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As Filed with the Securities and Exchange Commission on September 14, 1999
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Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
Intellesale.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware 5961 52-2137650
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or 510 Ryerson Road
organization)
Lincoln Park, New Jersey 07035
(973) 686-9100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________________
Charles D. Newman
Executive Vice President
510 Ryerson Road
Lincoln Park, New Jersey 07035
(973) 686-9100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
_________________________
Copies of all correspondence to:
<TABLE>
<S> <C> <C>
Michael Krawitz, Esq. Denis P. McCusker, Esq. Paul Jacobs, Esq.
Intellesale.com, Inc. Bryan Cave LLP Roy L. Goldman, Esq.
510 Ryerson Road One Metropolitan Square Fulbright & Jaworski L.L.P.
Lincoln Park, New Jersey 07035 211 North Broadway, Suite 3600 666 Fifth Avenue
(973) 686-9100 St. Louis, Missouri 63102-2750 New York, New York 10103
(973) 694-1166 (fax) (314) 259-2000 (212) 318-3000
(314) 259-2020 (fax) (212) 752-5958 (fax)
</TABLE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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============================================================================================================
Proposed maximum aggregate Amount of
Title of each class of securities to be registered offering price(1) registration fee
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<S> <C> <C>
Common Stock, $0.0001 par value per share $57,500,000 $15,985
============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933 and includes
shares that may be purchased by the underwriters to cover over-
allotments, if any.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities and we are not soliciting
any offer to buy these securities in any state where the offer or sale is not
permitted
PRELIMINARY PROSPECTUS DATED SEPTEMBER 14, 1999
PROSPECTUS
[________] Shares
[Logo]
Common Stock
___________________
This is the initial public offering of Intellesale.com, Inc. Intellesale is
offering [________]shares and our parent corporation, Applied Digital Solutions,
Inc., is offering [________]shares as the selling stockholder. In addition, the
underwriters may purchase up to [________] additional shares from Intellesale
and Applied Digital Solutions to cover over-allotments. Upon completion of this
offering, Applied Digital Solutions will beneficially own approximately [___]%
of our common stock. Applied Digital Solutions has agreed to vote its shares in
proportion to the votes of the other stockholders. We will not receive any
proceeds from shares of common stock sold by the selling stockholder.
Prior to this offering, there has been no public market for our common
stock. We currently estimate that the initial public offering price of the
shares will be between $[________] and $[________] per share. We intend to apply
for inclusion of our common stock on the Nasdaq National Market under the symbol
"SALE."
See "Risk Factors" starting on page 6 to read about certain factors you
should consider before you purchase shares of our common stock.
___________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
___________________
Per Share Total
--------- -----
Initial public offering price..................... $ $
Underwriting discounts and commissions............ $ $
Proceeds to Intellesale, before expenses.......... $ $
Proceeds to selling stockholder, before expenses.. $ $
___________________
The underwriters are offering the shares subject to various
conditions. The underwriters expect to deliver the shares to purchasers on or
about [ ], 1999.
Ladenburg Thalmann & Co. Inc.
Punk, Ziegel & Company
___________________
Prospectus dated [_____________], 1999
<PAGE>
SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. The other information is
important, so please read this entire prospectus carefully. Unless otherwise
stated, the information contained in this prospectus assumes that the
underwriters' over-allotment option to purchase [_________] shares of common
stock from us and from Applied Digital Solutions is not exercised and that we
issue [_________] shares of common stock to the sellers of certain businesses we
acquired.
INTELLESALE.COM, INC.
Our Business
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at www.Intellesale.com
as well as through traditional channels, which we are migrating to the Internet.
In addition to selling products on our website, we distribute products through
cooperative marketing arrangements with OnSale.com and uBid.com, where we
conduct auctions of our products, as well as with FlashNet Communications, Lycos
and other Internet portals and service providers. We are not aware of any major
online retailers currently focusing principally on refurbished computer
equipment.
In addition to our Internet business, we buy and remarket computer
equipment and components to traditional wholesalers, retailers and value-added
resellers, as well as individual and corporate end users, and provide
integration and consulting services, computer recycling, parts-on-demand
services and transportation services for computer and other equipment. We are
transitioning this traditional commerce business to the Internet.
We offer a wide range of refurbished and new products, including laptop and
desktop computers, monitors, disk drives, modems, printers, scanners, memory,
expansion boards, cables and connectors. The majority of the products we offer
are brand name, Intel Pentium(R) class or equivalent products manufactured by
IBM, Compaq, Sony, Fujitsu, Hewlett-Packard and other major manufacturers. We
offer our customers complete packages including monitors, regularly-featured
specials and the ability to purchase selected merchandise on an auction basis.
We provide a minimum six-month warranty for most products not covered by
manufacturer warranties. In addition, we offer our customers the opportunity to
purchase an extended warranty, which is priced on the basis of the selling price
of the item covered.
We believe the demand for refurbished brand name computer equipment is
growing as consumers realize they can purchase refurbished products that can
serve their needs at substantial discounts to the price of new merchandise. At
the same time, shorter product cycles are leading to increased off-lease and
excess inventory computer equipment which vendors and leasing companies need to
dispose of in large quantities without conflicting with their primary
distribution channels. We offer such vendors and leasing companies the ability
to conveniently sell all their products in a single transaction. We believe that
our ability to acquire many different types of equipment in large quantities
through our established vendor relationships provides us with a significant
competitive advantage both with consumers and vendors.
According to International Data Corporation, a market research firm, the
total value of goods and services purchased over the Internet will increase from
approximately $32.4 billion in 1998 to approximately $425.7 billion by 2002.
According to Jupiter Communications, another market research firm, the single
largest online retail category in the United States will be computers and
consumer electronics, which Jupiter projects will grow from approximately $836.0
million in 1997 to approximately $10.5 billion by the year 2002.
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We began offering products on the Internet in the second quarter of 1998.
We established the Intellesale.com website in January 1999 and began to focus
our business on, and migrate our traditional business to, the Internet. Our
revenues for the six months ended June 30, 1999, pro forma for our acquisition
of Bostek, Inc. and its affiliate, were $72.6 million. Of this amount,
approximately 28% were direct Internet sales and approximately 8% were Internet
fulfillment revenues. The Internet is our fastest growing sales channel and we
believe that the Internet will be the basis for our future growth.
Our goal is to become the premier website offering refurbished and new
computer equipment to consumers and businesses. Our strategy to achieve our goal
includes the following:
Increase Brand Awareness. Our direct Internet revenues for the six months
ended June 30, 1999 were $20.1 million, pro forma for our acquisition of Bostek,
and our Internet fulfillment revenues were 5.9 million, pro forma for our
acquisition of Bostek. We have achieved this level of revenue without the
benefit of significant investments in marketing and promotion of our brand. We
intend to use a portion of the proceeds from this offering to increase our
marketing and promotional efforts in order to increase our brand awareness. We
believe that a strong brand name is critical to differentiating Intellesale and
attracting a high level of customer traffic and purchases.
Increase Strategic Relationships. We have established cooperative
marketing programs with OnSale.com, uBid.com and FlashNet Communications, Inc.
We intend to expand these programs and establish new programs under which our
partners will promote our products on their websites and in their other customer
communications.
Continue Improving Our Website. We intend to expand our Internet sales
through continued upgrading and improvements to our website. We plan to add new
features to our website and improve its design on an ongoing basis.
Migrate Other Parts of Our Business to the Internet. We believe our
traditional commerce products can be marketed more effectively through our
website. As we expand our Internet presence, we intend to migrate the
traditional commerce segment of our business to the Internet, which should allow
us to expand our customer base, increase efficiency and reduce our operating
costs.
Expand and Improve Procurement Sources. In order to be able to offer
attractive prices to customers yet maintain our margins, we must be able to
source a sufficient amount of product at favorable prices. In order to continue
and expand our procurement capability, we intend to maintain and enhance our
existing relationships with leasing companies, manufacturers and other sources
of equipment and to pursue new relationships.
About Us
We were incorporated in Delaware in December 1998 and are a controlled
subsidiary of Applied Digital Solutions, a publicly-held company which was
formerly known as Applied Cellular Technology, Inc. and which is traded on the
Nasdaq National Market under the symbol "ADSX." We are the successor to several
businesses which Applied Digital Solutions acquired for us. Our principal
offices are located at 510 Ryerson Road, Lincoln Park, New Jersey 07035, and our
telephone number is (973) 686-9100. Our website is www.Intellesale.com. The
information on our website is not incorporated by reference into this
prospectus.
3
<PAGE>
THE OFFERING
Common stock offered
By Intellesale...................... [________] shares
By the selling stockholder.......... [________] shares
Number of shares outstanding after
the offering........................ [________] shares
Use of proceeds we will receive . Repay approximately $17.0
million under our line of
credit (1);
. Pay a total of $5.8 million to
various persons in connection
with the settlement of their
earn-out payment rights and the
purchase of minority interests
in our subsidiaries;
. Increase advertising and other
marketing efforts in connection
with the further development of
our Internet business and the
migration of other parts of our
business to the Internet; and
. General corporate purposes,
including working capital.
Proposed Nasdaq National Market
symbol.............................. "SALE"
________________________
(1) At the closing of this offering, Intellesale expects to have its own
line of credit in place, which will replace the line of credit which
Applied Digital Solutions is now providing to us.
You should be aware that the total shares outstanding after this
offering:
. include [_________] shares of common stock to be issued
immediately following this offering to the sellers of certain
businesses we acquired, based on an assumed initial public
offering price of $[__] per share; and
. do not include
. 2,335,000 shares reserved for issuance under our 1999
Flexible Stock Plan;
. 5,500,000 shares reserved for issuance under outstanding
options; and
. [_________] shares issuable by us if the underwriters
exercise their over-allotment option.
The shares offered by Applied Digital Solutions do not include [_________]
shares that it will sell if the underwriters exercise their over-allotment
option.
Risk Factors
See "Risk Factors," starting on page 5, to read about certain factors you
should consider before you purchase shares of our common stock.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes certain financial information about our
business. The pro forma data give effect to our acquisition of Bostek, Inc. and
an affiliate of Bostek as if it had been completed on January 1, 1998. Because
of our rapid growth through acquisitions, including Bostek, and our recent shift
to transacting business on the Internet, the historic information reflected
below may not be a good basis for evaluating our current and future performance.
For a more detailed explanation of this data, see "Selected Financial Data,"
"Pro Forma Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Management's Discussion and
Analysis of Pro Forma Results of Operations" and our financial statements
located elsewhere in this prospectus.
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<CAPTION>
Actual Pro Forma Actual Pro Forma
------------------------------ ------------ ---------------- ----------
Six Months
Year Ended Six Months Ended Ended June
Year Ended December 31, December 31, June 30, 30,
------------------------------ ------------ ------------------ ----------
1996 1997 1998 1998 1998 1999 1999
------------------------------ ------------ ------------------ ----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues........................... $ 1,993 $ 39,445 $ 60,743 $ 127,848 $ 28,199 $ 39,212 $ 72,612
Cost of goods sold....................... 851 33,202 47,623 105,386 22,337 27,816 57,412
-------- -------- -------- ------------ -------- -------- ----------
Gross profit............................. 1,142 6,243 13,120 22,462 5,862 11,396 15,200
Operating income (loss).................. 505 2,275 3,961 4,295 2,115 3,056 2,983
-------- -------- -------- ------------ -------- -------- ----------
Net income............................... $ 276 $ 993 $ 1,793 $ 960 $ 1,054 $ 1,393 $ 891
Earnings per common share - basic........ $ .02 $ .07 $ .12 $ $ .07 $ .09 $
Earnings per common share - diluted...... $ .02 $ .07 $ .11 $ $ .07 $ .09 $
Weighted average common shares
outstanding - basic.................... 15,000 15,000 15,000 15,000 15,000
Weighted average common shares
outstanding - diluted.................. 15,000 15,000 15,841 15,972 16,296
</TABLE>
The following balance sheet data give effect to our sale of _____ shares of
common stock in this offering at an assumed initial public offering price of
$_______ per share, after deducting the estimated underwriting discount and
estimated offering expenses, and the application of the net proceeds from this
offering and on a pro forma as adjusted basis to further reflect the issuance of
[______] shares to the sellers of Bostek and [_____] shares in settlement of
earn-out obligations and the acquistion of minority interests in our
subsidiaries. The assumed initial public offering price is the midpoint of the
estimated range of the initial public offering price. See "Use of Proceeds."
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June 30, 1999
-------------------------------------------
Pro Forma
Actual As Adjusted As Adjusted
----------- ------------- --------------
($ in thousands)
<S> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents............ $ 115 $ $
Working capital...................... (17,402)
Goodwill, net........................ 34,980 40,451 44,322
Total assets......................... 67,355
Due to parent company (1)............ 27,600 10,600 10,600
Due to stockholders of Bostek 15,000 15,000 5,000
Stockholders' equity 19,808
</TABLE>
_______________________
(1) At the closing of this offering we expect to have our own line of
credit in place, which will replace the line of credit which Applied
Digital Solutions is now providing to us. We intend to borrow under
this facility to repay all amounts we owe to Applied Digital
Solutions, which aggregated $33.0 million at August 31, 1999.
5
<PAGE>
RISK FACTORS
You should carefully consider the risk factors listed below and the other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any or all of the
risks listed below could have a material adverse effect on our business,
operating results or financial condition, which could cause the market price of
our stock to decline, in which event you could lose your investment in our
common stock. You should also keep these risk factors in mind when you read
forward-looking statements. There are other risks which may adversely affect our
business which we are not able to anticipate, and the risks identified here may
adversely affect our business or financial condition in ways which we cannot
anticipate.
Risks Relating to Our Business
- ------------------------------
Because we have transacted business over the Internet for only
a short period of time and our business model is unproven, you
have only a limited basis on which to evaluate our business
and prospects
In January 1999, we shifted our business emphasis to the Internet and away
from traditional commerce. We expect that expanding our Internet business will
continue to be the major focus of our strategy for the foreseeable future and
that the Internet will be the basis for our future growth. We cannot be certain
that we will be successful in implementing the changes required to carry out our
business model, or that we will be able to compete successfully in this highly
competitive area. For calendar year 1998 and the first half of 1999, on a pro
forma basis, direct Internet sales through our website represented approximately
14.3% and 27.7% of our revenues.
Because of our recent shift to focus on Internet sales, we have had only a
limited operating history selling products on the Internet. As a result, you
have only limited historical information on which to evaluate our business and
prospects as an e-commerce company. You should consider the risks and
difficulties that companies frequently encounter when entering this new and
rapidly evolving market. The risks we face in this area include:
. our ability to manage our evolving business model;
. our ability to compete with the more established Internet operations
of our competitors;
. our ability to anticipate and adapt to a rapidly developing market;
. our need to develop and upgrade our website, transaction processing
systems and network infrastructure;
. our need to attract and retain customers at a reasonable cost;
. our ability to upgrade our systems and fulfillment capabilities to
accommodate the growth of our business;
. our ability to access additional capital when required;
. our ability to develop and renew strategic relationships; and
. our ability to integrate our acquisitions and manage our growth.
We cannot assure you that we will successfully address these risks.
We may have difficulty integrating our recent acquisitions
Since the beginning of 1997, we have completed 11 acquisitions, including
the Bostek acquisition, which was completed effective June 1, 1999. On a pro
forma basis, these acquisitions accounted for approximately 90.9% of our
revenues for the year ended December 31, 1998. In the Bostek transaction, we
acquired Bostek, Inc. and its affiliate, Micro Components International,
Incorporated, which are
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engaged in the business of acquiring excess inventory and refurbished computer
equipment and selling such equipment, primarily over the Internet. We expect
this acquisition will be a major part of our Internet business. On a pro forma
basis, Bostek represents 47.5% of our revenues for the year ended December 31,
1998 and 52.9% for the six months ended June 30, 1999. As a result of all of
these acquisitions, we will amortize approximately $1.8 million of goodwill
annually, which will reduce our earnings per share.
Our success will depend in large part on our ability to fully integrate the
operations and management of these recently acquired entities, particularly
Bostek. A successful integration requires, among other things, the integration
of product offerings (including on our website), sales and marketing and
financial reporting. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. We cannot assure you that we will accomplish the integration smoothly
or successfully or that we will realize the anticipated benefits of these
acquisitions. The success of the integration will require the dedication of
management and other personnel resources which may distract their attention from
our day-to-day business.
We may have difficulty managing our future growth
Our business has been growing rapidly, and our business plan calls for
continued substantial growth. To manage such growth in a rapidly evolving market
requires an effective planning and management process. This will place a
significant strain on our management, information systems and financial
resources. If we are unable to manage our growth effectively, our business will
suffer. Our future success will depend on our ability to address potential
growth in the number of customers, to expand our product and service offerings
and to pursue other market opportunities. We expect that we will need to expand
existing operations, particularly those relating to customer service and product
acquisition. We expect that we will also need to continue to improve our
operational, financial and inventory systems, procedures and controls, and will
need to expand, train and manage our workforce. Furthermore, we will need to
continue to manage multiple relationships with various suppliers, freight
companies, websites, Internet service providers and other third parties to keep
control over our strategic direction as our e-commerce business evolves.
Unless we develop a strong brand identity, our business may not
continue to grow and our financial results may suffer
We believe that developing our brand name and Internet presence will be
critical to achieving widespread acceptance of our products and services.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts, our ability to provide high quality products and services at
attractive prices and our relationships with other Internet companies. In order
to promote our brand, we will need to continue to increase our marketing budget
and otherwise increase our financial commitment to creating and maintaining
brand loyalty among users. Brand promotion activities may not yield increased
revenues, and if they do, any increased revenues may not offset the expenses we
incur in building our brand. Even if we do attract new customers, they may not
return to our website to conduct additional transactions. If we fail to promote
and maintain our brand or incur substantial expenses in an unsuccessful attempt
to promote and maintain our brand, our business could be harmed.
We rely on merchandise vendors as sources for our products
The availability of off-lease and excess inventory computer equipment is
unpredictable. We have no long-term arrangements with our vendors that assure
the availability of merchandise. We purchase products from many different
vendors based on relationships we have established, but without any formal
commitments. We cannot assure you that our current vendors will continue to sell
merchandise to us as they have in the past, or that we will be able to establish
new vendor relationships that ensure
7
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merchandise will be available to us in sufficient quantities and at favorable
prices. If we are unable to obtain sufficient quantities of products at
favorable prices, our business will be adversely affected.
In addition, certain of our strategic alliances require that we deliver
specified types of computer equipment in a short time period and, in some cases,
at specified prices. Because we have no formal relationships with vendors, we
may not be able to obtain the required equipment in sufficient quantities in a
timely manner, which could adversely affect our ability to fulfill our
obligations to our partners.
If we are unable to establish and maintain our relationships
with other online companies, our business could be harmed
We depend to a great extent on relationships with other online companies
for marketing and building our brand, and a key element of our strategy is to
establish additional strategic alliances and cooperative advertising
relationships. These relationships may include agreements for joint product
offerings, anchor tenancy, promotional placements, sponsorships and banner
advertisements. These arrangements require us to make payments or provide
services, which may be material, and generally are short-term, non-exclusive or
do not provide for guaranteed renewal. The risks of depending on these types of
arrangements include:
. the uncertainty that significant spending on these relationships will
increase our revenues;
. the possibility that expected revenue increases resulting from such
spending will not occur within the time periods we expect or at all;
. the possibility that space on other websites or the same sites may
increase in price;
. the possibility that a competitor will purchase exclusive rights to
attractive space on one or more key sites;
. the possibility that, if these relationships are successful, we may
not be able to obtain adequate amounts of merchandise to meet the
increased demand that is generated;
. the possibility that we will not be able to renew the arrangements on
successful websites on reasonable terms or at all; and
. the possibility that online companies with which we have established
relationships may exercise their right to terminate such
relationships, which generally can be done without any significant
advance notice.
Any termination of our arrangements with these online companies could have a
material adverse effect on our business. In addition, obtaining and maintaining
these relationships could disrupt our ongoing business, distract our management
and employees and increase our expenses.
We are subject to risks which could adversely affect the
demand for or the prices at which we sell our merchandise
We purchase and warehouse inventory, much of which is refurbished or excess
inventory of personal computer equipment. As a result, we assume inventory risks
and price erosion risks for these products. These risks are especially
significant because personal computer equipment generally is characterized by
rapid technological change and obsolescence. These changes affect the market for
refurbished or excess inventory equipment. Our success will depend on our
ability to purchase inventory at attractive prices relative to its resale value
and our ability to turn our inventory rapidly through sales. If we pay too much
or hold inventory too long, we may be forced to sell our inventory at a discount
or at a loss or write down its value, and our business could be materially
adversely affected.
8
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Declining prices for new computer equipment could adversely
affect our business
The cost of new computer equipment, particularly personal computers, has
declined dramatically in recent years. As the price of new computer products
declines, consumers may be less likely to purchase refurbished computer
equipment unless there is a substantial discount to the price of the new
equipment. Accordingly, in selling refurbished equipment, we must offer
products at a substantial discount to the price of new products. As prices of
new products continue to decrease, our revenue, profit margins and earnings
could be adversely affected. There can be no assurance that we will be able to
maintain a sufficient pricing differential between new products and our
refurbished products to avoid adversely affecting our revenues, profit margins
and earnings.
Our quarterly revenues and operating results are not
indicative of future performance and are difficult to
forecast, and potential fluctuations in our quarterly
financial results may cause volatility in our stock price
Because we have grown rapidly through acquisition and have only recently
begun to transact business on the Internet, we do not have historical data for a
significant number of periods upon which to forecast quarterly revenues and
results of operations. As a result, although our revenues from e-commerce have
grown in recent quarters, and will increase significantly as a result of the
Bostek acquisition, we believe that you should not rely on period to period
comparisons of our operating results as indicators of future performance. We
base our current and future expenditures on our plans and estimates of future
revenues. Many of our expenses are fixed, and will not decrease if the level of
our business and revenues decrease. This limits our ability to reduce our
spending if we experience an unexpected shortfall in our revenues.
We expect that our future quarterly and annual operating results will
fluctuate significantly because of many factors, some of which we do not
control. These factors include:
. our ability to acquire, price and market inventory such that we
maintain gross margins on both an absolute dollar and percentage
basis;
. our ability to adequately maintain, upgrade and develop our website,
transaction processing systems and network infrastructure;
. our ability to integrate our recent acquisitions;
. our ability to maintain existing, and develop new, strategic marketing
relationships which may drive traffic and customers to our website;
. the transition of our Internet fulfillment business to selling
products directly through our website and our ability to migrate our
traditional commerce business to the Internet;
. our ability to obtain new customers at a reasonable cost and retain
existing customers;
. the development, announcement or introduction of new websites,
services or products by us or our competitors;
. the amount and timing of operating costs and capital expenditures that
we incur to expand our business and improve our website; and
. general economic conditions and economic conditions specific to the
computer industry, the Internet and e-commerce.
We depend on key individuals and we will need to attract and
retain additional personnel
Our future success is highly dependent upon the continued services and
performance of our senior management and other key personnel. We are organized
with a small senior management team. If we
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were to lose the services of any member of this management team, our overall
operations could be adversely affected. In addition, our future success depends
on our ability to identify, attract, hire, train, retain and motivate other
highly skilled technical, managerial, marketing, purchasing and customer service
personnel. Competition for these individuals is intense, and we cannot assure
you that we will be able to successfully attract, integrate or retain
sufficiently qualified personnel. Our failure to attract and retain the
necessary technical, managerial, marketing, purchasing and customer service
personnel could have a material adverse effect on our business.
If we need additional financing and cannot obtain it, we
may not be able to achieve our strategic business objectives
We expect that the proceeds of this offering, together with our available
cash resources, will be sufficient to meet our cash requirements for at least
the next 12 months. However, we may need to raise additional funds to:
. finance unanticipated working capital requirements;
. develop or enhance existing services;
. respond to competitive pressures; or
. acquire complementary businesses.
We do not yet have lending commitments from banks or other third parties, and,
until and unless we arrange for such commitments, we will rely on advances from
Applied Digital Solutions. Applied Digital Solutions has no obligation to
advance funds to us and, even if willing to do so, may not have funds available.
Our credit arrangements with Applied Digital Solutions are described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Relationships and Related Transactions -Transactions
with Applied Digital Solutions and its Affiliates."
We cannot assure you that additional financing will be available on
favorable terms or at all. If funds are not available when required for our
working capital needs or other transactions, our ability to carry out our
business plan could be adversely affected, and we may be required to scale back
our growth and operations to reflect the extent of available funding. If we are
able to arrange for credit facilities from other lenders, the debt instruments
will probably include limitations on our ability to incur other indebtedness, to
pay dividends, to create liens, to sell or purchase our capital stock, to sell
assets or to make acquisitions or enter into other transactions. Such
restrictions may adversely affect our ability to finance our future operations
or capital needs or to engage in other business activities. If we raise
additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced. These securities may
have rights, preferences or privileges senior to those of our common
stockholders.
If we experience problems in our distribution operations or
with other third parties on whom we rely, we could lose customers
In addition to merchandise vendors, we depend on several other third
parties over which we have limited control. We have no long-term relationships
with any of those parties. For example, we rely upon third-party carriers for
product shipments, including shipments to and from our distribution facility. We
are therefore subject to risks, including employee strikes and inclement
weather, which could result in failures by such carriers to deliver products to
our customers in a timely manner, which could damage our reputation and brand.
Some of our software was developed and produced by and is licensed from
third parties. We have from time to time discovered errors and defects in the
software and rely in part on our third-party providers to correct these errors
and defects in a timely manner.
10
<PAGE>
We also depend on credit card processing services of third parties. See "--
Concerns over and problems related to Internet commerce security and credit card
fraud could harm our business."
The industry in which we compete is highly competitive
While we are not aware of another company which operates in all of our
business areas, we face intense competition in each area of our business, and
many of our competitors have greater resources and a more established market
position than we have. As we focus our efforts on building our Internet
business, we expect to face increased competition from other companies that
already have an established Internet presence and from other companies which are
expanding into e-commerce that are selling their products on the Internet. Our
primary competitors include:
. major manufacturers of computer equipment such as Compaq, Dell and
IBM, which offer both refurbished and new equipment through their
websites;
. traditional store-based computer retailers, such as Best Buy, Circuit
City, CompUSA and Gateway Country; and
. other online competitors, such as the Boston Computer Exchange,
Buy.com, Cyberian Outpost, Egghead.com, Fairmarket.com, OnSale, uBid
and Value America.
In addition, our Internet fulfillment business allows others to compete
with our Internet business.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors already have an established brand and can devote
substantially more resources to website development, increasing brand
recognition and product acquisition than we can. In addition, larger, well-
established and well-financed entities may join with online competitors or
computer manufacturers or suppliers as the use of the Internet and other online
services increases. Our online partners also face intense competition, and if
they are unable to successfully respond to such competition our business could
suffer.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently or adopt more
aggressive price or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and test products in a manner
that is not possible over the Internet.
Our product offerings must compete with other new computer equipment and
related products offered by our competitors. That competition will intensify if
prices for new computers continue to decrease.
We expect competition to intensify in the future because current and new
competitors can enter our market with little difficulty and can launch new
websites at a relatively low cost.
If we fail to adequately protect our trademarks and proprietary
rights, our brand and reputation could be impaired and we
could lose customers
We regard our domain names, copyrights, service marks, trademarks, trade
secrets and similar intellectual property as important to establishing and
maintaining our brand. However, the steps we take to protect our proprietary
rights may be inadequate. Effective trademark, service mark, copyright and trade
secret protection may not be available in all of the countries where we sell our
products online. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of
11
<PAGE>
our trademarks and other proprietary rights. Use of "Intellesale.com" or
similar names by others could dilute our brand identity and confuse the market.
Moreover, other parties may assert infringement or unfair competition
claims against us. We believe that we and other participants in our markets may
be subject to infringement claims as the number of services and competitors in
our industry grows. We have, in the past, been required to make changes to
certain names under which we do business to avoid such claims. Any claim like
this, whether meritorious or not, could be time-consuming, result in costly
litigation, damage our reputation, cause service upgrade delays or require us to
enter into royalty or licensing agreements. These royalty or licensing
agreements may not be available on favorable terms or at all. As a result, any
claim like this could harm our business.
Year 2000 failures may adversely impact our operations
Some computers, software and other equipment include programming code in
which calendar year data is abbreviated to only two digits. As a result, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches, and
are commonly referred to as the "Millennium Bug" or "year 2000 problem."
As a company engaged in e-commerce, we rely on computer programs and
systems in connection with our internal and external communications networks and
systems (including transmissions of information over the Internet), the
operation of our website, order processing and fulfillment, accounting and
financial systems and other business functions. If any of our systems are not
year 2000 compliant or if our customers or suppliers fail to achieve year 2000
compliance, we may experience the following adverse consequences:
. a significant number of operational inconveniences and inefficiencies
for us and our customers that may divert management's time and attention
and financial and human resources from our ordinary business activities;
and
. a lesser number of serious system failures that may require significant
efforts by us or our customers to prevent or alleviate material business
disruptions.
