
authority to the Board of Directors, for a period of twelve months after the
date the Company's shareholders approve this proposal, to approve a reverse
stock split in a ratio not to exceed 1-for-25, to determine the effective
date of the reverse stock split, and to file an amendment to the Company's
Third Restated Articles of Incorporation, as amended, effecting the reverse
stock split, or to determine not to proceed with the reverse stock split,
shareholders may vote in one of the three following ways:
1. in favor of the item,
2. against the item, or
3. abstain from voting on the item.
Shareholders should specify their choice for the matter on the enclosed
form of Proxy. If no specific instructions are given, proxies which are
signed and returned will be voted FOR (1) the approval of the potential
issuance of up to approximately 26,200,000 shares of the Company's common
stock upon the conversion or redemption of the Company's $10,500,000
aggregate principal amount of 8.5% Convertible Exchangeable Debentures and
5,352,773 shares of the Company's common stock upon the exercise of related
Stock Purchase Warrants, subject to anti-dilution and other provisions
contained in the form of Debenture and form of Warrant, attached as Appendix
A and Appendix B, respectively; FOR (2) the approval of the issuance of up
to 30,000,000
shares of the Company's common stock after effectiveness of the Company's
registration statement on Form S-1 (File No. 333-106300), which was filed
with the Securities and Exchange Commission on June 20, 2003, which share
amount when combined with the issuance of the Debentures, Warrants and
common stock issued pursuant to the Securities Purchase Agreements,
represents more than 20% of the outstanding common stock of the Company on a
pre-transaction basis, and FOR (3) the approval of the granting of
discretionary authority to the Board of Directors, for a period of twelve
months after the date the Company's shareholders approve this proposal, to
approve a reverse stock split in a ratio not to exceed 1-for-25, to
determine the effective date of the reverse stock split, and to file an
amendment to the Company's Third Restated Articles of Incorporation, as
amended, effecting the reverse stock split, or to determine not to proceed
with the reverse stock split.
In addition, if other matters come before the Meeting, the persons
named in the accompanying form of Proxy will vote in accordance with their
best judgment with respect to such matters. A shareholder submitting a proxy
has the power to revoke it at any time prior to its exercise by voting in
person at the Meeting, by giving written notice to the Company's Secretary
bearing a later date than the proxy or by giving a later dated proxy. Any
written notice revoking a proxy should be sent to: ADP Investor
Communication Services, Inc., 51 Mercedes Way, Edgewood, NY 11717. Proxies
signed by brokers with no further statements indicated on the proxy and
shares as to which proxy authority has been withheld with respect to any
matter will be counted for quorum and for purposes of determining the number
of shares entitled to vote on a matter. Broker non-votes (proxies where the
broker has added statements such as "non-vote," "no vote" or "do not vote")
are not counted for quorum or for purposes of determining the number of
shares entitled to vote on each matter. The presence in person or by proxy
of the holders of the shares representing a majority of all outstanding
shares will constitute a quorum. The approval of Items 1 and 2 will require
the approval of a majority of the shares voting at the Meeting either
present or represented by proxy and the approval of Item 3 will require the
affirmative vote of a majority of the outstanding shares entitled to vote at
the Meeting.
The telephone and Internet voting procedures are designed to
authenticate shareholders' identities, to allow shareholders to vote their
shares and to confirm that their instructions have been properly recorded.
Specific instructions to be followed by shareholders interested in voting
via the telephone or the Internet are set forth on the proxy card. If the
proxy card does not contain these instructions, these options are not
available.
Record Date and Share Ownership
Owners of record of shares of the Company's common stock at the close
of business on July 22, 2003 (the "Record Date"), will be entitled to vote
at the Meeting or adjournments or postponements thereof. Each owner of
record of the Company's common stock on the Record Date is entitled to one
vote for each share of common stock so held.
As of the close of business on July 22, 2003, there were 352,127,414
shares of common stock outstanding and entitled to vote at the Meeting (all
such shares being referred to herein as the "shares" and all holders thereof
being referred to as the "shareholders" of the Company). A majority of the
shares must be present, in person or by proxy, to conduct business at the
Meeting.
2
TABLE OF CONTENTS
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Page
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1. Approval of the potential issuance of up to approximately 26,200,000 shares of the Company's common
stock upon the conversion or redemption of the Company's $10,500,000 aggregate principal amount of
8.5% Convertible Exchangeable Debentures and 5,352,773 shares of the Company's common stock upon
the exercise of related Stock Purchase Warrants, subject to anti-dilution and other provisions
contained in the form of Debenture and form of Warrant, attached as Appendix A and Appendix B,
respectively........................................................................................... 1
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2. Approval of the issuance of up to 30,000,000 shares of the Company's common stock after effectiveness
of the Company's registration statement on Form S-1 (File No. 333-106300), which was filed with the
Securities and Exchange Commission on June 20, 2003, which share amount when combined with the issuance
of the Debentures, Warrants and common stock issued pursuant to the Securities Purchase Agreements,
represents more than 20% of the outstanding common stock of the Company on a pre-transaction
basis.................................................................................................. 7
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3. Approval of the granting of discretionary authority to the Board of Directors, for a period of twelve
months after the date the Company's shareholders approve this proposal, to approve a reverse stock
split in a ratio not to exceed 1-for-25, to determine the effective date of the reverse stock split,
and to file an amendment to the Company's Third Restated Articles of Incorporation, as amended,
effecting the reverse stock split, or to determine not to proceed with the reverse stock split......... 10
- -----------------------------------------------------------------------------------------------------------------------
i
APPROVAL OF THE POTENTIAL ISSUANCE OF UP TO APPROXIMATELY 26,200,000
SHARES OF THE COMPANY'S COMMON STOCK UPON THE CONVERSION OR REDEMPTION OF
THE COMPANY'S $10,500,000 AGGREGATE PRINCIPAL AMOUNT OF 8.5% CONVERTIBLE
EXCHANGEABLE DEBENTURES AND 5,352,773 SHARES OF THE
COMPANY'S COMMON STOCK UPON THE EXERCISE OF RELATED STOCK
PURCHASE WARRANTS, SUBJECT TO ANTI-DILUTION AND OTHER
PROVISIONS CONTAINED IN THE FORM OF DEBENTURE AND FORM OF
WARRANT, ATTACHED AS APPENDIX A AND APPENDIX B, RESPECTIVELY
(ITEM 1)
BACKGROUND
Effective April 1, 2003, the Company entered into a Forbearance
Agreement with IBM Credit LLC ("IBM Credit"). Under the terms of the
Forbearance Agreement, the Company had the right to purchase all of its
outstanding debt obligations to IBM Credit, totaling approximately $99
million (including accrued interest), if the Company paid IBM Credit $30
million in cash by June 30, 2003. As of June 30, 2003, the Company made cash
payments to IBM Credit totaling $30 million and, thus, it has satisfied in
full its debt obligations to IBM Credit.
Use of Proceeds. Funding for the $30.0 million payment to IBM Credit
consisted of $17.8 million in net proceeds from the sale of an aggregate of
50,000,000 shares of the Company's common stock, $10.0 million in net
proceeds from the issuance of the Company's 8.5% Convertible Exchangeable
Debentures, and $2.2 million from cash on hand.
50,000,000 Share Transaction. The 50,000,000 shares of the Company's
common stock were purchased under the Securities Purchase Agreements dated
May 8, 2003, May 22, 2003, and June 4, 2003. The purchases resulted in net
proceeds to the Company of $17.8 million, after deduction of the 3% fee to
the Company's placement agent, J.P. Carey Securities, Inc.
Securities Purchase Agreement and Debentures. On June 30, 2003, the
Company entered into a Securities Purchase Agreement (the "Agreement") with
certain investors, collectively referred to herein as "the Purchasers." In
connection with the Agreement, the Company issued to the Purchasers $10.5
million aggregate principal amount of its 8.5% Convertible Exchangeable
Debentures due November 1, 2005, the proceeds of which were used to satisfy
the Company's obligations to IBM Credit (the "Debentures"). A form of the
8.5% Convertible Exchangeable Debentures due November 1, 2005 is attached
hereto as Appendix A. Subject to the terms under the various agreements, the
Debentures are convertible into shares of the Company's common stock or
exchangeable for shares of Digital Angel Corporation (AMEX:DOC) common stock
owned by the Company, or a combination thereof, at the Purchasers' option.
The Company currently owns 19.6 million shares of Digital Angel
Corporation's common stock, or approximately 73% of the shares outstanding
of Digital Angel Corporation's common stock as of June 30, 2003. The
Debentures are convertible or exchangeable at any time at the option of the
Purchasers. The conversion price for the Company's common stock is $0.515
per share (also known as the Set Price), subject to anti-dilution
provisions. The exchange price for the Digital Angel Corporation common
stock held by the Company for each individual holder of Debentures, subject
to anti-dilution provisions, is $2.20 per share as to the first fifty
percent (50%) of the original principal amount of the Debentures and $4.25
per share as to the remaining fifty percent (50%) of the original principal
amount, such fifty percent calculation being made on the basis of each
individual Debenture holder's principal amount of Debentures purchased.
Warrants. In addition, the Company has granted to the Purchasers
warrants to acquire 5,352,773 shares of the Company's common stock, or
950,742 shares of Digital Angel Corporation's common stock currently
outstanding and owned by the Company, or a combination of shares from both
companies, at the Purchasers' option (the "Warrants"). The form of Warrant
is attached hereto as Appendix B. The exercise prices are $0.564 and $3.178
for the Company's common stock and Digital Angel Corporation's common stock,
respectively. The Warrants are subject to anti-dilution provisions, vest
immediately and are exercisable through June 30, 2007. The Company has
entered into a Registration Rights Agreement with the Purchasers, whereby
the Company has agreed to register its common shares issuable upon conversion
of the Debentures and exercise of the Warrants within a specified time period.
1
Interest and Principal Redemption Payments. Among other provisions
under the Agreement and the Debentures, the Company is required to pay
interest at the rate of 8.5% per annum on a quarterly basis beginning
September 1, 2003, and, beginning on November 1, 2003, on a monthly basis as
to the principal amount required to be redeemed ($0.4 million) each month. A
final interest payment is due on the maturity date. Interest payments may be
made in either cash or in shares of Digital Angel Corporation's common
stock, or a combination thereof at the Company's option, subject to certain
restrictions. The interest conversion rate for the Digital Angel Corporation
common stock is calculated based upon 90% of the average of the lowest 10 of
the 20 volume-weighted average stock prices immediately prior to the
applicable interest payment date, subject to a late payment adjustment.
Principal redemption payments of $0.4 million are due monthly beginning
November 1, 2003. The principal redemption payments may be made in cash, the
Company's common stock or Digital Angel Corporation's common stock at the
Company's option, subject to certain limitations regarding the average
market value and trading volume of the Digital Angel Corporation common
stock. The conversion/exchange redemption prices are based upon the lesser
of (1) ninety percent (90%) of the lowest 10 of the 20 volume-weighted
average stock prices prior to the redemption date, and (2) the Set
Price/exchangeable prices, subject to anti-dilution provisions.
Since the issuance of the Company's common stock for the principal
redemption payments of the Debentures is based upon the volume-weighted
average stock price at the time of any such payments, the number of shares
the Company would be required to issue, if the Company so elected, is
indeterminate at this time. However, for purposes of illustration, if 100%
of the principal redemption payments of the Debentures were made in the
Company's common stock, using the volume-weighted average stock price for
the 20-day period between July 8 and August 4, 2003, of $.4454 per share,
then the maximum number of the Company's shares of common stock to be issued
would total approximately 26,200,000.
Future Financings. Subject to certain exempt transactions, including
among others the issuances of shares in connection with stock options, share
issuances under certain severance agreements (subject to shareholder
approval), exercises of warrants currently outstanding including the
Warrants, the conversion of the Debentures and issuances of shares for
acquisitions or strategic investments, the Company is not permitted under the
terms of the Agreement to incur, create, guarantee, assume or to otherwise
become liable on account of an indebtedness other than with a federally
regulated financial institution or to increase any amounts owing under any
existing obligations or to issue or sell shares of its common stock or
equivalents until ninety (90) days after the effective date of the
registration statement registering the Company's common shares underlying
the Debentures and Warrants. In addition, each Purchaser has the right of
first refusal with regard to any financings made by the Company in shares of
its common stock or common stock equivalents until such time as the
Purchaser no longer holds any Debentures.
Collateral. As collateral for the Debentures and under the terms of a
Security Agreement, the Company and its wholly-owned subsidiary Computer
Equity Corporation have granted to the Purchasers a security interest in all
of their accounts receivable, and under the terms of a Pledge Agreement, the
Company has granted to the Purchasers a security interest in up to 15.0
million shares of the Digital Angel Corporation common stock it currently
owns.
Fees. In connection with the Debentures, the Company incurred a
placement agency fee of $430,000 and it has reimbursed one of the Purchasers
$50,000 for legal, administrative, due diligence and other expenses incurred
to prepare and negotiate the transaction documents.
2
Shares Issuable Upon Conversion. While the principal redemption
payments may be made in cash, shares of the Company's common stock, and
shares of Digital Angel Corporation's common stock, or any combination
thereof, at the Company's option, the conversion price of the Company's
common stock regarding the principal redemption payments is tied to the
trading price of the Company's common stock, with no minimum or floor price
per share. The lower the price of the Company's common stock, the lower the
conversion price related to the principal redemption payments, and
consequently, the more shares of the Company's common stock that would be
issuable if the Company elected to make the required principal redemption
payments in shares of its common stock. Such election could, therefore,
result in the existing holders of the Company's common stock facing
additional dilution. As a result of such potential election by the Company,
and coupled with the Purchasers' option to convert or exchange the
Debentures and Warrants into shares of the Company's common stock, the
Digital Angel Corporation common stock owned by the Company or any
combination thereof, the total number of shares of the Company's common
stock that may actually become issuable under the terms of the Debentures
and Warrants, if any, cannot be determined. For purposes of illustration, if
the Purchasers elected to convert 100% of the $10,500,000 aggregate
principal amount of the Debentures and to exercise 100% of the Warrants into
shares of the Company's common stock, the number of shares to be so issued
would be 25,741,123 based upon the conversion/exercise prices set forth in
the agreements, subject to certain other terms in the agreements.
An aggregate of 25,741,123 shares of the Company's common stock is
issuable upon conversion of the Debentures and exercise of the Warrants.
This calculation is based on 100% of the $10,500,000 aggregate principal
amount of the Debentures being converted into the Company's common stock at
the set price of $0.515 per share (equaling 20,388,350 shares), plus 100% of
the 5,352,773 Warrants being exercised for 5,352,773 shares of the Company's
common stock for a total of 25,741,123 shares. The calculation of a maximum
of 25,741,123 shares does not take into consideration the shares of our
common stock which may be issued if the Company chooses to make its
principal redemption payments under the Debentures in the Company's common
stock. Since the issuance of the Company's common stock in payment for the
principal redemption payments of the Debentures is based upon the
volume-weighted average stock price at the time of any such payment, the
number of shares the Company would be required to issue, if the Company so
elected, is indeterminate at this time. However, for purposes of
illustration, if 100% of the principal redemption payments of the Debentures
were made in the Company's common stock, using the volume-weighted average
stock price for the 20-day period between July 8 and August 4, 2003, of
$.4454, then the maximum number of the Company's shares of common stock to
be issued would be approximately 26,200,000.
Consequences If the Company Does Not Obtain Shareholder Approval.
Nasdaq SmallCap Market
The Company may be required to delist its shares of common stock from
the Nasdaq SmallCap Market if specific events occur. The Nasdaq rules
generally require shareholder approval for the issuance of securities
representing 20% or more of an issuer's outstanding listed securities.
Nasdaq has taken the position that the issuance of the 50,000,000 shares, as
discussed above, under the Securities Purchase Agreements and any issuance
of the Company's common stock under the Debentures and Warrants should be
combined and treated as one transaction for determining the 20% threshold,
since the purpose of and the proceeds from these transactions were used to
pay the Company's debt obligation to IBM Credit. The Company had 286,053,403
shares of its common stock outstanding just prior to the initial issuance of
shares under the Securities Purchase Agreements. Therefore, 57,210,680
shares are equal to 20% of the outstanding shares of the Company on a
pre-transaction basis. Thus, any issuance of common stock under the
Debentures and Warrants in excess of 7,210,679 shares would result in an
issuance of securities representing 20% or more of the Company's common
stock under Nasdaq's rules. Under the terms of the Agreement, the Company
has agreed to seek shareholder approval at the Meeting for the potential
issuance of more than 7,210,679 shares of its common stock issuable upon
conversion of the Debentures and Warrants, to satisfy Nasdaq's requirements
of shareholder approval. No shares have been issued, in connection with the
Debentures and Warrants as of the date of this Meeting. If the Company
obtains shareholder approval, the number of shares that could be issued upon
the conversion of the Debentures and exercise of the Warrants would not be
limited by the Nasdaq 20% limitation.
The maximum of 25,741,123 shares of the Company's common stock issuable
upon conversion of the Debentures and Warrants is based on 100% of the
$10,500,000 aggregate principal amount of the Debentures being converted
into the Company's common stock at the set price of $0.515 per share
(equaling 20,388,350 shares), plus 100% of the 5,352,773 Warrants being
exercised for 5,352,773 shares of the Company's common stock for a total of
25,741,123 shares.
3
Decreased Equity Ownership in Digital Angel Corporation
The Company's ownership in Digital Angel Corporation was 72.7% as of
the Record Date. The table set forth below illustrates, as of the Record
Date, the Company's decreased equity ownership in Digital Angel Corporation
(i) should the Debentures be exchanged for the Company's shares of Digital
Angel Corporation common stock pursuant to the terms of the Debentures, and
(ii) should the Warrants be exercised for the Company's shares of Digital
Angel Corporation common stock pursuant to the terms of the Warrant.
OWNERSHIP
FOLLOWING
OWNERSHIP EXCHANGE OF
FOLLOWING DEBENTURES
EXCHANGE OF AND EXERCISE
DECREASED EQUITY OWNERSHIP IN DIGITAL ANGEL CORPORATION DEBENTURES OF WARRANTS(1)
Exchange of Debentures/Exercise of Warrants equal to 25% 68.3% 67.4%
Exchange of Debentures/Exercise of Warrants equal to 50% 63.9% 62.1%
Exchange of Debentures/Exercise of Warrants equal to 75% 61.6% 58.9%
Exchange of Debentures/Exercise of Warrants equal to 100% 59.3% 55.8%
<FN>
(1) The percentages do not include the effect on the Company's ownership in
Digital Angel Corporation if the Debenture interest and principal redemption
payments are paid in Digital Angel shares of common stock.
IF THE COMPANY DOES NOT OBTAIN SHAREHOLDER APPROVAL IT WILL BE ABLE TO
ISSUE ONLY UP TO 7,210,679 SHARES OF THE COMPANY'S COMMON STOCK UPON
CONVERSION OR IN CONNECTION WITH MONTHLY PRINCIPAL REDEMPTIONS PAYMENTS AND
WILL ONLY BE ABLE TO MAKE SUCH PAYMENTS IN CASH, OR SUBJECT TO CERTAIN
CONDITIONS, IN SHARES THAT THE COMPANY BENEFICIALLY OWNS IN DIGITAL ANGEL
CORPORATION. ALTHOUGH THE FAILURE TO OBTAIN SHAREHOLDER APPROVAL WOULD NOT
AFFECT THE TERMS OF THE DEBENTURES OR OTHERWISE HAVE AN ADVERSE ECONOMIC
EFFECT, THE COMPANY MIGHT PREFER TO HAVE THE DEBENTURES CONVERT INTO SHARES
OF ITS COMMON STOCK OR THE COMPANY MIGHT PREFER TO MAKE ITS MONTHLY
PRINCIPAL REDEMPTION PAYMENTS IN SHARES OF ITS COMMON STOCK IN ORDER TO
CONSERVE CASH AND TO PRESERVE THE COMPANY'S OWNERSHIP OF DIGITAL ANGEL
CORPORATION.
Effect of the 8.5% Convertible Exchangeable Debentures and the Related
Warrants on Existing Shareholders.
o The conversion of the Debentures and the exercise of the related
Warrants into shares of the Company's common stock could result in
a substantial number of additional shares being issued and a
significant number of the shares being sold into the market,
which would result in the ownership interests of holders of the
Company's common stock being diluted, and which could result in a
decrease in the price of the Company's common stock.
o Upon the occurrence of an event of default as set forth in the
Debenture, the Company may be required to prepay the Debentures at
a price equal to the greater of (a) 110% of the principal balance
outstanding, plus accrued interest or (b) the principal balance
outstanding, plus accrued interest divided by the Set Price and
multiplied by the volume-weighted average stock price on the date
the payment is demanded or the amount is paid in full, which ever
is greater, or (c) by similar calculations in respect of the
Digital Angel Corporation common stock.
o Each Purchaser has the right of first refusal with regard to any
financings made by the Company in shares of its common stock or
common stock equivalents until such time as the Purchaser no
longer holds any Debentures.