We may incur significant additional expenses addressing year 2000 issues.
The ability of third parties with whom we do business to address adequately
their year 2000 issues is outside our control. The most reasonably likely worst-
case scenario for us resulting from year 2000 issues is that third party
noncompliance would disrupt, reduce or eliminate for a period of time the
ability of customers to connect with and purchase products at our website. If
such occurrences are frequent or long in duration, they could materially
adversely affect our business.
In addition, because we sell refurbished computer systems, consumers may be
unwilling to purchase systems which they believe are not year 2000 compliant.
For a description of our year 2000 compliance efforts you should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
Risks Related to the Internet and the Internet Industry
- -------------------------------------------------------
If we cannot respond to rapidly changing technology, our business
could be harmed
To be competitive as an Internet marketer, we must continue to enhance and
improve the responsiveness, functionality and features of our website. The
e-commerce market is characterized by rapidly changing technology, evolving
industry standards, frequent new service and product
12
<PAGE>
introductions and enhancements embodying new technologies and changing customer
requirements and preferences. Our future success will depend on our ability to
adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. If we delay or fail to adapt to such changes
customers may not use our services and may instead use those of our competitors.
In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt our services or infrastructure.
Without the continued development and maintenance of the
Internet, our business may not succeed
Our market is new and rapidly evolving. Our business could suffer if
Internet usage does not continue to grow. Internet usage may be inhibited for a
number of reasons, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service;
. lack of availability of cost-effective and high-speed service; and
. changes in government regulation of the Internet.
If Internet usage grows, the Internet infrastructure might not be able to
support the demands placed on it by this growth or its performance and
reliability may decline. In addition, future outages and other interruptions
occurring throughout the Internet could lead to decreased use of our website and
would therefore harm our business.
We may be subject to Internet service disruptions, which could
harm our business and damage our reputation and credibility
We do not own our own gateway to the Internet, but instead rely on our
Internet service provider to connect our current website to the Internet. In
addition, we contract the hosting of our Internet servers to Cube Computer
Corporation. From time to time, we may experience interruptions in our website
connections and our telecommunications. Continuous or prolonged interruptions in
our website connections or in our telecommunications access, or slow response
times from our website, could have a material adverse effect on our business.
We will need to continually enhance and expand our transaction processing
systems, network infrastructure, delivery and shipping systems and other
technologies to accommodate the substantial increase in the volume of traffic on
our website which we hope to develop. We cannot assure you that we will be
successful in these efforts or that we will be able to accurately project the
rate or timing of increases, if any, in traffic to our website or to expand and
upgrade our systems and infrastructure on a timely basis to accommodate such
increases.
We cannot assure you that the network of our Internet service provider will
be able to achieve or maintain sufficiently high capacity of data transmission,
especially if the customer usage of our website increases. Failure to achieve or
maintain high capacity data transmission could significantly reduce customer
demand for our services and have a material adverse effect on our business.
Regulation of the Internet could harm our business
The laws governing Internet transactions remain largely unsettled. Today
there are relatively few laws specifically directed toward online services.
However, due to the increasing popularity and use of the Internet and online
services, it is likely that laws and regulations will be adopted with respect to
the Internet or online services. These laws and regulations could cover issues
such as online contracts, user privacy, freedom of expression, pricing, fraud,
content and quality of products and services, taxation,
13
<PAGE>
advertising, intellectual property rights and information security. It may take
years to determine whether and how existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation,
libel, obscenity and personal privacy apply to the Internet. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Those laws that do reference the
Internet have not yet been widely interpreted by the courts, and their
applicability and reach are therefore uncertain. Because of the rapidly evolving
and uncertain regulatory environment, we cannot predict how such laws and
regulations might affect our business. In addition, these uncertainties make it
difficult to ensure compliance with laws governing the Internet. These laws
could harm us by subjecting us to liability or forcing us to change how we do
business.
Concerns over and problems related to Internet commerce security and
credit card fraud could harm our business
An important characteristic of Internet commerce is the secure transmission
of confidential information over public networks. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information. If a compromise of our security measures were to occur, it could
have a material adverse effect on our business.
Any party that is able to circumvent our security measures could
misappropriate confidential information or cause interruptions in our
operations. We may be required to expend significant capital and other resources
to protect against security breaches or to alleviate problems caused by such
breaches. Concerns over the security of Internet transactions and the privacy of
users may also inhibit the growth of the Internet generally, especially as a
means of conducting Internet commerce transactions. To the extent that
activities of Intellesale or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could expose us to a risk of loss or litigation and possible liability.
We cannot assure you that our security measures will prevent security breaches
or that failure to prevent such security breaches will not have a material
adverse effect on our business.
Risks Related to our Affiliation with Applied Digital Solutions
- ---------------------------------------------------------------
We are controlled by Applied Digital Solutions, whose interests may
conflict with those of other stockholders
Following the offering, Applied Digital Solutions will own approximately
[__]% of our outstanding common stock. Of our seven directors, one is a director
of Applied Digital Solutions, one is an executive officer of Applied Digital
Solutions, and one is both a director and executive officer of Applied Digital
Solutions. Accordingly, subject to the voting agreement referred to below,
Applied Digital Solutions and its affiliates may be able to:
. elect our entire board of directors;
. control our management and policies;
. prevent or cause a change in control of us; and
. determine other matters submitted to our stockholders for approval,
including acquisitions, mergers, consolidations and the sale of all
or substantially all of our assets.
Applied Digital Solutions has entered into an agreement under which it has
agreed to vote its shares on matters presented to our stockholders in the same
proportions as the other stockholders vote their shares, as described under
"Certain Relationships and Related Transactions--Voting Agreement with Applied
Digital Solutions."
14
<PAGE>
Our common stock owned by Applied Digital Solutions will represent a
significant portion of Applied Digital Solutions' assets, and our results of
operations will have a significant impact on Applied Digital Solutions' results
of operations. Accordingly, subject to the limitations of the voting agreement
referred to above, Applied Digital Solutions, which is itself publicly traded,
may cause us to take certain actions which benefit its financial condition and
results of operations regardless of its effect on our business. In addition, we
have no agreement with Applied Digital Solutions that would prevent it from
competing with us.
Until we establish our separate sources of funding, we will depend
on Applied Digital Solutions for financing for our business
We currently rely on advances from Applied Digital Solutions to finance our
business operations. The availability of funds from Applied Digital Solutions
will depend on its ability to borrow under its line of credit, which in turn
depends on the financial performance of Applied Digital Solutions. Accordingly,
there can be no assurance that funds will continue to be available from Applied
Digital Solutions. Although we are in discussions with regard to establishing
our own line of credit, we may not be able to do so. See "--If we need
additional financing and cannot obtain it, we may not be able to achieve our
strategic business objectives."
Risks Associated with the Offering
- ----------------------------------
Future sales of our common stock could adversely affect the market
price of our common stock
If a substantial number of shares of our common stock, including shares
issuable upon exercise of outstanding options, are sold in the public market
after this offering, or investors become concerned that substantial sales might
occur, the market price of our common stock could decrease. Such a decrease
could make it difficult for us to raise capital by selling stock or to pay for
acquisitions using stock.
There will be [__________] shares of common stock outstanding immediately
after this offering after giving effect to the issuance of shares to the sellers
of certain businesses we acquired, assuming an initial public offering price of
$[______] per share, which are to be issued within 30 days after the date of
this offering, and 5,500,000 shares issuable upon exercise of outstanding
options, of which approximately 2,425,000 were granted to our executive
officers.
Our executive officers, directors and stockholders have agreed that they
will not sell, directly or indirectly, any common stock without the consent of
Ladenburg Thalmann & Co. Inc. for a period of 180 days after the date of this
prospectus. However, Ladenburg may release any or all of the shares subject to
lock-up agreements at any time without notice. After these lock-up agreements
expire, all but approximately [____] of the shares subject to these lock-up
agreements could be sold immediately in the public market, subject in most cases
to volume and other restrictions.
After the 180-day lock-up period expires, we expect to file registration
statements covering 4,450,000 shares of the common stock issuable upon exercise
of options and other grants pursuant to our equity incentive plans.
In addition, we may issue additional shares:
. to employees;
. in connection with corporate alliances;
. in connection with acquisitions; and
. to raise capital.
15
<PAGE>
Applied Digital Solutions, Marc Sherman, our President and Chief Executive
Officer, and Edward L. Cummings, our Executive Vice President and Chief
Financial Officer, are entitled to registration rights with respect to
[_____________] shares they will own after this offering. Those stockholders
have the right to include shares of common stock they own any time we register
our stock for sale beginning six months following the date of this offering,
other than in connection with registering shares related to an employee benefit
plan or a merger or consolidation. In addition, Applied Digital Solutions and
Mr. Sherman have up to five demand registration rights. Sales of shares of our
common stock pursuant to these agreements may dilute the value of the common
stock offered hereby or cause its market value to drop.
Because stockholders will not receive dividends for the foreseeable
future, stockholders must rely on stock appreciation for any
return on their investment in the common stock
We do not anticipate that we will pay dividends on our common stock in the
foreseeable future. We intend to use any earnings which may be generated to
finance the growth of our businesses. In addition, it is likely that any debt
financing agreements we enter into will restrict our ability to declare
dividends. As a result, appreciation, if any, of the price of the common stock
will provide the only return to investors in this offering.
There will be immediate and substantial dilution to new investors as
a result of this offering
The initial public offering price of our common stock will be substantially
higher than the pro forma tangible book value per share of our outstanding
common stock. At an assumed initial public offering price of $[______] per
share, purchasers of our common stock will incur immediate and substantial
dilution of $[______] per share in the pro forma net tangible book value of
their purchased shares. The shares of our common stock owned by existing
stockholders will receive a material increase in the pro forma net tangible book
value per share. Investors may also experience additional dilution if we issue
common stock in connection with future business acquisitions and as a result of
issuance and exercise of employee stock options. As a result of this dilution,
investors purchasing stock in this offering may receive significantly less than
the full purchase price that they paid for the shares purchased in this offering
in the event of a liquidation.
Our stock price may be volatile
Prior to this offering, there has been no public market for our common
stock, and we do not know how our common stock will trade after this offering.
We cannot predict the extent to which investor interest will lead to the
development of an active and liquid trading market for our common stock. The
initial public offering price will be determined through negotiations among the
underwriters and us and may not be indicative of the market price of the common
stock that will prevail in the trading markets. You may not be able to resell
your shares at or above the initial public offering price due to fluctuations in
the market price of our common stock. These fluctuations may result from a
number of factors, including the following:
. our perceived prospects;
. changes in our operating results;
. differences between our actual financial and operating results and
those expected by investors and research analysts;
. changes in research analysts' recommendations or projections;
. conditions or trends in the Internet and computer industries; and
. sales of common stock.
16
<PAGE>
In addition, the securities markets have experienced significant volume and
price fluctuations, and the market prices of Internet companies in particular
have been especially volatile. In the past companies that have experienced
volatility in the market price of their stock have been subject to securities
class action litigation. A securities class action lawsuit against us could
result in substantial costs and a diversion of our management's attention.
Provisions in our corporate documents and Delaware law could
delay or prevent a change in control of us
Provisions in our certificate of incorporation, bylaws and Delaware law
could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. discourage proxy contests and make it more difficult for you and
other stockholders to elect directors and take other corporate
actions.
As a result, these provisions could limit the price that
investors might be willing to pay in the future for shares
of our common stock.
In particular, our board of directors may issue up to 5,000,000 shares of
preferred stock with rights and privileges that might be senior to our common
stock without the consent of the holders of the common stock. Our certificate of
incorporation and bylaws provide that stockholders may not take actions by
written consent and that special meetings of stockholders may only be called by
our board of directors or our chief executive officer. We are also subject to
Section 203 of the Delaware General Corporation Law, which generally prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a period of three years
following the date on which the stockholder became an interested stockholder.
In addition, a change in control will trigger certain payment obligations
under employment agreements we have with key employees, which could discourage a
change in control of us. See "Management - Employment Agreements."
Forward-looking statements may prove to be inaccurate
Certain statements under the captions "Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Intellesale.com, Inc." and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations, prospects and intentions and other statements contained in this
prospectus that are not historical facts. When used in this prospectus, the
words "expect," "anticipate," "believe," "estimate," "intend," "plan," "seek"
and similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including changes in our plans, objectives, expectations, prospects
and intentions and other factors discussed under "Risk Factors" and elsewhere in
this prospectus.
We cannot guarantee any future levels of activity, performance or
achievements. Moreover, neither we nor anyone else assumes responsibility for
the accuracy and completeness of these statements. We undertake no obligation to
update any of the forward-looking statements after the date of this prospectus
to conform them to actual results or changes in our expectations.
This prospectus contains market data related to the Internet. These data
have been included in studies published by the Internet market research firms
Jupiter Communications and International Data Corporation. These market data
include projections that are based on a number of assumptions. If any of
17
<PAGE>
the assumptions on which these projections are based are incorrect, actual
results may differ from the projections based on those assumptions. The Internet
related markets might not grow at rates projected by Jupiter Communications and
International Data Corporation. The failure of these markets to grow at the
projected rates may seriously harm our business and may cause the price of our
common stock to decline.
USE OF PROCEEDS
Our net proceeds from the sale of the [________] shares of common stock
offered by us are estimated to be approximately $[__] million, or $[__] million
if the underwriters' over-allotment option is exercised in full, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses we will pay. We will not receive any proceeds from shares of common
stock sold by the selling stockholder.
We plan to use the net proceeds:
. to repay approximately $17.0 million under the line of credit which
we expect to have in place at the closing of this offering, which
will replace the line of credit which Applied Digital Solutions is
now providing to us, as described below under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources;"
. to pay a total of $5.8 million to various persons in connection
with the settlement of their earn-out payment rights and, in some
cases, the purchase of minority interests in our subsidiaries;
. to increase advertising and other marketing efforts and in
connection with the further development of our Internet business
and the migration of other parts of our business to the Internet;
and
. for general corporate purposes, including working capital.
Pending such uses, we intend to invest the net proceeds in short-term,
investment grade, interest bearing securities. Our management will retain broad
discretion in the allocation of these proceeds.
DIVIDEND POLICY
Holders of our common stock are entitled to receive such dividends as may
be declared by our board of directors. We have not paid any dividends on our
common stock and we do not anticipate that we will pay dividends in the
foreseeable future. Any payments of future dividends will be at the discretion
of our board of directors after taking into account various factors, such as our
financial condition, operating results, current and anticipated cash needs and
plans for expansion and restrictions in our credit documents or other
agreements. It is likely that any credit arrangement we enter into in the future
will limit our ability to pay dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at June 30, 1999:
. on a historical basis;
. as adjusted to reflect our sale of [________] shares of common stock
offered in the offering, assuming the underwriters' over-allotment option
is not exercised, at an assumed initial public offering price of
$[______] per share, after deducting the underwriting discounts,
commissions and estimated offering expenses and applying the estimated
net proceeds as described under "Use of Proceeds"; and
. pro forma as adjusted basis to further reflect the issuance of [______]
shares of our common stock to the sellers of certain businesses we have
acquired at an assumed initial public offering price of $________ per
share.
You should read this table in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------
As Pro Forma
Actual Adjusted As Adjusted
--------------------------------
($ in thousands)
<S> <C> <C> <C>
Due to parent company (1)................ $27,600 $10,600 $10,600
Due to stockholders of Bostek (2)........ 15,000 15,000 5,000
Notes payable............................ 62 62 62
Minority interest (3).................... 698 349 --
Stockholders' equity
Preferred stock, $.01 par value;
5,000,000 shares authorized; no shares
outstanding, actual, as adjusted and
pro forma as adjusted................. -- -- --
Common stock, $.0001 par value;
30,000,000 shares authorized,
15,000,000 shares issued and
outstanding, actual; shares issued
and outstanding ___________, as
adjusted; ______ shares issued and
outstanding pro forma as adjusted (4). 1
Additional paid-in capital.............. 15,537
Retained earnings....................... 4,270 4,270 4,270
--------------------------------
Total stockholders' equity............ 19,808
--------------------------------
Total capitalization.................. $63,168
================================
</TABLE>
(1) At the closing of this offering, we expect to have our own line of
credit in place, which will replace the line of credit which Applied
Digital Solutions is now providing to us. We intend to borrow under
this facility to repay all amounts we owe to Applied Digital
Solutions, which aggregated $33.0 million at August 31, 1999.
(2) Consists of $10,000,000 to be paid to the stockholders of Bostek and
its affiliate, Micro Components, in shares of our common stock, based
on the initial public offering price in this offering, within 30 days
after the closing of this offering; and $5,000,000 to be paid to the
stockholders of Bostek and its affiliate, Micro Components, in
January 2000.
(3) In connection with this offering, we will acquire minority interests
in our subsidiaries.
(4) Does not include (a) options to purchase 5,350,000 shares of our
common stock issued under our 1997 Non-Qualified Stock Option Plan
and outstanding as of June 30, 1999 or (b) 2,500,000 shares of our
common stock reserved for issuance upon exercise of options and other
stock awards which may be granted under our 1999 Flexible Stock
Option Plan.
19
<PAGE>
DILUTION
Our net tangible book value, as of June 30, 1999, was $(15,172,000), or
$(1.01) per share of common stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities and minority
interests divided by the number of shares of common stock outstanding at that
date. After giving effect to our sale of the [________] shares of common stock
being offered hereby at an assumed initial public offering price of $[______]
per share, and the issuance of [_________] shares of our common stock to the
sellers of certain businesses we have acquired assuming an initial public
offering price of $[________] per share and after deducting estimated
underwriting discounts and public commissions and estimated offering expenses,
our pro forma net tangible book value as of June 30, 1999, would have been
$[_______], or $[______] per share. This represents an immediate increase in pro
forma net tangible book value of $[______] per share to existing stockholders,
and an immediate dilution of $[______] per share to new investors. The following
table illustrates this per share dilution :
Assumed initial public offering price
per share................................ $
-------
Net tangible book value per share at
June 30, 1999............................ $(1.01)
Increase per share attributable to
new investors.............................
------
Pro forma net tangible book value per
share after this offering.................
-------
Dilution per share to new investors........ $
=======
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the number of shares of common stock purchased from
Intellesale, the total consideration paid and the average price per share paid
by existing stockholders, by sellers of certain businesses we have acquired at
an assumed initial public offering price of $[______], and by the new investors
purchasing shares in this offering (at an assumed initial public offering price
of $[______] per share and before deducting estimated underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Per
------------------------ -----------------------
Number Percent Amount Percent Share
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
% % $
Existing stockholders(1)..
Business acquisition
stockholders (2).........
----------- ----------- ---------- ---------- -----------
New investors(1)..........
----------- ----------- ---------- ---------- -----------
Total.................. 100% $ 100% $
=========== =========== ========== ========== ===========
</TABLE>
________________
(1) Sales by Applied Digital Solutions in this offering will cause the
number of shares held by existing stockholders to be reduced to _____,
or ____% of the total number of shares outstanding after the offering,
and will increase the number of shares held by new investors to
______, or ____% of the total number of our shares outstanding after
this offering.
(2) Represents shares issued to the sellers of certain businesses we have
acquired, assuming an initial public offering price of $[__] per
share.
If the underwriters exercise their over-allotment option in full, the
number of shares of common stock held by existing stockholders will be reduced
to [________] shares, or [____]% of the total number of shares of common stock
to be outstanding immediately after this offering. In addition, the number of
shares of common stock held by the new investors will be increased to [______]
or [___]% of the total number of shares of common stock to be outstanding
immediately after this offering. The foregoing discussion and tables assume no
exercise of any outstanding stock options. As of August 31, 1999, there were
outstanding options to purchase 5,500,000 shares of common stock, of which
5,350,000 have an exercise price of $0.85 per share and the remaining 150,000
have an exercise price equal to the initial public offering price. In addition,
as of August 31, 1999, there were 2,335,000 shares reserved for future grants
or purchases pursuant to our 1999 Flexible Stock Plan, and this amount could
increase to as many as 7,500,000 shares under the terms of the plan. To the
extent that any shares reserved for issuance under our stock plans are issued,
there will be further dilution to new investors.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the periods ended December
31, 1996, 1997 and 1998 has been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The information as of and for
the periods ended December 31, 1995 and June 30, 1998 and 1999 is unaudited and,
in our opinion, includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the information. Our results
for the six months ended June 30, 1999 are not necessarily indicative of the
results we may achieve for the full year. Because of our rapid growth through
acquisitions, including Bostek, and our recent shift to transacting business on
the Internet, the historic information reflected below may not be a good basis
for evaluating our current and future performance. You should read this
information together with the financial statements and related notes included in
this prospectus and the information under the headings "Pro Forma Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
Four Months Pro Forma Six Months
Ended Year Ended Six Months Ended Ended
December 31, Year Ended December 31, December 31, June 30, June 30,
------------ --------------------------- ------------ --------------------- ------------
1995 (1) 1996 1997 1998 1998 (2) 1998 1999 1999 (3)
------------ --------------------------- ------------ --------------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Revenues:
Internet and Internet
fulfillment $ -- $ -- $ -- $ 7,334 $ 26,486 $ 2,439 $ 12,817 $ 26,028
Traditional commerce 645 1,993 39,445 53,409 101,362 25,760 26,395 46,584
------- ------- ------- ------- -------- -------- --------- --------
Total revenues 645 1,993 39,445 60,743 127,848 28,199 39,212 72,612
Cost of goods sold 312 851 33,202 47,623 105,386 22,337 27,816 57,412
------- ------- ------- ------- -------- -------- --------- --------
Gross profit 333 1,142 6,243 13,120 22,462 5,862 11,396 15,200
Selling, general and
administrative expense 150 635 3,778 8,725 16,545 3,559 7,772 11,196
Depreciation and -- 2 190 434 1,622 188 568 1,021
amortization ------- ------- ------- ------- -------- -------- --------- --------
Operating income (loss) 183 505 2,275 3,961 4,295 2,115 3,056 2,983
-- 1 1 45 440 12 82 82
Interest income
Interest expense (2) (10) (152) (341) (1,663) (132) (363) (837)
------- ------- ------- ------- -------- -------- --------- --------
Income before provision
for income taxes and
minority interest 181 496 2,124 3,665 3,072 1,995 2,775 2,228
Provision for income taxes -- 190 884 1,646 1,876 809 1,273 1,228
------- ------- ------- ------- -------- -------- --------- --------
Income before minority
interest 181 306 1,240 2,019 1,196 1,186 1,502 1,000
Minority interest -- 30 247 226 236 132 109 109
------- ------- ------- ------- -------- -------- --------- --------
Net income $ 181 $ 276 $ 993 $ 1,793 $ 960 $ 1,054 $ 1,393 $ 891
Earnings per common share
- basic $ .01 $ .02 $ .07 $ .12 $ .07 $ .09
Earnings per common share
- diluted $ .01 $ .02 $ .07 $ .11 $ .07 $ .09
Weighted average common
shares outstanding - basic 15,000 15,000 15,000 15,000 15,000 15,000
Weighted average common
shares outstanding - 15,000 15,000 15,000 15,841 15,972 16,296
diluted
Balance Sheet Data
Cash and cash equivalents $ 66 $ 9 $ 615 $ 571 $ 676 $ 917 $ 115
Working capital 452 474 2,158 267 (21,259) 3,473 (17,402)
Goodwill, net -- 1,235 2,987 8,464 29,732 4,035 34,980
Total assets 784 3,207 11,387 21,963 54,089 16,233 67,355
Due to parent company 0 178 1,242 6,022 16,122 1,933 27,600
Due to stockholders of
Bostek -- -- -- -- 15,000 -- --
Stockholders' equity 155 2,023 5,247 9,740 9,740 7,763 19,808
</TABLE>
(1) Consists of Elite Computer Services, Inc. which was acquired by
Applied Digital Solutions effective September 1, 1995.
(2) Gives effect to (a) the acquisition of Bostek and the financing of
that acquisition and (b) the acquisition of Blue Star Electronics,
Inc., Consolidated Micro Components, Inc., Data Path Technologies,
Inc., Service Transport Company and Fiscal Advantage, Inc., as if such
acquisitions had occurred at January 1, 1998 .
(3) Gives effect to the acquisition of Bostek and the financing of that
acquisition as if such transactions had occurred at January 1, 1999.
The actual June 30, 1999 balance sheet data included Bostek.
21
<PAGE>
The following table sets forth certain financial data for our predecessor
companies, Elite Computer Services, Inc., of which Applied Digital Solutions
acquired 80% effective September 1, 1995, and Universal Commodities Corp., of
which Applied Digital Solutions acquired 80% effective November 1, 1996. The
selected financial data for the periods ended December 31, 1994, and 1995 and
August 31, 1995 has been derived from unaudited statements. The selected
financial data for Universal Commodities for the 10 months ended October 31,
1996 has been derived from the audited financial statements included elsewhere
in this prospectus. The selected financial data for Universal Commodities as of
and for the year ended December 31, 1994 are not presented because it commenced
operations in late December 1994. As of December 31, 1994, Universal Commodities
had nominal assets and no revenue.
<TABLE>
<CAPTION>
------------------------------------------ ---------------------------------------
Elite Predecessor Business UCC Predecessor Business
------------------------------------------ ---------------------------------------
Year Ended Eight Months Ended Year Ended Ten Months Ended
December 31, 1994 August 31, 1995 December 31, 1995 October 31, 1996
------------------------------------------ ---------------------------------------
Summary of Operations ($ in thousands)
<S> <C> <C> <C> <C>
Revenues:
Internet $ -- $ -- $ -- $ --
Traditional commerce 2,021 1,255 3,591 4,575
Total revenues 2,021 1,255 3,591 4,575
Cost of goods sold 1,274 563 2,834 3,689
------- ------- -------- -------
Gross profit 747 692 757 886
Selling, general and
administrative expense 748 726 605 936
Depreciation and amortization 4 -- 14 --
------- ------- -------- -------
Operating income (loss) (5) (34) 138 (50)
Interest income -- -- -- --
Interest expense (2) (1) (1) (13)
------- ------- -------- -------
Income before provision for
income taxes and minority
interest (7) (35) 137 (63)
Provision for income taxes -- -- -- --
------- ------- -------- -------
Income before minority
interest (7) (35) 137 (63)
Minority interest -- -- -- --
------- ------- -------- -------
Net income $ (7) $ (35) $ 137 $ (63)
Balance Sheet Data
Cash and cash equivalents $ 8 $ (30) $ 60 $ 12
Working capital (129) 336 289 107
Goodwill, net -- -- -- --
Total assets 466 607 537 785
Due to parent company -- -- -- --
Stockholders' equity (41) (75) 138 107
</TABLE>
22
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited condensed consolidated statement of our
operations for the six months ended June 30, 1999 reflects the effects of (1)
our acquisition of Bostek and the financing of that acquisition, and (2) this
offering and the application of the estimated net proceeds to repay certain
indebtedness, as if those transactions had occurred at January 1, 1999.
The following pro forma unaudited condensed consolidated statement of our
operations for the year ended December 31, 1998 reflects the effects of (1) the
acquisition of Bostek, which was completed effective June 1, 1999, and the
financing of that acquisition (other than $10.0 million which will be paid in
shares of our common stock upon the closing of this offering and $5.0 million
which will be paid in January 2000 without interest), (2) the acquisitions of
Blue Star Electronics, Inc., Consolidated Micro Components, Inc., Data Path
Technologies, Inc., GDB Software Services, Inc., Service Transport Company and
Fiscal Advantage, Inc. completed in 1998, and (3) this offering and the
application of the estimated net proceeds to repay certain indebtedness, as if
those transactions had occurred at January 1, 1998. The acquisitions completed
in 1998 were accounted for under the purchase method and are discussed under the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview--Our History." The Bostek acquisition was
accounted for under the purchase method and is discussed under the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Bostek--Acquisition by Intellesale."
This pro forma unaudited financial information does not purport to
represent (1) what our actual results of operations would have been had the
acquisitions occurred on the dates assumed or (2) what we expect our results of
operations to be in the future. They do not reflect any estimates of cost
savings or other efficiencies that may be achieved from the integration of
Bostek or the other companies acquired. We believe that the assumptions used in
preparing the pro forma unaudited condensed consolidated statements of
operations provide a reasonable basis for presenting all of the significant
effects of the acquisition of Bostek and the companies acquired in 1998 and this
offering.