4
o So long as the Debentures remain outstanding, the Company shall
not declare or pay any dividend on its common stock in the form of
cash or in the form of shares of Digital Angel Corporation common
stock owned by the Company.
Required Vote
- -------------
The affirmative vote of a majority of the shares voting at the Meeting
is required to approve the potential issuance of up to approximately
26,200,000 shares of the Company's common stock upon the conversion or
redemption of the Company's $10,500,000 aggregate principal amount of 8.5%
Convertible Exchangeable Debentures and 5,352,773 shares of the Company's
common stock upon the exercise of related Stock Purchase Warrants, subject
to anti-dilution and other provisions contained in the form of Debenture and
form of Warrant, attached as Appendix A and Appendix B, respectively.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
POTENTIAL ISSUANCE OF UP TO APPROXIMATELY 26,200,000 SHARES OF THE COMPANY'S
COMMON STOCK UPON THE CONVERSION OR REDEMPTION OF THE COMPANY'S $10,500,000
AGGREGATE PRINCIPAL AMOUNT OF 8.5% CONVERTIBLE EXCHANGEABLE DEBENTURES AND
5,352,773 SHARES OF THE COMPANY'S COMMON STOCK UPON THE EXERCISE OF RELATED
STOCK PURCHASE WARRANTS, SUBJECT TO ANTI-DILUTION AND OTHER PROVISIONS
CONTAINED IN THE FORM OF DEBENTURE AND FORM OF WARRANT, ATTACHED AS APPENDIX
A AND APPENDIX B, RESPECTIVELY. UNLESS A CONTRARY CHOICE IS SPECIFIED,
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR THE APPROVAL
OF THE POTENTIAL ISSUANCE OF UP TO APPROXIMATELY 26,200,000 SHARES OF THE
COMPANY'S COMMON STOCK UPON THE CONVERSION OR REDEMPTION OF THE COMPANY'S
$10,500,000 AGGREGATE PRINCIPAL AMOUNT OF 8.5% CONVERTIBLE EXCHANGEABLE
DEBENTURES AND 5,352,773 SHARES OF THE COMPANY'S COMMON STOCK UPON THE
EXERCISE OF RELATED STOCK PURCHASE WARRANTS, SUBJECT TO ANTI-DILUTION AND
OTHER PROVISIONS CONTAINED IN THE FORM OF DEBENTURE AND FORM OF WARRANT,
ATTACHED AS APPENDIX A AND APPENDIX B, RESPECTIVELY.
- -----------------------------------------------------------------------------
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL
The Company's authorized capital stock consists of 560,000,000 shares
of common stock, $.001 par value, and 5,000,000 shares of preferred stock,
$10.00 par value. Holders of the Company's common stock have no preemptive
or other subscription rights.
COMMON STOCK
As of the Record Date, there were 352,127,414 shares of the Company's
common stock outstanding and approximately 2,489 holders of record of the
Company's common stock.
The holders of the Company's common stock are entitled to one vote per
share on all matters submitted to a vote of the shareholders. Holders of the
Company's common stock do not have cumulative voting rights. Therefore,
holders of more than 50% of the shares of the Company's common stock are
able to elect all directors eligible for election each year. The holders of
common stock are entitled to dividends and other distributions out of assets
legally available if and when declared by the Company's Board of Directors.
Upon the Company's liquidation, dissolution or winding up, the holders of
the Company's common stock are entitled to share pro rata in the
distribution of all of the Company's assets remaining available for
distribution after satisfaction of all liabilities, including any prior
rights of any preferred stock which may be outstanding. There are no
redemption provisions (other than in the Debentures as defined below) or
sinking fund provisions applicable to the Company's common stock.
The transfer agent and registrar for the common stock is The Registrar
and Transfer Co.
5
PREFERRED STOCK
Series C Convertible Preferred Stock.
As of the Record Date, there were no shares of preferred stock
outstanding. Preferred stock may be created and issued from time to time by
the Company's Board of Directors, with such rights and preferences as it may
determine. Because of its broad discretion with respect to the creation and
issuance of any series of preferred stock without shareholder approval, the
Company's board of directors could adversely affect the voting power of the
Company's common stock. The issuance of preferred stock may also have the
effect of delaying, deferring or preventing a change in control of the
Company.
OPTIONS AND WARRANTS
As of the Record Date, there were options held by the Company's
employees and others to purchase an aggregate of 18,618,400 shares of the
Company's common stock at a weighted average exercise price of $1.20 per
share.
As of the Record Date, there were an aggregate of 11,970,889 issued and
outstanding warrants to purchase an aggregate of 11,970,889 shares of the
Company's common stock at a weighted average exercise price of $.64 per share
as follows:
o issued and outstanding warrants to purchase 5,789,428 shares
of the Company's common stock at a weighted average exercise
price of $0.15 per share;
o warrants issued during 2000 in connection with the sale of
Series C preferred stock to purchase up to 828,688 shares of
the Company's common stock at $4.57 per share, subject to
adjustment; and
o the Warrants to purchase up to 5,352,773 shares of the
Company's common stock at $0.564 per share, subject to
adjustment.
All of the warrants are currently exercisable. Of the outstanding
options, 16,327,764 options are now exercisable at a weighted average
exercise price of $1.26 per share, and the rest become exercisable at
various times over the next three years.
The exercise price of the warrants issued in connection with the Series
C preferred stock and the Warrants are subject to adjustment upon:
o the issuance of shares of common stock, or options or other
rights to acquire common stock, at an issuance price lower
than the exercise price under the warrants;
o the declaration or payment of a dividend or other
distribution on the Company's common stock;
o the issuance of any other of the Company's securities on a
basis which would otherwise dilute the purchase rights
granted by the warrants.
The exercise price of the warrants issued in connection with the
Series C preferred stock may be paid in cash, in shares of common stock or
by surrendering other warrants. The exercise price of the Warrants must be
paid in cash, however, if at any time after one year from the date of
issuance of the Warrants there is not an effective registration statement
registering the underlying shares, the warrant exercise price may be made by
means of a cashless exercise.
CONVERTIBLE EXCHANGEABLE DEBENTURES
As of the Record Date, the Company had outstanding Debentures, which
are convertible into shares of the Company's common stock or exchangeable
for shares of Digital Angel Corporation (AMEX:DOC) common stock owned by the
Company, or a combination thereof, at any time at the Purchasers' option.
The Company currently owns 19.6 million shares of Digital Angel
Corporation's common stock, or approximately 73% of the shares outstanding
of Digital Angel Corporation's common stock as of June 30, 2003. The
conversion price for the Company's common stock is $0.515 per share (also
known as the Set Price), subject to anti-dilution provisions. The exchange
price for the Digital Angel Corporation common stock held by the Company,
for each individual holder of Debentures, subject to anti-dilution
provisions, is $2.20 per share as to the first fifty percent (50%) of the
original principal amount of the Debentures and $4.25 per share as to the
remaining fifty percent (50%) of the original principal amount; such fifty
percent calculation being made on the basis of each individual Debenture
holder's principal amount of Debentures purchased.
6
The Company is required to pay interest at the rate of 8.5% per annum
on a quarterly basis beginning September 1, 2003, and, beginning on November
1, 2003, on a monthly basis as to the principal amount required to be
redeemed ($0.4 million) each month. A final interest payment is due on the
maturity date. Interest payments may be made in either cash or in shares of
Digital Angel Corporation's common stock, or a combination thereof at the
Company's option, subject to certain restrictions. The interest conversion
rate for the Digital Angel Corporation common stock is calculated based upon
90% of the average of the lowest 10 of the 20 latest volume-weighted average
daily stock prices immediately prior to the applicable interest payment
date, subject to a late payment adjustment. Principal redemption payments of
$0.4 million are due monthly beginning November 1, 2003. The principal
redemption payments may be made in cash, the Company's common stock or
Digital Angel Corporation's common stock at the Company's option, subject to
certain limitations regarding the average market value and trading volume of
the Digital Angel Corporation common stock. The conversion/exchange
redemption prices are based upon the lesser of (1) ninety percent (90%) of
the lowest 10 of the 20 volume-weighted average daily stock prices prior to
the redemption date, and (2) the Set Price/exchangeable prices, subject to
anti-dilution provisions.
As collateral for the Debentures and under the terms of a Security
Agreement, the Company and its wholly-owned subsidiary Computer Equity
Corporation have granted to the Purchasers a security interest in all of
their accounts receivable, and under the terms of a Pledge Agreement, the
Company has granted to the Purchasers a security interest in up to 15.0
million shares of the Digital Angel Corporation common stock it currently
owns.
So long as any portion of the Debentures remains outstanding, the
Company shall not declare or pay any dividend on its common stock in the
form of cash or in the form of shares of Digital Angel Corporation common
stock owned by the Company.
Subject to certain exempt transactions, including among others the
issuances of shares in connection with stock options, share issuances under
certain severance agreements (subject to shareholder approval), exercises of
warrants currently outstanding including the Warrants, the conversion of the
Debentures and issuances of shares for acquisitions or strategic
investments, the Company cannot, under the terms of the Agreement incur,
create, guarantee, assume or to otherwise become liable on account of any
indebtedness other than with a federally regulated financial institution or
to increase any amounts owing under any existing obligations or to issue or
sell shares of its common stock or equivalents until ninety (90) days after
the effective date of the registration statement registering the Company's
common shares underlying the Debentures and Warrants. In addition, each
Purchaser has the right of first refusal with regard to any financings made
by the Company in shares of its common stock or common stock equivalents
until such time as the Purchaser no longer holds any Debentures. No
indebtedness of the Company is senior to the Debentures in right of payment
other than indebtedness secured by purchase money securities and in that
case only as to the underlying assets covered thereby.
Under the terms of the Debentures, failure to make timely interest or
principal redemption payments, commencement of bankruptcy against the
Company, failure of the Company's common stock to be eligible for quotation
on or quoted for trading on a principal market as defined, and a change in
control as defined, among others, constitute events of default.
- ----------------------------------------------------------------------------
APPROVAL OF THE ISSUANCE OF UP TO 30,000,000 SHARES OF THE COMPANY'S COMMON
STOCK AFTER EFFECTIVENESS OF THE COMPANY'S REGISTRATION STATEMENT ON FORM
S-1 (FILE NO. 333-106300), WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JUNE 20, 2003, WHICH SHARE AMOUNT WHEN COMBINED WITH THE
ISSUANCE OF THE DEBENTURES, WARRANTS AND COMMON STOCK ISSUED PURSUANT TO THE
SECURITIES PURCHASE AGREEMENTS, REPRESENTS MORE THAN 20% OF THE OUTSTANDING
STOCK OF THE COMPANY ON A PRE-TRANSACTION BASIS
(ITEM 2)
BACKGROUND
On June 20, 2003, the Company filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission (File No. 333-106300),
whereby it proposes to offer up to 30,000,000 shares of its common, par
value $.001 per share. As part of the offering the Company had entered into
a placement agency agreement with J.P. Carey Securities Inc., a registered
broker-dealer, under which J.P. Carey Securities, Inc. agreed to act as the
7
Company's underwriter on a "best efforts" basis in connection with the offer
and sale of the shares. A "best efforts" underwriting means that J.P. Carey
Securities, Inc. is not obligated to purchase any of the shares offered.
J.P. Carey Securities, Inc. is an "underwriter" within the meaning of
Section 2(a)(11) of the Securities Act of 1933. The Company has agreed to
pay J.P. Carey Securities, Inc. a fee of 3% of the gross subscription
proceeds of the shares sold to purchasers identified (or deemed to be
identified) to the Company by J.P. Carey Securities, Inc. Notwithstanding
its agreement with J.P. Carey Securities, Inc., the Company has the right to
retain other broker-dealers to advise and assist in the distribution of
shares in the offering. There is no minimum number of shares that must be
sold in the offering. Under the terms of the agreements related to the
Debentures, the Company is not permitted to sell the 30,000,000 shares for
less than $0.35 per share.
Nasdaq rules generally require shareholder approval for the issuance of
securities representing 20% or more of an issuer's outstanding listed
securities. Nasdaq has taken the position that the offering of the
30,000,000 shares should be combined with the sale of the Company's
50,000,000 shares under the Securities Purchase Agreements, and with the
issuance of shares, if any, upon the conversion of the Debentures, and that
all such issuances should be treated as one transaction for determining the
20% threshold. The Company had 286,053,403 shares of its common stock
outstanding just prior to the initial issuance of shares under the
Securities Purchase Agreements. Therefore, 57,210,680 shares are equal to
20% of the outstanding shares of the Company on a pre-transaction basis.
Thus, any issuance of common stock under the 30,000,000 share offering would
result in the issuance of securities representing 20% or more of the
Company's common stock under Nasdaq's rules, assuming that more than
7,210,680 shares are issued upon conversion of the Debentures or exercise of
the Warrants.
If the Company obtains shareholder approval, the number of shares that
could be issued under the offering would not be limited by the Nasdaq rule
limiting the issuance of 20% or more of the Company's common stock. If the
Company does not obtain shareholder approval and is unable to issue these
shares because of restrictions relating to the Nasdaq rules, the Company may
be unable to fund all of the intended uses for the net proceeds anticipated
from this offering without obtaining funds from alternative sources or using
cash, if any, generated by its operations. The Company intends to use the
funds for repayment of outstanding indebtedness and for general corporate
purposes, which may include requirements for working capital (i.e. research
and development) and requirements for sales and marketing and capital
expenditures. If substantially less than the maximum shares being offered
are sold, the Company will not use any of the proceeds for payment of
outstanding indebtedness, but rather would apply the proceeds raised to
working capital requirements. Alternative sources of funds may not be
available to the Company at a reasonable cost.
Required Vote
- -------------
The affirmative vote of a majority of the shares voting at the Meeting
is required to approve the issuance of up to 30,000,000 shares of the
Company's common stock after effectiveness of the Company's registration
statement on Form S-1 (File No. 333-106300), which was filed with the
Securities and Exchange Commission on June 20, 2003, which share amount when
combined with the issuance of the Debentures, Warrants and common stock
issued pursuant to the Securities Purchase Agreements, represents more than
20% of the outstanding common stock of the Company on a pre-transaction
basis.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE
OF UP TO 30,000,000 SHARES OF THE COMPANY'S COMMON STOCK AFTER EFFECTIVENESS
OF THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-106300),
WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20,
2003, WHICH SHARE AMOUNT WHEN COMBINED WITH THE ISSUANCE OF THE DEBENTURES,
WARRANTS AND COMMON STOCK ISSUED PURSUANT TO THE SECURITIES PURCHASE
AGREEMENTS, REPRESENTS MORE THAN 20% OF THE OUTSTANDING COMMON STOCK OF THE
COMPANY ON A PRE-TRANSACTION BASIS. UNLESS A CONTRARY CHOICE IS SPECIFIED,
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR APPROVAL OF
THE ISSUANCE OF UP TO 30,000,000 SHARES OF THE COMPANY'S COMMON STOCK AFTER
EFFECTIVENESS OF THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO.
333-106300), WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
JUNE 20, 2003, WHICH SHARE AMOUNT WHEN COMBINED WITH THE ISSUANCE OF THE
8
DEBENTURES, WARRANTS AND COMMON STOCK ISSUED PURSUANT TO THE SECURITIES
PURCHASE AGREEMENTS, REPRESENTS MORE THAN 20% OF THE OUTSTANDING COMMON
STOCK OF THE COMPANY ON A PRE-TRANSACTION BASIS.
See Page 5 of this proxy statement, "DESCRIPTION OF CAPITAL STOCK"
9
APPROVAL OF THE GRANTING OF DISCRETIONARY AUTHORITY TO THE BOARD OF
DIRECTORS, FOR A PERIOD OF TWELVE MONTHS AFTER THE DATE THE COMPANY'S
SHAREHOLDERS APPROVE THIS PROPOSAL, TO APPROVE A REVERSE STOCK SPLIT IN A
RATIO NOT TO EXCEED 1-FOR-25, TO DETERMINE THE EFFECTIVE DATE OF THE REVERSE
STOCK SPLIT, AND TO FILE AN AMENDMENT TO THE COMPANY'S THIRD RESTATED
ARTICLES OF INCORPORATION, AS AMENDED, EFFECTING THE REVERSE STOCK SPLIT, OR
TO DETERMINE NOT TO PROCEED WITH THE REVERSE STOCK SPLIT.
(ITEM 3)
OVERVIEW OF THE REVERSE STOCK SPLIT
You are being asked to vote on an amendment to the Company's Third
Restated Articles of Incorporation, as amended, to effect a reverse stock
split of all of the issued and outstanding shares of the Company's Common
stock, and for the granting of discretionary authority to the Board of
Directors for a period of twelve months after the date the Company's
shareholders approve this proposal to determine the reverse stock split
ratio, not to exceed a ratio of 1-for-25, and the effective date of the
reverse stock split, or to determine not to proceed with the reverse stock
split. The Board of Directors has adopted a resolution approving, and
recommending to the Company's shareholders for their approval a proposal to
amend the Company's Third Restated Articles of Incorporation, as amended, to
effect a reverse stock split.
If the Company's shareholders approve the proposal to amend the Third
Restated Articles of Incorporation, as amended, to effect a reverse stock
split as outlined above, and should the Board of Directors determine to
proceed with the reverse stock split, the Company will file a Certificate of
Amendment to its Third Restated Articles of Incorporation, as amended, with
the Secretary of State of the State of Missouri as soon as possible after
the Boards' decision and the par value of the Company's common stock will be
increased proportionately. Upon the Board's decision to effect a reverse
stock split, the number of authorized shares of common stock may be reduced
at the Board's discretion; however, such reduction may not represent a
proportional reduction of authorized shares based upon the actual reverse
stock split ratio. The reverse stock split will not change the number of
authorized shares of preferred stock, or the par value of the Company's
preferred stock.
From March 26, 2002 through the Record Date, the Company's shareholders
of record have increased from 2,105 to 2,489 or by approximately 18%.
REASONS FOR THE REVERSE STOCK SPLIT
The Company's Board of Directors currently believes that it should
implement a reverse stock split to reduce the number of issued and
outstanding shares, which are a result, in part, of the Company's past
acquisitions, the payment of debt obligations to IBM Credit LLC and
preferred stock conversions. In addition, the Company's Board of Directors
believes that a reverse stock split will facilitate the continued listing of
the Company's common stock on the Nasdaq SmallCap Market and may enhance the
desirability and marketability of the Company's common stock to the
financial community and the investing public. This proposal is not being
made in connection with any going private transaction, nor does management
currently have any intention to effectuate the privatization of the Company.
If the Company effects the reverse stock split, the Company's Board of
Directors believes that the resulting reduction in the number of issued and
outstanding shares of the Company's common stock will better reflect the
current market environment, will be more consistent with comparable
technology companies and may encourage greater interest in the Company's
common stock by the investment community. The Company's Board of Directors
believes that the current market price of the Company's common stock may
impair its acceptability to institutional investors, professional investors
and other members of the investing public. Many institutional investors have
policies prohibiting them from holding lower-priced stocks in their own
portfolios, which reduces the number of potential buyers of the Company's
common stock. In addition, analysts at many leading brokerage firms are
reluctant to recommend lower-priced stocks to their clients or monitor the
activity of lower-priced stocks. A variety of brokerage
10
house policies and practices also tend to discourage individual brokers
within those firms from dealing in lower-priced stocks. Some of those
policies and practices pertain to the payment of brokers' commissions and to
time-consuming procedures that function to make the handling of lower-priced
stocks unattractive to brokers from an economic standpoint. The Company's
Board of Directors believes that if the reverse stock split has the effect
of raising the trading price of the Company's common stock, this will
increase the attractiveness of the Company's common stock to the investment
community.
The Company's common stock is quoted on the Nasdaq SmallCap Market. To
be quoted on the Nasdaq SmallCap Market, among other things, a company's
common stock must maintain a minimum bid price of $1.00 per share. The
Company's common stock has traded on the Nasdaq SmallCap Market since
November 12, 2002. To maintain its SmallCap listing, the Company must
continue to comply with the SmallCap's listing requirements and, on or
before October 25, 2003 have regained the minimum bid requirement of at
least $1.00 per share for a minimum of ten (10) consecutive trading days.
The Company's Board of Directors believes that the reverse stock split will
facilitate regaining compliance with the Nasdaq SmallCap Market minimum
bid-price listing requirement (and possibly a relisting on the Nasdaq
National Market) by causing an increase in the minimum bid price of the
Company's common stock to above the $1.00 per share minimum, although the
Company cannot assure you that this will occur. If the Company does not
regain compliance, and the Company's common stock is delisted from the
Nasdaq SmallCap Market, trading in the Company's common stock, if any, would
have to be conducted on, the OTC Bulletin Board or in the non-Nasdaq
over-the-counter market (or "pink sheet" market). This could significantly
decrease the liquidity of the Company's common stock and result in a default
under the terms of the Debentures.
There can be no assurance that the reverse stock split will result in
the benefits described above under the heading "Reasons for the Reverse
Stock Split." Specifically, there can be no assurance that the market price
of the Company's common stock immediately after the effective date of the
proposed reverse stock split would be maintained for any period of time or
that such market price would approximate the multiple of the stock split
ratio times the market price of the Company's common stock before the
reverse stock split. Accordingly, the total market capitalization of the
Company's common stock after the proposed reverse stock split may be lower
than the total market capitalization before the proposed reverse stock split
and, in the future, the market price of the Company's common stock following
the reverse stock split may not exceed or remain higher than the current
market price. In many cases, the total market capitalization of a company
following a reverse stock split is lower than the total market
capitalization before the reverse stock split. The Company cannot assure you
that the reverse stock split will not further adversely impact the market
price of the Company's common stock.
Furthermore, the Company cannot assure you that the reverse stock split
will result in a per share price that will attract institutional investors
and brokers. While the Company's Board of Directors believes that a higher
stock price may help generate investor interest, there can be no assurance
that the reverse stock split will result in a per share price that will
attract institutional investors and brokers.
RISKS ASSOCIATED WITH THE REVERSE STOCK SPLIT
This proxy statement includes forward-looking statements including
statements regarding the Company's intent to solicit approval of a reverse
stock split, the timing of the proposed reverse stock split, and the
potential benefits of a reverse stock split, including but not limited to
increased investor interest, continued listing on the Nasdaq SmallCap
Market, the possible relisting on the Nasdaq National Market, and the
potential for a higher stock price. The words "believe," "expect," "will,"
"may" and similar phrases are intended to identify such forward-looking
statements. Such statements reflect the current views and assumptions of the
Company, and are subject to various risks and uncertainties that could cause
actual results to differ materially from expectations. These risks include
but are not limited to risks relating to the volatility of the Company's
stock price, general market and economic conditions and risks related to the
development of the Company's business model. For a discussion of these and
other risk factors that could affect the Company's business, see "RISK
FACTORS" in the Company's filings with the Securities and Exchange
Commission, including its Form 10-K/A filed on March 31, 2003, as amended on
April 4, 2003 and June 3, 2003, its Form 10-Q filed on May 14, 2003 and its
Form S-1 filed on June 20, 2003.
11
IMPLEMENTATION AND EFFECTS OF THE REVERSE STOCK SPLIT
If the Company's shareholders approve the reverse stock split proposal
and the Company's Board of Directors implement the reverse stock split,
which the Company's Board of Directors may choose not to do at their
discretion, the reverse stock split would have the following effects:
o every X shares of the Company's common stock owned by a
shareholder will automatically be changed into and become one
new share of the Company's common stock, with X being equal
to the exchange stock ratio as determined by the Company's
Board of Directors;
o a proportionate adjustment will be made to the par value of
the Company's common stock, such that the stated value of the
Company's capital will remain unchanged;
o the number of shares of the Company's common stock issued and
outstanding will be reduced proportionately;
o proportionate adjustments will be made to the per share
exercise price and the number of shares issuable upon the
exercise of all outstanding options and warrants entitling
the holders thereof to purchase shares of the Company's
common stock, which will result in approximately the same
aggregate price being required to be paid for such options or
warrants upon exercise of such options or warrants
immediately preceding the reverse stock split;
o a proportionate adjustment will be made to the per share
conversion price under the terms of the Company's 8.5%
Convertible Exchangeable Debentures;
o the number of shares reserved for issuance under our existing
stock option plans and employee stock purchase plans, and
severance agreements will be reduced proportionately based on
the reverse stock split ratio.
The table set forth below illustrates the Company's hypothetical
capitalization subsequent to reverse stock splits in varying ratios with the
ratio of 1-for-25 being the maximum ratio which may be effectuated by the
Board of Directors pursuant to this proposal.
SHARES OF COMMON
STOCK AUTHORIZED IF SHARES OF COMMON STOCK
SHARES OF COMMON AND UNRESERVED AUTHORIZED AND UNRESERVED
SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE FOR ISSUANCE FOLLOWING
STOCK ISSUED AND AND RESERVED FOR FOLLOWING REVERSE REVERSE SPLIT ARE
OUTSTANDING ISSUANCE SPLIT ARE NOT PROPORTIONALLY REDUCED(1)
FOLLOWING REVERSE FOLLOWING PROPORTIONATELY
HYPOTHETICAL REVERSE STOCK SPLIT RATIO SPLIT REVERSE SPLIT REDUCED(1)
1-for-5 reverse split 70,425,483 34,215,053 455,359,464 7,359,464
1-for-15 reverse split 23,475,161 11,405,018 525,119,821 2,453,155
1-for-25 reverse split (maximum) 14,085,097 6,843,011 539,071,893 1,471,893
<FN>
(1) If the Board of Directors, in its discretion, elects to effect a
reverse split of the Company's common stock, it intends to reduce the
authorized number of shares of common stock. However, such reduction of
authorized shares may not be proportionate to the reverse stock split ratio.
12
The reverse stock split will be effected simultaneously for all of the
Company's common stock and the exchange number will be the same for all of
the Company's common stock. The reverse stock split will affect all of the
Company's shareholders uniformly and will not affect any shareholder's
percentage ownership interests in the Company, except to the extent that the
reverse stock split results in any of the Company's shareholders owning a
fractional share. As described below, shareholders holding fractional shares
will be entitled to cash payments in lieu of such fractional shares. Such
cash payments will reduce the number of post-split shareholders to the
extent there are shareholders presently holding fewer shares than the to be
determined exchange ratio, however, is not the purpose for which the Company
is effecting the reverse stock split. The Company will continue to be
subject to the periodic reporting requirements of the Securities and
Exchange Act of 1934, as amended.
The Company's Board of Directors may decide not to proceed with a
reverse stock split for various reasons including, among others, an increase
in the Company's stock price above Nasdaq's minimum bid price requirement,
an elimination of the minimum bid price requirement by Nasdaq and general
stock market/business conditions.
POTENTIAL FOR SIGNIFICANT DILUTION OF EQUITY INTEREST
The proposed reverse stock split will not affect the rights of
shareholders or any shareholder's proportionate equity interest in the
Company (subject to the treatment of fractional shares), and the number of
authorized shares will most likely be reduced by the Board of Directors.
However, if the Board of Directors determined not to reduce the number of
authorized shares, this will increase significantly the ability of the Board
of Directors to issue authorized but previously unissued shares without
further shareholder action. At this time the Company has no plans to issue
such additional shares, other than (i) as discussed in Items 1 and 2 above,
(ii) in connection with the Company's severance agreements with its former
executive officers for which shareholder approval was previously obtained at
the Company's 2003 Annual Meeting of shareholders, and (iii) in connection
with a potential acquisition of additional shares of our majority-owned
subsidiary, Digital Angel Corporation.
The Board of Directors' ability to issue additional shares is, however,
subject to the requirements of the Nasdaq Smallcap Market which will require
shareholder approval for certain issuances of securities. For example,
Nasdaq Marketplace Rules require that the Company, subject to certain
exceptions, obtain shareholder approval prior (among other things) to the
issuance of additional shares in connection with certain stock options or
purchase plans, certain acquisitions of stock or assets of another company,
transactions that would result in a change of control of the Company and
transactions where the Company would issue 20% or more of its common stock
(or voting power) outstanding before such issuance at a price that is less
than the greater of book value or market value of the common stock.
The future issuance of such authorized shares may have the effect of
diluting the earnings per share and book value per share, as well as the
stock ownership and voting rights, of the currently outstanding shares of
common stock. The effective increase in the number of authorized but
unissued shares of common stock may be construed as having an anti-takeover
effect by permitting the issuance of shares to purchasers who might oppose a
hostile takeover bid or oppose any efforts to amend or repeal certain
provisions of the Company's Third Restated Articles of Incorporation, as
amended, or By-laws.
FRACTIONAL SHARES
No scrip or fractional share certificates will be issued in connection
with the reverse stock split. Shareholders who otherwise would be entitled
to receive fractional shares because they hold a number of shares of the
Company's common stock not evenly divisible by the exchange ratio will be
entitled, upon surrender of certificate(s) representing such shares, to a
cash payment in lieu thereof. The cash payment will equal the product
obtained by multiplying (a) the fraction to which the stockholder would
otherwise be entitled by (b) the per share closing sales price of the
Company's common stock on the effective date of the reverse stock split as
reported on the Nasdaq SmallCap Market. The ownership of a fractional
interest will not give the holder thereof any voting, dividend or other
rights except to receive payment therefor as described herein.
Shareholders should be aware that, under the escheat laws of the
various jurisdictions where shareholders reside, where the Company is
domiciled and where the funds will be deposited, sums due for fractional
interests that are not timely claimed after the effective time may be
required to be paid to the designated agent for each such jurisdiction.
Thereafter, shareholders otherwise entitled to receive such funds may have
to seek to obtain them directly from the state to which they were paid.
13
AUTHORIZED SHARES
The reverse stock split may result in a change in the number of
authorized shares of the Company's common stock at the discretion of the
Company's Board of Directors. Note, however that any reduction might not be
in proportion to the reverse stock split ratio. Therefore, because the
number of authorized shares of the Company's common stock may not decrease
proportionally (if at all) to the number of shares of the Company's common
stock issued and outstanding, the number of shares remaining available for
future issuance under the Company's authorized pool of common stock would
increase. In addition, the Company will continue to have 5,000,000
authorized but unissued and undesignated shares of preferred stock.
These authorized unissued shares of common and preferred stock would be
available for issuance from time to time for corporate purposes such as
raising additional capital, acquisitions of companies or assets and sales of
stock or securities convertible into common stock. The Company believes that
the availability of the authorized unissued shares will provide it with the
flexibility to meet business needs as they arise, to take advantage of
favorable opportunities and to respond to a changing corporate environment.
If the Company issues additional shares, the ownership interests of holders
of the Company's common stock may be diluted. Also, if the Company issues
shares of its preferred stock, the issued shares may have rights,
preferences and privileges senior to those of its common stock.
OTHER EFFECTS ON ISSUED AND OUTSTANDING SHARES
If a reverse stock split is implemented, the rights and preferences of
the issued and outstanding shares of the Company's common stock would remain
the same after the reverse stock split. Each share of common stock issued
pursuant to the reverse stock split would be fully paid and nonassessable.
In addition, the reverse stock split would result in some shareholders
owing "odd-lots" of fewer than 100 shares of the Company's common stock.
Brokerage commissions and other costs of transactions in odd-lots are
generally higher than the costs of transactions in "round-lots" of even
multiples of 100 shares.
ACCOUNTING MATTERS
The reverse stock split will increase the par value of the Company's
common stock on a proportional basis. Accordingly, on the effective date of
the reverse stock split, the stated capital on the Company's balance sheet
attributable to the Company's common stock will not change. The per share
net income or loss and net book value of the Company's common stock will be
increased because there will be fewer shares of the Company's common stock
outstanding.
POTENTIAL ANTI-TAKEOVER EFFECT
Although the potential number of authorized but unissued shares of the
Company's common stock available to be issued may, under certain
circumstances, have an anti-takeover effect (for example, by permitting
issuances that would dilute the stock ownership of a person seeking to
effect a change in the composition of the Company's Board of Directors or
contemplating a tender offer or other transaction for the combination of the
Company with another company), this proposal is not being made in response
to any effort of which the Company is aware to accumulate the Company's
shares of common stock or obtain control of the Company, nor is it part of a
plan by management to recommend a series of similar amendments to the
Company's Board of Directors and shareholders. Other than this proposal, the
Company's Board of Directors does not currently contemplate recommending the
adoption of any other amendments to the Company's Third Restated Articles of
Incorporation, as amended, that could be construed to affect the ability of
third parties to take over or change the control of the Company.
PROCEDURE FOR EFFECTING REVERSE STOCK SPLIT AND EXCHANGE OF STOCK CERTIFICATES
If the shareholders approve the reverse stock split proposal, the
Company intends to implement the reverse stock split as soon as possible
thereafter, although the Board of Directors may decide in their sole
discretion not to effect or to postpone the reverse stock split. The reverse
stock split and reduction in the number of authorized shares of the
Company's common stock would be implemented by filing a Certificate of
Amendment to the Company's Third Restated Articles of Incorporation, as
amended, with the Secretary of State of the State of Missouri. The reverse
stock
14
split will become effective at the time specified in the Certificate of
Amendment, which will most likely be immediately after the filing of the
Certificate of Amendment and which the Company refers to as the "effective
time." Beginning at the effective time, each certificate representing shares
of the Company's common stock before the reverse stock split will
automatically be deemed for all corporate purposes to evidence ownership
based on the stock split ratio, not to exceed a ratio of 1-for-25 shares of
the Company's common stock after the reverse stock split. All shares
issuable upon exercise or conversion of outstanding options, warrants or
other securities will automatically be adjusted.
As soon as practicable after the effective time, shareholders will be
notified that the reverse stock split has been effected. The Company expects
that its transfer agent, The Registrar & Transfer Co., will act as exchange
agent for purposes of implementing the exchange of stock certificates.
Shareholders of record will receive a letter of transmittal requesting that
they surrender the stock certificates they currently hold for stock
certificates reflecting the adjusted number of shares as a result of the
reverse stock split. Persons who hold their shares in brokerage accounts or
"street name" will not be required to take any further actions to effect the
exchange of their certificates. No new certificates will be issued to a
shareholder until the shareholder has surrendered the shareholder's
outstanding certificate(s) together with the properly completed and executed
letter of transmittal to the exchange agent. Until surrender, each
certificate representing shares before the reverse stock split will continue
to be valid and will represent the adjusted number of shares rounded down to
the nearest whole share. SHAREHOLDERS SHOULD NOT DESTROY ANY STOCK
CERTIFICATE AND SHOULD NOT SUBMIT ANY CERTIFICATES UNTIL THEY RECEIVE A
LETTER OF TRANSMITTAL.
NO DISSENTERS' RIGHTS
Under the Missouri General Corporation Law, the Company's shareholders
are not entitled to dissenters' rights with respect to the reverse stock
split, and the Company will not independently provide shareholders with any
such right.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following is a summary of certain material United States federal
income tax consequences of the reverse stock split. It does not purport to
be a complete discussion of all of the possible United States federal income
tax consequences of the reverse stock split and is included for general
information only. Further, it does not address any state, local or foreign
income or other tax consequences. This discussion does not address the tax
consequences to holders that are subject to special tax rules, such as
banks, insurance companies, regulated investment companies, personal holding
companies, foreign entities, nonresident alien individuals, broker-dealers
and tax-exempt entities. The discussion is based on the provisions of the
United States federal income tax law as of the date hereof, which is subject
to change retroactively as well as prospectively. This summary also assumes
that the shares of our common stock held by our shareholders before the
reverse stock split were, and the shares of our common stock held after the
reverse stock split will be, held as "capital assets," as defined in the
Internal Revenue Code of 1986, as amended, or the "Code" (i.e., generally,
property held for investment). The tax treatment of a shareholder may vary
depending upon the particular facts and circumstances of such shareholder.
Each shareholder is urged to consult with such shareholder's own tax advisor
with respect to the tax consequences of the reverse stock split.
Other than the cash payments for fractional shares discussed below, no
gain or loss will be recognized by a shareholder upon such shareholder's
exchange of shares held before the reverse stock split for shares after the
reverse stock split. The aggregate tax basis of the shares of the Company's
common stock received in the reverse stock split (including any fraction of
a share deemed to have been received) will be the same as the shareholder's
aggregate tax basis in the shares of our common stock exchanged therefor. In
general, shareholders who receive cash instead of their fractional share
interests in the shares of our common stock as a result of the reverse stock
split will recognize gain or loss based on their adjusted basis in the
fractional share interests redeemed. The shareholder's holding period for
the shares of our common stock after the reverse stock split will include
the period during which the shareholder held the shares of our common stock
surrendered in the reverse stock split.
This summary of certain material United States federal income tax
consequence of the reverse stock split is not binding on the Internal
Revenue Service or the courts. Accordingly, each shareholder should consult
with his or her own tax advisor with respect to all of the potential tax
consequences to him or her of the reverse stock split.
15
Required Vote
- -------------
The affirmative vote of the holders of a majority of the outstanding
shares of the Company's common stock is required to approve the amendment to
the Company's Third Restated Articles of Incorporation, as amended, to
effect a reverse stock split of the Company's common stock, and granting of
discretionary authority to the Board of Directors for a period of twelve
months after the date the Company's shareholders approve this proposal to
determine the reverse stock split ratio and the effective date of the
reverse stock split or to determine not to proceed with the reverse stock
split.
The text of the proposed amendment to the Company's Third Restated
Articles of Incorporation, as amended, is set forth as Exhibit "A" to this
Proxy Statement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE GRANTING OF
DISCRETIONARY AUTHORITY TO THE BOARD OF DIRECTORS, FOR A PERIOD OF TWELVE
MONTHS AFTER THE DATE THE COMPANY'S SHAREHOLDERS APPROVE THIS PROPOSAL, TO
APPROVE A REVERSE STOCK SPLIT IN A RATIO NOT TO EXCEED 1-FOR-25, TO
DETERMINE THE EFFECTIVE DATE OF THE REVERSE STOCK SPLIT, AND TO FILE AN
AMENDMENT TO THE COMPANY'S THIRD RESTATED ARTICLES OF INCORPORATION, AS
AMENDED, EFFECTING THE REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK, OR
TO DETERMINE NOT TO PROCEED WITH THE REVERSE STOCK SPLIT. UNLESS A CONTRARY
CHOICE IS SPECIFIED, PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE
VOTED FOR APPROVAL OF THE GRANTING OF DISCRETIONARY AUTHORITY TO THE BOARD
OF DIRECTORS, FOR A PERIOD OF TWELVE MONTHS AFTER THE DATE THE COMPANY'S
SHAREHOLDERS APPROVE THIS PROPOSAL, TO APPROVE A REVERSE STOCK SPLIT IN A
RATIO NOT TO EXCEED 1-FOR-25, TO DETERMINE THE EFFECTIVE DATE OF THE REVERSE
STOCK SPLIT, AND TO FILE AN AMENDMENT TO THE COMPANY'S THIRD RESTATED
ARTICLES OF INCORPORATION, AS AMENDED, EFFECTING THE REVERSE STOCK SPLIT, OR
TO DETERMINE NOT TO PROCEED WITH THE REVERSE STOCK SPLIT.
OWNERSHIP OF EQUITY SECURITIES IN THE COMPANY
The following table shows information regarding beneficial ownership of
the Company's common stock as of the Record Date:
o each of our directors and named executive officers; and
o all directors and executive officers as a group.
16
NUMBER OF
SHARES OF PERCENT OF
COMMON COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED (1) OWNED
------------ ------------
Scott R. Silverman
400 Royal Palm Way, Palm Beach, FL 33480 1,925,000 *%
Daniel E. Penni
260 Eliot Street, Ashland, MA 01721 1,949,065 *
Dennis G. Rawan
400 Royal Palm Way, Palm Beach, FL 33480 -- *
Constance K. Weaver
295 North Maple Ave, Basking Ridge, NJ 07920 1,223,000 *
Michael S. Zarriello
400 Royal Palm Way, Palm Beach, FL 33480 -- *
Kevin H. McLaughlin
400 Royal Palm Way, Palm Beach, FL 33480 402,333 *
Michael E. Krawitz
400 Royal Palm Way, Palm Beach, FL 33480 1,560,462 *
Evan C. McKeown
400 Royal Palm Way, Palm Beach, FL 33480 234,327 *
Peter Zhou
5750 Division Street, Riverside, CA 92506 352,526 *
All directors and executive officers as a
group (10 persons) 8,049,030 2.2%
<FN>
- ----------
* Represents less than 1% of the issued and outstanding shares of our common stock.