You should read the pro forma unaudited condensed consolidated statements
of operations and the accompanying notes together with the historical financial
statements of Intellesale and Bostek, including the notes thereto, and other
financial information pertaining to Intellesale and Bostek, including the
information set forth under "Use of Proceeds," "Capitalization," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Management's Discussion and Analysis of Pro
Forma Financial Condition and Results of Operations" included elsewhere in this
prospectus.
23
<PAGE>
Intellesale.com, Inc.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 1999
--------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Bostek, Inc. and
Intellesale Affiliate Pro Forma Pro Forma Offering Pro Forma
Actual(1) Actual(2) Adjustments Consolidated Adjustments As Adjusted
----------- ---------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 39,212 $ 33,400 $ -- $ 72,612 $ -- $ 72,612
Cost of goods sold 27,816 29,596 -- 57,412 -- 57,412
----------- ---------------- ----------- ------------ ----------- -----------
Gross profit 11,396 3,804 -- 15,200 -- 15,200
Selling, general and administrative
expenses 7,772 3,424 -- 11,196 -- 11,196
Depreciation and amortization 568 10 443 (a) 1,021 236 (d) 1,257
----------- ---------------- ----------- ------------ ----------- -----------
Operating income (loss) 3,056 370 (443) 2,983 (236) 2,747
Interest and other income 82 -- -- 82 -- 82
Interest expense (363) (151) (323) (b) (837) 667 (e) (170)
----------- ---------------- ----------- ------------ ----------- -----------
Income before provision for income
taxes and minority interest 2,775 219 (766) 2,228 431 2,659
Provision (benefit) for income tax 1,273 74 (119) (c) 1,228 287 (f) 1,515
----------- ---------------- ----------- ------------ ----------- -----------
Income before minority interest 1,502 145 (647) 1,000 144 1,144
Minority interest 109 -- -- 109 (109) (g) --
----------- ---------------- ----------- ------------ ----------- -----------
Net income (loss) $ 1,393 $ 145 $ (647) $ 891 $ 253 $ 1,144
=========== ================ =========== ============ =========== ===========
Earnings per common share - diluted $ 0.09 -- -- $ 0.05 $
Weighted average common shares
outstanding - diluted 16,296 -- -- 16,296 (h)
- ---------------------------------- =========== ================ =========== ============ =========== ===========
</TABLE>
(1) Includes one month of Bostek's operations. We acquired Bostek effective
June 1, 1999.
(2) For the five month period ended May 31, 1999.
24
<PAGE>
Intellesale.com, Inc.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1998
------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Bostek, Inc.
and
Intellesale 1998 Pro Forma Affiliate Pro Forma
Actual(1) Acquisitions(2) Adjustments Subtotal Actual(3) Adjustments
----------- --------------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 60,743 $ 6,333 $ -- $ 67,076 $ 60,772 $ --
Cost of goods sold 47,623 4,397 -- 52,020 53,366 --
-------- ------- ----- -------- -------- -------
Gross profit 13,120 1,936 -- 15,056 7,406 --
Selling, general and
administrative expenses 8,725 2,145 10,870 5,675 --
Depreciation and
amortization 434 13 34 (i) 481 46 1,095 (l)
-------- ------- ----- -------- -------- -------
Operating income (loss) 3,961 (222) (34) 3,705 1,685 (1,095)
Interest and other income 45 3 -- 48 392 --
Interest expense (341) (18) -- (359) (353) (951) (m)
-------- ------- ----- -------- -------- -------
Income before provision
for income taxes and
minority interest 3,665 (237) (34) 3,394 1,724 (2,046)
Provision (benefit) for
income tax 1,646 -- (102) (j) 1,544 28 304 (n)
-------- ------- ----- -------- -------- -------
Income before minority
interest 2,019 (237) 68 1,850 1,696 (2,350)
Minority interest 226 -- 10 (k) 236 -- --
-------- ------- ----- ------- ------- --------
Net income (loss) $ 1,793 $ (237) $ 58 $ 1,614 $ 1,696 $ (2,350)
======= ====== ===== ======= ======= ========
Earnings per common share
- diluted $0.11 -- -- $ 0.10 -- --
Weighted average common
shares outstanding -
diluted 15,841 -- -- 15,841 -- --
======= ====== ===== ======= ======= ========
<CAPTION>
Pro Forma Offering Pro Forma
Consolidated Adjustments As Adjusted
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 127,848 $ -- $127,848
Cost of goods sold 105,386 -- 105,386
--------- ------- --------
Gross profit 22,462 -- 22,462
Selling, general and
administrative expenses 16,545 -- 16,545
Depreciation and
amortization 1,622 484 (o) 2,106
--------- ------- --------
Operating income (loss) 4,295 (484) 3,811
Interest and other income 440 -- 440
Interest expense (1,663) 1,530 (p) (133)
--------- ------- --------
Income before provision
for income taxes and
minority interest 3,072 1,046 4,118
Provision (benefit) for
income tax 1,876 658 (q) 2,534
--------- ------- --------
Income before minority
interest 1,196 388 1,584
Minority interest 236 (236) (r) --
--------- ------- --------
Net income (loss) $ 960 $ 624 $ 1,584
========= ======= ========
Earnings per common share
- diluted $ 0.06 $
Weighted average common
shares outstanding -
diluted 15,841 (s)
========= ======= ========
</TABLE>
(1) Includes the results of operations of the companies we acquired in
1998 from their respective dates of acquisition
(2) Represents the historical unaudited combined condensed results of Blue
Star Electronics, Inc., Consolidated Micro Components, Inc., DataPath
Technologies, Inc., GDB Software Services, Inc. and Service Transport
Company, each through March 31, 1998, and Fiscal Advantage, Inc.
through September 30, 1998.
(3) Represents Bostek's historical condensed combined results for the year
ended December 31, 1998.
25
<PAGE>
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
(a) Represents the net increase to amortization expense for goodwill,
arising from the allocation of the purchase price to the actual assets and
liabilities of Bostek at January 1, 1999, resulting from the acquisition of
Bostek amortized over a period of twenty years, calculated as follows:
Pro forma goodwill at January 1, 1999 $ 21,268
Divide by 20 years for annual amortization 1,063
---------
Multiply by 5/12 for 5 months amortization 443
=========
(b) Represents the net increase to our interest expense for the six months
ended June 30, 1999 associated with debt issued in connection with the purchase
of Bostek, based upon borrowing the $14,486 paid to the Bostek sellers and to
repay Bostek debt at closing, at an average interest rate of 7.85% per annum,
calculated as follows:
Net amount borrowed $ 14,486
Multiply by 7.85% for annual interest expense 1,137
Multiply by 5/12 for 5 months interest expense 474
Less: Bostek historical interest expense (151)
---------
Net adjustment 323
=========
A change in the interest rate of 1/8% would change interest expense by
approximately $7.
(c) Represents a decrease in Bostek's tax provision due to Bostek's
earnings reduced by the pro forma interest expense, multiplied by the combined
federal and state statutory income tax rate. Bostek was a subchapter S
corporation for income tax purposes and accordingly no provision was made for
federal income taxes on a pre-acquisition historical basis. Amortization is not
deducted in computing the pro forma income tax provision.
Bostek income before provision for income taxes $ 219
Less: Pro forma interest expense (323)
---------
Adjusted loss before provision (benefit) for income taxes (104)
Multiply by statutory income tax rate of 43% (45)
Less: Existing tax provision 74
---------
Pro forma tax adjustment (119)
=========
(d) Represents the increase in goodwill amortization as a result of our
purchase of the minority interests and settlement of the earn-out obligations in
connection with this offering:
Total value of additional consideration (excluding
Service Transport) $ 10,040
Value of 50,000 shares additional consideration due to
Service Transport minority stockholder, assuming an
initial public offering price of $[___] [ ]
Less: Minority interest at January 1, 1999 (590)
---------
Pro forma additional goodwill at January 1, 1999 9,450
Divide by 20 years for annual amortization 473
---------
Multiply by 6/12 for 6 months amortization 236
=========
26
<PAGE>
(e) Represents the decrease in interest expense resulting from our use of
the net proceeds to repay borrowings from Applied Digital Solutions:
Pro forma amount to be repaid $17,000
Multiply by 7.85% for annual interest expense 1,335
-------
Multiply by 6/12 for 6 months interest expense 667
=======
(f) Represents the increase in the tax provision as a result of the
decrease in interest expense in (e) above. Amortization is not deducted in
computing the pro forma income tax provision.
Pro forma decrease in interest expense $ 667
Multiply by statutory income tax rate of 43% $ 287
(g) Represents the elimination of minority interest as a result of our
purchase of the minority interests in connection with this offering.
(h) Represents shares issued in connection with:
(1) this offering;
(2) payment to the former shareholders of Bostek in the amount of
$10,000, assuming an initial offering price of $[__]; and
(3) our purchase of the minority interests and settlement of the
earn-out obligation, of $10,040 assuming an initial public
offering price of $[______], plus 50,000 shares.
(i) Represents the net increase to amortization expense for goodwill
resulting from the 1998 acquired companies amortized over a period of twenty
years, calculated as follows:
Pro forma goodwill at January 1, 1998 $ 2,397
Divide by 20 years for annual amortization 120
-------
Amortization for period prior to acquisition 34
=======
(j) Represents an adjustment to the 1998 acquired companies tax provision
due to their earnings multiplied by the combined federal and state statutory
income tax rate. The 1998 acquired companies were subchapter S corporations for
income tax purposes and accordingly no provision was made for federal income
taxes on a pre-acquisition historical basis. Amortization of goodwill is not
deducted in computing the pro forma income tax provision.
1998 acquired companies' loss before provision for income
taxes $ (237)
Multiply by statutory income tax rate of 43% (102)
Less: Existing tax provision 0
-------
Pro forma tax adjustment (102)
=======
(k) Represent the minority interest in the earnings and losses of two of
the 1998 acquired companies, as follows:
Combined net loss of less than wholly owned subsidiares $ (50)
Minority interest at 20% $ (10)
(l) Represents the net increase to amortization expense for goodwill,
arising form the allocation of the purchase price to the actual assets and
liabilities of Bostek at January 1, 1998, amortized over a period of twenty
years, calculated as follows:
Pro forma goodwill at January 1, 1998 $21,904
Divide by 20 years for annual amortization $ 1,095
(m) Represents the net increase to interest expense for the year ended
December 31, 1998 associated with debt issued in connection with the purchase of
Bostek, based upon borrowing the $14,486 paid to the Bostek sellers and to repay
Bostek debt at closing, borrowed at an average interest rate of 9% per annum,
calculated as follows:
27
<PAGE>
Net amount borrowed $ 14,486
Multiply by 9% for annual interest expense 1,304
Less: Bostek historical interest expense (353)
--------
Net adjustment 951
========
A change in the interest rate of 1/8% would change interest expense by
approximately $13
(n) Represents an increase in Bostek's tax provision due to Bostek's
earnings reduced by the pro forma interest expense, multiplied by the combined
federal and state statutory income tax rate. Bostek was a subchapter S
corporation for income tax purposes and accordingly no provision was made for
federal income taxes on a pre-acquisition historical basis. Amortization is not
deducted in computing the pro forma income tax provision.
Bostek income before provision for income taxes $ 1,724
Less: Pro forma interest expense (951)
--------
Adjusted income before provision for income taxes 773
Multiply by statutory income tax rate of 43% 332
Less: Existing tax provision (28)
--------
Pro forma tax adjustment 304
========
(o) Represents the increase in goodwill amortization as a result of our
purchase of the minority interests and settlement of the earn-out obligations in
connection with this offering:
Total value of additional consideration $ 10,040
(excluding Service Transport)
Value of 50,000 shares additional consideration due
Service Transport, assuming an initial public
offering price of $[____] [ ]
Less: Pro forma minority interest at January 1, 1998 (367)
Pro forma additional goodwill at January 1, 1998 9,673
--------
Divide by 20 years for annual amortization 484
========
(p) Represents the decrease in interest expense resulting from our use of
the net proceeds to repay borrowings from Applied Digital Solutions:
Pro forma amount to be repaid $ 17,000
Multiply by 9% for annual interest expense $ 1,530
(q) Represents the increase in the tax provision as a result of the
decrease in interest expense in (p) above. Amortization is not deducted in
computing the pro forma income tax provision.
Pro forma decrease in interest expense $ 1,530
Multiply by statutory income tax rate of 43% $ 658
(r) Represents the elimination of minority interest as a result of our
purchase of the minority interests in connection with this offering.
(s) Represents shares issued in connection with:
(1) this offering;
(2) payment to the former shareholders of Bostek in the amount of
$10,000, assuming an initial offering price of $[__]; and
(3) our purchase of the minority interests and settlement of the
earn-out obligations of $10,040, assuming an initial public
offering price of $[_____], plus 50,000 shares.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition and the results of operations and financial condition of Bostek should
be read in conjunction with the financial statements and related notes for us
and for Bostek included elsewhere in this prospectus. We consummated the Bostek
acquisition effective June 1, 1999; accordingly, the results presented for
Intellesale for the first six months of 1999 include one month of Bostek's
operations. The following discussion contains forward-looking statements that
reflect our expectations, assumptions, estimates and beliefs. The outcome of the
events described in these forward-looking statements is subject to risks and
uncertainties, and actual results could differ materially. Factors that could
cause or contribute to such differences include those discussed below and
elsewhere in this prospectus, particularly in "Risk Factors."
OVERVIEW
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at www.Intellesale.com
as well as through traditional channels, which we are migrating to the Internet.
In addition to selling products on our website, we distribute products through
cooperative marketing arrangements with OnSale.com and uBid.com, where we
conduct auctions of our products, as well as with FlashNet Communications, Lycos
and other Internet portals and service providers.
Our business consists of:
. Internet, in which we sell refurbished and new computer products
through our website.
. Traditional commerce and other services, in which we buy and remarket
computer equipment and components to traditional wholesalers,
retailers and value-added-resellers, as well as individual and
corporate end users, and provide integration and consulting services,
computer recycling, parts-on-demand services and transportation
services for computer and other equipment. We are transitioning this
traditional commerce business to the Internet.
We began offering products on the Internet in the second quarter of 1998
with the acquisition of Data Path Technologies, Inc., which marketed refurbished
computer products through the Internet. Building on this Internet platform, we
established the Intellesale.com website in January 1999 and began to focus our
business on, and migrate our traditional commerce business to, the Internet.
Our History
We were incorporated in Delaware in December 1998 and are the successor to
several businesses. We are a controlled subsidiary of Applied Digital Solutions,
Inc., a publicly held company which is traded on the Nasdaq National Market
under the symbol "ADSX." Applied Digital Solutions acquired 80% of each of our
predecessor businesses, which are Elite Computer Services, acquired on September
1, 1995, and Universal Commodities, acquired on November 1, 1996. Effective July
13, 1999, Universal Commodities was merged into Intellesale. Applied Digital
Solutions contributed the stock of Elite to Intellesale in July 1, 1999. We have
grown rapidly, both internally and through acquisition. Our acquisitions since
1996 have been made primarily through the use of Applied Digital Solutions'
common stock. Set forth below is certain information with respect to the
acquisitions we have completed:
29
<PAGE>
<TABLE>
<CAPTION>
Fair Value
Effective of Net
Date of Percent Acquisition Assets
Acquisition Acquired Price Acquired Goodwill Business Description
- ------------------------------------------------------------------------------------------------------------------------------------
1995 Acquisition ($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Elite Computer Services, September 1, 80% $ 557 $ 10 $ 547 Remarketer of computer parts
Inc. 1995
1996 Acquisition
Universal Commodities Corp. November 1, 80% 1,512 271 1,241 Remarketer of computer equipment
1996
1997 Acquisitions
Norcom Resources, Inc. January 1, 80% 538 57 481 Remarketer of mainframe computers
1997
Pizarro ReMarketing, Inc. January 1, 80% 356 156 200 Remarketer of computer tape and disk drives
1997
Cybertech Station, Inc. July 1, 1997 80% 467 0 467 Remarketer of computer memory products
Port Parties, Ltd. July 1, 1997 80% 3,966 82 3,884 Leasing and rental services for meeting and
convention planners
1998 Acquisitions
Blue Star Electronics, Inc. April 1, 1998 80% 431 1 430 Cable assembly manufacturer
Consolidated Micro April 1, 1998 100% 1,948 4 1,944 Remarketer of memory, processors and hard
Components, Inc. drives
Data Path Technologies, April 1, 1998 100% 3,421 146 3,275 Remarketer of computer equipment
Inc.
GDB Software Services, Inc. April 1, 1998 100% 1,931 221 1,710 Provider of data processing consulting
services
Service Transport Company April 1, 1998 80% 89 (69) 158 Transporter of computer equipment
Fiscal Advantage, Inc. October 1, assets 200 25 175 Computer leasing services
1998
1999 Acquisition
Bostek, Inc. and affiliate June 1, 1999 100% 25,205 3,747 21,458 Remarketer of computer equipment
</TABLE>
Applied Digital Solutions' common stock was issued as consideration for all
of the above acquisitions, except the acquisitions of Fiscal Advantage, Inc. and
Bostek. All of the above acquisitions, including Bostek and Fiscal Advantage,
have been accounted for using the purchase method of accounting and,
accordingly, the consolidated financial statements included elsewhere herein
reflect the results of operations of each company from the date of acquisition.
The costs of acquisition include all payments under the acquisition agreements
plus the direct costs incurred in connection with the acquisitions, primarily
fees for investment banking services, legal services and accounting services.
The excess of the purchase price for the acquisitions over the estimated fair
values of the net assets acquired has been allocated to goodwill, resulting in
approximately $35.0 million of goodwill. The amortization of this goodwill over
20 years will result in an annual noncash charge to our operating results of
approximately $1.8 million, or approximately $0.5 million per quarter.
Intellesale's historical results through June 30, 1999 do not fully reflect
these annual expected goodwill charges. See "Pro Forma Financial Information,"
Note 15 to our consolidated financial statements for information on depreciation
and amortization expense by operating segment, Note 16 for unaudited pro forma
information for the above acquisitions that occurred in 1997 and 1998 and Note
17 regarding acquisition activity in the six months ended June 30, 1999.
Accounting Policies and Trends
The consolidated financial statements included elsewhere herein reflect the
carved-out financial position, results of operations and cash flows of
Intellesale and its subsidiaries for the periods presented.
30
<PAGE>
The financial statements have been prepared as if we had operated as a stand-
alone entity for the periods presented, and include those assets, liabilities,
revenues and expenses directly attributable to our operations. The determination
and presentation of assets, liabilities, revenues and expenses have been made on
a basis consistent with the policies of Applied Digital Solutions used for
purposes of consolidation. Stockholders' equity has been restated to give effect
to the merger of Universal Commodities into Intellesale and the contribution of
Elite to Intellesale as if they had occurred at November 1, 1996 and September
1, 1995, the dates that Applied Digital Solutions acquired Universal Commodities
and Elite, respectively.
For product sales, we recognize revenue upon shipment. There are no
significant post-contract support obligations at the time of revenue
recognition. Our accounting policy regarding vendor and post-contract support
obligations is based on the terms of the customers' contract, billable upon the
occurrence of the post-sale support. Costs of goods sold are recorded as the
related revenue is recognized. Although an allowance for sales returns is
recorded, we do not experience significant product returns. Regardless of the
source of the merchandise, most of our products are warranted by either us or
the manufacturer. We provide a minimum six month warranty for most products not
covered by factory warranties. In addition, we offer our customers the
opportunity to purchase an extended warranty, which is priced on the basis of
the selling price of the item covered. These extended warranties are provided
under an agreement with a third party. We record a warranty accrual based on
estimated warranty claims.
With our emphasis on the Internet, we expect Internet revenues to
contribute a significantly greater percentage of our total revenue in the
future. As our Internet segment continues to grow, we expect that gross margins
from the Internet segment will continue to be higher than margins from our
traditional commerce segment, although they may vary based on several factors,
including product pricing and product acquisition costs. However, we expect
margin pressures as we expand the Internet segment of our business. As we expand
our Internet business, we expect operating margins will decline from current
levels as we increase our advertising and website maintenance costs.
Applied Digital Solutions currently provides certain services to, and
incurs certain expenses on behalf of, Intellesale. These services include legal,
internal audit, financial reporting and human resources. These expenses include
certain corporate overhead expenses, administration of our 401(k) employee
benefit plan, preparation of advertising materials and legal fees. The amounts
which Applied Digital Solutions charges Intellesale for these services and
expenses are determined on the basis of Intellesale's total revenues as a
percentage of consolidated Applied Digital Solutions revenues. These costs were
approximately $0.4 million in 1998 and $0.3 million in the first half of 1999.
No costs were allocated in 1996 and 1997 since Applied Digital Solutions did not
provide significant services. Such expenses are not necessarily indicative of
the expenses which would have resulted had we operated as a separate entity. If
we had to provide these services ourselves, they might have cost more. Following
the completion of this offering, we will be required to provide these services
at our expense.
Due to our historical dependence on Applied Digital Solutions for funding
and certain services, our ability to grow internally has been constrained by the
allocation of resources made by Applied Digital Solutions. For this reason, we
expect to have our own line of credit in place at the closing of this offering,
which will replace our line of credit with Applied Digital Solutions. Until we
establish such lines of credit, we will depend on Applied Digital Solutions for
funding, and the ability of Applied Digital Solutions to provide such funding
will be subject to the terms and conditions of its credit facilities. Applied
Digital Solutions has no obligation to provide funding to us. To the extent
Applied Digital Solutions does not provide funding to us, because it is unable
to borrow under its facilities or because it elects not to do so, our business
may be materially adversely affected.
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INTELLESALE.COM
Results of Operations
The following table summarizes our results of operations as a percentage of
revenue for the six month periods ended June 30, 1998 and 1999 and for the last
three years:
<TABLE>
<CAPTION>
Relationship to Revenue
-----------------------------------------------------
Years ended Six months ended
December 31, June 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 42.7 84.2 78.4 79.2 70.9
-------------------------- ---------------
Gross profit 57.3 15.8 21.6 20.8 29.1
Selling, general and administrative expenses 31.9 9.6 14.4 12.6 19.9
Depreciation and amortization 0.1 0.5 0.7 0.7 1.4
-------------------------- ---------------
Operating income 25.3 5.7 6.5 7.5 7.8
Interest income 0.1 0.0 0.1 0.0 0.2
Interest expense 0.5 0.4 0.6 0.4 0.9
-------------------------- ---------------
Income before provision for income taxes 24.9 5.3 6.0 7.1 7.1
and minority interest
Provision for income taxes 9.5 2.2 2.7 2.9 3.3
-------------------------- ---------------
Income before minority interest 15.4 3.1 3.3 4.2 3.8
Minority interest 1.5 0.6 0.4 0.5 0.2
-------------------------- ---------------
Net income 13.9% 2.5% 2.9% 3.7% 3.6%
========================== ===============
</TABLE>
Revenue
We began offering products on the Internet in the second quarter of 1998
with the acquisition of Data Path Technologies, Inc., which marketed refurbished
computer products through the Internet.
Six month periods ended June 30, 1998 and 1999. Revenue from customers for
each operating segment for the six months ended June 30, 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
---------------------------------
Internet.......................... $ 2,439 8.6 $12,817 32.7
Traditional commerce.............. 25,760 91.4 26,395 67.3
---------------------------------
Consolidated...................... $28,199 100.0 $39,212 100.0
=================================
Revenue for the six month period ended June 30, 1999 was $39.2 million, an
increase of $11.0 million, or 39.1%, from $28.2 million for the first six months
of 1998. Of the $11.0 million increase, $5.0 million, or 45.5%, was contributed
by Bostek, which we acquired effective June 1, 1999, and the remainder was
contributed primarily by the full six months of revenue in 1999 from our
acquisitions in 1998. Businesses acquired in the first six months of 1998
represented $13.0 million of revenue in the first half of 1999 and $5.4 million
in the first half of 1998.
In the Internet segment, the $10.4 million increase in revenue resulted
from several factors: $4.6 million from Data Path Technologies, which was owned
for only three months in the 1998 period and expanded its business in 1999, $2.8
million from Bostek, which was acquired effective June 1, 1999, and $3.0 million
from expansion and migration of other parts of our business to the Internet.
Revenue in the traditional commerce segment increased by $0.6 million or
2.5%. Bostek and the full six months of revenues from the 1998 acquisitions
resulted in an approximately $5.5 million increase in revenue in the first half
of 1999. This increase, however, was offset by a $4.9 million decrease in
revenue from the remainder of our business as a result of decreased demand for
certain memory products
32
<PAGE>
that had experienced significant sales in 1998, when customers were purchasing
memory to address the year 2000 problem, but which sales declined in 1999.
Years ended December 31, 1996, 1997 and 1998. Revenue from customers for
each operating segment was:
($ in thousands) 1996 % 1997 % 1998 %
--------------------------------------------------
Internet................ $ -- -- $ -- -- $ 7,334 12.1
Traditional commerce.... 1,993 100.0 39,445 100.0 53,409 87.9
--------------------------------------------------
Consolidated............ $1,993 100.0 $39,445 100.0 $60,743 100.0
==================================================
Revenue for 1998 was $60.7 million, an increase of $21.3 million, or 54.0%,
from $39.4 million in 1997. Of this increase, $17.7 million resulted from
acquisitions made during 1998 and $5.2 million resulted from acquisitions made
in 1997, which are included for a full year in 1998 results. As the acquired
companies were integrated, we increased revenue at certain companies as we
focused on shifting our customers to the proper distribution channel.
Accordingly, the dollar increase from certain 1997 acquisitions was partially
offset by decreases in revenues at other subsidiaries, resulting in an overall
revenue increase from 1997 acquisitions of $3.6 million. In addition, revenues
increased by $1.4 million in 1998 from increased sale of certain memory products
that were sold as customers prepared for the year 2000 problem.
All of our Internet revenue in 1998 was from companies we acquired in 1998.
Traditional commerce revenue for 1998 increased by $14.0 million, or 35.4%, over
1997. Of this amount, approximately $10.4 million, or 74.3%, was contributed by
companies we acquired during 1998 and a net $3.6 million, as described above,
was contributed by companies that we acquired during 1997 whose revenues grew in
1998.
The 1997 revenue represents an increase of $37.5 million over the $2.0
million reported in 1996. Of this amount, $34.0 million, or 90.7%, was
contributed by companies we acquired during 1997. The remaining increase is
primarily the result of revenues from Universal Commodities, which we acquired
in November 1996. Our operations in 1996 consisted only of Elite Computer
Services, which we acquired in August 1995, and two months of Universal
Commodities.
Gross Profit/Margin
Six month periods ended June 30, 1998 and 1999. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet................ $1,177 48.3 $ 5,498 42.9
Traditional commerce.... 4,685 18.2 5,898 22.3
---------------------------------
Consolidated............ $5,862 20.8 $11,396 29.1
=================================
Our gross profit for the first six months of 1999 was $11.4 million, an
increase of $5.5 million, or 94.4%, from $5.9 million for the first six months
of 1998. As a percentage of revenue, the gross margin was 29.1% for the first
six months of 1999 and 20.8% for the first six months of 1998. The increase in
our gross margins resulted primarily from lower product acquisition cost, higher
pricing resulting from increased demand and the continued migration of our
business to the Internet, which has higher margins, in the first half of 1999.
Gross profit in the Internet segment increased by $4.3 million. Of this
increase $0.5 million was contributed by Bostek, $2.7 million was contributed by
Data Path Technologies, which was included for a full six months in 1999 and
experienced significant growth in 1999 from direct website sales, and the
33
<PAGE>
remaining $1.1 million was contributed from Internet sales that resulted from
expansion and migration of other parts of our business to the Internet.
Years ended December 31, 1996, 1997 and 1998. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
-----------------------------------------------
Internet.................... $ -- -- $ -- -- $ 3,353 45.7
Traditional commerce........ 1,142 57.3 6,243 15.8 9,767 18.3
-----------------------------------------------
Consolidated................ $1,142 57.3 $ 6,243 15.8 $ 13,120 21.6
===============================================
Our gross profit for 1998 was $13.1 million, an increase of $6.9 million,
or 110.2%, from $6.2 million in 1997. Of this increase, $3.3 million was the
result of the Data Path Technologies acquisition and expansion of its business
in 1998. Additionally, 1998 acquisition activity resulted in a net increase of
$2.0 million, from both acquired businesses and internal growth, and 1997
acquisitions contributed $1.6 million to the increase. The overall increase in
our gross margins resulted primarily from lower product acquisition costs which
we were able to achieve as we integrated our businesses.
As a percentage of revenue, gross margin increased to 21.6% in 1998 from
15.8% in 1997, resulting from an increase in the volume of sales on the
Internet, which has higher margins. Additionally, margins improved in the
traditional commerce segment, a result of the acquisition activity contributing
higher margin business and our ability as a whole to negotiate lower product
acquisition costs based on our ability to purchase in higher volumes.