(1) This table includes presently exercisable stock options. The
following directors and executive officers hold the number of
exercisable options set forth following their respective names:
Scott R. Silverman - 1,925,000; Daniel E. Penni - 1,164,000;
Constance K. Weaver - 989,000; Kevin H. McLaughlin -391,333;
Michael E. Krawitz - 1,504,000; Evan C. McKeown - 233,334; Peter
Zhou - 329,000; and all directors and officers as a group -
6,909,667.
SHAREHOLDER PROPOSALS
Pursuant to the applicable rules under the Exchange Act, some
shareholder proposals may be eligible for inclusion in the Company's 2004
Proxy Statement. Proposals by shareholders intended to be included in the
Company's 2004 Proxy Statement must be submitted in writing to the Secretary
of the Company no later than February 11, 2004, or a reasonable time before
the Company begins to print and mail its proxy material. Shareholders
interested in submitting such a proposal are advised to contact
knowledgeable counsel with regard to the detailed requirements of such
securities rules. Proposals by shareholders to be presented at the Company's
2004 Annual Meeting (but not intended to be included in the Company's 2004
Proxy Statement) must be submitted in writing to the Secretary of the
Company no earlier than April 27, 2004 but no later than May 27, 2004, in
accordance with the Company's bylaws. Otherwise, the proxies named by the
Company's Board of Directors may exercise discretionary voting authority
with respect to the shareholder proposal, without any discussion of the
proposal in the Company's proxy material.
OTHER MATTERS
Other Matters. At the date hereof, there are no other matters which the
Board of Directors intends to present or has reason to believe others will
present at the Meeting. If other matters come before the Meeting, the
persons named in the accompanying form of proxy will vote in accordance with
their best judgment with respect to such matters.
Expenses of Solicitation. The expense of solicitation of proxies will
be borne by the Company. As of August 15, 2003, the Company has not retained
a proxy solicitor to solicit proxies, however the Company may choose to do
so prior to the Meeting. Proxies may also be solicited by certain of the
Company's directors, officers and other employees, without additional
compensation, personally or by written communication, telephone or other
electronic means. The Company is required to request brokers and nominees
who hold stock in their name to furnish the Company's proxy material to
beneficial owners of the stock and will reimburse such brokers and nominees
for their reasonable out-of-pocket expenses in so doing.
The form of Proxy and this Proxy Statement have been approved by
the Board of Directors and are being mailed and delivered to shareholders by
its authority.
MICHAEL E. KRAWITZ
Executive Vice President,
General Counsel and Secretary
Palm Beach, Florida
August 15, 2003
17
Exhibit "A"
Proposed Amendment to Third Restated Articles of Incorporation, as amended
AMENDMENT OF THIRD RESTATED
ARTICLES OF INCORPORATION
OF
APPLIED DIGITAL SOLUTIONS, INC.
Pursuant to the provisions of the General and Business Corporation Law
of Missouri, the undersigned corporation certifies the following:
1. The present name of the corporation is Applied Digital Solutions,
Inc. The name under which it was originally organized was Applied
Cellular Technology, Inc.
2. The following amendment to the corporation's Third Restated
Articles of Incorporation, as amended, was adopted by the
shareholders on September 10, 2003.
3. Article Three is hereby amended and restated to read in its
entirety as follows:
"ARTICLE THREE
--------------
The aggregate number of shares of all classes of stock which
the Corporation shall have authority to issue is ______________ (_________)
shares, of which Five Million (5,000,000) shares shall be preferred stock
("Preferred Stock") having a par value of $10.00 per share and _____________
(_________) shares shall be common stock ("Common Stock") having a par value
of $____ per share. A statement of the preferences, qualifications,
limitations, restrictions, and the special or relative rights, including
convertible rights, in respect of the shares of each class is as follows:
A. Preferred Stock.
Subject to the requirements of the laws of the State of
Missouri, authority is hereby vested in the Board of Directors from time to
time to issue ____________ shares of Preferred Stock in one or more series
and by resolution or resolutions as to each series:
(a) to fix the distinctive serial designation of the shares
of such series;
(b) to fix the rate per annum at which the holders of the
shares of such series shall be entitled to receive dividends, the dates on
which said dividends shall be payable, and, if the directors determine that
the dividends with respect to said series shall be cumulative, the date or
dates from which such dividends shall be cumulative;
(c) to determine whether the shares of such series shall have
voting power, and, if so, the extent and definition of such voting power;
(d) to fix the price or prices at which the shares of such
series may be redeemed, and to determine whether the shares of such series
may be redeemed in whole or in part or only as a whole;
(e) to fix the amounts payable on the shares of such series
in the event of liquidation, dissolution, or winding up of the Corporation;
18
(f) to determine whether or not the shares of any such series
shall be made convertible into or exchangeable for shares of any other class
or classes of stock of the Corporation or of any other series of Preferred
Stock and the conversion price or prices, or the rate or rates of exchange
at which such conversion or exchange may be made;
(g) to determine the amount of the sinking fund, purchase
fund, or any analogous fund, if any, to be provided with respect to each
such series; and
(h) to fix preferences and relative, participating, optional,
or other special rights, and qualifications, limitations or restrictions
thereof, applicable to each such series.
B. Common Stock.
Each share of Common Stock shall be identical with each other
share of Common Stock, except as the holders thereof shall otherwise
expressly agree in writing. Subject to the prior rights of the Preferred
Stock from time to time issued and outstanding, as hereinbefore set forth,
the holders of Common Stock shall be entitled to receive such sums as the
Board of Directors may from time to time declare as dividends thereon, or
authorize as distributions thereon, out of any sums available to be
distributed as dividends and to receive any balance remaining in case of the
dissolution, liquidation or winding up of the Corporation after satisfying
the prior rights of the Preferred Stock, if any be then outstanding. Each
share of Common Stock shall have one vote for all corporate purposes."
4. Of the ____________ shares of common stock currently outstanding,
____________ shares of common stock were entitled to vote on such
amendment.
5. The number of shares of common stock voted for and against the
amendment was as follows:
- -----------------------------------------------------------------------------------------------
Number of Shares Number of Shares
Voted For Voted Against
--------- -------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
6. The amount in dollars of authorized shares having a par value as
changed is $__________.
IN WITNESS WHEREOF, the undersigned, [President or Vice President] has
executed this instrument and its [Secretary or Assistant Secretary] has
affixed its corporate seal hereto and attested said seal on __________, 20.
[Corporate seal] Applied Digital Solutions, Inc.
By:
Name:
[President or Vice President]
19
Attest:
- -------
- ----------------------
Name:
---------------
[Secretary or Assistant Secretary]
State of )
------------------
) ss.
County of )
-----------------
I, , a Notary Public, do hereby certify that on
---------------
, 20, personally appeared before me
- ------------ --------------------------
who, being by me first duly sworn, declared that he/she is the
of Applied Digital Solutions, Inc., that he/she signed
- ------------------
the foregoing documents as , and that the statements therein
---------
contained are true.
[Notary seal]
-------------------------
Notary Public
My commission expires:
My county of commission:
20
APPENDIX A
NEITHER THESE SECURITIES NOR THE COMMON STOCK OF THE COMPANY INTO WHICH
THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
--------------
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY
A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE
OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND
THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES. THE PRINCIPAL AMOUNT REPRESENTED BY THIS DEBENTURE AND,
ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION OR EXCHANGE HEREOF MAY
BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF.
Date of Issuance: June 30, 2003
$
---------------
8.5% CONVERTIBLE EXCHANGEABLE DEBENTURE
DUE NOVEMBER 1, 2005
THIS DEBENTURE is one of a series of duly authorized and issued
Debentures of Applied Digital Solutions, Inc., a Missouri corporation,
having a principal place of business at 400 Royal Palm Way, Suite 410, Palm
Beach, FL 33480 (the "Company"), designated as its 8.5% Convertible
-------
Exchangeable Debenture, due November 1, 2005 (the "Debentures").
----------
FOR VALUE RECEIVED, the Company promises to pay to
or its registered assigns (the "Holder"), the
- ------------------------ ------
principal sum of $ on November 1, 2005 or such earlier date
---------------
as the Debentures are required to be repaid as provided hereunder (the
"Maturity Date") and to pay interest to the Holder on the aggregate
-------------
unconverted and then outstanding principal amount of this Debenture at the
rate of 8.5% per annum, payable quarterly on March 1, July 1, September 1
and December 1, beginning on September 1, 2003 and on each Monthly
Redemption Date (as to that principal amount then being redeemed) and on the
Maturity Date (except that, if any such date is not a Business Day, then
such payment shall be due on the next succeeding Business
1
Day) (each such date, an "Interest Payment Date"), in cash or DOC Shares, or
---------------------
any combination thereof, at the Interest Conversion Rate; provided, however,
-------- -------
payment in DOC Shares may only occur if on the Interest Payment Date and
during the 20 Trading Days prior to such date the DOC Equity Conditions have
been satisfied or waived by the Holder. Subject to the aforementioned
conditions, the decision whether to pay interest hereunder in DOC Shares or
cash shall be at the discretion of the Company. Not less than 20 Trading
Days prior to each Interest Payment Date, the Company shall provide the
Holder with written notice of its election to pay interest hereunder either
in cash or DOC Shares (the Company may indicate in such notice that the
election contained in such notice shall continue for later periods until
revised), or any specified combination thereof. Failure to timely provide
such written notice shall be deemed an election by the Company to pay the
interest on such Interest Payment Date in cash. Interest shall be calculated
on the basis of a 360-day year and shall accrue daily commencing on the
Original Issue Date until payment in full of the principal sum, together
with all accrued and unpaid interest and other amounts which may become due
hereunder, has been made. Payment of interest in DOC Shares shall otherwise
occur pursuant to Section 5(b), and for purposes of the payment of interest
in DOC Shares only, the Interest Payment Date shall be deemed the Conversion
Date. Interest shall cease to accrue with respect to any principal amount
converted, provided that the Company in fact delivers the Underlying Shares
or DOC Shares, as the case may be, within the time period required by
Sections 4(b)(i) and 5(b)(i), as applicable. Interest hereunder will be paid
to the Person in whose name this Debenture is registered on the records of
the Company regarding registration and transfers of Debentures (the
"Debenture Register"). Except as otherwise provided herein, if at anytime
------------------
the Company pays interest partially in cash and partially in DOC Shares,
then such payment shall be distributed ratably among the Holders based upon
the principal amount of Debentures originally purchased by each Holder. All
overdue accrued and unpaid interest to be paid hereunder shall entail a late
fee at the rate of 18% per annum (or such lower maximum amount of interest
permitted to be charged under applicable law) ("Late Fee") which will accrue
--------
daily, from the date such interest is due hereunder through and including
the date of payment. THE COMPANY MAY NOT PREPAY ANY PORTION OF THE PRINCIPAL
AMOUNT ON THIS DEBENTURE WITHOUT THE PRIOR WRITTEN CONSENT OF THE HOLDER.
This Debenture is subject to the following additional provisions:
Section 1) This Debenture is exchangeable for an equal aggregate
---------
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be
made for such registration of transfer or exchange.
Section 2) This Debenture has been issued subject to certain
---------
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement and applicable federal and state securities laws and
regulations. Prior to due presentment to the Company for transfer of this
Debenture, the Company and any agent of the Company (including the Trustee)
may treat the Person in whose name this Debenture is duly registered on the
Debenture Register as the owner hereof for the purpose of receiving payment
as herein provided and for all other purposes, whether or not this Debenture
is overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
2
Section 3) Events of Default.
--------- -----------------
a) "Event of Default", wherever used herein, means any
----------------
one of the following events (whatever the reason and whether it
shall be voluntary or involuntary or effected by operation of law
or pursuant to any judgment, decree or order of any court, or any
order, rule or regulation of any administrative or governmental
body):
i) any default in the payment of the principal
of, interest on or liquidated damages in respect of, any
Debentures, free of any claim of subordination, as and
when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or
otherwise) which default is not cured, if possible to
cure, within 5 Trading Days of notice of such default sent
by the Holder;
ii) the Company shall fail to observe or perform
any other material covenant, agreement or warranty
contained in, or otherwise commit any material breach of
any of the Transaction Documents (other than a breach by
the Company of its obligations to deliver shares of Common
Stock to the Holder upon conversion or interest payment
which breach is addressed in clause (x) below) which is
not cured, if possible to cure, within 10 Trading Days of
notice of such default sent by the Holder (within 5
Trading Days in the case of failure to deliver unlegended
Underlying Shares or shares of DOC Common Stock). For
clarity, any payment of cash dividends or a dividend in
the form of DOC Common Stock paid to the holders of Common
Stock shall be a material breach of covenant, or ;
iii) the Company or any of its Subsidiaries
shall commence, or there shall be commenced against the
Company or any such Subsidiary a case under any applicable
bankruptcy or insolvency laws as now or hereafter in
effect or any successor thereto, or the Company commences
any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of
any jurisdiction whether now or hereafter in effect
relating to the Company or any Subsidiary thereof or there
is commenced against the Company or any Subsidiary thereof
any such bankruptcy, insolvency or other proceeding which
remains undismissed for a period of 60 days; or the
Company or any Subsidiary thereof is adjudicated insolvent
or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or the
Company or any Subsidiary thereof suffers any appointment
of any custodian or the like for it or any substantial
part of its property which continues undischarged or
unstayed for a period of 60 days; or the Company or any
Subsidiary thereof makes a general assignment for the
benefit of creditors; or the Company shall fail to pay, or
shall state that it is unable to pay, or shall be unable
to pay, its debts generally as they become due; or the
Company or any Subsidiary thereof shall call a meeting of
its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or
3
the Company or any Subsidiary thereof shall by any act or
failure to act expressly indicate its consent to, approval
of or acquiescence in any of the foregoing; or any corporate
or other action is taken by the Company or any Subsidiary
thereof for the purpose of effecting any of the foregoing;
iv) the Company shall default in any of its
obligations under any other Debenture or any mortgage,
credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there
may be issued, or by which there may be secured or
evidenced any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement of
the Company in an amount exceeding $500,000, whether such
indebtedness now exists or shall hereafter be created and
such default shall result in such indebtedness becoming or
being declared due and payable prior to the date on which
it would otherwise become due and payable;
v) the Common Stock shall not be eligible for
quotation on or quoted for trading on the Nasdaq SmallCap
Market, New York Stock Exchange, American Stock Exchange
or the Nasdaq National Market (each, a "Principal Market")
----------------
and shall not again be eligible for and quoted or listed
for trading thereon within ten Trading Days;
vi) the Company shall be a party to any Change
of Control Transaction, shall agree to sell or dispose of
all or in excess of 50% of its assets in one or more
transactions (whether or not such sale would constitute a
Change of Control Transaction) or shall redeem or
repurchase more than a de minimis number of its
outstanding shares of Common Stock or other equity
securities of the Company (other than redemptions of
Underlying Shares);
vii) an Underlying Shares Registration Statement
shall not have been declared effective by the Commission
on or prior to the 150th calendar day after the Original
Issue Date;
viii) if, during the Effectiveness Period (as
defined in the Registration Rights Agreement), the
effectiveness of the Underlying Shares Registration
Statement lapses for any reason or the Holder shall not be
permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Underlying
Shares Registration Statement, in either case, for more
than 15 consecutive Trading Days or 20 non-consecutive
Trading Days during any 12 month period;
ix) an Event (as defined in the Registration
Rights Agreement) shall not have been cured to the
satisfaction of the Holder prior to the expiration of
thirty days from the Event Date (as defined in the
Registration Rights Agreement) relating
4
thereto (other than an Event resulting from a failure of an
Underlying Shares Registration Statement to be declared
effective by the Commission on or prior to the Effectiveness
Date (as defined in the Registration Rights Agreement), which
shall be covered by Section 3(a)(vii));
x) the Company shall fail for any reason to
deliver certificates to a Holder prior to the fifth
Trading Day after a Conversion Date pursuant to and in
accordance with Section 4(b) or the Company shall provide
notice to the Holder, including by way of public
announcement, at any time, of its intention not to comply
with requests for conversions of any Debentures in
accordance with the terms hereof;
xi) the Company shall fail for any reason to deliver
the payment in cash pursuant to a Buy-In (as defined herein)
within five Trading Days after notice thereof is delivered
hereunder; or
xii) the Company's (A) failure to use best efforts
to provide the Trustee with any documentation or information
reasonably requested by the Trustee to cause a transfer of
the DOC Shares to the Holder within 5 Trading Days after
an Exchange Date or (B) notice, written or oral, to any
holder of the Debentures, including by way of a public
announcement or through any of its agents, at any time, of
its intention not to comply with a request for exchange of
any Debentures into DOC Shares that are tendered for
exchange in accordance with the provisions of the
Debentures.
b) If any Event of Default occurs and is continuing, the
full principal amount of this Debenture (and, at the Holder's
option, all other Debentures then held by such Holder), together
with interest and other amounts owing in respect thereof, to the
date of acceleration shall become at the Holder's election,
immediately due and payable in cash. The aggregate amount payable
upon an Event of Default shall be equal to the Mandatory
Prepayment Amount. Interest shall accrue on the Mandatory
Prepayment Amount hereunder from the 5th day after such amount is
due (being the date of an Event of Default) through the date of
prepayment in full thereof in an amount equal to the Late Fee, to
accrue daily from the date such payment is due hereunder through
and including the date of payment. All Debentures for which the
full prepayment price hereunder shall have been paid in accordance
herewith shall promptly be surrendered to or as directed by the
Company. The Holder need not provide and the Company hereby waives
any presentment, demand, protest or other notice of any kind, and
the Holder may enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable
law. Such declaration may be rescinded and annulled by Holder at
any time prior to payment hereunder and the Holder shall have all
rights as a Debenture holder until such time, if any, as the full
payment under this Section shall have been received by it. No such
rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon.
5
Section 4) Conversions into Common Stock.
--------- -----------------------------
a) i) Conversions. At any time after the Closing Date,
-----------
this Debenture shall be convertible into shares of Common
Stock at the option of the Holder, in whole or in part at
any time and from time to time (subject to the limitations
on conversion set forth in Section 4(a)(ii) hereof). The
Holder shall effect conversions by delivering to the
Company the form of conversion notice attached hereto as
Annex A (a "Conversion Notice"), specifying therein the
------- -----------------
principal amount of Debentures to be converted and the
date on which such conversion is to be effected (a
"Conversion Date"). If no Conversion Date is specified in
---------------
a Conversion Notice, the Conversion Date shall be the date
that such Conversion Notice is provided hereunder. To
effect conversions hereunder, the Holder shall not be
required to physically surrender Debentures to the Company
unless the entire principal amount of this Debenture has
been so converted. Conversions hereunder shall have the
effect of lowering the outstanding principal amount of
this Debenture plus all accrued and unpaid interest
thereon in an amount equal to the applicable conversion.
The Holder and the Company shall maintain records showing
the principal amount converted and the date of such
conversions. In the event of any dispute as to the number
of Underlying Shares issuable to the Holder in connection
with a Conversion Notice, the Company shall issue to the
Holder the number of Underlying Shares not in dispute and
resolve such dispute in accordance with Section 11. The
Holder and any assignee, by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of
this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of
this Debenture may be less than the amount stated on the
face hereof.
ii) Certain Conversion Restrictions.
-------------------------------
(A) A Holder may not convert Debentures or
receive shares of Common Stock as payment of interest
hereunder to the extent such conversion or receipt
of such interest payment would result in the Holder,
together with its Affiliates, beneficially owning
(as determined in accordance with Section 13(d) of
the Exchange Act and the rules promulgated
thereunder) in excess of 4.99% of the then
issued and outstanding shares of Common Stock,
including shares issuable upon conversion of, and
payment of interest on, the Debentures held by such
Holder after application of this Section. The Holder
shall be entitled to rely on the Company's public
filings with respect to the number of shares
of Common Stock which are then issued and
outstanding, and the Holder may inquire of the
Company's Chief Financial Officer to obtain a more
current number, which shall be provided within 2
Business Days of written request therefor.
To ensure compliance with this restriction, the
Holder will be deemed to represent to the Company
each time it delivers a Conversion Notice that such
Conversion Notice has not violated the restrictions
set forth in this paragraph. If the Holder has
delivered a Conversion Notice for a principal
amount of Debentures that,
6
without regard to any other shares that the Holder
or its affiliates may beneficially own, would
result in the issuance in excess of the permitted
amount hereunder, the Company shall notify the
Holder of this fact and shall honor the conversion
for the maximum principal amount permitted to be
converted on such Conversion Date in accordance
with the periods described in Section 4(b) and, at
the option of the Holder, either retain any principal
amount tendered for conversion in excess of the
permitted amount hereunder for future conversions
or return such excess principal amount to the Holder.
In the event of a merger or consolidation of the
Company with or into another Person, this paragraph
shall not apply with respect to a determination of
the number of shares of common stock issuable upon
conversion in full of the Debentures if such
determination is necessary to establish the
Securities or other assets which the holder of
Common Stock shall be entitled to receive upon the
effectiveness of such merger or consolidation. The
provisions of this Section 4(a)(ii)(A) may be
waived by the Holder at the election of the Holder
upon not less than 61 days' prior notice to the
Company, and the provisions of this Section
4(a)(ii)(A) shall continue to apply until such 61st
day (or such later date, as determined by the
Holder, as may be specified in such notice of
waiver). No conversion of this Debenture in
violation of this Section 4(a)(ii)(A) but otherwise
in accordance with this Debenture shall affect the
status of the Underlying Shares as validly issued,
fully-paid and nonassessable.
(B) If the Company has not obtained
Shareholder Approval (as defined below), if
required by the applicable rules and regulations
of the Principal Market (or any successor
entity), then the Company may not issue upon
conversion of the Debentures, in the aggregate,
in excess of (i) 19.99% of the number of shares
of Common Stock outstanding on the Trading Day
immediately preceding the Original Issue Date,
(ii) less any shares of Common Stock issued as
payment of interest or to be issued upon exercise
of the Warrants issued to Holders of the
Debentures on the Original Issue Date pursuant to
the Purchase Agreement or upon exercise of the
warrants issued to J.P. Carey Securities, Inc.
for its services as placement agent under the
Purchase Agreement (the "Placement Warrant")
-----------------
(such number of shares, the "Issuable Maximum").
----------------
Each Holder shall be entitled to a portion of the
Issuable Maximum equal to the quotient obtained
by dividing (x) the aggregate principal amount of
the Debenture(s) issued and sold to such Holder
on the Original Issue Date by (y) the aggregate
principal amount of all Debentures issued and
sold by the Company on the Original Issue Date.
If any Holder shall no longer hold Debentures,
then such Holder's remaining portion of the
Issuable Maximum shall be allocated pro-rata
among the remaining Holders. If on any Conversion
Date: (A) the applicable Set Price then in effect
is such that the shares issuable under this
Debenture on any
7
Conversion Date together with the aggregate
number of shares of Common Stock that would
then be issuable upon conversion in full of
all then outstanding Debentures would exceed
the Issuable Maximum, and (B) the Company
shall not have obtained Shareholder Approval,
then the Company shall issue to the Holder
requesting a conversion a number of shares of
Common Stock equal to such Holder's pro-rata
portion (which shall be calculated pursuant to
the terms hereof) of the Issuable Maximum and,
with respect to the remainder of the aggregate
principal amount of the Debentures (including any
accrued interest) then held by such Holder for
which a conversion in accordance with the
applicable conversion price would result in an
issuance of shares of Common Stock in excess of
such Holder's pro-rata portion (which shall be
calculated pursuant to the terms hereof) of the
Issuable Maximum (the "Excess Principal"), the
----------------
Company shall be prohibited from converting such
Excess Principal, and shall notify the Holder of
the reason therefor. This Debenture shall
thereafter be unconvertible into Underlying
Shares until and unless Shareholder Approval is
subsequently obtained or is otherwise not
required, but this Debenture shall otherwise
remain in full force and effect. The Company and
the Holder understand and agree that shares of
Common Stock issued to and then held by the
Holder as a result of conversions of Debentures
shall not be entitled to cast votes on any
resolution to obtain Shareholder Approval
pursuant hereto. For clarity, the failure of the
Company to actually obtain Shareholder Approval
shall not be a breach of covenant or Event of
Default under Section 3 of this Debenture.
iii) Shares Issuable Upon Conversion. The number
-------------------------------
of shares of Common Stock issuable upon a conversion shall
be determined by the quotient obtained by dividing (x) the
outstanding principal amount of this Debenture to be
converted and (y) the Set Price.
b) i) Not later than three Trading Days after any
Conversion Date, the Company will deliver to the Holder a
certificate or certificates for the Shares of Common Stock
which shall be free of restrictive legends and trading
restrictions (other than those required by the Purchase
Agreement) representing the number of shares of Common
Stock being acquired upon the conversion of Debentures.
The Company shall, upon request of the Holder, if
available and if allowed under applicable securities laws,
use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under
this Section electronically through the Depository Trust
Corporation or another established clearing corporation
performing similar functions. If in the case of any
Conversion Notice such certificate or certificates are not
delivered to or as directed by the applicable Holder by
the fifth Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any
time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in
which event the Company shall immediately
8
return the certificates representing the principal amount of
Debentures tendered for conversion.
ii) If the Company fails for any reason to deliver
to the Holder such certificate or certificates pursuant to
Section 4(b)(i) by the third Trading Day after the
Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, for each
$5,000 of principal amount being converted, $50 per
Trading Day thereafter (increasing to $100 per Trading Day
after 3 Trading Days and increasing to $200 per Trading
Day 6 Trading Days after such damages begin to accrue) for
each Trading Day after such third Trading Day until such
certificates are delivered. Nothing herein shall limit a
Holder's right to pursue actual damages or declare an
Event of Default pursuant to Section 3 herein for the
Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period
specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or
under applicable law.
iii) In addition to any other rights available to
the Holder, if the Company fails for any reason to deliver to
the Holder such certificate or certificates pursuant to
Section 4(b)(i) by the third Trading Day after the
Conversion Date, and if after such third Trading Day the
Holder is required by its brokerage firm to purchase (in
an open market transaction or otherwise) Common Stock to
deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving
upon such conversion (a "Buy-In"), then the Company shall
------
(A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which
(x) the Holder's total purchase price (including brokerage
commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder anticipated
receiving from the conversion at issue multiplied by (2)
the actual sale price of the Common Stock at the time of
the sale (including brokerage commissions, if any) giving
rise to such purchase obligation and (B) at the option of
the Holder, either reissue Debentures in principal amount
equal to the principal amount of the attempted conversion
or deliver to the Holder the number of shares of Common
Stock that would have been issued had the Company timely
complied with its delivery requirements under Section
4(b)(i). For example, if the Holder purchases Common Stock
having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted conversion of Debentures with
respect to which the actual sale price of the Underlying
Shares at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase
obligation was a total of $10,000 under clause (A) of the
immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall
provide the Company written notice indicating the amounts
payable to
9
the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the
Company to make payment in respect of a Buy-In for the
failure to timely deliver certificates hereunder and the
Company timely pays in full such payment, the Company shall
not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting
in such Buy-In.
iv) Notwithstanding anything herein to the
contrary, if after the Effective Date the VWAP for any 15
consecutive Trading Days (such period, the "Forced
------
Conversion Condition Period") exceeds the then Set Price
---------------------------
by more than 200%, the Company may, within 2 Trading Days
of any such period, deliver a notice to the Holder (a
"Forced Conversion Notice" and the date such notice is
------------------------
received by the Holder, the "Forced Conversion Notice Date")
-----------------------------
to cause the Holder to immediately convert all or
part (and if part, pro-rata in proportion to each Holders
initial purchase of the Debentures relative to all
Debentures issued pursuant to the Purchase Agreement) of
the then outstanding principal amount of Debentures
pursuant to Section 4(a)(i). The Company may only effect a
Forced Conversion Notice if on each Trading Day during the
Forced Conversion Condition Period through the Forced
Conversion Notice Date all of the Company Equity
Conditions have been satisfied. If any of the Company
Equity Conditions shall cease to be satisfied at any time
during the required period, then the Holder may elect to
nullify the Forced Conversion Notice in which case such
forced conversion shall be null and void, ab initio.
Notwithstanding anything to the contrary in this Section
4, the Company's determination to deliver a Forced
Conversion Notice and effect a forced conversion shall be
applied ratably among the Holders based upon the principal
amount of Debentures initially purchased by each Holder,
adjusted upward ratably in the event all of the Debentures
of any Holder are no longer outstanding.
c) i) The conversion price in effect on any Conversion
Date shall be equal to $0.515 (subject to adjustment
herein)(the "Set Price").
---------
ii) If the Company, at any time while the Debentures
are outstanding: (A) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common
Stock issued by the Company pursuant to this Debenture,
including interest thereon), (B) subdivide outstanding
shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number
of shares, or (D) issue by reclassification of shares of
the Common Stock any shares of capital stock of the
Company, then the Set Price shall be multiplied by a
fraction of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator
shall be the number of shares of Common Stock
10
outstanding after such event. Any adjustment made pursuant
to this Section shall become effective immediately after the
record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become
effective immediately after the effective date in the case
of a subdivision, combination or re-classification.
iii) If the Company, at any time while Debentures
are outstanding, shall issue rights, options or warrants to
all holders of Common Stock (and not to Holders) entitling
them to subscribe for or purchase shares of Common Stock
or Common Stock Equivalents at a price per share less than
the VWAP at the record date mentioned below, then the Set
Price shall be adjusted by multiplying the Set Price in
effect immediately prior to such record date by a
fraction, of which the denominator shall be the number of
shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common
Stock offered for subscription or purchase, and of which
the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the
total number of shares so offered would purchase at the
VWAP on the record date. Such adjustment shall be made
whenever such rights or warrants are issued, and shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such
rights, options or warrants.
iv) If the Company or any Subsidiary thereof, as
applicable, at any time while Debentures are outstanding,
shall offer, sell, grant any option to purchase or offer,
sell or grant any right to reprice its securities, or
otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other
disposition) any Common Stock or any equity or equity
equivalent securities (including any equity, debt or other
instrument that is at any time over the life thereof
convertible into or exchangeable for Common Stock)
(collectively, "Common Stock Equivalents") entitling any
------------------------
Person to acquire shares of Common Stock, at an effective
price per share less than 95% of the then Set Price
("Dilutive Issuance"), as adjusted hereunder (if the
-----------------
holder of the Common Stock or Common Stock Equivalent so
issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which is issued in
connection with such issuance, be entitled to receive
shares of Common Stock at an effective price per share
which is less than the Set Price, such issuance shall be
deemed to have occurred for less than the Set Price), then
the Set Price shall be reduced to equal 105% of the
effective conversion, exchange or purchase price for such
Common Stock or Common Stock Equivalents (including any
reset provisions thereof) at issue. Such adjustment shall
be made whenever such Common Stock or Common Stock
Equivalents are issued. The Company shall notify the
Holder in writing, no later than the Business Day
11
following the issuance of any Common Stock or Common Stock
Equivalent subject to this section, indicating therein the
applicable issuance price, or of applicable reset price,
exchange price, conversion price and other pricing terms.
v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common
Stock (and not to Holders) evidences of its indebtedness
or assets or rights or warrants to subscribe for or
purchase any security, then in each such case the Set
Price shall be determined by multiplying such price in
effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall
be the VWAP determined as of the record date mentioned
above, and of which the numerator shall be such VWAP on
such record date less the then fair market value at such
record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of
Directors in good faith. In either case the adjustments
shall be described in a statement provided to the Holders
of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become
effective immediately after the record date mentioned
above.
vi) In case of any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the
Common Stock is converted into other securities, cash or
property, the Holders shall have the right thereafter to,
at their option, (A) convert the then outstanding
principal amount, together with all accrued but unpaid
interest and any other amounts then owing hereunder in
respect of this Debenture only into the shares of stock
and other securities, cash and property receivable upon or
deemed to be held by holders of the Common Stock following
such reclassification or share exchange, and the Holders
of the Debentures shall be entitled upon such event to
receive such amount of securities, cash or property as the
shares of the Common Stock of the Company into which the
then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture could have
been converted immediately prior to such reclassification
or share exchange would have been entitled or (B) require
the Company to prepay the aggregate of its outstanding
principal amount of Debentures, plus all interest and
other amounts due and payable thereon, at a price
determined in accordance with Section 3(b). The entire
prepayment price shall be paid in cash. This provision
shall similarly apply to successive reclassifications or
share exchanges.
vii) All calculations under this Section 4 shall be
made to the nearest cent or the nearest 1/100th of a share,
as the case may be. For purposes of this Section 4, the
number of shares of Common Stock deemed to be outstanding
as of a given date
12
shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) outstanding.
viii) Whenever the Set Price is adjusted pursuant to
any of Section 4(c)(ii) - (v), the Company shall promptly mail
to each Holder a notice setting forth the Set Price after
such adjustment and setting forth a brief statement of the
facts requiring such adjustment.
ix) If (A) the Company shall declare a dividend (or
any other distribution) on the Common Stock; (B) the Company
shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of
the Company; then, in each case, the Company shall cause
to be filed at each office or agency maintained for the
purpose of conversion of the Debentures, and shall cause
to be mailed to the Holders at their last addresses as
they shall appear upon the stock books of the Company, at
least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose
of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption,
rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective
or close, and the date as of which it is expected that
holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities,
cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or
share exchange; provided, that the failure to mail such
--------
notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action
required to be specified in such notice. Holders are
entitled to convert Debentures during the 20-day period
commencing the date of such notice to the effective date
of the event triggering such notice.
x) If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B)
the Company effects any sale of all or substantially all of
its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or
another Person) is completed pursuant to which holders of
Common Stock are
13
permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects
any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a
"Fundamental Transaction"), then upon any subsequent
-----------------------
conversion of this Debenture, the Holder shall have the
right to receive, for each Underlying Share that would
have been issuable upon such conversion absent such
Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been
entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior
to such Fundamental Transaction, the holder of one share
of Common Stock (the "Alternate Consideration"). For
-----------------------
purposes of any such conversion, the determination of the
Set Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate
Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company
shall apportion the Set Price among the Alternate
Consideration in a reasonable manner reflecting the
relative value of any different components of the
Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to
be received in a Fundamental Transaction, then the Holder
shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this
Debenture following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions,
any successor to the Company or surviving entity in such
Fundamental Transaction shall issue to the Holder a new
Debenture consistent with the foregoing provisions and
evidencing the Holder's right to convert such Debenture
into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or
surviving entity to comply with the provisions of this
paragraph (c) and insuring that this Debenture (or any
such replacement security) will be similarly adjusted upon
any subsequent transaction analogous to a Fundamental
Transaction. If any Fundamental Transaction constitutes or
results in a Change of Control Transaction, then at the
request of the Holder delivered before the 90th day after
such Fundamental Transaction, the Company (or any such
successor or surviving entity) will purchase the Debenture
from the Holder for a purchase price, payable in cash
within 30 calendar days after such request (or, if later,
on the effective date of the Fundamental Transaction),
equal to the 100% of the remaining unconverted principal
amount of this Debenture on the date of such request, plus
all accrued and unpaid interest thereon, plus all other
accrued and unpaid amounts due hereunder.
xi) Notwithstanding the foregoing, no adjustment
will be made under this paragraph (c) in respect of (A) the
granting of options to employees, officers and directors
of the Company pursuant to any stock option plan duly
adopted by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the
members of a committee of non-employee directors
established for such purpose, (B)
14
upon the exercise of this Debenture or any other Debenture of
this series or of any other series or security issued by the
Company in connection with the offer and sale of this
Company's securities pursuant to the Purchase Agreement, or
(C) upon the exercise of or conversion of any Convertible
Securities, options or warrants issued and outstanding on the
Original Issue Date, provided such securities have not been
amended since the date of the Purchase Agreement, or (D)
acquisitions or strategic investments, the primary purpose of
which is not to raise capital, or (E) any other Exempt
Transaction.
d) The Company covenants that it will at all times
reserve and keep available out of its authorized and unissued
shares of Common Stock solely for the purpose of issuance upon
conversion of the Debentures and payment of interest on the
Debentures, each as herein provided, free from preemptive rights or
any other actual contingent purchase rights of persons other than
the Holders, not less than such number of shares of the Common
Stock as shall (subject to any additional requirements of the
Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and
restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of
interest hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and
validly authorized, issued and fully paid, nonassessable and, if
the Underlying Shares Registration Statement has been declared
effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of
shares of the Common Stock, but may if otherwise permitted, make a
cash payment in respect of any final fraction of a share based on
the VWAP at such time. If the Company elects not, or is unable, to
make such a cash payment, the Holder shall be entitled to receive,
in lieu of the final fraction of a share, one whole share of Common
Stock.
f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge
to the Holder for any documentary stamp or similar taxes that may
be payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that
may be payable in respect of any transfer involved in the issuance
and delivery of any such certificate upon conversion in a name
other than that of the Holder and the Company shall not be required
to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
15
Section 5) Exchanges into DOC Common Stock.
--------- -------------------------------
a) i) Exchanges. At any time after the Closing Date,
---------
this Debenture shall be exchangeable into DOC Shares at
the option of the Holder, in whole or in part at any time
and from time to time (subject to the limitations on
exchanges set forth in Section 5(a)(ii) hereof). Upon any
such transfer of any DOC Shares to the Holder upon an
exchange, the Holder shall have good and marketable title
to such shares, free and clear of any liens, encumbrances,
restrictions, rights of first refusal or rights of any
other Person and such shares shall be unrestricted and,
assuming Holder is not deemed to be an underwriter, freely
tradable on the Principal Market without any prospectus
delivery or other requirement whatsoever and without the
need for registration under the Securities Act or any
state securities laws. The Holder shall effect exchanges
by delivering to the Company the form of exchange notice
attached hereto as Annex B (an "Exchange Notice") with a
------- ---------------
copy to the Trustee, specifying therein the principal
amount of Debentures to be exchanged and the date on which
such exchange is to be effected (an "Exchange Date"). If
-------------
no Exchange Date is specified in a Exchange Notice, the
Exchange Date shall be the date that such Exchange Notice
is provided hereunder. To effect exchanges hereunder, the
Holder shall not be required to physically surrender
Debentures to the Company unless the entire principal
amount of this Debenture has been so exchanged. Exchanges
hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture plus all
accrued and unpaid interest thereon in an amount equal to
the applicable exchange. The Holder and the Company shall
maintain records showing the principal amount exchanged
and the date of such exchanges. In the event of any
dispute as to the number of DOC Shares issuable to the
Holder in connection with a Conversion Notice, the the
Trustee shall issue to the Holder the number of DOC Shares
not in dispute and resolve such dispute in accordance with
Section 11. The Holder and any assignee, by acceptance of
this Debenture, acknowledge and agree that, by reason of
the provisions of this paragraph, following exchange of a
portion of this Debenture, the unpaid and unexchanged
principal amount of this Debenture may be less than the
amount stated on the face hereof.
ii) Exchange Restriction. Notwithstanding
--------------------
anything herein to the contrary, (A) A Holder may not
exchange Debentures or receive shares of DOC Common Stock
as payment of interest hereunder to the extent such
exchange or receipt of such interest payment would result
in the Holder, together with its Affiliates, beneficially
owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules promulgated thereunder) in
excess of 4.99% of the then issued and outstanding shares
of DOC Common Stock, including shares issuable upon
exchange of, and payment of interest on, the Debentures
held by such Holder after application of this Section. The
Holder shall be entitled to rely on the DOC's public
filing with respect to the number of shares of DOC Common
Stock which are then issued and outstanding. In the event
of a merger or consolidation of DOC with or into another
Person, this paragraph shall not apply with respect to a
determination of the number of shares of DOC Common Stock
issuable upon exchange in full of
16
the Debentures if such determination is necessary to
establish the securities or other assets which the holder of
DOC Common Stock shall be entitled to receive upon the
effectiveness of such merger or consolidation. The provisions
of this Section 5(a)(ii) may be waived by the Holder at the
election of the Holder upon not less than 61 days' prior
notice to the Company, and the provisions of this Section
5(a)(ii) shall continue to apply until such 61st day (or such
later date, as determined by the Holder, as may be specified
in such notice of waiver) and (B) the Company shall not honor
an exchange by the Holder to the extent such Exchange shall
cause the aggregate number of DOC Shares issued to the Holder
pursuant to the present exchange and all prior exchanges to
exceed the Holder's pro-rata share (as determined by such
Holder's initial purchases of Debentures pursuant to the
Purchase Agreement relative to all Debentures issued) of 15
million DOC Shares.
iii) The number of shares of DOC Common Stock
issuable upon a Exchange shall be determined by the
quotient obtained by dividing (x) the outstanding
principal amount of this Debenture to be converted and (y)
the Exchange Price.
b) i) Not later than five Trading Days after any
Exchange Date, the Company will cause the Trustee to
deliver to the Holder a certificate or certificates for
the shares of DOC Common Stock which shall be free of
restrictive legends and trading restrictions representing
the number of shares of DOC Common Stock being acquired
upon the exchange of Debentures.
c) i) The exchange price in effect on any Exchange Date
shall be equal to $2.20 as to the first 50% of the
original principal amount of this Debenture and $4.25 as
to the remaining 50% of the original principal amount of
this Debenture (all subject to adjustment herein)(the
"Exchange Price").