The 1997 gross profit represents an increase of $5.1 million over the $1.1
million reported in 1996. Of this amount, $3.9 million was a result of 1997
acquisitions and the remainder was due to inclusion of Universal Commodities for
a full year in 1997. Gross margin was 57.3% in 1996, but represented only the
results of Elite for the whole year and Universal Commodities for two months.
Accordingly, we believe that 1998 margins are more indicative of margins from
our continuing business.
Selling, General and Administrative Expense
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in our traditional commerce segment.
This is because advertising costs, website maintenance costs and labor costs are
all significantly greater than in our traditional commerce segment. We expect
these expenses to increase in absolute dollar terms in the future as the
Internet segment grows.
Six month periods ended June 30, 1998 and 1999. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet.................... $ 739 30.3 $3,703 28.9
Traditional commerce........ 2,820 10.9 4,069 15.4
--------------------------------
Consolidated................ $3,559 12.6 $7,772 19.8
================================
Selling, general and administrative expenses were $7.8 million for the
first six months of 1999, an increase of $4.2 million, or 118.4%, from $3.6
million for the first six months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 19.8% for the first six months of 1999
and 12.6% for the first six months of 1998. Of the increase, $0.7 million
resulted from the Bostek acquisition, and $2.8 million resulted from 1998
acquisitions and related increase in personnel. The remainder of the increase,
both in absolute dollar terms and as a percentage of revenue, was due to the
addition of corporate management and other employees to support our growth,
advertising and management fees paid to Applied Digital Solutions. Management
fees paid to Applied Digital Solutions in the first half of 1999 amounted to
$0.3 million compared to $0.2 million in the first half of 1998.
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<PAGE>
In the Internet segment, selling general and administrative expenses
increased by $3.0 million, of which $0.4 million was due to the Bostek
acquisition and the remaining $2.6 million was primarily due to both the
inclusion of Data Path Technologies for the full six months in 1999 and the
resulting growth of the Internet business costs, including additional personnel
and advertising.
Selling, general and administrative expenses in the traditional commerce
segment increased by $1.2 million. Of this amount, $0.8 million is a result of
the acquisition of Bostek and the companies acquired in 1998. The remaining
increase is primarily due to the addition of corporate management.
Years ended December 31, 1996, 1997 and 1998. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
---------------------------------------------
Internet................... $ -- -- $ -- -- $2,551 34.8
Traditional commerce....... 635 31.9 3,778 9.6 6,174 11.6
---------------------------------------------
Consolidated............... $ 635 31.9 $ 3,778 9.6 $8,725 14.4
=============================================
Selling, general and administrative expenses were $8.7 million in 1998, an
increase of $4.9 million, or 130.9%, from $3.8 million in 1997. As a percentage
of revenue, selling, general and administrative expenses increased to 14.4% in
1998 from 9.6% in 1997. The increase from 1997 to 1998 was due primarily to 1998
acquisitions, which contributed additional expenses of $3.5 million in 1998, and
1997 acquisitions, which contributed additional expenses of $0.9 million in
1998. In addition, we paid $0.4 million in management fees to Applied Digital
Solutions in 1998. We paid no fees in 1996 or 1997 as services provided were
insignificant.
The 1997 expense represents an increase of $3.1 million over the $0.6
million reported in 1996. In 1996, selling, general and administrative expenses
were 31.9% of revenue, compared to 9.6% in 1997. The increase in absolute dollar
terms from 1996 to 1997 was primarily a result of acquisitions made in 1997 and
the acquisition of Universal Commodities made in November 1996. The decrease in
selling, general and administrative expenses as a percentage of revenue was
because acquisitions made in 1997 allowed us to spread our corporate overhead
expenses over a larger revenue base.
Depreciation and Amortization
Six month periods ended June 30, 1998 and 1999. Depreciation and
amortization for each of the operating segments, and as a percentage of segment
revenues, during the first six months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
----------------------------
Internet....................... $ 6 $236
Traditional commerce........... 182 332
----------------------------
Consolidated................... $ 188 0.7 $568 1.4
============================
Depreciation and amortization expense was $0.6 million for the first six
months of 1999, an increase of $0.4 million, or 202.1%, from $0.2 million for
the first six months of 1998. The increase is primarily due to goodwill
amortization resulting from the companies acquired in 1998 and the Bostek
acquisition.
35
<PAGE>
Years ended December 31, 1996, 1997 and 1998. Depreciation and amortization
for each of the operating segments, and as a percentage of segment revenues,
was:
($ in thousands) 1996 % 1997 % 1998 %
----------------------------------------
Internet................... $ -- -- $ -- -- $ 21 0.3
Traditional commerce....... 2 0.1 190 0.5 413 0.8
----------------------------------------
Consolidated............... $ 2 0.1 $190 0.5 $434 0.7
========================================
Depreciation and amortization expense was $0.4 million in 1998, an increase of
$0.2 million, or 128.4%, from 1997. The increase is primarily due to
amortization of goodwill associated with 1998 and 1997 acquisitions.
Depreciation and amortization expense increased by $0.2 million in 1997 as
compared to 1996 primarily as a result of goodwill amortization associated with
companies acquired in 1997 and the acquisition of Universal Commodities in
November 1996. Including our acquisition of Bostek, our annual goodwill
amortization expense will be $1.8 million.
Operating Income
Six month periods ended June 30, 1998 and 1999. Operating income for each
of the operating segments, and as a percentage of segment revenue, during the
first six months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet................... $ 437 17.9 $1,741 13.6
Traditional commerce....... 1,678 6.5 1,315 5.0
--------------------------------
Consolidated............... $2,115 7.5 $3,056 7.8
================================
Operating income was $3.1 million for the first six months of 1999, an
increase of $1.0 million, or 44.5%, from $2.1 million for the first six months
of 1998.
Years ended December 31, 1996, 1997 and 1998. Operating income for each of
the operating segments, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
---------------------------------------------
Internet.................... $ -- -- $ -- -- $ 782 10.7
Traditional commerce........ 505 25.3 2,275 5.8 3,179 6.0
---------------------------------------------
Consolidated................ $ 505 25.3 $2,275 5.8 $3,961 6.5
=============================================
Operating income was $4.0 million in 1998, an increase of $1.7 million, or
74.1%, from $2.3 million in 1997. The 1997 operating income represents an
increase of $1.8 million over the $0.5 million reported in 1996.
Interest Income and Expense
Interest income was insignificant in each of the periods. Interest income
is earned primarily from short-term investments. Interest expense was $0.4
million for the first six months of 1999 and $0.1 million for the first six
months of 1998. Interest expense was $0.3 million in 1998, an increase of $0.2
million from $0.1 million in 1997. The 1997 expense increased $0.1 million over
the nominal amount reported in 1996. As we have grown over the last three years,
our need to finance our working capital has increased, resulting in greater
amounts borrowed and higher interest expense. Interest expense is principally
associated with advances from Applied Digital Solutions and borrowings from
financial institutions.
Income Taxes
We had effective income tax rates of 40.6% for the first six months of 1998
and 45.9% for the first six months of 1999. Our effective income tax rates were
38.3% in 1996, 41.6% in 1997 and 44.9% in 1998. Changes in the effective rate
were primarily the result of acquisitions of companies in states with
36
<PAGE>
higher state income tax rates. Information on income taxes can be found in Notes
1 and 9 to our financial statements.
Liquidity and Capital Resources
We have historically funded our operations primarily through borrowings
from Applied Digital Solutions and cash from operations.
As of June 30, 1999, cash and cash equivalents totaled $0.1 million, a
decrease of $0.5 million from $0.6 million at December 31, 1998. Excess cash on
hand has been concentrated and applied against our indebtedness to Applied
Digital Solutions.
Operating Activities
Net cash used in operating activities was approximately $5.7 million for
the six month period ended June 30, 1999. This was primarily the result of an
increase in accounts receivable of $2.0 million and an increase of $5.4 million
in inventory, offset by net income of $1.4 million. The higher levels of
accounts receivable and inventory are a result of increased sales and
anticipated sales from the Internet. Net cash provided by operating activities
for the six months ended June 30, 1998 was approximately $0.4 million. This was
primarily the result of net income of $1.1 million and an increase in amounts
owed to Applied Digital Solutions of $0.5 million, offset by an increase in
inventory of $1.1 million.
Net cash used in operating activities was approximately $2.2 million for
the year ended December 31, 1998. This was primarily the result of an increase
in inventory of $2.3 million, a decrease in accounts payable and accrued
expenses of $1.8 million and a decrease in amounts due to Applied Digital
Solutions of $0.4 million, offset by net income of $1.8 million and depreciation
and amortization of $0.4 million. Net cash provided by operating activities was
approximately $0.2 million for the year ended December 31, 1997. This was
primarily the result of an increase in inventory of $2.3 million, an increase in
accounts receivable of $1.4 million, an increase in accounts payable of $1.7
million and an increase in amounts due to Applied Digital Solutions of $0.8
million, offset by net income of $1.0 million. Net cash provided by operating
activities was approximately $0.1 million for the year ended December 31, 1996.
This was primarily the result of an increase in inventory of $0.2 million, an
increase in accounts receivable of $0.1 million, a decrease in accounts payable
of $0.2 million and an increase in amounts owed to Applied Digital Solutions of
$0.4 million, offset by net income of $0.3 million.
Investing Activities
Net cash used in investing activities was approximately $11.8 million for
the six month period ended June 30, 1999. This was the result of payments in the
Bostek acquisition of $10.6 million and the purchase of furniture and fixtures,
equipment and leasehold improvements of $1.1 million. Net cash used in investing
activities for the six months ended June 30, 1998 was nominal.
Net cash used in investing activities was approximately $1.0 million for
the year ended December 31, 1998. This was primarily the result of an increase
in notes receivable from officers. Net cash provided by investing activities was
$0.4 million for the year ended December 31, 1997. This was primarily the result
of net cash acquired in acquisitions of $0.6 million, a decrease in notes
receivable of $0.1 million and proceeds from the sale of assets of $0.1 million,
offset by purchases of $0.4 million. Net cash used in investing activities for
the year ended December 31, 1996 was nominal.
Financing Activities
Net cash provided by financing activities was $17.0 million for the six
month period ended June 30, 1999. This was the result of additional borrowings
of $17.0 million from Applied Digital Solutions, including $10.1 million
borrowed to acquire Bostek and an additional $4.4 million to refinance Bostek's
37
<PAGE>
working capital loans. Net cash provided by financing activities for the six
months ended June 30, 1998 was nominal.
Net cash provided by financing activities was approximately $3.2 million
for the year ended December 31, 1998. This was primarily the result of
additional borrowings from Applied Digital Solutions of $5.0 million for
acquisitions and working capital, offset by payments of amounts due financial
institutions of $1.8 million. Net cash used in financing activities for the year
ended December 31, 1997 was nominal. Net cash used in financing activities for
the year ended December 31, 1996 was $0.2 million. This was the result of
reductions in the amounts due financial institutions.
As of June 30, 1999, our outstanding borrowings from Applied Digital
Solutions were $27.6 million, including the amounts borrowed in connection with
the Bostek acquisition as described above. As of August 31, 1999, our
outstanding borrowings from Applied Digital Solutions were $33.0 million. From
January 1, 1999 through August 31, 1999, our average weighted interest rate on
borrowings from Applied Digital Solutions was 7.6%, and at August 31, 1999 the
interest rate on these borrowings was 6.9%. Our borrowings from Applied Digital
Solutions bear interest at the same rate as the rate paid by Applied Digital
Solutions to its lender. These rates are subject to adjustment to reflect
changes in specified interest rate indexes. We expect to have our own line of
credit in place at the closing of this offering, which will replace the line of
credit which Applied Digital Solutions is now providing to us. We cannot provide
assurance that we will be able to establish such line of credit on favorable
terms or at all. Until we establish such line of credit, we will depend on
Applied Digital Solutions for funding, and the ability of Applied Digital
Solutions to provide such funding will be subject to the terms and conditions of
its credit facilities. We expect that the proceeds of this offering, together
with our available cash resources, will be sufficient to meet our cash
requirements for at least the next 12 months will provide us with sufficient
resources to finance our working capital requirements for the next 12 months.
However, after that 12-month period, we may require additional equity or debt
financing to meet our working capital and capital expenditure requirements. Our
capital requirements depend on a variety of factors, including but not limited
to the rate of increase or decrease in our existing business base, the success,
timing, and amount of investment required to bring new products or services
online, revenue growth or decline, and potential acquisitions. We cannot assure
you that we will not need additional financing sooner or, if required, that it
will be available on a timely basis or on terms satisfactory to us.
Applied Digital Solutions currently has a term and revolving credit
facility with IBM Credit Corporation, under which Applied Digital Solutions may
borrow in various tranches. The aggregate amount of the facility for domestic
use is $79.0 million, of which $22.0 million is a revolving credit line that may
be used for general working capital requirements, capital expenditures and
certain other permitted purposes. The U.S. tranche bears interest at a floating
rate equal to 30-day LIBOR plus 1.75%. As of August 31, 1999, a total of $60.5
million was outstanding under this facility and $18.5 million remained available
under the U.S. tranche. The shares of Intellesale held by Applied Digital
Solutions are pledged as security for this facility. Our ability to borrow funds
from Applied Digital Solutions is subject to various factors, including the
ability of Applied Digital Solutions to meet the conditions to borrowing under
the facility, the amounts available under the facility and the determination of
the management of Applied Digital Solutions whether to make funds available to
us, which will be affected by the borrowing requirements of Applied Digital
Solutions for its own operations, for acquisitions and for its other
subsidiaries. While we cannot assure you as to Applied Digital Solutions' future
ability to borrow under this facility, Applied Digital Solutions has advised us
that it meets all conditions to borrowing under the facility as of the date of
this prospectus. Due to our historical dependence on Applied Digital Solutions
for funding, our ability to grow internally has been constrained by the
allocation of resources made by Applied Digital Solutions. We expect to have our
own line of credit in place at the closing of this offering, which will replace
the line of credit which Applied Digital Solutions
38
<PAGE>
is now providing, and we plan to use approximately $17.0 million of the proceeds
from this offering to repay borrowings under that line of credit.
In connection with certain acquisitions, we have agreed to pay additional
amounts to the sellers of the acquired businesses depending on the performance
of the businesses. We have recently entered into agreements with those sellers
who are entitled to these payments under which we have agreed to pay certain
fixed amounts, in a combination of cash and shares of our stock, in lieu of the
earn-out payments. Some of those individuals also retained minority interests in
our subsidiaries, and in those cases, we have also agreed to repurchase their
minority interests, also for a combination of cash and our stock. Our aggregate
cash obligation to those individuals under all of these agreements is $5.8
million. We intend to use $5.8 million of the proceeds from this offering to
satisfy the cash portion of those obligations, and to issue [_________] shares
of our common stock, assuming an initial public offering price of $[__] per
share to satisfy the stock portion of those obligations.
Impact of Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued FAS 137, Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FAS 133. We currently do not use any derivative financial instruments to
hedge our exposure to adverse fluctuations in interest rates, foreign exchange
rates, fluctuations in commodity prices or other market risks, nor do we invest
in speculative financial instruments.
Quantitative and Qualitative Disclosures About Market Risk
Less than 5% of our revenues for 1998 resulted from export to other
countries. Our operations may be subject to volatility due to inflation or
changes in political and economic conditions in these countries. Sales and
expenses that are denominated in local currencies may be affected as currency
fluctuations affect our product prices and operating costs or those of our
competitors.
Borrowings from Applied Digital Solutions are at a variable rate. We do not
have any hedging arrangements for interest rates.
BOSTEK
This portion of this discussion provides information about the operations
of Bostek for periods prior to our acquisition of Bostek, which occurred
effective June 1, 1999, and also provides information about the anticipated
effect of the acquisition on Intellesale.
Bostek was founded in 1983 as a reseller of computer equipment. In early
1998, Bostek shifted its focus to capitalize on an emerging niche segment in the
computer equipment distribution industry that involved acquiring new and
refurbished computer equipment from manufacturers, retailers and resellers and
selling such equipment over the Internet and through traditional sales channels.
In March 1998, Bostek developed a website under the name American Discount
Warehouse, at PickADW.com, to sell its products over the Internet.
Bostek operated in three business segments:
. Internet, which began in the second quarter of 1998, in which
Bostek remarketed new and refurbished computer products through
its website;
. Internet fulfillment, in which Bostek sold products to other
Internet companies that remarket the products through the
Internet; and
39
<PAGE>
. Traditional commerce, in which Bostek remarketed personal
computer equipment and components to traditional wholesalers,
retailers and value-added resellers as well as individual and
corporate end users.
Acquisition by Intellesale
Effective June 1, 1999, we completed the purchase of Bostek and its
affiliate, Micro Components International, for $25.2 million, and we have agreed
to pay up to an additional $5.0 million if Bostek achieves specified levels of
earnings before income taxes over the two-year period ended May 31, 2001. Of the
$25.2 million base purchase price, including expenses, $10.1 million was paid in
cash at the closing, $10.0 million will be paid in our common stock within 30
days after the closing of this offering, based on the initial public offering
price of this offering, and $5.0 million is payable in January 2000. We will
also reimburse the former Bostek stockholders approximately $1 million in tax
liability they will incur as a result of a Section 338(h)(10) tax election we
made in connection with the acquisition. As a result of this election, a portion
of goodwill amortization will not be deductible for tax purposes. This amount of
goodwill has not been finalized. We borrowed the $10.1 million cash portion of
the consideration from Applied Digital Solutions. We also borrowed $4.4 million
from Applied Digital Solutions to refinance Bostek's working capital loans. We
intend to replace our line of credit with Applied Digital Solutions with our own
line of credit, which we expect to have in place at the closing of this
offering. Assuming an initial public offering price of $[ ], we will issue [ ]
shares of common stock to the two former Bostek stockholders within 30 days of
the closing of this offering, which will represent approximately [ ]% of our
outstanding common stock after giving effect to this offering and the issuance
of shares of common stock to satisfy certain earn-out obligations and to
purchase minority interests in certain subsidiaries. Both of the former Bostek
stockholders are officers of Intellesale.
The purchase price for Bostek was assigned to the assets acquired and the
liabilities assumed based on their estimated fair values at the acquisition
date. Based on such allocations, the aggregate purchase price exceeded the
estimated fair value of the net assets acquired by approximately $21.5 million.
That amount is recognized as goodwill and is being amortized over 20 years and
will result in an annual amortization charge of approximately $1.1 million. Any
additional amounts paid out under the purchase price contingency provision noted
above will result in additional goodwill.
Bostek is engaged in the business of acquiring excess inventory and
manufacturer refurbished computer equipment and selling such equipment,
primarily over the Internet. As a result of the Bostek acquisition, our product
mix now includes newer, factory-warranted, higher-end products in addition to
our refurbished equipment. In addition to expanding our product mix and customer
base, we expect that the integration of Bostek will have the following benefits:
. the combination of the best features of both websites should
enhance our customers' experience; and
. the combination of Bostek's warehousing operations with our own
should lead to cost savings.
40
<PAGE>
Results of Operations
The following table summarizes Bostek's historical, pre-acquisition results
of operations as a percentage of revenue for the five-month period ended May 31,
1998 and 1999 and for the years ended December 31, 1996, 1997 and 1998:
Relationship to Revenue
---------------------------------------------
Years ended Five months ended
December 31, May 31,
------------------------ ------------------
1996 1997 1998 1998 1999
-------- ------ ------ ------ ----------
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 87.1 86.2 87.8 87.8 88.6
------------------------ ------------------
Gross profit 12.9 13.8 12.2 12.2 11.4
Selling, general and
administrative expenses 7.1 10.1 9.4 7.5 10.3
------------------------ ------------------
Operating income 5.8 3.7 2.8 4.7 1.1
Interest and other income -- -- (0.6) -- --
Interest expense 0.2 0.1 0.6 0.9 0.5
------------------------ ------------------
Income before provision
for income taxes 5.6 3.6 2.8 3.8 0.6
Provision for income taxes 0.1 0.1 0.0 0.3 0.2
------------------------ ------------------
Net income 5.5% 3.5% 2.8% 3.5% 0.4%
======================== ==================
Revenue
Five month periods ended May 31, 1998 and 1999. Revenue from customers for
each operating segment for the first five months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
----------------------------------------
Internet.................. $ 1,475 6.2 $ 7,321 22.0
Internet fulfillment...... 3,456 14.5 5,890 17.6
Traditional commerce...... 18,933 79.3 20,189 60.4
----------------------------------------
Consolidated.............. $23,864 100.0 $33,400 100.0
========================================
Revenue for the first five months of 1999 was $33.4 million, an increase of
$9.5 million, or 40.0%, from $23.9 million for the first five months of 1998.
This increase is primarily attributable to more transactions conducted over the
Internet. Bostek's Internet segment began operating in April 1998 and accounted
for 61.3% of the increase.
Years ended December 31, 1996, 1997 and 1998. Revenue from customers for
each operating segment was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet................. $ -- -- $ -- -- $ 7,789 12.8
Internet fulfillment..... -- -- -- -- 8,208 13.5
Traditional commerce..... 54,400 100.0 42,930 100.0 44,775 73.7
------------------------------------------------
Consolidated............. $54,400 100.0 $42,930 100.0 $60,772 100.0
================================================
Revenue for 1998 was $60.8 million, an increase of $17.8 million, or 41.6%,
from $42.9 million in 1997. This increase is principally attributable to
increased number of transactions being conducted over the Internet and increased
revenues from Internet fulfillment arrangements. Traditional commerce revenues
were up slightly in 1998 due to increased volume of sales. The 1997 revenue
represents a decrease of $11.5 million, or 21.1% from the $54.4 million reported
in 1996. This decrease was a result of significant changes within the personal
computer market, primarily the introduction of the Intel Pentium(R) processor
which severely impacted the demand for older processors.
41
<PAGE>
Gross Profit/Margin
Five month periods ended May 31, 1998 and 1999. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
-----------------------------------
Internet...................... $ 201 13.6 $ 878 12.0
Internet fulfillment.......... 317 9.2 658 11.2
Traditional commerce.......... 2,388 12.6 2,268 11.2
-----------------------------------
Consolidated.................. $2,906 12.2 $3,804 11.4
===================================
Gross profit for the first five months of 1999 was $3.8 million, an
increase of $0.9 million, or 30.9%, from $2.9 million for the first five months
of 1998. As a percentage of revenue, gross margin was 11.4% for the first five
months of 1999 and 12.2% for the first five months of 1998. Overall gross
margin decreased in the 1999 period primarily because Bostek shifted its product
mix to newer higher-end systems where there is higher demand but increased
competition that results in lower margins for such products on both the Internet
and through traditional channels.
Years ended December 31, 1996, 1997 and 1998. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet................. $ -- -- $ -- -- $ 857 11.0
Internet fulfillment..... -- -- -- -- 940 11.5
Traditional commerce..... 7,034 12.9 5,915 13.8 5,609 12.5
------------------------------------------------
Consolidated............. $7,034 12.9 $5,915 13.8 $7,406 12.2
================================================
Gross profit for 1998 was $7.4 million, an increase of $1.5 million, or
25.2%, from $5.9 million in 1997. Gross profit for 1997 represents a decrease of
$1.1 million, or 15.9%, over the $7.0 million reported in 1996. Overall gross
margin decreased in 1998 primarily because Bostek shifted its product mix to
newer higher-end systems, where there is higher demand but increased competition
that results in lower margins for such products on both the Internet and through
traditional channels.
Selling, General and Administrative Expense
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in Bostek's traditional and Internet
fulfillment segments. All labor costs are included in this category, as are
website maintenance costs and advertising costs, both of which are significantly
greater than in Bostek's traditional commerce and Internet fulfillment segments.
Five month periods ended May 31, 1998 and 1999. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1998 % 1999 %
-----------------------------------
Internet...................... $ 163 11.1 $ 921 12.6
Internet fulfillment.......... 208 6.0 578 9.8
Traditional commerce.......... 1,424 7.5 1,935 9.6
-----------------------------------
Consolidated.................. $1,795 7.5 $3,434 10.3
===================================
Selling, general and administrative expenses were $3.4 million for the
first five months of 1999, an increase of $1.6 million, or 91.3%, from $1.8
million for the first five months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 10.3% for the first five months of 1999
and 7.5% for the first five months of 1998. The increased expense in absolute
dollar terms and as a percentage of revenue is due to the expansion of the
corporate infrastructure necessary to support continued growth and the entry
into the Internet market.
42
<PAGE>
Years ended December 31, 1996, 1997 and 1998. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
-----------------------------------------
Internet........................ $ -- -- $ -- -- $1,114 14.3
Internet fulfillment............ -- -- -- -- 712 8.7
Traditional commerce............ 3,858 7.1 4,354 10.1 3,895 8.7
-----------------------------------------
Consolidated.................... $3,858 7.1 $4,354 10.1 $5,721 9.4
=========================================
Selling, general and administrative expenses were $5.7 million in 1998, an
increase of $1.4 million, or 31.4%, from $4.4 million in 1997. The 1997 expense
represents an increase of $0.5 million, or 12.9%, over the $3.9 million reported
in 1996. As a percentage of revenue, selling, general and administrative
expenses increased from 7.1% in 1996 to 10.1% in 1997 but decreased to 9.4% in
1998. During these periods, Bostek expanded its corporate infrastructure to
support continued growth, entered the Internet market and lowered sales prices
to meet increased competition.
Operating Income
Five month periods ended May 31, 1998 and 1999. Operating income for each
of the operating segments, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet.......................... $ 38 2.6 $ (43) (0.6)
Internet fulfillment.............. 109 3.2 80 1.4
Traditional commerce.............. 964 5.1 333 1.6
--------------------------------
Consolidated...................... $1,111 4.7 $ 370 1.1
================================
Operating income was $0.4 million for the first five months of 1999, a
decrease of $0.7 million, or 66.7%, from $1.1 million for the first five months
of 1998. The operating loss in the Internet segment for the five months ended
May 31, 1999 was primarily the result of increased advertising.
Years ended December 31, 1996, 1997 and 1998. Operating income for each of
the operating segments, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------
Internet........................ $ -- -- $ -- -- $ (257) (3.3)
Internet fulfillment............ -- -- -- -- 228 2.8
Traditional commerce............ 3,175 5.8 1,561 3.6 1,714 3.8
------------------------------------------
Consolidated.................... $3,175 5.8 $1,561 3.6 $1,685 2.8
==========================================
Operating income was $1.7 million in 1998, an increase of $0.1 million, or
7.9%, from $1.6 million in 1997. Operating income for 1997 represents a decrease
of $1.6 million, or 50.8%, over the $3.2 million reported in 1996. The operating
loss for the Internet segment for the year ended December 31, 1998 was primarily
the result of increased advertising.
Interest and Other Income and Interest Expense
Interest income, earned primarily from short-term investments, was
immaterial in each of the periods. During 1998, Bostek recognized a gain on sale
of investment of $0.4 million. The investment was accepted as payment of a
receivable and was sold for a gain by Bostek. Interest expense was $0.1 million
for the first five months of 1999 and $0.2 million for the first five months of
1998. Interest expense was $0.3 million in 1998, nominal in 1997 and $0.1
million in 1996. Interest expense is principally associated with borrowings from
financial institutions. As Bostek grew during 1998 and invested in its Internet
and Internet fulfillment segments, its need to finance its working capital
increased, resulting in greater amounts borrowed and higher interest expense
over 1997 and 1996.
43
<PAGE>
Income Taxes
In 1995, Bostek elected to be treated as subchapter S corporation for
income tax purposes. The effect of this election was that corporate earnings
were reported on the individual returns of the shareholders. Upon our
acquisition of Bostek, the subchapter S corporation election terminated. Had
Bostek not been a subchapter S corporation, its tax rate would have been
approximately 44%. Bostek paid an immaterial amount of state and local taxes in
the periods presented.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was approximately $2.5 million
for the five months ended May 31, 1999. This was primarily the result of net
income of $0.1 million, a decrease in inventory of $2.1 million, an increase in
accounts payable and accrued expenses of $2.1 million, offset by an increase in
accounts receivable of $1.9 million. Net cash used by operating activities was
approximately $1.0 million for the five month period ended May 31, 1998. This
was primarily the result of an increase in accounts receivable of $2.9 million,
offset by an increase in accounts payable and accrued expenses of $0.8 million
and net income of $0.8 million.
Net cash used in operating activities was approximately $2.3 million for
the year ended December 31, 1998. This was primarily the result of an increase
in inventory of $2.0 million, an increase in accounts receivable of $0.6
million, a decrease in accounts payable and accrued expenses of $0.7 million,
offset by net income of $1.7 million. Net cash provided by operating activities
was approximately $0.1 million for the year ended December 31, 1997. This was
primarily the result of net income of $1.5 million, offset by an increase in
inventory of $1.5 million. Net cash provided by operating activities was $4.1
million for the year ended December 31, 1996. This was primarily the result of
net income of $3.0 million and a decrease in inventory of $1.0 million.