--------------
ii) If DOC, at any time while the Debentures are
outstanding: (A) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its DOC
Common Stock or any other equity or equity equivalent
securities payable in shares of DOC Common Stock (which,
for avoidance of doubt, shall not include any shares of
DOC Common Stock issued by DOC pursuant to this Debenture,
including interest thereon), (B) subdivide outstanding
shares of DOC Common Stock into a larger number of shares,
(C) combine (including by way of reverse stock split)
outstanding shares of DOC Common Stock into a smaller
number of shares, or (D) issue by reclassification of
shares of the DOC Common Stock any shares of capital stock
of DOC, then the Exchange Price shall be multiplied by a
fraction of which the numerator shall be the number of
shares of DOC Common Stock (excluding treasury shares, if
any) outstanding before such event and of which the
denominator shall be the number of shares of DOC Common
Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective
immediately after the record date for the determination of
stockholders entitled to receive such dividend
17
or distribution and shall become effective immediately after
the effective date in the case of a subdivision,
combination or re-classification.
iii) In case of any reclassification of the DOC
Common Stock or any compulsory share exchange pursuant to
which the DOC Common Stock is converted into other
securities, cash or property, the Holders shall have the
right thereafter to exchange the then outstanding principal
amount of this Debenture, together with all accrued but
unpaid interest and any other amounts then owing hereunder in
respect of this Debenture into the shares of stock and other
securities, cash and property receivable upon or deemed to be
held by holders of the DOC Common Stock following such
reclassification or share exchange, and the Holders of the
Debentures shall be entitled upon such event to receive such
amount of securities, cash or property as the shares of the
DOC Common Stock into which the then outstanding principal
amount, together with all accrued but unpaid interest and any
other amounts then owing hereunder in respect of this
Debenture could have been exchanged immediately prior to such
reclassification or share exchange. This provision shall
similarly apply to successive reclassifications or share
exchanges.
iv) If, at any time while this Debenture is
outstanding, (A) DOC effects any merger or consolidation of
DOC with or into another Person, (B) the DOC effects any sale
of all or substantially all of its assets in one or a series
of related transactions, (C) any tender offer or exchange
offer (whether by DOC or another Person) is completed
pursuant to which holders of DOC Common Stock are permitted
to tender or exchange their shares for other securities, cash
or property, or (D) DOC effects any reclassification of the
DOC Common Stock or any compulsory share exchange pursuant to
which the DOC Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such
case, a "DOC Fundamental Transaction"), then upon any
---------------------------
subsequent conversion of this Debenture, the Holder shall
have the right to receive, for each DOC Share that would have
been issuable upon such conversion absent such DOC
Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled
to receive upon the occurrence of such DOC Fundamental
Transaction if it had been, immediately prior to such DOC
Fundamental Transaction, the holder of one share of DOC
Common Stock (the "DOC Alternate Consideration"). For
---------------------------
purposes of any such conversion, the determination of the
Exchange Price shall be appropriately adjusted to apply to
such DOC Alternate Consideration based on the amount of DOC
Alternate Consideration issuable in respect of one share of
DOC Common Stock in such DOC Fundamental Transaction, and the
Trustee shall apportion the Exchange Price among the DOC
Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the DOC
Alternate Consideration.
18
d) Upon an exchange hereunder the Company shall not be
required to issue stock certificates representing fractions of shares
of the DOC Common Stock, but shall issue, in lieu of the final fraction
of a share, one whole share of DOC Common Stock.
e) The issuance of certificates for DOC Shares on exchange
of the Debentures shall be made without charge to the Holder
for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that
the Company shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issuance and delivery
of any such certificate upon conversion in a name other than that
of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
Section 6) Redemption.
--------- ----------
a) Monthly Redemption. On each Monthly Redemption Date, the
Company shall redeem each Holder's Pro Rata Portion of the Monthly
Redemption Amount plus accrued but unpaid interest, the sum of all
liquidated damages and any other amounts then owing to such Holder
in respect of the Debenture (or such lesser amount as is then
outstanding). For purposes of this subsection 6(a) only, "Pro Rata
--------
Portion" is the ratio of (x) the principal amount of this
-------
Debenture on the Original Issue Date and (y) the sum of the
aggregate original principal amounts of the Debentures issued to
all Holders on the Closing. If any Holder shall no longer holds
Debentures, then the Pro Rata Portion shall be recalculated to
exclude such Holder's principal amount from clause (y) above. The
Monthly Redemption Amount due on each Monthly Redemption Date
shall, except as provided in this Section, be paid in cash. As to
any Monthly Redemption and upon at least 20 Trading Days' prior
written irrevocable notice ("Monthly Notice Redemption Period")
--------------------------------
and subject to the applicable Equity Conditions, in lieu of a cash
redemption payment the Company may elect to pay 100% of a Monthly
Redemption in either (i) Underlying Shares based on a conversion
price equal to the lesser of (A) 90% of the average of the lowest
10 of the 20 VWAPs immediately prior to the applicable Monthly
Redemption Date (subject to adjustment for any stock dividend,
stock split, stock combination or other similar event affecting
the Common Stock during such 20 Trading Day period) and (B) the
Set Price (the "Monthly Conversion Price") or (ii) DOC Shares
------------------------
based on an exchange price equal to the lesser of (A) 90% of the
average of the lowest 10 of the 20 DOC VWAPs immediately prior to
the applicable Monthly Redemption Date (subject to adjustment for
any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 20 Trading
Day period) and (B) the Exchange Price (the "Monthly Exchange
----------------
Price"). For clarity, the Company's notice shall specify whether
-----
such amounts shall be paid in Underlying Shares, DOC Shares, or a
specific combination thereof. Notwithstanding anything herein to
the contrary, unless waived by the Holder, the Company may not pay
the Monthly Redemption Amount in DOC Shares unless the average
daily trading volume of DOC Common Stock is at least 50,000 shares
and the
19
average of the DOC VWAPs is at least $1.50 (subject to reverse
and forward stock splits and the like) for each of the 10 Trading
Days preceding the Monthly Notice and on each Trading Day
during the Monthly Notice Redemption Period through the Monthly
Redemption Date the DOC Equity Conditions have been satisfied.
Issuances of Underlying Shares hereunder or transfers of DOC
Shares hereunder shall be made otherwise pursuant to the
provisions of Section 4 and Section 5, as applicable. The Holders
may convert, pursuant to Section 4(a)(i), or exchange, pursuant to
Section 5(a)(i), any principal amount of the Debenture subject to
a Monthly Redemption at any time prior to the date that the
Monthly Redemption Amount and all amounts owing thereon are due
and paid in full. The Company covenants and agrees that it will
honor all Conversion Notices and Exchange Notices tendered up
until such amounts are paid in full.
b) Redemption Procedure. The payment of cash, issuance of
Common Stock or transfer of DOC Shares, as the case may be,
pursuant to a Monthly Redemption shall be made on the Monthly
Redemption Date. If any portion of the cash payment for a Monthly
Redemption shall not be paid by the Company by the respective due
date, interest shall accrue thereon at the rate of 18% per annum
(or the maximum rate permitted by applicable law, whichever is
less) until the payment of the Monthly Redemption Amount, plus all
amounts owing thereon is paid in full. In addition, if any portion
of the Monthly Redemption Amount remains unpaid after such date,
the Holders subject to such redemption may elect, by written
notice to the Company given at any time thereafter, to invalidate
ab initio such redemption, notwithstanding anything herein
---------
contained to the contrary. Notwithstanding anything to the
contrary in this Section 6, the Company's determination to redeem
in cash, shares of Common Stock or DOC Shares shall be applied
ratably among the Holders based upon the principal amount of
Debentures initially purchased by each Holder, adjusted upward
ratably in the event all of the shares of Debentures of any Holder
are no longer outstanding.
Section 7) Definitions. For the purposes hereof, in addition to the
--------- -----------
terms defined elsewhere in this Debenture: (a) capitalized terms not
otherwise defined herein have the meanings given to such terms in the
Purchase Agreement, and (b) the following terms shall have the following
meanings:
"Business Day" means any day except Saturday, Sunday and
------------
any day which shall be a federal legal holiday in the United States
or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Change of Control Transaction" means the occurrence after
-----------------------------
the date hereof of any of (i) an acquisition after the date hereof
by an individual or legal entity or "group" (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act) of effective
control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33%
of the voting securities of the Company, or (ii) a replacement at
one time or within a one year period of more than one-half of the
members of the Company's board of directors which is not approved
by a majority of those individuals
20
who are members of the board of directors on the date hereof
(or by those individuals who are serving as members of the board
of directors on any date whose nomination to the board of
directors was approved by a majority of the members of the board
of directors who are members on the date hereof), or (iii) the
execution by the Company of an agreement to which the Company is a
party or by which it is bound, providing for any of the events set
forth above in (i) or (ii).
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the common stock, $0.001 par value
------------
per share, of the Company and stock of any other class into which
such shares may hereafter have been reclassified or changed.
"Company Equity Conditions" shall mean all of the
-------------------------
following: (i) the Company shall have duly honored all conversions
or exchanges occurring by virtue of one or more Conversion Notices
or Exchange Notices prior to the date in question, (ii) there is an
effective Underlying Shares Registration Statement pursuant to
which the Holder is permitted to utilize the prospectus thereunder
to resell all of the Underlying Shares issued to the Holder and all
of the Underlying Shares as are issuable to the Holder upon
conversion in full of this Debenture (and the Company believes, in
good faith, that such effectiveness will continue uninterrupted for
the foreseeable future), (iii) the Common Stock is listed for
trading on a Principal Market (and the Company believes, in good
faith, that trading of the Common Stock on a Principal Market will
continue uninterrupted for the foreseeable future), (iv) all
liquidated damages and other amounts owing in respect of the
Debentures and Underlying Shares shall have been paid or will,
concurrently with the event subject to this condition will be paid
in cash; (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the
issuance of all the Underlying Shares as are issuable to the Holder
upon conversion in full of the Debentures; (vi) no Event of Default
nor any event that with the passage of time would constitute an
Event of Default has occurred and is continuing; (vii) such
issuance would be permitted in full without violating the
limitations set forth in clauses (A) or (B) of Section 4(a)(ii) and
(viii) no public announcement of a pending or proposed Change of
Control Transaction or Fundamental Transaction has occurred that
has not been consummated.
"Conversion Date" shall have the meaning set forth in
---------------
Section 4(a)(i) hereof.
"Conversion Notice" shall have the meaning set forth in
-----------------
Section 4(a)(i) hereof.
"DOC" shall mean Digital Angel Corporation.
---
"DOC Common Stock" means the common stock, $0.005 par
----------------
value per share, of DOC and stock of any other class into which
such shares may hereafter have been reclassified or changed.
21
"DOC Equity Conditions" shall mean all of the following:
---------------------
(i) the Company shall have duly honored all conversions or
exchanges occurring by virtue of one or more Conversion Notices or
Exchange Notices prior to the date in question, (ii) there is an
effective registration statement with the Commission pursuant to
which the Holder is permitted to utilize the prospectus thereunder
to resell all of the DOC Shares transferred to the Holder (and the
Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future), (iii) the DOC
Common Stock is listed for trading on a Principal Market (and the
Company believes, in good faith, that trading of the Common Stock
on a Principal Market will continue uninterrupted for the
foreseeable future), (iv) all liquidated damages and other amounts
owing in respect of the Debentures and Underlying Shares shall have
been paid or will, concurrently with the event subject to this
condition will be paid in cash; (v) no Event of Default nor any
event that with the passage of time would constitute an Event of
Default has occurred and is continuing; and (vi) such issuance
would be permitted in full without violating the limitations set
forth in Section 4(a)(ii).
"DOC VWAP" means, for any date, the price determined by
--------
the first of the following clauses that applies: (a) if the DOC
Common Stock is then listed or quoted on a Principal Market or the
OTC Bulletin Board, the daily volume weighted average price of the
DOC Common Stock for such date (or the nearest preceding date) on
the Principal Market (or OTC Bulletin Board) on which the DOC
Common Stock is then listed or quoted as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. ET to 4:02
p.m. Eastern Time) using the VAP function; (b) if the DOC Common
Stock is not then listed or quoted on a Principal Market or the OTC
Bulletin Board and if prices for the DOC Common Stock are then
reported in the "pink sheets" published by the National Quotation
Bureau Incorporated (or a similar organization or agency succeeding
to its functions of reporting prices), the most recent bid price
per share of the DOC Common Stock so reported; or (c) in all other
cases, the fair market value of a share of DOC Common Stock as
determined by a nationally recognized independent appraiser
selected in good faith by Purchasers' Representative.
"DOC Shares" means the shares of DOC Common Stock pledged
----------
to the Holders of the Debentures pursuant to the terms of the
Pledge Agreement entered into in connection with the Purchase
Agreement, which shares when transferred in accordance with the
terms hereunder shall be fully paid and nonassessable.
"Exchange Act" means the Securities Exchange Act of 1934,
------------
as amended.
"Exchange Date" shall have the meaning ascribed to such
-------------
term in Section 5(a)(i).
"Exchange Notice" shall have the meaning ascribed to such
---------------
term in Section 5(a)(i).
"Exchange Price" shall have the meaning set forth in
--------------
Section 5(c)(i) hereof.
22
"Interest Conversion Rate" means, (i) as to shares of
------------------------
Common Stock, 90% of the lesser of (A) the average of the lowest 10
of the 20 VWAPs immediately prior to the applicable Interest
Payment Date or (B) the average of the 20 VWAPs immediately prior
to the date the applicable interest payment shares are issued and
delivered if after the Interest Payment Date and, (ii) as to DOC
Shares, 90% of the lesser of (A) the average of the lowest 10 of
the 20 DOC VWAPs immediately prior to the applicable Interest
Payment Date or (B) the average of the 20 DOC VWAPs immediately
prior to the date the applicable interest payment shares are issued
and delivered if after the Interest Payment Date.
"Late Fees" shall have the meaning set forth in the second
---------
paragraph to this Debenture.
"Mandatory Prepayment Amount" for any Debentures shall
---------------------------
equal the sum of (i) the greater of: (A) 110% of the principal
amount of Debentures to be prepaid, plus all accrued and unpaid
interest thereon, (B) the principal amount of Debentures to be
prepaid, plus all accrued and unpaid interest thereon, plus all
other accrued and unpaid amounts due hereunder, divided by the Set
Price on (x) the date the Mandatory Prepayment Amount is demanded
or otherwise due or (y) the date the Mandatory Prepayment Amount is
paid in full, whichever is less, multiplied by the VWAP on (x) the
date the Mandatory Prepayment Amount is demanded or otherwise due
or (y) the date the Mandatory Prepayment Amount is paid in full,
whichever is greater, or (C) the principal amount of Debentures to
be prepaid, plus all accrued and unpaid interest thereon, plus all
other accrued and unpaid amounts due hereunder, divided by the
Exchange Price on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment
Amount is paid in full, whichever is less, multiplied by the DOC
VWAP on (x) the date the Mandatory Prepayment Amount is demanded or
otherwise due or (y) the date the Mandatory Prepayment Amount is
paid in full, whichever is greater, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such
Debentures.
"Monthly Conversion Price" shall have the meaning set
------------------------
forth in Section 6(a) hereof.
"Monthly Redemption" shall mean the redemption of the
------------------
Debenture pursuant to Section 6(a) hereof.
"Monthly Redemption Amount" shall mean, as to a Monthly
-------------------------
Redemption, $400,000, in the aggregate among all Holders or such
lesser amount if the total principal amount outstanding among all
Debentures is less than $400,000.
"Monthly Redemption Date" means the 1st of each month,
-----------------------
commencing on November 1, 2003 and ending upon the full redemption
of this Debenture.
23
"Person" means a corporation, an association, a
------
partnership, organization, a business, an individual, a government
or political subdivision thereof or a governmental agency.
"Purchase Agreement" means the Securities Purchase
------------------
Agreement, dated as of the Original Issue Date, to which the
Company and the original Holder are parties, as amended, modified
or supplemented from time to time in accordance with its terms.
"Registration Rights Agreement" means the Registration
-----------------------------
Rights Agreement, dated as of the Original Issue Date, to which the
Company and the original Holder are parties, as amended, modified
or supplemented from time to time in accordance with its terms.
"Securities Act" means the Securities Act of 1933, as
--------------
amended, and the rules and regulations promulgated thereunder.
"Set Price" shall have the meaning set forth in Section
---------
4(c)(i).
"Shareholder Approval" means such approval as may be
--------------------
required by the applicable rules and regulations of the Principal
Market (or any successor entity) form the shareholders of the
Company with respect to the transactions contemplated by the
Transaction Documents, including the issuance of all of the
Underlying Shares and shares of Common Stock issuable upon exercise
of the Warrants.
"Trading Day" means (a) a day on which the shares of
-----------
Common Stock and DOC Common Stock are traded on the Principal
Market, or (b) if the shares of Common Stock or shares of DOC
Common Stock are not quoted on a Principal Market, a day on which
the such shares are quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any
similar organization or agency succeeding its functions of
reporting prices).
"Transaction Documents" shall have the meaning set forth
---------------------
in the Purchase Agreement.
"Trust Agreement" means that certain Trust Agreement of
---------------
the Digital Angel Share Trust between Wilmington Trust Company and
the Company, dated as of March 1, 2002, as amended June 30, 2003.
"Trustee" means Wilmington Trust Company, a Delaware banking
-------
corporation.
"Underlying Shares" means the shares of Common Stock
-----------------
issuable upon conversion of Debentures or as payment of interest in
accordance with the terms hereof.
"Underlying Shares Registration Statement" means a
----------------------------------------
registration statement meeting the requirements set forth in the
Registration Rights Agreement, covering among other things
24
the resale of the Underlying Shares and naming the Holder as a "selling
stockholder" thereunder.
"VWAP" means, for any date, the price determined by the
----
first of the following clauses that applies: (a) if the Common
Stock is then listed or quoted on a Principal Market or the OTC
Bulletin Board, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the
Principal Market (or OTC Bulletin Board) on which the Common Stock
is then listed or quoted as reported by Bloomberg Financial L.P.
(based on a Trading Day from 9:30 a.m. ET to 4:02 p.m. Eastern
Time) using the VAP function; (b) if the Common Stock is not then
listed or quoted on a Principal Market or the OTC Bulletin Board
and if prices for the Common Stock are then reported in the "pink
sheets" published by the National Quotation Bureau Incorporated (or
a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the
Common Stock so reported; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by a
nationally recognized independent appraiser selected in good faith
by Purchasers' Representative.
Section 8) Except as expressly provided herein, no provision of this
---------
Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct debt
obligation of the Company. This Debenture ranks pari passu with all other
---- -----
Debentures now or hereafter issued under the terms set forth herein. The
Company agrees and acknowledges the obligations of the Company under this
Debenture are secured by 15 million shares of DOC Common Stock pursuant to
the terms of the Pledge Agreement and that such shares also comprise the DOC
Shares which are exchangeable pursuant to the terms of Section 5 and which
are transferable upon exercise of the warrants issued in connection with the
Purchase Agreement. As long as there are Debentures outstanding, the Company
shall not and shall cause it Subsidiaries not to, without the consent of the
Holders, (a) amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the Holders; (b) repay,
repurchase or offer to repay, repurchase or otherwise acquire shares of its
Common Stock or other equity securities other than as to the Underlying
Shares to the extent permitted or required under the Transaction Documents;
(c) enter into any agreement with respect to any of the foregoing; or (d)
issue any variable priced equity securities or variable priced equity linked
securities.
Section 9) If this Debenture shall be mutilated, lost, stolen or
---------
destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu
of or in substitution for a lost, stolen or destroyed Debenture, a new
Debenture for the principal amount of this Debenture so mutilated, lost,
stolen or destroyed but only upon receipt of evidence of such loss, theft or
destruction of such Debenture, and of the ownership hereof, and indemnity,
if requested, all reasonably satisfactory to the Company.