Investing Activities
Net cash used in investing activities was approximately $0.1 million for
the five months ended May 31, 1999. This was the result of the purchase of
furniture, fixtures and equipment. Net cash used by investing activities was
nominal for the five month period ended May 31, 1998.
Net cash used by investing activities was approximately $0.2 million for
the year ended December 31, 1998. This was the result of purchase of furniture,
fixtures and equipment. Net cash used by investing activities was nominal for
the years ended December 31, 1997 and 1996.
Financing Activities
Net cash used by financing activities was $2.5 million for the five months
ended May 31, 1999. This was primarily the result of reductions in the amounts
due financial institutions of $2.1 million and dividends of $0.4 million. Net
cash provided by financing activities for the five month period ended May 31,
1998 was approximately $0.9 million. This was primarily the result of additional
borrowings from financial institutions of $0.9 million.
Net cash provided by financing activities was approximately $1.6 million
for the year ended December 31, 1998. This was primarily the result of net
borrowings from financial institutions of $3.1 million, offset by dividends paid
of $1.1 million and loans to officers of $0.5 million. Net cash provided by
financing activities was approximately $0.5 million for the year ended December
31, 1997. This was primarily the result of net borrowings from financial
institutions of $2.7 million and loans from officers of $0.3 million, offset by
dividends paid of $2.5 million. Net cash used by financing activities was $3.4
million for the year ended December 31, 1996. This was primarily the result of
reductions in the amounts due financial institutions of $2.9 million and
dividends paid of $0.5 million.
44
<PAGE>
Bostek's borrowings were made under a revolving line of credit with
Citizens Bank of Massachusetts at a floating interest rate equal to the bank's
prime rate. In connection with our acquisition of Bostek, the outstanding
balance of $4.4 million under this line of credit was paid off entirely.
Financing is now obtained through borrowings from Applied Digital Solutions.
YEAR 2000 COMPLIANCE
Background. Some computers, software and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millennium Bug" or "Year 2000 problem."
Assessment. The Year 2000 problem could affect computers, software and
other equipment used, operated or maintained by us. Accordingly, we are
reviewing our internal computers, software, applications and related equipment
and our systems other than information technology systems to ensure that they
will be Year 2000 compliant. We believe that our Year 2000 plan will be
completed in all material respects prior to September 30, 1999. We spent
approximately $20,000 in 1998 on our Year 2000 compliance plan and estimate an
additional $30,000 will be spent in 1999, of which $15,000 has been spent
through June 30, 1999, most of which relates to new equipment. These amounts
include expenditures by Bostek. We cannot be certain that our total costs will
be limited to these amounts.
Software Sold to Consumers. We do not develop software for resale. We do,
however, sell off the shelf software that may be bundled with hardware that we
sell. Software updates which address Year 2000 issues are available for most,
but not all, third party software that we sell. Furthermore when we sell such
software, it is sold "as is" without warranty of any kind. However, variability
of definitions of "compliance" with the Year 2000 and of different combinations
of software, firmware and hardware could lead to lawsuits against us. The
outcome of any such lawsuits and the impact on us are not estimable at this
time.
Internal Infrastructure. We believe that our major computers, software
applications and related equipment used in connection with our internal
operations are not subject to significant Year 2000 problems, because the
computer programs used by us are primarily off-the-shelf, recently developed
programs from third-party vendors. We have requested and obtained assurances
from certain of our vendors as to the Year 2000 compliance of their products.
However, most vendors have been reluctant to provide written assurances and we
cannot be certain that our systems utilized by us will not be affected. We have
assessed all of our operating locations and have determined that all key systems
in all locations are Year 2000 compliant, except for one location where we are
still in the process of upgrading the systems. We expect all of our systems and
equipment to be Year 2000 compliant prior to September 30, 1999.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 problem. We have assessed
all of our operating locations and have determined that all such other systems
and facilities are Year 2000 compliant.
Suppliers. We have communicated with third party suppliers of the major
computers, software, and other equipment we use. Based on our discussions with
these suppliers, we are not aware of any material Year 2000 problem which would
be expected to affect us. However, we have limited or no control over the
actions of these third party suppliers, and we cannot be certain that Year 2000
problems with these systems will not cause a material disruption to our
business.
45
<PAGE>
Internet. As a significant percentage of our business is conducted over the
Internet, it is possible that we would be affected by telecommunications
problems experienced by our local Internet service provider or by Internet users
which might prevent those customers from being able to access our website. This
could be combined with, or result from, interruptions in electrical power
systems. Additionally, many customers may be using older systems which may not
be Year 2000 compliant, which could affect their ability to access our website.
Year 2000 problems, either in our systems or in third party systems, could also
prevent us from processing credit card sales.
Contingency Plans. At certain subsidiaries, we are preparing contingency
plans relating to identified Year 2000 risks and developing cost estimates
relating to these plans. We anticipate completion of the Year 2000 contingency
plans prior to the anticipated Year 2000 failure dates. Once developed, Year
2000 contingency plans and related cost estimates will be tested and refined as
additional information becomes available.
Most Likely Consequences of Year 2000 Problems. We believe we have
identified and resolved all Year 2000 problems that could materially adversely
affect our business. However, we believe that it is not possible to determine
with complete certainty that all Year 2000 problems affecting us have been
identified or corrected, and we cannot accurately predict the extent to which
Year 2000 problem-related failures may affect us. However, if such problems do
occur, we expect that they might have the following consequences:
. a significant number of operational inconveniences and inefficiencies
for us and our clients that may divert management's time and attention
and financial and human resources from our ordinary business
activities; and
. a lesser number of serious system failures that may require significant
efforts by us or our customers to prevent or alleviate material
business disruptions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
RESULTS OF OPERATIONS
This section discusses our results of operations on a pro forma basis, and
has been prepared to illustrate the pro forma effects of the Bostek acquisition
and the other acquisitions we describe herein as if they had all occurred on
January 1, 1996.
This pro forma unaudited financial information does not purport to
represent (1) what our actual results of operations would have been had the
acquisitions occurred on January 1, 1996 or (2) what we expect our results of
operations to be in the future. They do not reflect any estimates of cost
savings or other efficiencies that may be achieved from the integration of
Bostek or the other companies acquired. This discussion of results of operations
does not reflect the effects of this offering or the application of the net
proceeds therefrom.
This section should be read in conjunction with the historical financial
statements of Intellesale and Bostek, including the notes thereto, and other
financial information set forth under "Capitalization," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Pro Forma Financial Information" included elsewhere in this
document.
Pro Forma Results of Operations
The following table sets forth for the periods indicated certain components
of our pro forma unaudited consolidated statements of operations, before giving
effect to this offering and the application of the proceeds from this offering,
and the percentage of revenue represented by these components. We have not
presented a full consolidated statement of operations, which would have included
the effects of
46
<PAGE>
interest expense and income taxes. We believe that if we had acquired each of
the companies on January 1, 1996 the purchase price would have been lower than
the price we paid, since many of the acquired companies grew significantly
between the beginning of 1996 and the dates of acquisition. Accordingly, showing
the pro forma effects of the debt incurred or assumed in connection with the
acquisition as if they had occurred on January 1, 1996, would result in a
disproportionately greater amount of pro forma interest expense than would
likely have been the case had we acquired them on that date. Except for our
acquisition of Bostek and Fiscal Advantage, all of the acquisitions were made in
exchange for the common stock of Applied Digital Solutions.
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
-------------------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
$ % $ % $ % $ % $ %
-------------------------------------------------------- ------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $101,323 100.0% $110,237 100.0% $127,848 100.0% $64,346 100.0% $72,612 100.0%
Cost of goods sold 83,670 82.6 89,467 81.2 105,386 82.4 52,900 82.2 57,412 79.1
-------------------------------------------------------- ------------------------------------
Gross profit 17,653 17.4 20,770 18.8 22,462 17.6 11,446 17.8 15,200 20.9
Selling, general and
administrative expenses 12,742 12.6 16,201 14.7 16,545 12.9 7,955 12.4 11,196 15.4
Depreciation and amortization 1,529 1.5 1,462 1.3 1,622 1.3 781 1.2 1,021 1.4
-------------------------------------------------------- ------------------------------------
Operating income $ 3,382 3.3 $ 3,107 2.8 $ 4,295 3.4 $ 2,710 4.2 $ 2,983 4.1
======================================================== ====================================
</TABLE>
Pro Forma Revenue
We and Bostek began operating over the Internet in the second quarter of
1998. However, Data Path Technologies, which we acquired effective April 1,
1998, began its Internet operations in 1996 and was our platform for beginning
Internet operations.
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma revenue
for each operating segment for the first six months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
-------------------------------
Internet............................ $ 7,857 12.2 $20,138 27.7
Internet fulfillment................ 5,498 8.5 5,890 8.1
Traditional commerce................ 50,991 79.3 46,584 64.2
-------------------------------
Consolidated........................ $64,346 100.0 $72,612 100.0
===============================
Pro forma revenue for the six month period ended June 30, 1999 was $72.6
million, an increase of $8.3 million, or 12.8%, from $64.3 million for the six
month period ended June 30, 1998.
Internet segment pro forma revenue increased by $12.3 million or 156.3%.
This increase is a result of broader consumer use and acceptance of the
Internet, as well as our marketing efforts on the Internet, via Internet portals
such as Yahoo! and Lycos and wholesale marketing arrangements with websites such
as OnSale and uBid.
Internet fulfillment segment pro forma revenue increased by $0.4 million or
7.1%. Internet fulfillment sales are sales in which Bostek sells products to
other Internet companies that remarket the products through the Internet. This
increase in pro forma revenues resulted from Bostek's use of Internet
fulfillment as a means to develop its overall Internet business, which commenced
in 1998. We are transitioning away from this wholesale distribution business and
focusing on selling products directly through our website. There are no
contractual relationships with Internet fulfillment customers and we plan to
gradually reduce this business.
Traditional commerce segment pro forma revenue decreased $4.4 million or
8.6%, primarily as a result of shifting our operations to the Internet.
47
<PAGE>
Pro forma years ended December 31, 1996, 1997 and 1998. Pro forma revenue
for each operating segment was:
($ in thousands) 1996 % 1997 % 1998 %
---------------------------------------------------
Internet................. $ 7,309 7.2 $ 12,096 11.0 $ 18,278 14.3
Internet fulfillment..... -- -- -- -- 8,208 6.4
Traditional commerce..... 94,014 92.8 98,141 89.0 101,362 79.3
---------------------------------------------------
Consolidated............. $101,323 100.0 $110,237 100.0 $127,848 100.0
===================================================
Pro forma revenue for 1998 was $127.8 million, an increase of $17.6
million, or 16.0%, from $110.2 million in 1997. The 1997 pro forma revenue
represents an increase of $8.9 million, or 8.8%, over the pro forma revenue of
$101.3 million reported in 1996.
Internet segment pro forma revenue increased from 1997 to 1998 by $6.2
million, or 51.1%, and from 1996 to 1997 by $4.8 million, or 65.5%. This growth
is a direct result of our increased marketing via our websites and Internet
marketing arrangements and expanded use of the Internet by consumers.
Internet fulfillment was commenced by Bostek in 1998. Bostek did not begin
any Internet sales until 1998. It had previously focused on traditional
distribution lines.
Traditional commerce pro forma revenue increased from 1997 to 1998 by $3.2
million, or 3.3%, and from 1996 to 1997 by $4.1 million, or 4.4%. In general,
these increases are a result of internal growth as the computer and related
industries have expanded.
Pro Forma Gross Profit/Margin
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma gross
profit by operating segment, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
-------------------------------
Internet........................... $ 2,466 31.4 $ 6,376 31.7
Internet fulfillment............... 563 10.2 658 11.2
Traditional commerce............... 8,417 16.5 8,166 17.5
-------------------------------
Consolidated....................... $11,446 17.8 $15,200 20.9
===============================
Pro forma gross profit for the first six months of 1999 was $15.2 million,
an increase of $3.8 million, or 33.1%, from $11.4 million for the first six
months of 1998. As a percentage of pro forma revenue, the pro forma gross margin
was 20.9% for the first six months of 1999 and 17.8% for the first six months of
1998.
In the Internet segment, pro forma gross margin remained relatively stable.
We anticipate margin pressures as we expand the Internet segment of our
business. We expect that gross margins from the Internet segment will vary based
on several factors, primarily product pricing and product acquisition costs.
Internet fulfillment pro forma margin increased by approximately 1.0
percentage point. This increase resulted from improved pricing of Internet
fulfillment arrangements. We note that this margin is significantly below the
margin achieved from direct Internet sales. Accordingly, we plan to gradually
reduce this business over time and focus on our website and wholesale marketing
arrangements for product distribution via the Internet.
Traditional commerce pro forma margin increased by approximately 1.1
percentage points. As we integrated our businesses, we have achieved higher
margins.
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Pro forma years ended December 31, 1996, 1997 and 1998. Pro forma gross
profit by operating segment, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
--------------------------------------------------
Internet................. $ 1,854 25.4 $ 3,509 29.0 $ 5,189 28.4
Internet fulfillment..... -- -- -- -- 940 11.5
Traditional commerce..... 15,799 16.8 17,261 17.6 16,333 16.1
--------------------------------------------------
Consolidated............. $17,653 17.4 $20,770 18.8 $22,462 17.6
==================================================
Our pro forma gross profit for 1998 was $22.5 million, an increase of $1.7
million, or 8.1%, from $20.8 million in 1997. Our 1997 gross profit represents
an increase of $3.1 million, or 17.7%, over the $17.7 million reported in 1996.
As a percentage of pro forma revenue, our pro forma gross margin decreased to
17.6% in 1998 from 18.8% in 1997. This was a result of (1) Bostek's entry into
the Internet fulfillment business, which has a lower gross margin than our
Internet and traditional commerce businesses because these customers purchase in
larger quantities than retail customers, and (2) decreases in prices to meet
competition. Pro forma gross margin was 17.4% in 1996.
Pro Forma Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in our traditional segment. This is
because advertising costs, website maintenance costs and labor costs are all
significantly greater than in our traditional commerce segment. We expect these
expenses to increase in absolute dollar terms in the future as the Internet
segment grows.
Applied Digital Solutions has provided certain services and incurred
certain expenses on our behalf and on behalf of our subsidiaries. These expenses
are not necessarily indicative of the expenses which would have resulted had we
operated as a separate entity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Trends and Accounting Policies."
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma
selling, general and administrative expenses by operating segment, and as a
percentage of pro forma segment revenue, were:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet.......................... $2,025 25.8 $ 4,624 23.0
Internet fulfillment.............. 346 6.3 578 9.8
Traditional commerce.............. 5,584 11.0 5,994 12.9
--------------------------------
Consolidated...................... $7,955 12.4 $11,196 15.4
================================
Pro forma selling, general and administrative expenses were $11.2 million
for the six month period ended June 30, 1999, an increase of $3.2 million, or
40.7%, from $8.0 million for the six month period ended June 30, 1998. The
primary reason for the increase is the overall expansion into the Internet, as
described above. As a percentage of pro forma revenue, pro forma selling,
general and administrative expenses were 15.4% and 12.4% for the six month
periods ended June 30, 1999 and 1998. However, as they relate to the Internet
business, pro forma selling, general and administrative expenses decreased as a
percentage of revenue from 25.8% to 23.0%. This decrease is due to the fact that
general and administrative expenses in the Internet segment are largely fixed
costs, and we spent only a small amount on advertising.
Pro forma selling, general and administrative expenses include management
fees paid to Applied Digital Solutions. Management fees paid to Applied Digital
Solutions in the six months ended June 30, 1999 amounted to $0.3 million
compared to $0.2 in the six months ended June 30, 1998.
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Pro forma years ended December 31, 1996, 1997 and 1998. Pro forma selling,
general and administrative expense by operating segment, and as a percentage of
pro forma segment revenue, were:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet................... $ 1,753 23.9 $ 3,486 28.8 $ 4,631 25.3
Internet fulfillment....... -- -- -- -- 712 8.7
Traditional commerce....... 10,989 11.7 12,715 13.0 11,202 11.1
------------------------------------------------
Consolidated............... $12,742 12.6 $16,201 14.7 $16,545 12.9
================================================
Pro forma selling, general and administrative expenses were $16.6 million
in 1998, an increase of $0.3 million, or 2.1%, from $16.2 million in 1997. The
1997 pro forma selling, general and administrative expense represents an
increase of $3.5 million or 27.1% over the $12.7 million incurred in 1996. As a
percentage of pro forma revenue, selling, general and administrative expenses
have decreased to 12.9% in 1998 from 14.7% in 1997. In 1996, pro forma selling,
general and administrative expenses were 12.6%. The increase from 1996 to 1997
represents the increased investment in our internal infrastructure to support
our growth. Management fees paid to Applied Digital Solutions in 1998 amounted
to $0.4 million. No costs were allocated in 1996 and 1997 since Applied Digital
Solutions did not provide significant services. Internet segment pro forma
selling, general and administrative expenses increased as a percentage of
Internet segment pro forma revenues from 23.9% in 1996 to 28.8% in 1997, but
decreased to 25.3% in 1998. This increase resulted as initial start-up costs
were incurred in 1997. However, as general and administrative expenses related
to the Internet are largely fixed, they tend to decline as a percentage of total
revenues as sales increase.
Pro Forma Depreciation and Amortization
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma
depreciation and amortization by operating segment and as a percentage of pro
forma segment revenue was:
($ in thousands) 1998 % 1999 %
------------------------------
Internet............................ $ 51 0.6 $ 230 1.2
Internet fulfillment................ 84 1.5 84 1.1
Traditional commerce................ 646 1.3 707 1.5
------------------------------
Consolidated........................ $ 781 1.2 $1,021 1.4
==============================
Pro forma depreciation and amortization expense for the six month period
ended June 30, 1999 was $1.0 million, an increase of $0.2 million, or 30.7%,
from $0.8 million for the six month period ended June 30, 1998. The increase in
pro forma depreciation and amortization from 1998 to 1999 is attributable to
additional amortization of goodwill resulting from earn-out payments made in
1999, which increased the amount of goodwill subject to amortization.
Pro forma years ended December 31, 1996, 1997 and 1998. Pro forma
depreciation and amortization by operating segment, and as a percentage of pro
forma segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet.................. $ 44 0.6 $ 28 0.2 $ 177 0.9
Internet fulfillment...... -- -- -- -- 153 1.8
Traditional commerce...... 1,485 1.6 1,434 1.5 1,292 1.3
------------------------------------------------
Consolidated.............. $1,529 1.5 $1,462 1.3 $1,622 1.3
================================================
The pro forma depreciation and amortization for 1998 was $1.6 million, an
increase of $0.2 million, or 11.0%, from $1.5 million in 1997. The 1997 and 1996
pro forma depreciation and amortization remained relatively flat, with a
decrease of $0.1 million, or 4.4%.
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<PAGE>
Pro Forma Operating Income
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma
operating income for each of the operating segments, and as a percentage of pro
forma segment revenue, during the six month period ended June 30, 1998 and 1999
was:
($ in thousands) 1998 % 1999 %
-------------------------------
Internet........................... $ 390 5.0 $1,522 7.6
Internet fulfillment............... 133 2.4 (4) --
Traditional commerce............... 2,187 4.3 1,465 3.1
-------------------------------
Consolidated....................... $2,710 4.2 $2,983 4.1
===============================
Pro forma operating income was $3.0 million for the six month period ended
June 30, 1999, an increase of $0.3 million, or 10.1%, from $2.7 million in the
six month period ended June 30, 1998.
Pro forma years ended December 31, 1996, 1997 and 1998. Pro forma operating
income for each of the operating segments, and as a percentage of pro forma
segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet................... $ 57 0.8 $ (5) (0.1) $ 381 2.1
Internet fulfillment....... -- -- -- -- 75 0.9
Traditional commerce....... 3,325 3.5 3,112 3.2 3,839 3.8
------------------------------------------------
Consolidated............... $3,382 3.3 $3,107 2.8 $4,295 3.4
================================================
Pro forma operating income was $4.3 million in 1998, an increase of $1.2
million, or 38.2%, from $3.1 million in 1997. The 1997 pro forma operating
income represents a decrease of $0.3 million, or 8.4%, from the $3.4 million
reported in 1996.
51
<PAGE>
INTELLESALE.COM, INC.
About Us
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at www.Intellesale.com
as well as through traditional channels, which we are migrating to the Internet.
In addition to selling products on our website, we distribute products through
cooperative marketing arrangements with OnSale.com and uBid.com, where we
conduct auctions of our products, as well as FlashNet Communications, Lycos and
other Internet portals and service providers. Most of the computers we offer are
brand name, Intel Pentium(R) class or equivalent products. We offer our
customers complete packages, including monitors, regularly-featured specials and
the ability to purchase selected merchandise on an auction basis. We are not
aware of any major online retailers currently focusing principally on
refurbished computer equipment.
We operate in two business segments:
. Internet, in which we sell refurbished and new computer products
through our website. Refurbished products consist primarily of off-
lease equipment which we test, clean and prepare for sale, and
manufacturer refurbished products which carry a manufacturer's
warranty. Our Internet business also includes Internet fulfillment,
in which we bulk wholesale our products to other companies that
market these products on their websites. We are transitioning away
from this wholesale distribution business and focusing on selling
products directly through our website.
. Traditional commerce and other services, in which we buy and
remarket computer equipment and components to traditional
wholesalers, retailers and value-added resellers, as well as
individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services
and transportation services for computer and other equipment. We are
transitioning our traditional commerce business to the Internet.
We believe the demand for refurbished brand name computer equipment is
growing as consumers realize they can purchase refurbished products that can
serve their needs at substantial discounts to the price of new merchandise.
Shorter product life cycles are leading to increased off-lease and excess
inventory computer equipment which vendors and leasing companies need to dispose
of in large quantities without conflicting with their primary distribution
channels. We offer such vendors and leasing companies the ability to
conveniently sell all their products to us in a single transaction. We believe
that our ability to acquire many different types of equipment in large
quantities through our established vendor relationships provides us with a
significant competitive advantage both with consumers and vendors.
We have grown rapidly, both internally and through acquisitions, since
1996. We began offering products on the Internet in the second quarter of 1998
with the acquisition of Data Path Technologies, Inc., which marketed refurbished
computer products through the Internet. Building on this Internet presence as a
platform, we established the Intellesale.com website in January 1999 and began
to focus our business on, and migrate our traditional commerce business to, the
Internet. Our revenues for the six months ended June 30, 1999, pro forma for our
acquisition of Bostek, Inc. and its affiliate, were $72.6 million. Of this
amount, approximately 28% were direct Internet sales and approximately 8% were
Internet fulfillment revenues. The Internet is our fastest growing sales channel
and we believe that the Internet will be the basis for our future growth. We
believe the expansion of our Internet business and our recent acquisition of
Bostek position Intellesale.com to become the premier website offering
refurbished and new computer equipment to consumers and businesses.
52
<PAGE>
Our Industry
Growth in Internet traffic and its use as a channel of distribution has
been fueled by several factors, including:
. a large and growing numbers of installed personal computers in the
home and workplace;
. improvements in Internet infrastructure and bandwidth; and
. increased awareness and acceptance of the Internet among consumer
and business users.
According to International Data Corporation, a market research firm, the
number of Internet users worldwide will increase from approximately 97 million
at the end of 1998 to approximately 500 million by the end of 2003. IDC further
estimates that that the total value of goods and services purchased over the
Internet will increase from approximately $32.4 billion in 1998 to approximately
$425.7 billion by 2002 and that the percentage of Internet users buying goods
and services on the Internet will increase from approximately 28% at the end of
1998 to approximately 40% by the end of 2002. According to Jupiter
Communications, another market research firm, the single largest online retail
category in the United States will be computers and consumer electronics, which
Jupiter projects will grow from approximately $836 million in 1997 to
approximately $10.5 billion by the year 2002.
In recent years, the number of companies leasing rather than purchasing
computer equipment has increased significantly. Corporate leases generally have
a three-year term after which the equipment is replaced and a new lease cycle
begins. However, with shorter product life cycles and greater reliance on
computers, it is becoming increasingly common for lessees to terminate leases
early. Off-lease equipment is generally from brand-name manufacturers and still
has a relatively high resale value when refurbished. The refurbished computer
market also includes computer equipment that has been reconditioned by the
manufacturer after being returned by customers. Refurbished computer equipment
typically requires a nominal amount of service, such as minor repairs, cleaning
and repackaging.
In addition to refurbished computer equipment, large quantities of excess
inventory computer products become available on a regular basis because the PC
industry is characterized by frequent introductions of new models with
incremental increases in features or capacity. Excess inventory products are
only marginally different from the newest models, and will serve the needs of
most users.
The disposal of refurbished and excess inventory computer equipment
represents a substantial burden on many vendors. Such computers and accessories
are currently sold through many different outlets, including wholesale
distributors, catalogs, company stores or outlets, resellers and specialized
retailers, as well as mass merchants that are not committed to the resale of
these goods and generally sell them as a supplementary product line. Because of
the highly fragmented and relatively undeveloped nature of the market for this
product, prices received by leasing companies and vendors tend to be highly
variable and subject to negotiation based on quantity, age and condition of the
merchandise. Our experience has indicated that leasing companies and vendors
look favorably upon a distribution channel that enables them to dispose of
significant quantities of merchandise quickly without affecting their
traditional sales channels.
We are not aware of any major online retailers currently focusing
principally on refurbished computer equipment. Although some websites such as
OnSale.com, uBid.com and Egghead.com offer some refurbished products, we believe
that the majority of their products consist of new computers and accessories.
53
<PAGE>
Our Strategy
Our goal is to become the premier website offering refurbished and new
computer equipment and related components to consumers and businesses. Our
strategy to achieve our goal includes the following:
Increase Brand Awareness. We believe that a strong brand name is critical
to differentiating Intellesale and attracting a high level of customer traffic
and purchases. To date, we have made limited investments in marketing and
promotion of our brand. We intend to use a portion of the proceeds of this
offering to increase our visibility and brand recognition through online and
traditional advertising. We intend to promote Intellesale.com on a number of
websites, including content providers, major portal sites and targeted computer-
related sites. Our traditional media-based advertising efforts will include
radio, print advertising, television and outdoor media.
Increase Strategic Relationships. We intend to expand existing cooperative
programs and establish new programs under which our partners will promote our
products on their websites and in their other customer communications, and under
which we will compensate them through promotions of their products and services
or through payments of fees. We have established such programs with OnSale and
uBid, which conduct web auctions of our products, and FlashNet Communications,
with whom we jointly market products and services. These types of strategic
alliances and cooperative marketing programs can be a source of significant new
website traffic and customers and should aid in building recognition of our
brand.
Continue Improving Our Website. We intend to expand our Internet sales
through continued upgrading and improvements to our website. We plan to combine
Bostek's PickADW.com website with our Intellesale.com website by the end of the
third quarter of 1999. We also plan to add new features to our website and
improve its design on an ongoing basis to increase ease of use, to lead
customers to areas that may be of particular interest to them based on their
prior purchases and page viewing patterns, and to draw customers' attention to
products we wish to feature.
Migrate Other Parts of Our Business to the Internet. From January 1, 1999
through June 30, 1999, on a pro forma basis including Bostek, approximately 28%
of our sales were conducted directly through the Internet. As we expand our
Internet presence, we intend to migrate the traditional commerce segment of our
business to the Internet, which should allow us to expand our customer base,
increase efficiency and increase our operating margins. We believe our
traditional commerce products can be marketed more effectively through our
website. We plan to display our entire inventory on our website and give access
to password-protected areas to our wholesale and mainframe customers. As part of
an automated registration process, we intend to gather basic information about
customers, their businesses and areas of interest. Based on this information and
the customers' purchase history, we plan to highlight products which may be of
interest to them or direct them to additional parts, accessories or features
which are compatible with their existing equipment. We may also include special
pricing features for some items, showing increasing discounts for customers
based on purchase volume.
Expand and Improve Procurement Sources. In order to be able to offer
attractive prices to customers yet maintain our margins, we must be able to
obtain a sufficient amount of product at favorable prices. As we have grown in
size and developed cooperative relationships, we have been able to secure more
products on improved terms. We believe this reflects the desire of vendors to
have a reliable purchaser who is in a position to regularly acquire large
quantities of products. In order to continue and expand our procurement
capability, we intend to maintain and enhance our existing relationships with
leasing companies, manufacturers and other sources of equipment and to pursue
new relationships.
54
<PAGE>
Products That We Sell Online
Intellesale offers a wide range of refurbished and new products, including
laptop and desktop computers, monitors, disk drives, modems, printers, scanners,
memory, expansion boards, cables and connectors. The majority of the products we
offer are brand name products manufactured by IBM, Compaq, Sony, Fujitsu,
Hewlett-Packard and other major manufacturers. For the first half of 1999,
approximately 75% of our Internet product sales were laptops, desktop PCs and
monitors.