25
Section 10) The Company will not and will not permit any of its
----------
Subsidiaries to, directly or indirectly, enter into, create, incur, assume
or suffer to exist any indebtedness of any kind, on or with respect to any
of its property or assets now owned or hereafter acquired or any interest
therein or any income or profits therefrom that is senior in any respect to
the Company's obligations under the Debentures.
Section 11) All questions concerning the construction, validity,
----------
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or
agents) shall be commenced in the state and federal courts sitting in the
City of New York, Borough of Manhattan (the "New York Courts"). Each party
---------------
hereto hereby irrevocably submits to the exclusive jurisdiction of the New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such
party at the address in effect for notices to it under this Debenture and
agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted
by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Debenture or the transactions
contemplated hereby. If either party shall commence an action or proceeding
to enforce any provisions of this Debenture, then the prevailing party in
such action or proceeding shall be reimbursed by the other party for its
attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.
Section 12) Any waiver by the Company or the Holder of a breach of any
----------
provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other
term of this Debenture. Any waiver must be in writing.
Section 13) If any provision of this Debenture is invalid, illegal or
----------
unenforceable, the balance of this Debenture shall remain in effect, and if
any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances. If it
shall be found that any interest or other amount deemed interest due
hereunder violates applicable
26
laws governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay, extension or usury law or
other law which would prohibit or forgive the Company from paying all or any
portion of the principal of or interest on the Debentures as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which
may affect the covenants or the performance of this indenture, and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by
resort to any such law, hinder, delay or impeded the execution of any power
herein granted to the Holder, but will suffer and permit the execution of
every such as though no such law has been enacted.
Section 14) Whenever any payment or other obligation hereunder shall
----------
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.
Section 15) Any and all notices or other communications or deliveries
----------
to be provided by the Holders hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company,
at the address set forth above, FACSIMILE NUMBER 561-805-8002, ATTN:
DEBENTURE DEPARTMENT, WITH A COPY OF SUCH NOTICE E-MAILED TO
debentures@adsx.com, AND WITH A COPY OF ANY NOTICE (OTHER THAN CONVERSION
NOTICE) TO HOLLAND & KNIGHT, FACSIMILE NUMBER 305-789-7799, ATTN: HARVEY
GOLDMAN, or such other address or facsimile number as the Company may
specify for such purposes by notice to the Holders delivered in accordance
with this Section and to THE TRUSTEE AT C/O WILMINGTON TRUST COMPANY, RODNEY
SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DE 19890, ATTN:
CORPORATION TRUST ADMINISTRATION, FACSIMILE NUMBER . Any and
----------------
all notices or other communications or deliveries to be provided by the
Company hereunder shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to each Holder
at the facsimile telephone number or address of such Holder appearing on the
books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or
other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 5:30 p.m. (New York City time) on a
Trading Day, (ii) the Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New York
City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt
by the party to whom such notice is required to be given.
Section 16) This Debenture, and all other Debentures of this series,
----------
are secured by a Pledge Agreement and Security Agreement of even date
herewith.
*********************
27
IN WITNESS WHEREOF, the Company has caused this Exchangeable
Debenture to be duly executed by a duly authorized officer as of the date
first above indicated.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ Scott Silverman
---------------------------------
Name: Scott Silverman
Title: CEO
28
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal and, if specified,
interest under the 8.5% Exchangeable Debenture of Applied Digital Solutions,
Inc., (the "Company") due on June 29, 2006, into shares of common stock,
$0.001 par value per share (the "Common Stock"), of the Company according to
the conditions hereof, as of the date written below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the
Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock
does not exceed the amounts determined in accordance with Section 13(d) of
the Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements
under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted
Payment of Interest in Common Stock / / Yes / / No
If yes, $_______ of Interest Accrued on
Account of Conversion at Issue
Number of shares of Common Stock to be Issued:
Applicable Conversion Price:
Signature:
Name:
Address:
Taxpayer ID#
Address:
29
ANNEX B
NOTICE OF EXCHANGE
The undersigned hereby elects to exchange principal and, if specified,
interest under the 8.5% Exchangeable Debenture of Applied Digital Solutions,
Inc., (the "Company") due on June 29, 2006, into shares of common stock,
$0.005 par value per share (the "Common Stock"), of Digital Angel
Corporation according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
By the delivery of this Notice of Exchange the undersigned represents and
warrants to the Company that its ownership of the Common Stock does not
exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 5 of this Debenture.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted
Payment of Interest in Common Stock / / Yes / / No
If yes, $_______ of Interest Accrued on
Account of Conversion at Issue
Number of shares of Common Stock to be Issued:
Applicable Conversion Price:
Signature:
Name:
Address:
30
APPENDIX B
NEITHER THIS SECURITY NOR THE SHARES OF COMMON STOCK OF APPLIED DIGITAL
SOLUTIONS, INC. FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY,
--------------
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS
AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT,
THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED
BY SUCH SECURITIES.
STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
APPLIED DIGITAL SOLUTIONS, INC.
and/or
____________ shares of Common Stock of
DIGITAL ANGEL CORPORATION
THIS STOCK PURCHASE WARRANT CERTIFIES that, for value
received, (the "Holder"), is entitled, upon the terms and
-------------
subject to the limitations on exercise and the conditions hereinafter set
forth, at any time on or after June , 2003 (the "Initial Exercise Date")
-- ---------------------
and on or prior to the close of business on the fourth anniversary of the
Initial Exercise Date (the "Termination Date") but not thereafter, to either
----------------
(i) subscribe for and purchase from Applied Digital Solutions, Inc., a
corporation incorporated in the State of Missouri (the "Company"), up to
-------
shares (the "Warrant Shares") of Common Stock, par value $0.001
- ------------ --------------
per share, of the Company (the "Common Stock") or (ii) purchase from the
------------
Digital Angel Corporation ("DOC") up to shares ("DOC Warrant
--- --------- -----------
Shares") of common stock, par value $0.005 per share, of DOC (the "DOC
- ------ ---
Common Stock"), or any combination thereof. The purchase price of one share
- ------------
of Common Stock (the "Exercise Price") under this Warrant shall be $0.564,
--------------
subject to adjustment hereunder, and the purchase price of one share of DOC
Common Stock (the "DOC Exercise Price") under this Warrant shall be $3.178,
------------------
as adjusted hereunder. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED
HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE
AGREEMENT (THE "PURCHASE
--------
1
AGREEMENT"), DATED JUNE 30, 2003, BETWEEN THE COMPANY AND THE PURCHASERS
- ---------
SIGNATORY THERETO.
1. Title to Warrant. Prior to the Termination Date and
----------------
subject to compliance with applicable laws and Section 7 of this Warrant,
this Warrant and all rights hereunder are transferable, in whole or in part,
at the office or agency of the Company by the Holder in person or by duly
authorized attorney, upon surrender of this Warrant together with the
Assignment Form annexed hereto properly endorsed. The transferee shall sign
an investment letter in form and substance reasonably satisfactory to the
Company.
2. Authorization of Warrant Shares and DOC Warrant Shares.
------------------------------------------------------
The Company covenants that all Warrant Shares which may be issued upon the
exercise of the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue). The
Company is the beneficial owner and the Trustee is the record owner of all
of the DOC Warrant Shares, free and clear of any Liens, and upon exercise in
accordance with this Warrant, the Company and the Trustee will transfer to
the Holder good and marketable title to such DOC Warrant Shares, free and
clear of any Liens. Upon any such transfer to the Holder of any DOC Warrant
Shares, and assuming the Holder is not deemed to be an underwriter and
assuming the Holder complies with the applicable plan of distribution, the
DOC Warrant Shares shall be unrestricted and freely tradable on the
Principal Market without any prospectus delivery or other requirements
whatsoever and without the need to make any registration or other filing
with the Commission.
3. Exercise of Warrant.
-------------------
(a) Except as provided in Section 4 herein,
exercise of the purchase rights represented by this Warrant may be
made at any time or times on or after the Initial Exercise Date and
on or before the Termination Date by the surrender of this Warrant
and the Notice of Exercise Form annexed hereto duly executed, at
the office of the Company or, in the case of exercise into DOC
Warrant Shares, to the Trustee (or such other office or agency of
the Company or Trustee as they may designate by notice in writing
to the registered Holder at the address of such Holder appearing on
the books of the Company or the Trustee, respectively) and upon
payment of the Exercise Price and/or DOC Exercise Price, as the
case may be, of the shares thereby purchased by wire transfer or
cashier's check drawn on a United States bank to the Company, or by
means of a cashless exercise pursuant to Section 3(e) (as to
Warrant Shares only), the Holder shall be entitled to receive a
certificate for the number of Warrant Shares, DOC Warrant Shares,
or combination thereof, so purchased. Certificates for shares
purchased hereunder shall be delivered to the Holder within five
(5) Trading Days after the date on which this Warrant shall have
been exercised as aforesaid. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be deemed
to have been issued, and Holder or any other person so designated
to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the Warrant
has been exercised by payment to the Company of the Exercise Price
and/or DOC Exercise Price, as the case may be, and all taxes
required to be paid by the Holder, if any, pursuant
2
to Section 5 prior to the issuance of such shares, have been paid.
If the Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this
Section 3(a) by the third Trading Day after the date of exercise,
then the Holder will have the right to rescind such exercise. In
addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to an
exercise by the third Trading Day after the date of exercise, and
if after such third Trading Day the Holder is required by its
broker to purchase (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a "Buy-In"), then the Company shall (1) pay in
------
cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained
by multiplying (A) the number of Warrant Shares that the Company
was required to deliver to the Holder in connection with the
exercise at issue times (B) the price at which the sell order
giving rise to such purchase obligation was executed, and (2) at
the option of the Holder, either reinstate the portion of the
Warrant and equivalent number of Warrant Shares for which such
exercise was not honored or deliver to the Holder the number of
shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations
hereunder. For example, if the Holder purchases Common Stock having
a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted exercise of shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000,
under clause (1) of the immediately preceding sentence the Company
shall be required to pay the Holder $1,000. The Holder shall
provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the
Company. Nothing herein shall limit a Holder's right to pursue any
other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance
and/or injunctive relief with respect to the Company's failure to
timely deliver certificates representing shares of Common Stock
upon exercise of the Warrant as required pursuant to the terms
hereof.
(b) This Warrant is exercisable proportionately
into Warrant Shares and/or DOC Warrant Shares, but is not
exercisable into the full number of both Warrant Shares and DOC
Warrant Shares. For every Warrant Share purchased, a proportionate
number of DOC Warrant Shares shall cease to be purchasable and
vice versa. By way of example, if this Warrant were initially
exercisable for up to 2,000 Warrant Shares and up to 1,000 DOC
Warrant Shares, and the Holder subsequently exercises this Warrant
for 500 Warrant Shares, then, after such exercise, the maximum
number of DOC Warrant Shares for which this Warrant could be
exercised would be 750 DOC Warrant Shares. If this Warrant were
first exercised to purchase 500 DOC Warrant Shares, then, after
such exercise, the maximum number of Warrant Shares for which this
Warrant could be exercised would be 1,000.
(c) Notwithstanding anything herein to the contrary,
in no event shall the Holder be permitted to exercise this Warrant for
Warrant Shares to the extent that (i) the number of shares of
Common Stock beneficially owned by such Holder, together with
3
any affiliate thereof (other than Warrant Shares issuable
upon exercise of this Warrant) plus (ii) the number of Warrant
Shares issuable upon exercise of this Warrant, would be equal to
or exceed 4.9999% of the number of shares of Common Stock then
issued and outstanding, including shares issuable upon exercise of
this Warrant held by such Holder after application of this Section
3(c). As used herein, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and the rules
promulgated thereunder. To the extent that the limitation
contained in this Section 3(c) applies, the determination of
whether this Warrant is exercisable (in relation to other
securities owned by the Holder) and of which a portion of this
Warrant is exercisable shall be in the sole discretion of such
Holder, and the submission of a Notice of Exercise shall be deemed
to be such Holder's determination of whether this Warrant is
exercisable (in relation to other securities owned by such Holder)
and of which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the Company
shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to
restrict the right of a Holder to exercise this Warrant into
Warrant Shares at such time as such exercise will not violate the
provisions of this Section 3(c). The provisions of this Section
3(c) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days' prior notice to the Company, and
the provisions of this Section 3(c) shall continue to apply until
such 61st day (or such later date, as determined by the Holder, as
may be specified in such notice of waiver). No exercise of this
Warrant in violation of this Section 3(c) but otherwise in
accordance with this Warrant shall affect the status of the
Warrant Shares as validly issued, fully-paid and nonassessable.
(d) Notwithstanding anything herein to the
contrary, in no event shall the Holder be permitted to exercise
this Warrant for DOC Warrant Shares to the extent that (i) the
number of shares of DOC Common Stock beneficially owned by such
Holder, together with any affiliate thereof (other than DOC Warrant
Shares issuable upon exercise of this Warrant) plus (ii) the number
of DOC Warrant Shares issuable upon exercise of this Warrant, would
be equal to or exceed 4.9999% of the number of shares of DOC Common
Stock then issued and outstanding, including shares issuable upon
exercise of this Warrant held by such Holder after application of
this Section 3(d). As used herein, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and
the rules promulgated thereunder. To the extent that the limitation
contained in this Section 3(d) applies, the determination of
whether this Warrant is exercisable (in relation to other
securities owned by the Holder) and of which a portion of this
Warrant is exercisable shall be in the sole discretion of such
Holder, and the submission of a Notice of Exercise shall be deemed
to be such Holder's determination of whether this Warrant is
exercisable (in relation to other securities owned by such Holder)
and of which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the Company
shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict
the right of a Holder to exercise this Warrant into DOC Warrant
Shares at such time as such exercise will not violate the
provisions of this Section 3(d). The provisions of this Section
3(d) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days' prior notice to the Company, and the
provisions of this Section 3(d)
4
shall continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of
waiver).
(e) If at any time after one year from the date
of issuance of this Warrant there is no effective Registration
Statement registering the resale of the Warrant Shares by the
Holder, or the sale of the DOC Warrant Shares by the Trust to the
Holder, then this Warrant may also be exercised at such time by
means of a "cashless exercise" in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares
equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where:
(A) = the VWAP or the DOC VWAP, as applicable, on the
Trading Day preceding the date of such election;
(B) = the Exercise Price or the DOC Exercise Price, as
applicable, of the Warrants, as adjusted; and
(X) = the number of Warrant Shares or DOC Warrant
Shares, as applicable, issuable upon exercise of
the Warrants in accordance with the terms of this
Warrant.
4. No Fractional Shares or Scrip. No fractional shares or
-----------------------------
scrip representing fractional shares shall be issued upon the exercise of
this Warrant. As to any fraction of a share which Holder would otherwise be
entitled to purchase upon such exercise, the Company shall pay a cash
adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price or DOC Exercise Price, as the case
may be.
5. Charges, Taxes and Expenses. Issuance of certificates
---------------------------
for Warrant Shares and/or DOC Warrant Shares shall be made without charge to
the Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the
name of the Holder or in such name or names as may be directed by the
Holder; provided, however, that in the event certificates for Warrant Shares
-------- -------
and/or DOC Warrant Shares are to be issued in a name other than the name of
the Holder, this Warrant when surrendered for exercise shall be accompanied
by the Assignment Form attached hereto duly executed by the Holder; and the
Company may require, as a condition thereto, the payment of a sum sufficient
to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its
----------------
stockholder books or records in any manner which prevents the timely
exercise of this Warrant, pursuant to the terms hereof.
7. Transfer, Division and Combination.
----------------------------------
(a) Subject to compliance with any applicable
securities laws and the conditions set forth in Sections 1
and 7(f) hereof and to the provisions of Section 4.1 of the
Purchase Agreement, this Warrant and all rights hereunder are
transferable, in whole or in part, upon surrender of this
Warrant at the principal office of the Company, together
5
with a written assignment of this Warrant substantially in
the form attached hereto duly executed by the Holder or its
agent or attorney and funds sufficient to pay any transfer
taxes payable upon the making of such transfer. Upon such
surrender and, if required, such payment, the Company shall
execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination or
denominations specified in such instrument of assignment, and
shall issue to the assignor a new Warrant evidencing the
portion of this Warrant not so assigned, and this Warrant
shall promptly be cancelled. A Warrant, if properly assigned,
may be exercised by a new holder for the purchase of Warrant
Shares and/or DOC Warrant Shares without having a new Warrant
issued.
(b) This Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid
office of the Company, together with a written notice
specifying the names and denominations in which new Warrants
are to be issued, signed by the Holder or its agent or
attorney. Subject to compliance with Section 7(a), as to any
transfer which may be involved in such division or
combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants
to be divided or combined in accordance with such notice.
(c) The Company shall prepare, issue and deliver
at its own expense (other than transfer taxes) the new
Warrant or Warrants under this Section 7.
(d) The Company agrees to maintain, at its aforesaid
office, books for the registration and the registration of
transfer of the Warrants.
(e) If, at the time of the surrender of this Warrant
in connection with any transfer of this Warrant, the transfer
of this Warrant shall not be registered pursuant to an
effective registration statement under the Securities Act and
under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such transfer
(i) that the Holder or transferee of this Warrant, as the
case may be, furnish to the Company a written opinion of
counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions)
to the effect that such transfer may be made without
registration under the Securities Act and under applicable
state securities or blue sky laws, (ii) that the holder or
transferee execute and deliver to the Company an investment
letter in form and substance acceptable to the Company and
(iii) that the transferee be an "accredited investor" as
defined in Rule 501(a) promulgated under the Securities Act.
8. No Rights as Shareholder until Exercise. This Warrant does
---------------------------------------
not entitle the Holder to any voting rights or other rights as a shareholder
of the Company or of DOC prior to the exercise hereof. Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price (or by means of
a cashless exercise) or DOC Warrant Shares, the Warrant Shares and/or DOC
Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The
-------------------------------------------------
Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft,
6
destruction or mutilation of this Warrant or any stock certificate relating
to the Warrant Shares, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it (which, in the case of
the Warrant, shall not include the posting of any bond), and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the
Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or
---------------------------------
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday,
then such action may be taken or such right may be exercised on the next
succeeding day not a Saturday, Sunday or legal holiday.
11. Adjustments of Exercise Price and Number of Warrant
---------------------------------------------------
Shares and DOC Warrant Shares.
- -----------------------------
(a) Stock Splits, etc.
-----------------
(i) Warrant Shares. The number and kind of
--------------
securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of
any of the following. In case the Company shall
(i) pay a dividend in shares of Common Stock or
make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii)
subdivide its outstanding shares of Common Stock
into a greater number of shares, (iii) combine its
outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (iv) issue
any shares of its capital stock in a reclassification
of the Common Stock, then the number of Warrant
Shares purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that
the Holder shall be entitled to receive the kind
and number of Warrant Shares or other securities
of the Company which it would have owned or have
been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such
adjustment of the kind and number of Warrant Shares
or other securities of the Company which are
purchasable hereunder, the Holder shall thereafter
be entitled to purchase the number of Warrant Shares
or other securities resulting from such adjustment
at an exercise price per Warrant Share or other
security obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant
hereto immediately prior to such adjustment and
dividing by the number of Warrant Shares
or other securities of the Company resulting from
such adjustment. An adjustment made pursuant to this
paragraph shall become effective immediately after
the effective date of such event retroactive to the
record date, if any, for such event.
(ii) DOC Warrant Shares. The number and kind
------------------
of securities purchasable upon the exercise of this
Warrant and the DOC Exercise Price shall be subject
to adjustment from time to time upon the happening
of any of the following. In case DOC shall (i) pay
a dividend in shares of DOC Common Stock or make
a distribution in shares of DOC Common Stock to
holders of its
7
outstanding DOC Common Stock, (ii) subdivide its
outstanding shares of DOC Common Stock into a
greater number of shares, (iii) combine its
outstanding shares of DOC Common Stock into a
smaller number of shares of DOC Common Stock, or
(iv) issue any shares of its capital stock in a
reclassification of the DOC Common Stock, then the
number of DOC Warrant Shares purchasable upon
exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be
entitled to receive the kind and number of DOC
Warrant Shares or other securities of DOC which it
would have owned or have been entitled to receive
had such Warrant been exercised in advance thereof.
Upon each such adjustment of the kind and
number of DOC Warrant Shares or other securities of
DOC which are purchasable hereunder, the Holder
shall thereafter be entitled to purchase the number
of DOC Warrant Shares or other securities resulting
from such adjustment at an exercise price per DOC
Warrant Share or other security obtained by
multiplying the DOC Exercise Price in effect
immediately prior to such adjustment by the number
of DOC Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing
by the number of DOC Warrant Shares or other
securities of DOC resulting from such
adjustment. An adjustment made pursuant to this
paragraph shall become effective immediately after
the effective date of such event retroactive to
the record date, if any, for such event.
(b) Anti-Dilution Provisions. During the Exercise
------------------------
Period, the Exercise Price and the number of Warrant Shares
issuable hereunder and for which this Warrant is then
exercisable pursuant to Section 1 hereof shall be subject
to adjustment from time to time as provided in this
Section 11(b). In the event that any adjustment of the
Exercise Price as required herein results in a fraction
of a cent, such Exercise Price shall be rounded up or
down to the nearest cent.
(i) Adjustment of Exercise Price. Except as
----------------------------
set forth in Section 11(b)(ii)(E), if and whenever
the Company issues or sells, or in accordance with
Section 11(b) hereof is deemed to have issued or
sold, any shares of Common Stock for an effective
consideration per share of less than the then
Exercise Price or for no consideration (such lower
price, the "Base Share Price" and such issuances
----------------
collectively, a "Dilutive Issuance"), then, the
-----------------
Exercise Price shall be reduced to equal the Base
Share Price, provided, that for purposes hereof,
--------
all shares of Common Stock that are issuable upon
conversion, exercise or exchange of Capital Share
Equivalents shall be deemed outstanding immediately
after the issuance of such Common Stock. Such
adjustment shall be made whenever such shares
of Common Stock or Capital Share Equivalents are
issued.
(ii) Effect on Exercise Price of Certain
-----------------------------------
Events. For purposes of determining the adjusted
------
Exercise Price under Section 11(b) hereof, the
following will be applicable:
(A) Issuance of Rights or
---------------------
Options. If the Company in any manner issues
-------
or grants any warrants, rights or options,
whether or not immediately exercisable, to
subscribe for or to purchase Common Stock or
other securities exercisable, convertible
into or exchangeable for Common
8
Stock ("Convertible Securities") (such
----------------------
warrants, rights and options to purchase
Common Stock or Convertible Securities are
hereinafter referred to as "Options") and
-------
the effective price per share for which
Common Stock is issuable upon the exercise
of such Options is less than the
Exercise Price ("Below Base Price Options"),
------------------------
then the maximum total number of shares of
Common Stock issuable upon the exercise
of all such Below Base Price Options
(assuming full exercise, conversion or
exchange of Convertible Securities, if
applicable) will, as of the date of the
issuance or grant of such Below Base Price
Options, be deemed to be outstanding and
to have been issued and sold by the Company
for such price per share and the maximum
consideration payable to the Company upon
such exercise (assuming full exercise,
conversion or exchange of Convertible
Securities, if applicable) will be deemed
to have been received by the Company. For
purposes of the preceding sentence, the
"effective price per share for which Common
Stock is issuable upon the exercise of
such Below Base Price Options" is determined
by dividing (i) the total amount, if any,
received or receivable by the Company as
consideration for the issuance or granting
of all such Below Base Price Options, plus
the minimum aggregate amount of additional
consideration, if any, payable to the
Company upon the exercise of all such
Below Base Price Options, plus, in the case
of Convertible Securities issuable upon
the exercise of such Below Base Price
Options, the minimum aggregate amount of
additional consideration payable upon the
exercise, conversion or exchange thereof
at the time such Convertible Securities first
become exercisable, convertible or
exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable
upon the exercise of all such Below Base
Price Options (assuming full conversion of
Convertible Securities, if applicable).
No further adjustment to the Exercise Price
will be made upon the actual issuance of
such Common Stock upon the exercise of
such Below Base Price Options or upon the
exercise, conversion or exchange of
Convertible Securities issuable upon exercise
of such Below Base Price Options.
(B) Issuance of Convertible
-----------------------
Securities. If the Company in any manner
----------
issues or sells any Convertible Securities,
whether or not immediately convertible (other
than where the same are issuable upon the
exercise of Options) and the effective price
per share for which Common Stock is issuable
upon such exercise, conversion or exchange
is less than the Exercise Price, then the
maximum total number of shares of
Common Stock issuable upon the exercise,
conversion or exchange of all such
Convertible Securities will, as of the date
of the issuance of such Convertible
Securities, be deemed to be outstanding and
to have been issued and sold by the Company
for such price per share and the maximum
consideration payable to the Company upon
such exercise (assuming full exercise,
conversion or exchange of Convertible
Securities, if applicable) will be deemed
to have been received by the Company. For
9
the purposes of the preceding sentence,
the "effective price per share for
which Common Stock is issuable upon such
exercise, conversion or exchange" is
determined by dividing (i) the total amount,
if any, received or receivable by the
Company as consideration for the issuance
or sale of all such Convertible Securities,
plus the minimum aggregate amount of
additional consideration, if any, payable
to the Company upon the exercise, conversion
or exchange thereof at the time such
Convertible Securities first become
exercisable, convertible or exchangeable,
by (ii) the maximum total number of shares
of Common Stock issuable upon the exercise,
conversion or exchange of all such
Convertible Securities. No further
adjustment to the Exercise Price will be made
upon the actual issuance of such Common Stock
upon exercise, conversion or exchange of such
Convertible Securities.
(C) Change in Option Price or
-------------------------
Conversion Rate. If there is a change at any
---------------
time in (i) the amount of additional
consideration payable to the Company upon
the exercise of any Options; (ii) the amount
of additional consideration, if any, payable
to the Company upon the exercise, conversion
or exchange of any Convertible Securities;
or (iii) the rate at which any Convertible
Securities are convertible into or
exchangeable for Common Stock (in each
such case, other than under or by reason of
provisions designed to protect against
dilution), the Exercise Price in effect at
the time of such change will be readjusted
to the Exercise Price which would have
been in effect at such time had such Options
or Convertible Securities still
outstanding provided for such changed
additional consideration or changed
conversion rate, as the case may be, at the
time initially granted, issued or sold.
(D) Calculation of Consideration
----------------------------
Received. If any Common Stock, Options or
--------
Convertible Securities are issued, granted or
sold for cash, the consideration received
therefor for purposes of this Warrant will
be the amount received by the Company
therefor, before deduction of reasonable
commissions, underwriting discounts or
allowances or other reasonable expenses
paid or incurred by the Company in
connection with such issuance, grant or sale.
In case any Common Stock, Options or
Convertible Securities are issued or sold
for a consideration part or all of which
shall be other than cash, the amount of
the consideration other than cash
received by the Company will be the fair
market value of such consideration, except
where such consideration consists of
securities, in which case the amount of
consideration received by the Company will
be the fair market value (closing bid price,
if traded on any market) thereof as of
the date of receipt. In case any Common
Stock, Options or Convertible Securities
are issued in connection with any merger or
consolidation in which the Company is the
surviving corporation, the amount of
consideration therefor will be
deemed to be the fair market value of such
portion of the net assets and business of
the non-
10
surviving corporation as is attributable to
such Common Stock, Options or Convertible
Securities, as the case may be. The fair
market value of any consideration other than
cash or securities will be determined in
good faith by an investment banker or other
appropriate expert of national reputation
selected by the Company and reasonably
acceptable to the holder hereof, with
the costs of such appraisal to be borne by
the Company.
(E) Exceptions to Adjustment of
---------------------------
Exercise Price. Notwithstanding the
--------------
foregoing, no adjustment will be made under
this Section 11(b) in respect of (1) the
granting of options to employees, officers
and directors of the Company pursuant to
any stock option plan duly adopted by
a majority of the non-employee members of the
Board of Directors of the Company or a
majority of the members of a committee of
non-employee directors established for such
purpose, (2) upon the exercise of the
Debentures or any Debentures of this series
or of any other series or security
issued by the Company in connection with the
offer and sale of this Company's securities
pursuant to the Purchase Agreement, (3) upon
the exercise of or conversion of any
convertible securities, options or warrants
issued and outstanding on the Original Issue
Date, provided that the securities have not
been amended since the date of the Purchase
Agreement, (4) acquisitions or strategic
investments, the primary purpose of which
is not to raise capital or (5) any other
Exempt Transaction.
(iii) Minimum Adjustment of Exercise Price. No
------------------------------------
adjustment of the Exercise Price or DOC Exercise Price
shall be made in an amount of less than 1% of the Exercise
Price or DOC Exercise Price in effect at the time such
adjustment is otherwise required to be made, but any such
lesser adjustment shall be carried forward and shall be
made at the time and together with the next subsequent
adjustment which, together with any adjustments so carried
forward, shall amount to not less than 1% of such exercise
price.
12. Reorganization, Reclassification, Merger, Consolidation
-------------------------------------------------------
or Disposition of Assets.
- ------------------------
(a) In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into
another corporation (where the Company is not the surviving
corporation or where there is a change in or distribution with
respect to the Common Stock of the Company), or sell, transfer or
otherwise dispose of all or substantially all its property, assets
or business to another corporation and, pursuant to the terms of
such reorganization, reclassification, merger, consolidation or
disposition of assets, shares of common stock of the successor or
acquiring corporation, or any cash, shares of stock or other
securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) in addition to
or in lieu of common stock of the successor or acquiring
corporation ("Other Property"), are to be received by or
--------------
distributed to the holders of Common Stock of the Company, then
the Holder shall have the right thereafter to receive, upon
exercise of this Warrant, the number of shares of Common Stock of
the successor or acquiring corporation or of the Company, if it is
11
the surviving corporation, and Other Property receivable upon or
as a result of such reorganization, reclassification, merger,
consolidation or disposition of assets by a Holder of the number
of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such
reorganization, reclassification, merger, consolidation or
disposition of assets, the successor or acquiring corporation (if
other than the Company) shall expressly assume the due and
punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the
Company and all the obligations and liabilities hereunder, subject
to such modifications as may be deemed appropriate (as determined
in good faith by resolution of the Board of Directors of the
Company) in order to provide for adjustments of Warrant Shares for
which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this
Section 12. For purposes of this Section 12, "common stock of the
successor or acquiring corporation" shall include stock of such
corporation of any class which is not preferred as to dividends or
assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences
of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either
immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to
subscribe for or purchase any such stock. The foregoing provisions
of this Section 12 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or
disposition of assets.
(b) If any of the foregoing events shall occur with
respect to DOC, and the DOC Warrant Shares shall have been
converted into or shall be deemed to have been converted into
common stock of the successor or acquiring corporation and/or
Other Property, then, after such event, this Warrant shall be
exercisable into such other corporation's common stock and/or
Other Property as aforesaid with respect to the Company.
13. Voluntary Adjustment by the Company. The Company may at
-----------------------------------
any time during the term of this Warrant reduce the then current Exercise
Price or DOC Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant
--------------------
Shares or number or kind of securities or other property purchasable upon
the exercise of this Warrant or the Exercise Price is adjusted, as herein
provided, the Company shall give notice thereof to the Holder, which notice
shall state the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made. Whenever
the Company has knowledge that the number of DOC Warrant Shares or number or
kind of securities or other property purchasable upon the exercise of this
Warrant or the DOC Exercise Price is adjusted, as herein provided, the
Company shall give notice thereof to the Holder, which notice shall state
the number of DOC Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the DOC Exercise Price of
such DOC Warrant Shares (and other securities or property) after such
adjustment, setting forth a brief
12
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.
15. Notice of Corporate Action. If at any time:
--------------------------
(a) the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, or any right to subscribe
for or purchase any evidences of its indebtedness, any shares of
stock of any class or any other securities or property, or to
receive any other right, or
(b) there shall be any capital reorganization of
the Company, any reclassification or recapitalization of the
capital stock of the Company or any consolidation or merger of the
Company with, or any sale, transfer or other disposition of all or
substantially all the property, assets or business of the Company
to, another corporation or,
(c) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i)
at least 20 days' prior written notice of the date on which a record date
shall be selected for such dividend, distribution or right or for
determining rights to vote in respect of any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
liquidation or winding up, and (ii) in the case of any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause also shall specify (i) the date on which any such
record is to be taken for the purpose of such dividend, distribution or
right, the date on which the holders of Common Stock shall be entitled to
any such dividend, distribution or right, and the amount and character
thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding up.
Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 17(d). Notwithstanding the foregoing,
no notice or action by the Company is required in connection with the
reincorporation of the Company from Missouri to Florida as set forth in the
Proxy.
16. Authorized Shares. The Company covenants that during the
-----------------
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the
issuance of the Warrant Shares upon the exercise of any purchase rights
under this Warrant. The Company further covenants that its issuance of this
Warrant shall constitute full authority to its officers who are charged with
the duty of executing stock certificates to execute and issue the necessary
certificates for the Warrant Shares upon the exercise of the purchase rights
under this Warrant. The Company will take all such reasonable action as may
be necessary to assure that such Warrant Shares may be issued as
13
provided herein without violation of any applicable law or regulation, or of
any requirements of the Principal Market upon which the Common Stock may be
listed.
Except and to the extent as waived or consented
to by the Holder, the Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of Holder as set forth in this Warrant against
impairment. Without limiting the generality of the foregoing, the Company
will (a) not increase the par value of any Warrant Shares above the amount
payable therefor upon such exercise immediately prior to such increase in
par value, (b) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use
commercially reasonable efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
Before taking any action which would result in an
adjustment in the number of Warrant Shares for which this Warrant is
exercisable or in the Exercise Price, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction
thereof.
17. Miscellaneous.
-------------
(a) Jurisdiction. This Warrant shall constitute a
------------
contract under the laws of New York, without regard to its conflict
of law, principles or rules.
(b) Restrictions. The Holder acknowledges that this
------------
Warrant and the Warrant Shares acquired upon the exercise of this
Warrant, if not registered, will have restrictions upon resale imposed
by state and federal securities laws.
(c) Nonwaiver and Expenses. No course of dealing or
----------------------
any delay or failure to exercise any right hereunder on the part
of Holder shall operate as a waiver of such right or otherwise
prejudice Holder's rights, powers or remedies, notwithstanding all
rights hereunder terminate on the Termination Date. If the Company
willfully and knowingly fails to comply with any provision of this
Warrant, which results in any material damages to the Holder, the
Company shall pay to Holder such amounts as shall be sufficient to
cover any costs and expenses including, but not limited to,
reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.
(d) Notices. Any notice, request or other document
-------
required or permitted to be given or delivered to the Holder by
the Company shall be delivered in accordance
14
with the notice provisions of the Purchase Agreement. Notice of
any exercise of this Warrant shall also be sent to
debentures@adsx.com.
(e) Limitation of Liability. No provision hereof,
-----------------------
in the absence of any affirmative action by Holder to exercise
this Warrant or purchase Warrant Shares, and no enumeration herein
of the rights or privileges of Holder, shall give rise to any
liability of Holder for the purchase price of any Common Stock or
as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
(f) Remedies. Holder, in addition to being entitled
--------
to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights
under this Warrant. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Warrant and hereby agrees
to waive the defense in any action for specific performance that a
remedy at law would be adequate.
(g) Successors and Assigns. Subject to applicable
----------------------
securities laws, this Warrant and the rights and obligations
evidenced hereby shall inure to the benefit of and be binding upon
the successors of the Company and the successors and permitted
assigns of Holder. The provisions of this Warrant are intended to
be for the benefit of all Holders from time to time of this
Warrant and shall be enforceable by any such Holder or holder of
Warrant Shares.
(h) Amendment. This Warrant may be modified or
---------
amended or the provisions hereof waived with the written consent
of the Company and the Holder.
(i) Severability. Wherever possible, each provision
------------
of this Warrant shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of
this Warrant shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of
such provisions or the remaining provisions of this Warrant.
(j) Headings. The headings used in this Warrant are
--------
for the convenience of reference only and shall not, for any
purpose, be deemed a part of this Warrant.
********************
15
IN WITNESS WHEREOF, the Company has caused this Warrant to
be executed by its officer thereunto duly authorized.
Dated: June __, 2003
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ Scott Silverman
------------------------------
Name: Scott Silverman
Title: CEO
16
NOTICE OF EXERCISE
To: Applied Digital Solutions, Inc.
(1) The undersigned hereby elects to purchase ________ Warrant Shares
of Applied Digital Solutions, Inc. and/or __________ DOC Warrant Shares of
Digital Angel Corporation pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise
price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] as to Warrant Shares only, the cancellation
of such number of Warrant Shares as is necessary,
in accordance with the formula set forth in
subsection 3(e), to exercise this Warrant with
respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise
procedure set forth in subsection 3(e).
(3) Please issue a certificate or certificates representing said
Warrant Shares and/or DOC Warrant Shares in the name of the undersigned or
in such other name as is specified below:
________________________________________ (if issuance is to a
Person other than Holder, a letter on Holder's letterhead must confirm the
notice) Federal Taxpayer ID# _______________________
The Warrant Shares and/or DOC Warrant Shares shall be delivered to the
following:
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OR, in the case of Warrant Shares ONLY, DTC information:
Clearing Agent Name:______________________________
DWAC Number:______________________________________
(4) Accredited Investor. The undersigned is an "accredited
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investor" as defined in Regulation D promulgated under the Securities Act
of 1933, as amended.
[PURCHASER]
By:_______________________________
Name:
Title:
Dated: ___________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to
_______________________________________________ whose address is
___________________________________________________________________.
___________________________________________________________________
Dated: ______________, _______
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: _____________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as
it appears on the face of the Warrant, without alteration or enlargement or
any change whatsoever, and must be guaranteed by a bank or trust company.
Officers of corporations and those acting in a fiduciary or other
representative capacity should file proper evidence of authority to assign
the foregoing Warrant.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF
APPLIED DIGITAL SOLUTIONS, INC.
Michael E. Krawitz and Evan C. McKeown, and each of them, are
appointed by the undersigned as proxies, each with power of substitution, to
represent and vote the shares of stock of Applied Digital Solutions, Inc.
(the "Company") which the undersigned would be entitled to vote at the
Special Meeting of Shareholders of the Company to be held on September 10,
2003 at 8:00 a.m. Eastern Daylight Time, at the West Palm Beach Marriott
Hotel, 630 Clearwater Park Road, West Palm Beach, Florida 33401, and at any
postponements or adjournments thereof (the "Special Meeting") as if the
undersigned were present and voting at the meeting.
1. Approval of the potential issuance of up to approximately
26,200,000 shares of the Company's common stock upon the
conversion or redemption of the Company's $10,500,000 aggregate
principal amount of 8.5% Convertible Exchangeable Debentures
and 5,352,773 shares of the Company's common stock upon the
exercise of related Stock Purchase Warrants, subject to
anti-dilution and other provisions contained in the form of
Debenture and form of Warrant, attached as Appendix A and
Appendix B, respectively;
FOR / / AGAINST / / ABSTAIN / /
2. To approve the issuance of up to 30,000,000 shares of the
Company's common stock after effectiveness of the Company's
registration statement on Form S-1 (File No. 333-106300),
which was filed with the Securities and Exchange Commission
on June 20, 2003, which share amount when combined with the
issuance of the Debentures, Warrants and common stock issued
pursuant to the Securities Purchase Agreements, represents
more than 20% of the outstanding common stock of the Company
on a pre-transaction basis; and
FOR / / AGAINST / / ABSTAIN / /
3. To approve an amendment to the Company's Third Restated Articles
of Incorporation, as amended, effecting a reverse stock split
of the Company's common stock, and granting of discretionary
authority to the Board of Directors for a period of twelve
months after the date the Company's shareholders approve this
proposal to determine the reverse stock split ratio, not to
exceed a ratio of 1-for-25, and the effective date of the
reverse stock split or to determine not to proceed with the
reverse stock split.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, on any other business that may properly
come before the Special Meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTIONS SET FORTH ABOVE AND, WHERE NO DIRECTIONS ARE GIVEN, SUCH SHARES
WILL BE VOTED FOR EACH PROPOSAL REFERRED TO ABOVE.
Dated , 2003
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Signature
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Signature
Please sign, date and return this proxy in the enclosed envelope.
Joint Owners should each sign this proxy. Attorneys-in-fact, executors,
administrators, trustees, guardians or corporation officers should give
their full title.
Yes No
Please indicate if you plan to attend this meeting. / / / /
HOUSEHOLDING OPT-OUT- / / I wish to opt-out of the Householding
Program.
Please indicate by checking the opt-out box if you do not wish to
participate in the Householding Program. Please note that if you do not
check the opt-out box, you will be deemed to have consented to our
Householding Program, and Householding will begin [60] days after the
mailing of the Proxy Statement.