Regardless of the source of the merchandise, most of our products are
warranted by either us or the manufacturer. We provide a minimum six month
warranty for most products not covered by manufacturer warranties. In addition,
we offer our customers the opportunity to purchase an extended warranty, which
is priced on the basis of the selling price of the item covered. These extended
warranties are provided under an agreement with a third party. We believe that
our ability to offer this extended warranty coverage provides us with an
advantage over our competitors, which generally rely solely on warranties
provided by the manufacturer.
How We Acquire Products
We believe our ability to acquire computer equipment in large quantities
and at favorable prices is a key competitive advantage. We purchase from leasing
companies, computer manufacturers, corporate information technology departments
and others who look to us to be a reliable channel for disposition of products.
In 1998, we acquired approximately 43% of our refurbished equipment from 15
leasing companies and corporate end-users. Other sources of our products include
independent brokers, federal, state and local governments, liquidators and
educational institutions. We receive information about new sources of products
from prior contacts, online resources to which we subscribe, advertising,
industry publications, trade associations and email and fax bid requests
received. We currently have 18 employees who are involved in procuring
equipment.
We do not enter into formal agreements for the purchase of equipment. Our
access to sources of equipment is based primarily on relationships which we have
established over a number of years. Since product availability is unpredictable,
a strong base of vendor relationships is important to our success. We maintain
ongoing contact through telephone calls with our vendors to learn when products
will become available.
The average age of the products which we refurbish is approximately 18
months, and the average age of our manufacturer-refurbished products is
approximately six months. The average time between our purchase of an item and
our sale of that item was approximately 30 days for the six months ended June
30, 1999. Although we assume inventory and price risk associated with selling
these products, we believe our ability to sell our inventory quickly through our
website and our other distribution channels justifies the risk. We typically
purchase products in large quantities, and frequently make bulk purchases on an
"as-is" basis, which can result in significantly lower acquisition cost,
although these purchases are without warranties except as to title and quantity
of equipment. A small part of a particular shipment may not meet our strict
quality standards for products we offer. In those cases, we seek to immediately
sell these products in bulk through brokers, which in some cases sell the
products internationally. To date, our expenses resulting from writedowns of
excess inventory have not been material.
There are no set formulas for determining the purchase prices we pay to our
suppliers. The pricing is usually negotiated for each transaction based on the
current market prices for similar equipment, the condition and location of the
equipment and the cost and effort anticipated in packing and shipping the
equipment.
55
<PAGE>
How We Handle and Refurbish Products
When we purchase equipment, we usually have responsibility for
transportation of the equipment to our warehouse. In some cases we use our own
trucks to transport the equipment to our warehouse. After we receive equipment
at our warehouse, we follow standard procedures to audit each shipment,
including a physical count, an inspection for physical damage and testing of
equipment. We then submit any appropriate freight claims or claims against the
vendor for shortages or defects which are covered by warranties, if any.
We have a standardized process for refurbishing equipment, depending on the
type of product. For each standard product type, we have detailed procedures
under which we identify any aspects or components of the product that do not
meet our requirements. If the defect cannot readily be remedied or if the
component cannot be replaced on a cost-effective basis, we use the component for
parts or otherwise dispose of the defective item.
For example, the procedure we follow in refurbishing a desktop PC is:
. Inspection and testing
- Physical inspection of the exterior and appearance
- Interior cleaning
- Complete erasing of all existing data and software
- Complete hardware diagnostics
. Repair or set aside
- Replacement of defective components, if any
- Set aside computers not suitable for repair, to be used for parts
. Upgrade and testing
- Upgrade the computer according to the specifications of the
customer work order
- Test the upgraded hardware
- Clean the exterior of the computer
- Label and package the computer
How We Determine Selling Prices
We determine our selling prices, both wholesale and retail, on the basis of
current market conditions and the numbers of items we have on hand, as well as
our target profit margins for various types of products. In setting the prices,
we compare prices of similar new equipment, if any, as well as prices offered by
our competitors for similar products over the Internet, in trade publications
and in other published advertisements. Given the nature of our products and the
rapid technological changes in the industry, we may have to reduce prices over
time, and a portion of our inventory may have to be recycled or sold as scrap.
However, we take these factors into account when we purchase equipment and we
have not to date incurred significant writedowns of inventory.
How We Handle Online Customer Orders
When a customer places an order through our website, processing of the
order is automated, including submission of credit card information for
approval. If we receive this approval, we immediately notify the customer that
the order has been accepted with an automated e-mail message
56
<PAGE>
thanking the customer for the order. If the credit card transaction is declined,
we contact the customer by telephone, fax or e-mail.
On accepted orders, the order is printed automatically and delivered to the
appropriate processing department, depending on the product purchased. The
product is then taken from the warehouse, on the basis of the product locator
shown on the order, and appropriately packed with foam packing, bubble wrap or
other packaging material, the computer-generated label is attached and the order
is shipped by Federal Express or United Parcel Service or, in the case of
wholesale orders, by customer pickup or by truck shipment.
Customers may also place telephone orders for equipment shown on our
website, particularly for larger quantity orders or if the purchaser is itself a
reseller or wishes to request a quantity discount. In these cases the use of our
website increases efficiency since the customer is familiar with the product
description, availability information and pricing before the customer calls us.
On average, we currently ship products 24 to 48 hours following receipt of
the order. We offer our online customers the ability to track their shipments
through our website, using tracking numbers provided automatically for each
customer shipment.
Internet Sales and Marketing
We are focusing our marketing strategy on strengthening our brand name,
increasing customer traffic to our website and helping consumers understand the
value of purchasing refurbished computer equipment. Our marketing strategy
consists of establishing relationships with leading online companies, as well as
employing various media and promotional activities to achieve these goals. We
have engaged Rare Medium Inc. to assist us in implementing our expanded sales
and marketing efforts and in enhancing our website. Rare Medium is a consulting
firm specializing in e-commerce and Internet marketing strategies. Glenn Myers,
one of our directors, is the President and Chief Executive Officer of Rare
Medium.
Relationships with Leading Online Companies. We have established strategic
alliances and cooperative advertising relationships with Internet service and
content providers, and we intend to build on our existing relationships and
establish additional relationships. These relationships can be a source of
significant new website traffic and customers, and aid in building brand
recognition. Some of these alliances require us to pay either up-front or
periodic fees as well as payments based upon a percentage of the net revenue
generated through the alliance. We typically enter into these agreements for an
initial term of one year, with Intellesale having a right to renew at specified
times on certain conditions, or for additional fees and/or increased revenue
sharing. Some of our relationships include:
. OnSale. We have an arrangement with OnSale.com under which OnSale hosts
web auctions of Intellesale products. On completion of each auction,
information on the winning bidders is forwarded to us electronically, and
we process and complete the entire transaction. We deal directly with the
customer, process the credit card transaction, ship directly to the
customer and handle any related customer service matters. We retain
information relating to the transaction, and pay OnSale a percentage fee
for each sale made through these auctions. Links to OnSale appear on our
website. This relationship was established by our subsidiary Data Path
Technologies in 1996. We believe that we are the primary source for
refurbished computer equipment available on OnSale.com.
. uBid. Through Bostek, we have an arrangement under which uBid hosts web
auctions of Bostek products, under arrangements similar to the
arrangements we have with OnSale. Once an auction is completed, we
process and complete the sale to the customer and deal directly with the
customer. Bostek established this relationship with uBid in 1998.
57
<PAGE>
. FlashNet. On May 28, 1999, we entered into an agreement with FlashNet
Communications, Inc., under which we jointly promote refurbished
computers and Internet services. Under this program, FlashNet pays us to
provide a free personal computer for each customer who agrees to a 24 to
36 month service agreement to use the FlashNet Internet service. FlashNet
also provides $300 rebates for the purchase of selected computers from
Intellesale for customers who subscribe for Internet services through
FlashNet and who choose not to participate in the free computer program.
The rebates and free computers are advertised on both Intellesale.com and
Flash.net. We also promote the FlashNet Internet service to our customers
and include the FlashNet software with each computer we sell. In the
first three months of this program, we received orders representing
approximately $ 8.0 million in revenue for Intellesale.
Internet Advertising. We have not spent significant amounts on advertising
or promotion of the Intellesale.com brand name. We intend to use a portion of
the proceeds from this offering to increase our advertising and promotional
activities, including online advertising. We will attempt to maximize the return
from promotional expenditures by choosing advertising media based on the cost
relative to the likely audience and ability to generate increased traffic on our
website. We intend to place advertisements on specific sites which offer product
reviews and allow price comparisons, such as ZDNet. We also will target high-
profile and high-traffic portal websites, such as Excite, Yahoo!, Lycos and
Go2Net. These advertisements will usually take the form of banner ads that
encourage readers to click through directly to our website.
We also plan to offer the sites on which we advertise reciprocal links on
our website. Our goal is to use these programs to increase our brand awareness,
educate consumers about the benefits of refurbished computer ownership, obtain
favorable percentages of click-throughs and convert those click-throughs to
sales. We currently have in place the following arrangements for Internet
advertising:
. Yahoo! We have entered into an agreement with the Yahoo! Internet portal
for banner advertising of Intellesale, which is renewable on a monthly
basis.
. Lycos. We have entered into an agreement with the Lycos Internet portal
under which, for a one year period starting May 1999, we are paying a fee
to be a featured vendor for refurbished computers on the Lycos website.
We will also appear in at least one million banner impressions on Lycos
during that period.
Customer Electronic Mail Broadcasts. Intellesale markets to its own base of
customers through e-mail broadcasts. All customers purchasing through our
website are invited to join our electronic mailing list. At least once each
month, we send an e-mail message announcing new items available, special
products available, site changes and new features. We maintain a policy of
sending only solicited e-mail, and a customer can remove his or her name from
our mailing list at any time.
Internet Fulfillment
In our Internet fulfillment business, we bulk wholesale our products to
other Internet companies that remarket these products on their websites. Some of
our Internet fulfillment customers include ValueAmerica, uBid.com, Bid.com,
CyberianOutpost and OnSale.com. We are gradually transitioning away from this
wholesale distribution business in order to focus on selling products directly
through our website. Bostek accounted for substantially all our Internet
fulfillment revenue.
The Intellesale.com Experience
Browsing. We categorize the products that we offer at Intellesale.com into
a simple set of categories and sub-categories. By clicking on the category name,
the consumer can quickly target products of interest. The major categories
offered on our opening page are "Refurbished Equipment," "New
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Equipment," "Make Us an Offer" and "Parts and Kits." Our website also displays a
number of featured specials plus links to information about our customer
service, tech support, terms and conditions of sale, contact information for
persons wishing to sell used equipment and a button to check out all purchases.
Depending on whether the customer chooses to shop for refurbished or new
equipment, the screen presents a list of product groups, including notebooks,
computers and monitors. Within each product category there are further
subcategories, and the user can choose to display items based on characteristics
such as manufacturer or processor speed.
Searching. At each product screen, we provide a search tool that allows
customers to search by keywords they may enter, such as the manufacturer or
product type. Customers also have the option to select "Shop Your Way," which
allows them to search for products on our website by category (computers,
notebooks, monitors), type (new, refurbished or both) and price range.
Products on Hand. The inventory offered on our website changes daily based
on our purchases and sales of equipment. We also offer a full line of new
products, through arrangements we have made with another online vendor, whose
catalog is directly linked with our website. We generally do not include
operating systems or software with our refurbished products, although we offer
Windows installation as an option and include a copy of the FlashNet Internet
connection software with each computer we sell.
Warranty. We provide a minimum six month warranty for most products we sell
which are not covered by manufacturer warranties. In addition, we offer our
customers the opportunity to purchase an extended warranty, which is priced on
the basis of the selling price of the item covered. These extended warranties
are provided under an agreement with a third party.
Product Information and Ordering. For many of our products, the customer
can access detailed information, such as a description, system requirements and
a photo, by clicking on the item. To purchase products, customers simply click
on a button to add products to their virtual shopping baskets. Customers can add
and subtract products from their shopping baskets as they browse, just as in a
physical store. To execute orders, customers click on the "Buy Now" button, are
prompted to select quantity of products and are shown final product price and
shipping costs. The customer then reviews the pricing information and adds the
item to the shopping cart, and is shown the current status of the shopping cart
and total purchases. The customer can choose to check out from any screen, and
is then presented with warranty and return policy information, and options for
purchasing extended warranties. The customer is then prompted to supply shipping
and credit card details. Prior to finalizing an order, an order confirmation is
displayed showing the final pricing and shipping information. Our system
automatically confirms each order via e-mail. Although it does not occur
frequently, if a product selected is on backorder, our personnel will contact
the customer and inquire whether the customer wishes to wait until the selected
product is available or assists the customer in making an alternative purchase.
Customer Service. The customer service area of our website contains
information about shopping for, ordering and returning products. We currently
have 12 customer service agents who are available to answer customer questions
about products and the shopping process. Our customer service hours are 9 a.m.
to 6 p.m. Eastern time, Monday through Friday, and we have made arrangements for
a call center to answer calls in case all of our agents are busy. Calls received
during non-business hours are routed to the call center, and calls are returned
on the next business day. Customers also have the ability to check the status of
an order directly on our website.
Future Enhancements and Improvements. We intend to continue enhancing the
Intellesale.com experience through ongoing upgrades and improvements to our
website. We plan to combine Bostek's PickADW.com website with our
Intellesale.com website by the end of the third quarter of 1999. The combined
website will be Intellesale.com, and visitors to PickADW.com will be
automatically redirected
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to the combined website. Once the combination of the two websites is completed,
we plan to add new features which will:
. allow users to compare prices of refurbished products available on
our website with those of comparable new products;
. allow users to indicate their areas of interest and customize the
Intellesale.com experience for those users by directing them to
pages showing products and services that match their areas of
interest; and
. track page views and purchases of registered users, and customize
the featured items and menu selections so that customers do not
have to input their areas of interest each time they access the
website.
Technology and Systems
Intellesale has implemented a broad array of website management, search,
customer support, transaction-processing and fulfillment systems using a
combination of proprietary technologies and commercially available, licensed
technologies. Our website is built on industry standard technologies, including
two Sun Microsystems servers. The Microsoft NT 4.0 operating system, running
Active Server Pages technology and Microsoft SQL Server, performs the user
interface, ordering and customer communication functions.
We believe our website can survive the failure of one server with little or
no downtime. We currently have the capacity to support up to one million hits
per hour through a redundant T-3 connection to the Internet. Capacity can be
quickly and easily expanded without substantial additional development. Our
policy is to run key systems at no more than 60% of capacity. When our website
traffic exceeds 60% of our current capacity, we plan to increase our Internet
connection and server capacity to handle up to three million hits per hour.
We handle back-end transaction processing primarily through our custom
designed software. Our system accepts and validates orders, processes orders
with multiple vendors, receives product and assigns it to customer orders,
manages shipments and multiple shipment methods, credit card transaction
processing and automated customer communications and allows the customer to
choose whether to receive single or multiple shipments based on availability.
Cube Computer Corporation, an Internet data center specialist with an
extensive national backbone, hosts our Internet servers. Cube provides redundant
Internet connections to multiple Internet access points, a secure physical
environment, climate control and redundant power. In addition, Cube provides us
with 24 hour a day, seven day a week system monitoring. Cube currently hosts our
wide area network operations in its Elmsford, New York facility, and we believe
Cube has the capacity to support our foreseeable growth.
Traditional Commerce
In our traditional commerce business, we provide leasing, remarketing and
parts-on-demand for mainframe and midrange systems to industrial, commercial and
retail organizations. We also purchase electronic components for demanufacturing
and reclamation of precious metals, steel, aluminum and copper.
Although we expect to focus on selling our products on the Internet, we
intend to maintain and further develop other areas of our business which we
believe to be complementary to our main business. We also intend to migrate this
businesses to the Internet. We believe that the customers in our traditional
commerce businesses desire to transact business over the Internet and that the
migration of these businesses to the Internet will increase the potential market
opportunities available to us, by allowing us
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to present a wider selection of products which are likely to be of interest to
these customers and allowing them to easily select and purchase additional
products.
As we migrate our traditional commerce business to the Internet, we plan to
display our entire available inventory for our wholesale products, mainframe and
midrange parts and accessories on our website. We have traditionally sold these
products through direct marketing, catalogs and telephone orders. Under the
traditional model, a customer would call us to purchase a particular item, and
may not be aware of the entire range of products which we have available. As we
introduce our wholesale customers to our website, we plan to give them access to
password-protected areas of our website which will be customized by product line
and type of customer. As part of an automated registration process, we intend to
gather basic information about customers' businesses and areas of interest.
Based on this information and the customers' purchase history, we plan to
highlight products which may be of interest to them or direct them to additional
parts, accessories or features which are compatible with their existing
equipment. We may also include a pricing feature for certain items which will
display increasing price discounts for customers based on the volume of their
purchases of particular items. The website information will also provide them
with telephone numbers for priority access to our personnel for transactions
which cannot be completed directly through our website.
Competition
While we are not aware of another company which operates in all of our
business areas, we face intense competition in each area of our business, and
many of our competitors have greater resources than we have. As we focus our
efforts on building our Internet business, we expect to face increased
competition from other companies that have an established Internet presence and
from other companies which are expanding into e-commerce.
The primary competitors we have identified include the following:
. major manufacturers of computer equipment such as Compaq, Dell and
IBM, which offer both refurbished and new equipment through their
own websites;
. traditional store-based computer retailers, such as Best Buy,
Circuit City, CompUSA and Gateway Country; and
. other online competitors, such as the Boston Computer Exchange,
Buy.com, Cyberian Outpost, Egghead.com, Fairmarket.com, OnSale, uBid
and Value America.
In our sale of refurbished computers in conjunction with FlashNet, we will
compete with, among others, the CompuServe, Prodigy and Microsoft Network online
services, each of which recently announced similar programs in which customers
can receive free new computers if they subscribe to the online service for a
specified period of time. Many computer manufacturers and traditional retailers
sell directly through their own websites, and a number of them have established
websites specifically for refurbished and off-lease equipment. In addition,
Internet portals and online service providers that feature shopping services,
such as Yahoo!, Excite, Lycos and America Online, also sell refurbished and new
computer equipment.
The principal competitive factors affecting our market are the ability to
secure large volumes of products at favorable prices, to attract customers at
favorable customer acquisition costs, to operate our website in an uninterrupted
manner and with acceptable speed and to offer attractive product pricing to
consumers. We believe our relationships with our vendors is a competitive
advantage for Intellesale, and that our ability to acquire many different types
of equipment in large quantities through our established vendor relationships
provides us with a significant competitive advantage both with consumers and
vendors.
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Until we complete phasing out our Internet fulfillment business, in which
we bulk wholesale products to other Internet companies that remarket these
products on their websites, we will also face competition from those companies
in direct sales to consumers.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors already have an established brand and can devote
substantially more resources to website development, increasing brand
recognition and product sourcing than we can. In addition, larger, well-
established and well-financed entities may join with online competitors or
computer manufacturers or suppliers as the use of the Internet and other online
services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently or adopt more
aggressive price or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and test products in a manner
that is not possible over the Internet.
Employees
As of August 31, 1999, we had a total of 445 full-time employees. We also
use independent contractors and temporary employees on an as-needed basis. None
of our employees is represented by a labor union, and we consider our labor
relations to be good.
As we continue to consolidate the businesses we have acquired in recent
years, we expect to eliminate redundant positions. However, we expect that the
overall number of employees will increase as our business continues to grow. We
expect, in particular, to add employees in our technical support services area
and in our warehouse operations.
Intellectual Property
We have been granted a registered service mark for the name "Intellesale."
We also have rights to several Internet domain names, including
"Intellesale.com" and "PickADW.com".
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Facilities
At August 31, 1999, we leased a total of approximately 258,000 square feet
for our operations. Of this space, 32,000 square feet is used for office
facilities and 226,000 square feet is for factory/warehouse use. These leases
expire at various dates through 2009.
Our primary operations are conducted at our newly-leased facility in
Lincoln Park, New Jersey, which is also our corporate headquarters.
Our current leased properties are:
<TABLE>
<CAPTION>
Location Size Description
- --------------------------------------------------------------------------------
<S> <C> <C>
Lincoln Park, New Jersey 135,750 s.f. Headquarters,
warehouse/distribution; 8,000 warehouse and
s.f. office space operations center
Pleasantville, New York 21,000 s.f. warehouse; 3,000 Technical service
s.f. office space center, customer
service center
and warehouse
Hayward, California 20,000 s.f. Warehouse
Dallas, Texas 5,250 s.f. Office
Cherry Hill, New Jersey 2,900 s.f. Sales office
Newtown, Pennsylvania 2,825 s.f. Sales office
Syosset, New York 240 s.f. Sales office
</TABLE>
We also lease space in various other locations, representing a total of
59,400 additional square feet, under leases which expire at various times from
October 1999 through December 2003. Most of the operations at these locations
are being moved to our new headquarters in Lincoln Park, New Jersey. The
aggregate lease obligations for the remaining lease terms at these locations are
approximately $162,000. We do not intend to renew these leases when they expire.
Our current total lease obligations are $1.6 million per year.
Legal Proceedings
We are a party to various legal actions, either as plaintiff or defendant,
which have arisen in the ordinary course of our business. In the opinion of
management, none of these proceedings, if adversely determined, would have a
material adverse affect on our business.
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MANAGEMENT
Our Directors and Executive Officers
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------
<S> <C> <C>
Marc Sherman 36 Director, President and Chief Executive
Officer
Edward L. Cummings 50 Director, Executive Vice President, Chief
Financial Officer and Secretary
Garrett A. Sullivan 64 Director
Constance K. Weaver (1)(2) 46 Director
David A. Loppert 45 Director
Alexander H. Good (2) 49 Director
Glenn Meyers (1) 38 Director
Charles D. Newman 35 Executive Vice President and Chief Operating
Officer
Joseph S. Keats 36 Vice President Sales and Marketing
</TABLE>
__________________
(1) Member of audit committee
(2) Member of compensation committee
Marc Sherman has served as a director and President and Chief Executive
Officer since the inception in December 1994 of our predecessor, Universal
Commodities Corp., which was merged into Intellesale in July 1999. Mr. Sherman
founded Universal Commodities and subsequently sold 80% of its stock to Applied
Digital Solutions in November 1996. He was appointed Vice President of Applied
Digital Solutions in April 1998 and Senior Vice President in March 1999,
positions from which he resigned effective August 9, 1999. For ten years prior
to 1994, he served in key positions in various family businesses. He has over
ten years of experience in marketing, operations and executive management.
Edward L. Cummings has served as Executive Vice President, Chief Financial
Officer and Secretary of Intellesale since July 1999. He joined our predecessor
company Universal Commodities Corp. in October 1995 as controller and was
elected to the board of directors in January 1997. From September 1994 to
October 1995 he owned TCC, Inc., an operator of several retail gift shops. From
December 1981 to September 1994 he was Chief Financial Officer and Treasurer of
Albert E. Price, Inc., a giftware import and export company.
Garrett A. Sullivan has served as a director of Intellesale since
December 1998. He has served on the board of directors of Applied Digital
Solutions since August 1995 and has been Applied Digital Solutions' President
and Chief Operating Officer since February 1997. He was Applied Digital
Solutions' acting Chief Financial Officer from March 1995 to February 1997. From
1993 to 1994 he was an Executive Vice President of Envirobusiness, Inc., an
environmental consulting firm.
Constance K. Weaver has served as a director of Intellesale since
January 1998. She has been a member of Applied Digital Solutions' board of
directors since June 1998. Since 1996, Ms. Weaver has been Vice President,
Investor Relations and Financial Communications for AT&T Corporation. From 1995
through 1996 she was Senior Director, Investor Relations and Financial
Communications for Microsoft Corporation. From 1993 to 1995 she was Vice
President, Investor Relations, and from 1991 to 1993 she was Director of
Investor Relations, for MCI Communications, Inc. Ms. Weaver is a director of
Primark Corporation and the National Investor Relations Institute. Ms. Weaver is
the sister-in-law of our President and Chief Executive Officer, Marc Sherman.
David A. Loppert has served as a director of Intellesale since
December 1998. He has been the Vice President, Treasurer and Chief Financial
Officer of Applied Digital Solutions since February 1997. From 1996 to 1997, he
was Chief Financial Officer of Bingo Brain, Inc., a manufacturer of handheld
computer
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devices. From 1994 to 1996, he was Chief Financial Officer of C.T.A.
America, Inc. and Ricochet International, L.L.C., both footwear retailers. Mr.
Loppert started his financial career with Price Waterhouse in 1978 where he
advanced to the position of Senior Manager.
Alexander H. Good has served as a director of Intellesale since August
1999. Mr. Good is Chief Executive Officer of @Link Networks, Inc., a data
competitive local exchange carrier. Prior to joining @Link in August 1999, Mr.
Good was Executive Vice President, Strategy and Corporate Development of Bell
Atlantic Corporation since 1994. Prior to this position, Mr. Good
served as Corporate Senior Vice President, Strategic Planning and Corporate
Development and as President and Chief Executive Officer of Bell Atlantic
International, Inc. Prior to joining Bell Atlantic, Mr. Good was Senior Vice
President of Mobile Telecommunications Technologies Corporation and President of
MTEL International. He has served or is currently serving on a number of boards,
including Bell Atlantic Europe, S.A., Bell Atlantic International-Italia S.r.L.,
Bell Atlantic International Ventures, Inc., Bell Atlantic Puerto Rico, Inc.,
Infostrada, S.p.A. and Sodalia S.p.A.
Glenn Meyers has served as a director of Intellesale since August 1999.
Mr. Meyers has been a director and the Chairman and Chief Executive Officer of
Rare Medium, Inc. since September 1995. In addition, he has served as Chairman,
Chief Executive Officer and President of Rare Medium Group since April 1998.
Prior to joining Rare Medium, he was President of Brookridge Capital Management,
an Internet venture capital firm.
Charles D. Newman has served as Executive Vice President and Chief
Operating Officer of Intellesale since January 1999. He joined Universal
Commodities in September 1996 as Vice President. From 1992 to 1996, Mr. Newman
was the president and founder of Nu-Blind Inc., a window treatment company. From
1988 to 1992, he served as president of Phoenix Abatement, Inc., a national
asbestos and waste removal company.
Joseph S. Keats joined Intellesale in May 1998 as Vice President - Sales
and Marketing. From 1996 to 1998, he was General Manager of the Budget Car Group
retail sales division in Philadelphia, Pa., which was Budget's largest retail
location in the United States. He was the President and General Manager of Keats
Ford from 1985 to 1996, when he sold this business.
Board of Directors' Committees
We have established an audit committee and a compensation committee of
our board of directors, effective upon completion of this offering.
Our audit committee will recommend for approval by the board of directors a
firm of certified public accountants to audit our financial statements. The
audit committee will also monitor the effectiveness of the audit effort, our
internal and financial accounting organization and controls and financial
reporting.
Our compensation committee will administer our 1999 Flexible Stock Plan,
including the review and grant of benefits to officers and other employees under
the plan, and will recommend the adoption of new plans. The compensation
committee will also review and approve our other compensation policies and
matters and will review and approve salaries and other matters relating to our
executive officers. The compensation committee will review all senior corporate
employees after the end of each fiscal year to determine compensation for the
subsequent year.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. In addition,
each of Mr. Good and Mr. Meyers has been granted 7,500 shares of restricted
common stock for nominal consideration, with restrictions that lapse after one
year of service on the board, and has received an option to purchase 75,000 of
our common stock, exercisable at the initial public offering price beginning on
the first anniversary of such director
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joining the board of directors. The options become exercisable in three equal
annual installments. Each of our directors who is not an employee or affiliate
of Intellesale is paid $2,000 for each board meeting attended and $1,000 for
each committee meeting attended.
Executive Compensation
The following table sets forth certain summary information concerning the
total remuneration paid in to our President and Chief Executive Officer and each
of our other executive officers whose compensation exceeded $100,000 in fiscal
year 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------------------- ----------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation Options
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marc Sherman 1998 $129,808 $114,900 $60,279(1) 400,000(2)
President and Chief Executive 1997 125,000 -- 50,941(1) 1,060,000(2)
Officer 1996 67,215 -- -- 50,000(2)
Edward L. Cummings 1998 77,885 76,600 55,664(3) --
Executive Vice President and Chief 1997 75,000 -- 45,054(3) 1,040,000(4)
Financial Officer 1996 56,538 -- -- 33,500(4)
Charles D. Newman 1998 104,000 19,150 1,237(5) --
Executive Vice President and Chief 1997 70,000 -- 7,200(5) 300,000(6)
Operating Officer 1996 13,846 -- -- 10,000(6)
</TABLE>
_______________
(1) For 1998, includes $5,779 in leased vehicle payments and $54,500 in
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by or in which Mr. Sherman was instrumental. For 1997,
includes $5,887 in leased vehicle payments and $45,054 in finders fee
payments paid by Applied Digital Solutions in connection with
acquisitions made by Applied Digital Solutions that were initiated by
or in which Mr. Sherman was instrumental.
(2) For 1998 and 1996, consists of options granted by Applied Digital
Solutions under its 1996 Non-Qualified Stock Option Plan. For 1997,
includes 1,000,000 options granted by our predecessor, Universal
Commodities, under its 1997 Stock Option Plan and 60,000 options
granted by Applied Digital Solutions under its 1996 Non-Qualified
Stock Option Plan.
(3) For 1998, includes $1,164 in leased vehicle payments and $54,500 in
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by or in which Mr. Cummings was instrumental. For 1997,
consists of finder's fee payments paid by Applied Digital Solutions in
connection with acquisitions made by Applied Digital Solutions that
were initiated by or in which Mr. Cummings was instrumental.
(4) For 1997, includes 1,000,000 options granted by our predecessor,
Universal Commodities, under its 1997 Stock Option Plan and 40,000
options granted by Applied Digital Solutions under its 1996 Non-
Qualified Stock Option Plan. For 1996, consists of options granted by
Applied Digital Solutions under its 1996 Non-Qualified Stock Option
Plan.
(5) For 1998, consists of leased vehicle payments. For 1997, consists of
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by or in which Mr. Newman was instrumental.
(6) For 1997, consists of 300,000 options granted by our predecessor,
Universal Commodities, under its 1997 Stock Option Plan. For 1996,
consists of options granted by Applied Digital Solutions under its
1996 Non-Qualified Stock Option Plan.
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Stock Options
None of the executive officers named in the summary compensation table
received options to purchase our common stock in 1998. The following table
contains information concerning grants of stock options in 1998 under Applied
Digital Solutions' 1996 Non-Qualified Stock Option Plan to each of those
officers in connection with their employment by Intellesale:
Applied Digital Solutions
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------
Number of % of Total
Securities Options Per
Underlying Granted to Share Grant Date
Options Employees Exercise Expiration Present
Name Granted in 1998(2) Price Date Value (3)
- ---------------------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marc Sherman 200,000 (1) 3.7% $ 2.16 December 2004 $254,000
200,000 (1) 3.7% 2.19 December 2004 $254,000
Edward L. Cummings -- -- -- -- --
Charles D. Newman -- -- -- -- --
</TABLE>
___________________
(1) These options are exercisable over a ten-year period beginning with the
first anniversary of the grant date.
(2) Represents the percentage of options granted to employees of Applied Digital
Solutions in 1998.
(3) Based on the grant date present value of $1.27 per option share that was
derived using the Black-Scholes option pricing model in accordance with
rules and regulations of the Securities and Exchange Commission. This is not
intended to forecast future appreciation of Applied Digital Solutions'
common stock price. The Black-Scholes model was used with the following
assumptions: dividend yield of 0%; expected volatility of 43.69%; risk-free
interest rate of 4.74%; and expected lives of five years.
Fiscal Year-End Option Values
The following table sets forth information with respect to each of the
executive officers named in the summary compensation table concerning their
unexercised Intellesale options held on December 31, 1998. No options were
exercised during 1998. All options listed become fully exercisable upon the
completion of this offering.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at Year End 1998 Year End 1998 (1)
---------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marc Sherman 1,000,000 -- --
Edward L. Cummings 1,000,000 -- --
Charles D. Newman 300,000 -- --
</TABLE>
______________________
(1) The dollar values have been calculated by determining the difference between
the fair market value of the securities underlying the options at December
31, 1998 and the exercise prices of the options. Solely for purposes of
determining the value of options at December 31, 1998, we have assumed that
the fair market value of shares of common stock issuable upon exercise of
options was $________ per share, the assumed initial public offering price,
since the common stock was not traded in an established market before the
offering.
Employment Agreements
Effective July 1, 1999, we entered into employment agreements with
Marc Sherman, Edward L. Cummings, Charles D. Newman and Joseph S. Keats. The
initial term of each agreement ends on June 30, 2004, subject to extension in
the case of Mr. Sherman as described below. Mr. Sherman's base compensation is
initially $400,000 per year, which will be reduced to $280,000 per year upon
completion of this offering. He will also be entitled to receive a minimum
annual bonus based on the annual
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earnings of Intellesale before interest, taxes, depreciation and amortization as
a percentage of the budgeted amount and the annual net revenue of Intellesale as
a percentage of the budgeted amount. Each such percentage will be multiplied by
$125,000 to determine his minimum bonus. The agreements of the other executives
provide for base compensation as set forth in the table below, and each is also
entitled to a minimum bonus as indicated in the table. Any bonus in excess of
the minimum bonus will be at the discretion of the board of directors.
<TABLE>
<CAPTION>
Executive Base Salary Minimum Bonus
----------------------------------------------------------------
<S> <C> <C>
Edward L. Cummings $280,000 $70,000
Charles D. Newman $280,000 $70,000
Joseph S. Keats $150,000 $37,500
</TABLE>
In addition, each of the agreements requires Intellesale to make severance
payments to the executive in the event of a change of control, as defined in the
agreements. A change of control under the agreements generally means:
. the acquisition by any person or entity of (1) more than 20% of
our outstanding shares of voting stock without the approval of the
board of directors, or (2) more than 50% of such shares with the
approval of the board, in either case through a tender offer,
exchange offer or otherwise;
. the sale or other disposition of all or substantially all of our
assets unless before the sale our stockholders own at least 50% of
the voting stock of the purchaser, and the purchaser assumes our
obligations under these agreements;
. a merger or consolidation after which our stockholders own less
than 50% of the voting stock of the surviving entity; or
. any time during any two-year period in which individuals who
constituted the board of directors at the start of such period, or
who were elected after being nominated by individuals who
constituted at least two-thirds of the board at the start of this
period, do not constitute at least 50% of the board for any
reason.
In the case of Messrs. Cummings, Newman and Keats, the severance payment
would not be payable unless Mr. Sherman was also no longer our chief executive
officer. Each executive, at his sole option and discretion, may terminate his
employment at any time upon 15 days' notice within one year after any change of
control. In this event, or if the executive's employment is terminated other
than for cause within one year of a change of control, we would be obligated to
pay to the executive, within one month after termination, a severance payment
equal to three times his average annual compensation for the previous five
years, minus $1.00. The amounts of these severance payments would be reduced if
their payment would result in an additional special tax to the executive.
Any changes in stock ownership resulting from this offering or changes in
Intellesale's board of directors within two years after this offering will not
trigger the change of control provisions in these agreements.
Each of these agreements also provides that the executive officer will not
engage in any business competitive with our business or own more than 5% of any
such business for three years after termination of employment with Intellesale.
In addition to the above, Mr. Sherman's agreement provides for automatic
one-year extensions to the employment term at the end of each contract year
unless either party gives notice at least 30 days prior to the end of such
contract year that the agreement will no longer be extended. Mr. Sherman also
receives $5,000 per month for personal expenses. In the event Mr. Sherman is
terminated for any reason except a material breach of his employment agreement,
he is entitled to receive for three years following such
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termination an amount equal to his highest annual compensation in any 12-month
period during the term of his agreement. This amount would be reduced by any
change of control payments described above.
In August 1999, Applied Digital Solutions guaranteed a mortgage loan to Mr.
Sherman in the amount of $1,250,000, in satisfaction of Intellesale's obligation
under his employment agreement. The guaranty is secured by a mortgage on other
real property owned by Mr. Sherman.
1997 Non-Qualified Stock Option Plan
In 1997, Universal Commodities adopted a Non-Qualified Stock Option Plan.
Intellesale assumed the plan following the merger of Universal Commodities into
Intellesale in July 1999. Options to purchase a total of 5,350,000 shares are
outstanding under this plan, and are exercisable for ten years from the date of
the grant. The exercise price under each of the options is $0.85 per share. We
do not intend to issue any future options under this plan.
This plan was a long-term plan designed to link rewards with stockholder
value over time. Stock options were granted to aid in the retention of employees
and to align the interests of employees with stockholders. The value of the
stock options to an employee increases as the price of our stock increases above
the fair market value on the grant date, and the employee must remain in our
employ for the period required for the stock option to be exercisable, which
provides an incentive to remain with us.
1999 Flexible Stock Plan
In May 1999, our board of directors and Applied Digital Solutions, as our
majority stockholder, approved our 1999 Flexible Stock Plan. The flexible plan
is intended to attract, retain, motivate and reward employees and other
individuals and to encourage ownership by employees and other individuals of our
common stock. The flexible plan provides for benefits to be awarded in the form
of incentive stock options, non-qualified stock options, stock appreciation
rights, performance shares, restricted stock, cash awards, and other stock based
awards. Benefits under the flexible plan may be granted only to:
. persons who are our employees, members of our board and employees
and owners of entities which are not affiliated with us but which
have a direct or indirect ownership interest in us or one of our
affiliates;
. individuals who, and employees and owners of entities that, are
our or one of our affiliate's customers or suppliers;
. individuals who, and employees and owners of entities that, render
services to us or one of our affiliates; and
. individuals who, and employees and owners of entities that, have
ownership or business affiliations with any individual or entity
previously described.
The flexible plan will be administered by our compensation committee, which
has complete authority to determine the terms, conditions and provisions of, and
restrictions relating to, and to grant, the benefits under the plan.
The number of shares of our common stock which may be issued in connection
with benefits granted under the flexible plan is initially 2,500,000 shares,
plus an annual increase, effective on the first day of each calendar year
commencing January 1, 2001, of 5% of the number of outstanding shares of common
stock as of the first day of such calendar year, but not more than 7,500,000
shares in the aggregate. If there is any change in our common stock, the number
and class of shares available under the plan, and/or the price thereof, will be
appropriately adjusted.
Options granted under the flexible plan which are intended to qualify as
incentive stock options must be exercised within ten years of the date of grant
or the expiration date set forth in the option grant, if
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earlier, subject to earlier option expiration upon termination of the holder's
employment, disability or death. The exercise price of all options intended to
qualify as incentive stock options must be at least equal to the fair market
value of the underlying shares of common stock on the date of the grant, and the
exercise price of other options must be at least 85% of the fair market value of
the shares on the date of grant. Incentive stock options granted to any
participant who owns 10% or more of our outstanding common stock must have an
exercise price equal to or exceeding 110% of the fair market value of a share of
common stock on the date of the grant and must not be exercisable for longer
than five years.
A participant who is granted a stock appreciation right under the flexible
plan has the right to receive an amount equal to the difference between the fair
market value of a share of stock on the date of grant of the stock appreciation
right and such value on the date of its payment. Under the flexible plan, a
participant may also be awarded performance shares, under which the participant
may receive a grant of shares of our common stock or cash equal to the fair
market value of those shares that is contingent upon achieving targeted profit
or performance objectives established by the committee. In addition, the
committee may make restricted stock awards under the flexible plan. Restricted
stock granted under the flexible plan is subject to the terms and conditions,
and carries the voting, dividend and other ownership rights, in each case as
determined by the compensation committee.
We have granted 7,500 shares of restricted stock and nonqualified options
to purchase 75,000 shares of our common stock under the flexible plan to each of
Mr. Good and Mr. Meyers, who are members of our board of directors. The exercise
price under each option will be equal to the public offering price for the
shares in this offering. No other options, performance awards, stock
appreciation rights, restricted stock awards or other awards are outstanding
under the flexible plan.
Our board of directors may amend or terminate the plan, but the board may
not amend the plan without the approval of our stockholders, if such amendment
would:
. cause the options which are intended to qualify as incentive stock
options to fail to qualify as incentive stock options;
. cause the plan to fail to meet the requirements of Rule 16b-3 of
the Exchange Act; or
. violate applicable law.
In the event of a change in control, our board of directors or its
committee may provide such protection as it deems necessary to maintain a
participant's rights, including:
. providing for the acceleration of any time periods relating to the
exercise or realization of any benefit;
. providing for the purchase of a benefit upon the participant's
request for an amount in cash equal to the amount which could have
been attained upon the exercise or realization of the benefit had
it been currently exercisable or payable;
. making such adjustment to the outstanding benefits as the
committee deems appropriate; and/or
. causing the outstanding benefits to be assumed, or new benefits
substituted therefor, by the surviving corporation.
Compensation Committee Interlocks and Insider Participation
Before the closing of this offering, all matters concerning executive
officer compensation were addressed by the entire board of directors because we
did not have a compensation committee. Messrs. Sherman and Cummings were
directors and executive officers during that period and, as directors,
participated in deliberations regarding executive compensation.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition of Minority Interests
We are the successor to a number of businesses, which have been acquired
primarily through the use of the common stock of our principal stockholder,
Applied Digital Solutions. In some cases, we purchased 80% of the stock of the
businesses we acquired. In addition, we generally agreed to make earn-out
payments to the sellers of the businesses we acquired, including instances where
we acquired 100% of the stock of those businesses. We have now agreed to
purchase, upon the closing of this offering, all of the minority interests in
our subsidiaries and to settle all of the earn-out payments for fixed amounts,
using a combination of cash and our common stock. We will issue an aggregate of
[_________] shares of our common stock in acquiring these minority interests,
assuming and initial offering price of $[__] per share. These transactions are
described below.
Elite Computer Services, Inc.
In September 1995, Applied Digital Solutions acquired 80% of the
outstanding stock of Elite Computer Services, Inc. In July 1999, Applied Digital
Solutions contributed the stock of Elite to Intellesale. In August 1999, we
repurchased the minority interest in Elite for $300,000 in cash.
Universal Commodities Corporation
In November 1996, Applied Digital Solutions acquired 80% of the outstanding
stock of Universal Commodities Corp. from Mr. Sherman, our current President and
Chief Executive Officer, for 735,000 shares of Applied Digital Solutions' common
stock, having a fair value of approximately $1.5 million. On July 1, 1999, we
completed a corporate reorganization in which Universal Commodities merged into
Intellesale, with Intellesale as the surviving corporation. The outstanding
shares of common stock and options to purchase shares of common stock of
Universal Commodities were exchanged for the same number of shares of, and
options to purchase, common stock of Intellesale, having the same relative
rights and preferences as such exchanged shares. The business operations of
Intellesale are identical in all material respects to those of Universal
Commodities and Elite prior to the reorganization. Applied Digital Solutions,
Mr. Sherman and Mr. Cummings received 12,000,000, 2,700,000 and 300,000 shares,
respectively, of Intellesale common stock in exchange for their shares of
Universal Commodities in the merger.
Norcom Resources Incorporated
In January 1997, we acquired 80% of the outstanding stock of Norcom
Resources Incorporated. The Norcom shareholders were granted the right to
require us to purchase their remaining 20% interest in Norcom. In August 1999,
we amended our agreement with the Norcom shareholders to provide that we will
purchase their remaining interests in Norcom for $900,000. We have the option to
pay that amount in cash, shares of our common stock or a combination of cash and
stock. We intend to pay $450,000 from the proceeds of this offering and to pay
the balance in shares of our common stock, valued at the initial public offering
price in this offering.
Pizarro Re-Marketing, Inc.
In January 1997, we acquired 80% of the outstanding stock of Pizarro Re-
Marketing, Inc. Ms. Pizarro, the sole stockholder of Pizarro Remarketing, was
granted the right to require us to purchase her remaining 20% interest in
Pizarro Re-Marketing. In March 1999, we amended our agreement with Ms. Pizarro
to provide that we will purchase her remaining interest in Pizarro Re-Marketing
for $500,000. In August 1999, we further amended our agreement with Ms. Pizarro
to provide that we will pay that amount in cash within 30 days following the
completion of this offering. We intend to use a portion of the proceeds of this
offering to make that payment.
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Cybertech Station, Inc.
In July 1997, we acquired 80% of the outstanding stock of Cybertech
Station, Inc. Ms. Sheerr, the sole stockholder of Cybertech Station, was granted
the right to require us to purchase her remaining 20% interest in Cybertech
Station. In August 1999, we amended our agreement with Ms. Sheerr to provide
that we will purchase her remaining interest in Cybertech Station for $415,000.
We are obligated to pay Ms. Sheerr $208,000 of the $415,000 in cash, which we
intend to pay from the proceeds of this offering, and to issue to Ms. Sheerr
$207,000 of our common stock, valued at the initial public offering price in
this offering, within 30 days following the completion of this offering. Ms.
Sheerr is the sister of Marc Sherman, our President and Chief Executive Officer.
Port Parties, Ltd.
Effective July 1997, Applied Digital Solutions acquired 80% of the
outstanding stock of Port Parties, Ltd. Applied Digital Solutions agreed to pay
an additional amount to Harvey H. Newman and Martin D. Zuckerman, the sole
stockholders of Port Parties, if Port Parties achieved specified earnings
targets during various periods ending December 31, 2000. In addition, the
selling stockholders were granted the right to require us to purchase their
remaining 20% interest in Port Parties. In August 1999, Applied Digital
Solutions transferred its shares in Port Parties to us, and we amended our
agreement with Messrs. Newman and Zuckerman. The amendment provides that we will
pay $4,000,000 in lieu of the earn-out payments and for the purchase of their
remaining interests in Port Parties. We are obligated to pay Mr. Newman
$1,020,000 in cash, which we intend to pay from the proceeds of this offering,
and to issue to Mr. Newman $1,020,000 of our common stock, valued at the initial
public offering price in this offering. We are obligated to pay Mr. Zuckerman
$980,000 in cash, which we intend to pay from the proceeds of this offering, and
to issue to Mr. Zuckerman $980,000 of our common stock, valued at the initial
public offering price in this offering. Mr. Newman is the father of Charles
Newman, our Executive Vice President.
Blue Star Electronics, Inc.
In April 1998, we acquired 80% of the outstanding stock of Blue Star
Electronics, Inc. We agreed to pay an additional amount to Paul Pappas, the sole
stockholder of Blue Star, if Blue Star achieved specified earnings targets
during the two years ending December 31, 1999. In addition, Mr. Pappas was
granted the right to require us to purchase his remaining 20% interest in Blue
Star. In August 1999, we amended our agreement with Mr. Pappas to provide that
we will pay $175,000 in lieu of the earn-out payments and to purchase his
remaining interest in Blue Star. We are obligated to pay Mr. Pappas $88,000 of
the $175,000 in cash, which we intend to pay from the proceeds of this offering,
and to issue to Mr. Pappas $87,000 of our common stock, valued at the initial
public offering price in this offering.
Service Transport Company
In April 1998, we acquired 80% of the outstanding stock of Service
Transport Company. Under the acquisition agreement, Erich Nigl and Carl C.
Saracino, the stockholders of Service Transport, had the right to require us to
purchase their remaining 20% interest in Service Transport. We purchased Mr.
Nigl's remaining interest in December 1998. In August 1999, we amended our
agreement with Mr. Saracino to provide that we will purchase his remaining
interest in Service Transport within 30 days after the closing of this offering
for an aggregate of 50,000 shares of our common stock.
Data Path Technologies, Inc.
In April 1998, we acquired all of the outstanding stock of Data Path
Technologies, Inc. We agreed to pay an additional amount to the stockholders of
Data Path, including Donn J. Wagner, the President of Data Path, if Data Path
achieved specified earnings targets during various periods ending December 31,
2001. In March 1999, we amended our agreement with the Data Path stockholders to
provide that we
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will pay $2,000,000 in lieu of the earn-out payments. We have the option to pay
that amount in cash, in shares of our common stock, or in a combination of cash
and stock. We intend to pay $1,400,000 of the $2,000,000 from the proceeds of
this offering and to pay the balance in stock by issuing shares of our common
stock to the Data Path stockholders, valued at the initial public offering price
in this offering.
GDB Software Services, Inc.
Effective April 1998, we acquired all of the stock of GDB Software
Services, Inc. We agreed to pay an additional amount to Patrick C. Chai and
Robert W. Borra, the sole stockholders of GDB Software, if GDB Software achieved
specified earnings targets during various periods ending December 31, 2001. In
April 1999, we amended our agreement with the selling stockholders to provide
that we will pay $1,500,000 in lieu of the earn-out payments. We have the option
to pay that amount in cash, in shares of our common stock, or in a combination
of cash and stock. We intend to pay $750,000 of the $1,500,000 from the proceeds
of this offering and to pay the balance in stock by issuing shares of our common
stock to Messrs. Chai and Borra, valued at the initial public offering price in
this offering.
Fiscal Advantage Corporation
Effective October 1998, we acquired substantially all of the assets of
Fiscal Advantage Corporation. We agreed to pay an additional amount to Charles
J. Phillips, the sole stockholder of Fiscal Advantage, if Fiscal Advantage
achieved specified earnings targets. In April 1999, we amended our agreement
with Mr. Phillips to provide that we will pay $250,000 in lieu of the earn-out
payments. We have the option to pay that amount in cash, in shares of our common
stock, or in a combination of cash and stock. We intend to repay $125,000 of the
$250,000 from the proceeds of this offering and to pay the balance in stock by
issuing shares of our common stock to Mr. Phillips, valued at the initial public
offering price in this offering.
Stockholders' Agreement
On June 30, 1999, Applied Digital Solutions and Messrs. Sherman and
Cummings entered into a stockholders' agreement, pursuant to which Applied
Digital Solutions granted Messrs. Sherman and Cummings certain "tag along" and
put sales rights for their shares of our common stock:
. Each of Mr. Sherman and Mr. Cummings, at his option, may participate
proportionately in any sale of our shares made by Applied Digital
Solutions, other than a sale into the public market. In that event,
Messrs. Sherman and Cummings would be entitled to elect to sell the
same percentage of their shares of our common stock as Applied Digital
Solutions proposes to sell of its shares, and would be entitled to
receive the same per share amount as Applied Digital Solutions.
. Beginning November 1, 2001, if a "qualified public offering" has not
occurred, each of Messrs. Sherman and Cummings may, at his option,
require that Applied Digital Solutions purchase all of his shares of
our common stock for a per share purchase price determined as provided
in the stockholders' agreement. This offering is a "qualified public
offering" for purposes of the stockholders' agreement. Accordingly, on
completion of this offering, such right to require the purchase of
shares of Intellesale will no longer apply.
Transactions with Applied Digital Solutions and Its Affiliates
Applied Digital Solutions is our principal stockholder. After the
completion of this offering, assuming an initial public offering price of
$[_____] per share and after giving effect to the issuance of [___] shares of
our common stock to the sellers of Bostek and our other subsidiaries, Applied
Digital Solutions will own approximately [_______]% of our outstanding common
stock, or approximately
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___% if the underwriters' over-allotment option is exercised in full. Applied
Digital Solutions is a Missouri corporation which is principally engaged in the
communications industry.
Voting and Standstill Agreement. In September 1999, we entered into a
voting and standstill agreement with Applied Digital Solutions relating to
shares of our voting securities held by Applied Digital Solutions.
Under the agreement, Applied Digital Solutions has agreed to vote all of
the voting stock of Intellesale that it holds either for or against the election
or removal of directors, or on any other matter presented to the stockholders,
in the same proportion as the other stockholders of Intellesale vote for or
against such matter. Applied Digital Solutions has granted to us an irrevocable
proxy to vote its shares in this manner. In addition, Applied Digital Solutions
has agreed not to initiate or participate in any discussions relating to a
business combination involving Intellesale unless those discussions are approved
by a majority of the disinterested directors. "Disinterested directors" means
directors who are not officers or directors of Applied Digital Solutions or
owners of 5% of the outstanding common stock of Applied Digital Solutions.
Applied Digital Solutions has also agreed that it will not:
. participate in or form any "group" relating to Intellesale within the
meaning of the Regulations 13D and G of the Securities Exchange Act;
. enter into any voting trust or other voting agreement relating to its
Intellesale shares, other than its agreement with us; or
. enter into proxy contests, election contests or solicit or participate
in solicitation or any stockholder proposals relating to Intellesale
shares.
Applied Digital Solutions also agreed that it will not own any more shares
of our stock than it will own immediately following this offering, except for
any increases due to stock splits, stock dividends or reorganizations.
The agreement provides that Applied Digital Solutions will not initiate or
participate in any tender offer for our shares, or assist any third party in a
tender offer, without the approval of a majority of the disinterested directors.
Applied Digital Solutions may sell our shares only if the sale is registered
under the Securities Act or if the sale is made through any national stock
market. It may make sales under Rule 144 only if it has first given us a copy of
any notice it is required to file with the SEC specifying the aggregate number
of shares it proposes to sell. All other private sales by Applied Digital
Solutions must first be approved by our disinterested directors. Applied Digital
Solutions has agreed not to sell any shares of our voting stock it owns during
the 180 days following the effective date of any registration statement for
sales of our voting stock.
Applied Digital Solutions has pledged the shares of Intellesale which it
owns to secure its revolving credit agreement. If the lender under the credit
agreement were to foreclose on that pledge, it would be able to sell the shares
of Intellesale it acquires, free from the restrictions of our agreement with
Applied Digital Solutions.
The voting and standstill agreement terminates on the earlier of:
. when Applied Digital Solutions owns less than 10% of our outstanding
voting securities; or
. when it owns less than 15% of our outstanding voting securities and
another stockholder beneficially owns more voting securities than
Applied Digital Solutions.
Registration Rights. Upon completion of this offering, Applied Digital
Solutions, Marc Sherman and Edward L. Cummings, or their transferees will be
entitled to certain rights with respect to the registration
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of their shares under the Securities Act. These three stockholders will hold a
total of [__________] shares of our common stock after this offering. Applied
Digital Solutions may cause us to effect five registrations of the stock, but
the offerings must be underwritten and each one may cover no more than one-third
of the shares held by Applied Digital Solutions upon completion of this
offering. Mr. Sherman may cause us to effect seven registrations, but each one
may cover no more than 20% of the shares he holds. In addition, Applied Digital
Solutions and Messrs. Sherman and Cummings are entitled to include their shares
for registration in the event we register our stock for sale, subject to
customary rights of underwriters to reduce the number of shares that each of
those stockholders may include. We have agreed to indemnify these stockholders
in connection with these registrations, except to the extent that the losses
relate to statements included in the registration statement that are provided by
the registering stockholder or to the extent that person participates as an
underwriter in the offering.
Registration of these shares under the Securities Act would result in the
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness of
the registration.
Management Services. Applied Digital Solutions currently provides certain
services to us and incurs certain expenses on our behalf. These services include
legal, internal audit, financial reporting and human resources. We incurred
approximately $0.4 million in these costs in 1998 and approximately $0.3 million
in the first half of 1999. No costs were allocated in 1996 and 1997 because
Applied Digital Solutions did not provide significant services to us. These
expenses are not necessarily indicative of the expenses we would have incurred
had we operated as a separate entity. If we had to provide these services
ourselves, they might have cost more.
Following the closing of this offering, Applied Digital Solutions will
provide certain legal services for us on an informal basis at a cost to us of
$100 per hour. There is no formal written agreement in place with respect to
such services.
Financing. As of August 31, 1999, the outstanding amount of our borrowings
from Applied Digital Solutions was $33.0 million. We expect to have our own line
of credit in place at the closing of this offering, which will replace our line
of credit with Applied Digital Solutions. We cannot provide assurance that we
will be able to establish such line of credit on favorable terms or at all.
Applied Digital Solutions has advised us that, subject to the availability
of funds, it intends to provide interim financing to us until we have obtained
our own financing. We have been advised by Applied Digital Solutions that this
financing would be provided on a pass-through basis, which means that Applied
Digital Solutions would be passing on the exact cost of its financing. There is
no formal written agreement in place with respect to the provision of this
financing support, and we cannot assure you that Applied Digital Solutions will
be willing and/or able to provide funds to us. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a discussion of Applied Digital Solutions' credit facility.
Tax Allocation Agreement. We have entered into a tax allocation and tax
sharing agreement with Applied Digital Solutions. The agreement provides that
the tax liability of the Applied Digital Solutions federal consolidated tax
return group, during the period that we are a member of that group, will be
allocated among the members of the group in proportion to their separately
calculated tax liability. It also provides that any savings resulting from the
tax benefits of a particular member will be paid to that member, rather than
accruing to the benefit of the other members. The agreement requires that
certain payments be made between Applied Digital Solutions and us in the event
there is a change in pre-offering tax liabilities of Intellesale and provides
that Applied Digital Solutions may settle proposed adjustments without our
consent. In addition, Applied Digital Solutions has agreed to indemnify us
against any tax liabilities of the Applied Digital Solutions federal
consolidated tax return group that are
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not attributable to us, and we have agreed to indemnify Applied Digital
Solutions against any of our tax liabilities.
Conflicts of Interest. Our directors included one person who is a director
of Applied Digital Solutions, one who is an executive officer of Applied Digital
Solutions, and one who is both a director and executive officer of Applied
Digital Solutions. In addition, Mr. Sherman was an executive officer of Applied
Digital Solutions prior to August 9, 1999 and beneficially owns 1,409,419 shares
of Applied Digital Solutions common stock. These persons may have had a conflict
of interest in negotiating the arrangements between Applied Digital Solutions
and us described above. Although we believe that the terms of such agreements
are at least as favorable to us as those we could negotiate with unrelated
parties, these agreements may be modified in the future, and we may enter into
additional agreements or transactions with Applied Digital Solutions or its
affiliates. Conflicts of interest could arise between Applied Digital Solutions
and us with respect to any of these or any future agreements or arrangements
between Applied Digital Solutions and us. In addition, subject to the
limitations of the Voting Agreement referred to above, Applied Digital Solutions
may be able to direct the outcome of matters requiring approval by our
stockholders, including the election of our directors. If this occurs, it could
delay or prevent a change of control of Intellesale.
Indebtedness of Management
We made loans to several of our executive officers in 1997 and 1998
aggregating $696,505. The loans are unsecured, bear interest at 6% per year, and
are payable on demand. All of the loans are to be repaid in full at the time of
completion of this offering. The following table summarizes the outstanding
loans to each officer at August 31, 1999:
<TABLE>
<CAPTION>
Accrued
Interest as of
Outstanding August 31,
Officer Principal 1999 Total
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marc Sherman $595,000 $43,318 $638,318
Edward L. Cummings 70,000 2,913 72,913
Charles D. Newman 26,505 3,802 30,307
--------------------------------------------------
$691,505 $50,033 $741,538
==================================================
</TABLE>
As provided in his employment agreement with us, Applied Digital Solutions
has guaranteed a $1,250,000 mortgage loan to Mr. Sherman, which is described
under "Management--Employment Agreements."
Agreement with Rare Medium
We have entered into an agreement with Rare Medium, under which Rare Medium
will provide strategic services and ongoing support services relating to the
development and maintenance of our brand and website. In exchange for these
services, we will pay Rare Medium an annual fee of approximately $2.0 million.
Glenn Meyers, one of our directors, is a director and the President and Chief
Executive Officer of Rare Medium.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of September 13, 1999, and as adjusted to reflect the
sale of the shares of common stock offered by this prospectus and the related
transactions described below, by:
. each person known to us who beneficially owns more than 5% of our
common stock;
. each of our directors and each of our executive officers named in the
summary compensation table;
. the selling stockholder; and
. all of our directors and executive officers as a group.
Except as otherwise noted below, the address of each person listed below is
our address. Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with respect to
securities. Beneficial ownership also includes shares of common stock subject to
options and warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of the date of this table. Beneficial ownership after
the offering assumes:
. no exercise by the underwriters of their over-allotment options from
us and Applied Digital Solutions;
. the issuance of a total of [_________] shares of our common stock to
the sellers of Bostek in connection with our acquisition of Bostek;
and
. the issuance of [_______] shares of our common stock in settlement of
earn-outs in connection with certain of our other acquisitions and in
connection with the acquisition of all outstanding minority interests
in our subsidiaries.
For a description of our obligations to the Bostek sellers, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Bostek--Acquisition by Intellesale." For a description of the
settlement of our earn-out obligations and our acquisition of these minority
interests, see "Certain Relationships and Related Transactions--Acquisition of
Minority Interests." Unless otherwise indicated, to our knowledge, all persons
listed have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law. The address of each individual listed in this table is the
address of Intellesale.
<TABLE>
<CAPTION>
Shares Owned Prior to Shares Owned After
Name of Beneficial Owners the Offering the Offering
- -------------------------------------------- -----------------------------------------------------------------------------
Number Percent Shares Offered Number Percent
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Applied Digital Solutions, Inc.
400 Royal Palm, Suite 410
Palm Beach, Florida 33480................ 12,000,000 79.92%
Marc Sherman (1)............................ 3,700,000 23.10% 3,700,000
Edward L. Cummings (1)...................... 1,300,000 8.12% 1,300,000
Garrett A. Sullivan (2)..................... 500,000 3.22% 500,000
David A. Loppert (2)........................ 500,000 3.22% 500,000
Charles D. Newman (3)....................... 300,000 1.96% 300,000
Constance K. Weaver.........................
Alexander H. Good........................... 7,500 * 7,500 *
Glenn Meyers................................ 7,500 * 7,500 *
All directors and executive officers as
a group (9 Persons) (4).................... 6,440,000 34.92% 6,440,000
========= ===== =========
</TABLE>
* Less than 1%.
(1) Includes 1,000,000 shares of common stock issuable upon the exercise
of stock options within 60 days. Such shares would be subject to the
limitations of the lock-up agreements described below under "Shares
Available for Future Sale."
(2) Consists of shares of common stock issuable upon the exercise of stock
options within 60 days. Such shares would be subject to the
limitations of the lock-up agreements described below under "Shares
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Available for Future Sale."
(3) Consists of shares of common stock issuable upon the exercise of stock
options within 60 days. Such shares would be subject to the
limitations of the lock-up agreements described below under "Shares
Available for Future Sale." Includes options beneficially owned by his
wife.
(4) Includes 3,425,000 shares of common stock issuable upon the exercise
of stock options within 60 days.
If the underwriters exercise their over-allotment option, Applied Digital
Solutions will own _____ shares of our common stock representing approximately
[___]% of our common stock (or approximately [__]% if the underwriters exercise
their over-allotment option.
DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation authorizes the issuance of up to
30,000,000 shares, par value $0.0001 per share, of our common stock, and up to
5,000,000 shares of preferred stock, par value $.01 per share.
As of August 31, 1999, 15,015,000 shares of our common stock were
outstanding and held of record by five stockholders. As of August 31, 1999,
options to purchase 5,350,000 shares of our common stock at an exercise price of
$0.85 per share, and options to purchase 150,000 shares of our common stock at
an exercise price equal to the initial public offering price in the offering,
were outstanding. Of the outstanding options, none are now exercisable, but
4,300,000 become exercisable upon completion of this offering and the remainder
become exercisable at various times over the next year. Upon the closing of this
offering, we will have outstanding [______] shares of common stock, after giving
effect to the issuance of [____] shares to sellers of various subsidiaries,
including Bostek, in connection with the Bostek acquisition, the redemption of
minority interests in our subsidiaries, and the settlement of earn-out rights.
Common Stock
All of the outstanding shares of common stock are, and the shares offered
hereby will be, fully paid and nonassessable. Each holder of common stock is
entitled to one vote for each share held of record on all matters presented to a
vote of stockholders. Holders of common stock do not have cumulative voting
rights in the election of directors. Stockholders casting a plurality of the
votes of stockholders entitled to vote in an election of directors may elect all
of the directors. Holders of common stock have no preemptive rights to purchase
or subscribe for any stock or other securities and there are no conversion
rights or redemption or sinking fund provisions with respect to such stock.
Subject to the rules and regulations of the Nasdaq National Market, additional
shares of authorized common stock may be issued without stockholder approval.
Applied Digital Solutions has entered into an agreement under which it has
agreed to vote its shares on matters presented to our stockholders in the same
proportions as the other stockholders vote their shares, subject to certain
conditions, as described under "Certain Relationships and Related Transactions--
Voting Agreement with Applied Digital Solutions."
Upon a liquidation, dissolution or winding-up, holders of our common stock
will each receive their pro rata share of our remaining assets, after payment of
liquidation preferences, if any, on any outstanding shares of preferred stock
and payments of claims of creditors.
Preferred Stock
Upon the closing of this offering, we will not have any shares of our
preferred stock outstanding. The 5,000,000 authorized shares of preferred stock
may be issued in one or more series without further approval from our
stockholders. Our board of directors is authorized to determine the terms,
limitations and relative rights and preferences of the preferred stock, to
establish series of preferred stock and to determine the variations among
series. If we issue preferred stock, it would have priority over our
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<PAGE>
common stock with respect to dividends and to other distributions, including the
distribution of assets upon liquidation. In addition, we may be obligated to
repurchase or redeem it. The holders of preferred stock may have voting and
conversion rights, including multiple voting rights, which could adversely
affect the rights of the holders of our common stock. We do not have any present
plans to issue any shares of preferred stock.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any "business combination"
with any "interested stockholder" for a period of three years following the date
that such stockholder became an interested stockholder unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by
persons who are directors and also officers, and employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
In general, Section 203 defines "business combination" to include mergers
or consolidations between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries and transactions which increase
an interested stockholder's percentage ownership of stock. In general, Section
203 defines an "interested stockholder" as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by such entity or
person.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws contain certain provisions
permitted under Delaware law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in circumstances involving
certain wrongful acts, such as:
. for any breach of the director's duty of loyalty to us or to our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for any actions under Section 174 of the Delaware General Corporation
Law; or
. for any transaction from which the director derives an improper
personal benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. In addition, we will
enter into separate agreements with each of our directors that will provide them
with indemnification protection. We believe that these provisions and agreements
will assist us in attracting and retaining qualified individuals to serve as
directors and officers.
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<PAGE>
Transfer Agent
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
Listing
There is currently no active trading market for our common stock. We intend
to apply to have our common stock approved for quotation on the Nasdaq National
Market under the symbol "SALE."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be [___________] shares of our
common stock outstanding, assuming of this no exercise of the underwriters'
over-allotment offering, there option, no exercise of options and the issuance
of will be [___] shares to sellers of our subsidiaries. Of the outstanding
shares, all of the shares of common stock sold in this offering will be freely
tradable without restriction under the Securities Act of 1933, except that any
shares purchased in this offering by our affiliates, as that term is defined in
Rule 144 under the Securities Act, may generally only be resold in compliance
with applicable provisions of Rule 144. This leaves [________] shares eligible
for sale in the public market as follows:
Number of Shares Date
-------------------------------- --------------------------
0 After the date of this prospectus.
After 180 days from the date of
this prospectus, subject, in some
cases, to volume limitations.
At various times after 180 days
from the date of this prospectus.
The restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. We are unable to estimate the number of
shares of common stock that may be sold in the public market pursuant to Rule
144, because this will depend on the market price of our common stock, the
personal circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of our common stock in the public market could adversely
affect the market price of our common stock and could impair our ability to
raise capital through an offering of, or effect acquisitions with, our equity
securities.
Rule 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
. one percent of the number of shares of our common stock then
outstanding, which will equal approximately [______] shares
immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is deemed not to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner except an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, such "144(k) shares" may be sold immediately upon the completion of
this offering.
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<PAGE>
Rule 701
Securities issued in reliance on Rule 701, such as shares of common stock
acquired pursuant to the exercise of certain options prior to this offering, are
also restricted securities. Beginning 180 days after the date of this
prospectus, these restricted securities may be sold by stockholders other than
our affiliates, subject only to the manner of sale provisions of Rule 144, and
by our affiliates, subject to all provisions of Rule 144 except the one-year
holding period requirement.
Lock-Up Agreements
All of our directors, executive officers and stockholders have signed lock-
up agreements under which they have agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock,
for a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner:
. with the prior written consent of Ladenburg Thalmann & Co. Inc.;
. in the case of gifts or estate planning transfers where the donee
signs a lock-up agreement; or
. in the case of distributions to stockholders or affiliates of the
stockholders where the recipient signs a lock-up agreement.
Richard Sullivan, the Chairman of the Board of Applied Digital Solutions,
who holds options to purchase 1,000,000 shares of our common stock, has agreed
that, for six months following expiration of the 180-day lockup period, he will
sell any shares he may acquire under the options only pursuant to the notice and
volume limitations provisions of Rule 144.
Registration Rights
Upon completion of this offering, Applied Digital Solutions, Marc Sherman
and Edward L. Cummings and their transferees will be entitled to certain rights
with respect to the registration of their shares of common stock under the
Securities Act, entitling them to include the shares of common stock they own
when we register our own shares for sale, subject to customary provisions
limiting the number of shares they may include. Those stockholders will hold
[_________________] shares of our common stock after this offering, after giving
effect to the sale of the [___] shares of the common stock offered by Applied
Digital Solutions in this offering, assuming no exercise of the underwriters'
over-allotment option. In addition, Applied Digital Solutions and Mr. Sherman
will have "demand" registration rights, which means that they would be able to
cause us to register their shares under the Securities Act in certain instances.
Registration of those shares under the Securities Act would result in those
shares becoming freely saleable by these persons without restriction under the
Securities Act. See "Certain Relationships and Related Transactions--
Transactions with Applied Digital Solutions and Its Affiliates--Registration
Rights."
Stock Options
We intend to file a registration statement under the Securities Act
covering 5,350,000 shares of common stock reserved for issuance under our 1997
Non-Qualified Stock Option Plan and 2,500,000 shares of our common stock
reserved for issuance under our 1999 Flexible Stock Plan 180 days following
completion of this offering. Thereafter, shares of common stock which are issued
as a result of options previously granted to our employees and directors and
directors and officers of our affiliates will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open market,
beginning approximately 180 days after the effective date of this offering.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated [___], 1999, the underwriters named below, who are represented by
Ladenburg Thalmann & Co. Inc. and Punk, Ziegel & Company L.P., have severally
agreed to purchase from us the number of shares opposite their names below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ------
<S> <C>
Ladenburg Thalmann & Co. Inc. ............
Punk, Ziegel & Company L.P. ..............
-----------
Total..................................
-----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters and to certain other
conditions. The underwriters are obligated to purchase and accept delivery of
all the shares, other than those shares covered by the over-allotment option
described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the initial public offering price on the cover page of this
prospectus and some of the shares to certain dealers at the initial public
offering price less a concession not in excess of $[________] per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $[________] per share on sales to other dealers. After the initial
offering of the shares to the public, the representatives may change the public
offering price and such concessions.
The following table shows the per share and total underwriting fees to be
paid to the underwriters by us and by Applied Digital Solutions in connection
with this offering. These amounts are shown with and without exercise of the
underwriters' over-allotment option.
<TABLE>
<CAPTION>
Total
---------------------------------------
Without With
Per Share Over-Allotment Over-Allotment
----------------------------------------------------------
<S> <C> <C> <C>
Underwriting discounts and commissions
we will pay.............................
Underwriting discounts and commissions
Applied Digital Solutions will pay......
----------------------------------------------------------
Total................................
==========================================================
</TABLE>
We will pay the offering expenses, which we estimate will be $______
million.
We and Applied Digital Solutions have granted to the underwriters an
option, exercisable for 30 days after the date of this prospectus, to purchase
up to [_________] additional shares from Intellesale and up to [__________]
additional shares from Applied Digital Solutions, at the initial public offering
price minus the underwriting fees. If the underwriters exercise this option, the
additional shares will be allocated between Intellesale and Applied Digital
Solutions in the same proportion as the other shares offered hereunder. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitment.
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<PAGE>
We and Applied Digital Solutions have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect to any of those liabilities.
Ladenburg Thalmann & Co. Inc. has informed us that the underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the underwriters do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
We, our executive officers and directors, Applied Digital Solutions and all
of our other stockholders have agreed, for a period of 180 days from the date of
this prospectus, not to, without the prior written consent of Ladenburg
Thalmann: (1) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or exercisable
or exchangeable for our common stock; or (2) enter into any swap or other
arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any common stock, regardless of whether any of
the transactions described in clause (1) or (2) is to be settled by the delivery
of common stock, or such other securities, in cash or otherwise. This limitation
will not apply to the shares offered by Applied Digital Solutions in this
offering. In addition, during this period, we have agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and all of our stockholders have agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock (other than a registration statement registering options or shares
granted under a stock option plan) without the prior written consent of
Ladenburg Thalmann.
Prior to this offering, there was no established trading market for our
common stock. The initial public offering price for the common stock in this
offering will be determined by negotiation among us, Applied Digital Solutions
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price include the history of and the
prospects for the industry in which we compete, the ability of our management,
our past and present operations, our prospects for future earnings, the general
condition of the securities markets at the time of this offering and the recent
market prices of securities of generally comparable companies.
We intend to apply for quotation of our common stock on the Nasdaq National
Market under the symbol "SALE."
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any of these
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of our common stock included in this offering in any jurisdiction where
that would not be permitted or legal.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of
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<PAGE>
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the common stock while this offering is in
progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. The underwriters are not required to engage in these activities. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
Ladenburg Thalman has in the past performed investment banking services for
Applied Digital Solutions, for which it has received customary compensation.
LEGAL MATTERS
Bryan Cave LLP, St. Louis, Missouri, as our counsel, has issued an opinion
as to the validity of the common stock. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Fulbright & Jaworski
L.L.P. Bryan Cave LLP from time to time serves as legal counsel to us and to
some of our affiliates, including Applied Digital Solutions.
EXPERTS
Our consolidated financial statements for the year ended December 31,
included in this prospectus have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. Our consolidated
financial statements for the years ended December 31, 1997 and 1996 in this
prospectus have been included herein in reliance upon the report of Rubin,
Brown, Gornstein & Co. LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements for Universal Commodities Corp. for the ten months
ended October 31, 1996 included in this prospectus have been included in this
prospectus have been included herein in reliance on the report of Rubin, Brown,
Gornstein & Co. LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements for Bostek for the years ended December 31, 1996,
1997 and 1998 included in this prospectus have been included in this prospectus
have been included herein in reliance on the report of DiPesa & Company,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
CHANGE IN INDEPENDENT ACCOUNTANTS
On October 23, 1998, the board of directors of Applied Digital Solutions
voted to replace Rubin, Brown, Gornstein & Co. LLP with PricewaterhouseCoopers
LLP as Applied Digital Solutions' and, as a result, Intellesale's independent
accountants for the year ending December 31, 1998. The reports of Rubin, Brown,
Gornstein on our financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with the audits of our financial statements for each of the two fiscal years
ended December 31, 1997 and 1996, and in the subsequent interim period through
85
<PAGE>
November 2, 1998, there were no disagreements with Rubin, Brown, Gornstein & Co.
LLP on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Rubin, Brown, Gornstein & Co. LLP, would have caused them to
make reference to the matter in their report. During the two most recent fiscal
years and in the subsequent interim period through November 2, 1998, there were
no reportable events as defined in Regulation S-K Item 304(a)(1)(v). On November
2, 1998, Applied Digital Solutions and, as a result, Intellesale, engaged
PricewaterhouseCoopers LLP as principal accountants to audit the financial
statement for the year ending December 31, 1998. During fiscal 1996 and 1997 and
in the subsequent interim period, Applied Digital Solutions and we had not
consulted PricewaterhouseCoopers LLP on items which concerned the application of
accounting principles generally, or to a specific transaction or group of
transactions, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 to register
the shares of common stock offered hereby. This prospectus is a part of that
Registration Statement. As allowed by the SEC rules, this prospectus does not
contain all the information you can find in the registration statement or the
exhibits to that registration statement. For further information with respect to
us and the common stock offered hereby, reference is made to the registration
statement and the exhibits to that registration statement. Statements in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to that exhibit. Each statement in this
prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified by the filed exhibits. You can obtain a copy
of the registration statement and the exhibits through the SEC, at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C., 20549, Seven
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, or the SEC's
website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges.
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent auditors . We will also file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You can also request copies of these documents, for a copying fee, by
writing the SEC.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Intellesale.com, Inc.
Consolidated Financial Statements for the years ended December 31,
1996, 1997 and 1998
<S> <C>
Reports of Independent Accountants...................................... F-2
Financial Statements
Consolidated Balance Sheets................................... F-4
Consolidated Statements of Operations......................... F-5
Consolidated Statements of Stockholders' Equity............... F-6
Consolidated Statements of Cash Flows......................... F-7
Notes to Consolidated Financial Statements.................... F-8
Consolidated Financial Statements (unaudited) for the six months ended
June 30, 1999
Consolidated Balance Sheets................................... F-23
Consolidated Statements of Operations......................... F-24
Consolidated Statements of Stockholders' Equity............... F-25
Consolidated Statements of Cash Flows......................... F-26
Notes to Consolidated Financial Statements.................... F-27
Bostek, Inc. and Affiliate
Financial Statements for the years ended December 31, 1996, 1997 and 1998
Independent Auditor's Report............................................ F-32
Financial Statements
Balance Sheet................................................. F-35
Statements of Income and Retained Earnings.................... F-36
Statement of Cash Flows....................................... F-37
Notes to Financial Statements................................. F-38
Financial Statements (unaudited) for the five months ended May 31, 1999
and May 31, 1998
Balance Sheet................................................. F-46
Statement of Income and Retained Earnings..................... F-47
Statement of Cash Flows....................................... F-48
Notes to Financial Statements................................. F-49
Universal Commodities Corp.
Financial Statements for the ten months ended October 31, 1996
Report of Independent Accountants....................................... F-51
Financial Statements
Balance Sheet................................................. F-52
Statement of Operations....................................... F-53
Statement of Cash Flows....................................... F-54
Notes to Financial Statements................................. F-55
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Intellesale.com, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of
Intellesale.com, Inc. (a majority-owned subsidiary of Applied Digital Solutions,
Inc.) and its subsidiaries at December 31, 1998, and the results of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 10, 1999 (Except as to the second paragraph
of Note 1, Note 11 and Note 17 which are as of August 23, 1999)
F-2
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Intellesale.com, Inc.
We have audited the accompanying consolidated balance sheet of Intellesale.com,
Inc. (a majority-owned subsidiary of Applied Digital Solutions, Inc.) and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intellesale.com, Inc. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
F-3
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
<TABLE>
<CAPTION>
Assets
December 31,
--------------------
1997 1998
--------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 615 $ 571
Accounts receivable (net of allowance for doubtful accounts
of $100 in 1997 and $362 in 1998) 3,626 4,675
Inventories 3,474 6,249
Notes receivable - related parties 74 262
Prepaid expenses and other current assets 125 143
- ---------------------------------------------------------------------------------
Total Current Assets 7,914 11,900
Equipment and leasehold improvements, net 418 601
Notes receivable - related parties -- 873
Goodwill, net 2,987 8,464
Other assets 68 125
- ---------------------------------------------------------------------------------
$11,387 $21,963
=================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,403 $ 80
Due to Parent Company 1,242 6,022
Accounts payable and accrued expenses 3,111 5,531
- ---------------------------------------------------------------------------------
Total Current Liabilities 5,756 11,633
- ---------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 11)
- ---------------------------------------------------------------------------------
Minority Interest 384 590
- ---------------------------------------------------------------------------------
Stockholders' Equity
Common shares:
Authorized 30,000 shares of $.0001 par value; issued
and outstanding 15,000 shares 1 1
Additional paid-in capital 4,162 6,862
Retained earnings 1,084 2,877
- ---------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,247 9,740
- ---------------------------------------------------------------------------------
$11,387 $21,963
=================================================================================
</TABLE>
See the accompanying notes to financial statements
F-4
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For The Years
Ended December 31,
-----------------------------
1996 1997 1998
-----------------------------
<S> <C> <C> <C>
Revenue $ 1,993 $39,445 $60,743
Costs of goods sold 851 33,202 47,623
- ----------------------------------------------------------------------------
Gross profit 1,142 6,243 13,120
Operating costs and expenses
Selling, general and administrative expenses 635 3,778 8,725
Depreciation and amortization 2 190 434
- ----------------------------------------------------------------------------
Operating income 505 2,275 3,961
INTEREST INCOME 1 1 45
INTEREST EXPENSE 10 152 341
- ----------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 496 2,124 3,665
Provision for income taxes 190 884 1,646
- ----------------------------------------------------------------------------
Income before minority interest 306 1,240 2,019
Minority interest 30 247 226
- ----------------------------------------------------------------------------
Net income $ 276 $ 993 $ 1,793
============================================================================
Earnings per common share - basic $ .02 $ .07 $ .12
============================================================================
Earnings per common share - diluted $ .02 $ .07 $ .11
============================================================================
Weighted average number of common
shares outstanding - basic 15,000 15,000 15,000
============================================================================
Weighted average number of common
shares outstanding - diluted 15,000 15,000 15,841
============================================================================
</TABLE>
See the accompanying notes to financial statements
F-5
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
---------------- Paid-in Earnings Stockholders'
Number Amount Capital (Deficit) Equity (Deficit)
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 -- $ -- $ 33 $ (185) $ (152)
Net income -- -- -- 276 276
Contribution of capital from Parent Company for
Parent Company shares issued for acquisitions 15,000 1 335 -- 336
- ----------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 15,000 1 368 91 460
Net income -- -- -- 993 993
Contribution of capital from Parent Company for
Parent Company shares issued for acquisitions -- -- 3,794 -- 3,794
- ----------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 15,000 1 4,162 1,084 5,247
Net income -- -- -- 1,793 1,793
Contribution of capital from Parent Company for
Parent Company shares issued for acquisitions -- -- 2,700 -- 2,700
- ----------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 15,000 $ 1 $6,862 $2,877 $ 9,740
==========================================================================================================
</TABLE>
F-6
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 276 $ 993 $ 1,793
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2 190 434
Minority interest 30 247 226
Gain on sale of equipment -- -- (21)
Net change in operating assets and liabilities
(Note 14) (180) (1,239) (4,640)
- ---------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 128 191 (2,208)
- ---------------------------------------------------------------------------------------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable - related parties -- 108 (1,097)
Proceeds from sale of assets -- 120 110
Payments for equipment and other assets (20) (372) (248)
Net cash acquired in (used for) business acquisitions 12 563 208
- ---------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities (8) 419 (1,027)
- ---------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Increase (decrease) in bank overdrafts 82 (82) --
Net amounts borrowed (paid) on notes payable (259) 78 (1,813)
Net amounts borrowed from Parent Company -- -- 5,004
- ---------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities (177) (4) 3,191
- ---------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash (57) 606 (44)
Cash and Cash Equivalents - Beginning of Period 66 9 615
- ---------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of Period $ 9 $ 615 $ 571
=======================================================================================
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ -- $ 45 $ 2
Interest paid 10 149 341
- ---------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization And Summary Of Significant Accounting Policies
Operations and Basis of Presentation
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at
www.Intellesale.com as well as through traditional channels, which we are
migrating to the Internet. In addition to selling products on our website,
we distribute products through cooperative marketing arrangements with
OnSale.com and uBid.com, where we conduct auctions of our products, as well
as FlashNet Communications, Lycos and other Internet portals and service
providers. Intellesale operates in two segments as more fully discussed in
Note 3.
Intellesale is a majority-owned subsidiary of Applied Digital Solutions,
Inc. (ADS or the Parent Company), formerly Applied Cellular Technology,
Inc. ADS owns 80% of Intellesale. Intellesale was incorporated in December
1998 and had no operations until July 1999, when it was merged with
Universal Commodities Corp. (UCC), one of its predecessors and
subsidiaries. Prior to merging into Intellesale, UCC had identical
ownership as Intellesale. In July 1999, the stock of Elite Computer
Services, Inc. (Elite), the other predecessor, was contributed by ADS to
Intellesale.
Accordingly, the historical results included herein present the results of
UCC and subsidiaries and Elite. As used herein, "the Company" refers to
Intellesale, UCC and subsidiaries and Elite, collectively. All significant
intercompany transactions have been eliminated in consolidation.
Stockholders' equity has been restated to give effect to the merger of UCC
into Intellesale and the contribution of Elite to Intellesale as if they
had occurred at November 1, 1996 and September 1, 1995, the dates that
Applied Digital Solutions acquired UCC and Elite, respectively.
The accompanying financial statements reflect the carved-out financial
position, results of operations and cash flows of the Company for the
periods presented. The financial statements have been prepared as if the
Company had operated as a stand-alone entity for the periods presented, and
include those assets, liabilities, revenues and expenses directly
attributable to the Company. The determination and presentation of assets,
liabilities, revenues and expenses of the Company have been made on a basis
consistent with the policies of ADS used for purposes of consolidation.
Historically, the Company operated as a stand-alone entity. However, as a
subsidiary, the Company did receive certain services from ADS which are
more fully described in Note 6.
Use of Estimates
The preparation of the financial statements requires management to make
certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates are
based on the knowledge of current events and actions the Company may
undertake in the future, they may ultimately differ from actual results.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories primarily consist of finished goods and equipment available for
resale. Inventory is valued at the lower of cost or market, determined by
the first-in, first-out method. The Company closely monitors and analyzes
inventory for potential obsolescence and slow-moving items based upon the
aging of the inventory. Inventory items designated
F-8
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
as obsolete or slow-moving are reduced to net realizable value. The reserve
for excess and obsolete inventory was $50 at December 31,1998. There was no
inventory reserve in 1997.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed using straight-line and accelerated
methods. Leasehold improvements are depreciated and amortized over periods
ranging from 10 to 30 years and equipment is depreciated over periods
ranging from 3 to 10 years. Equipment and leasehold improvements are
periodically reviewed for impairment based on expected future undiscounted
cash flows. Management believes there has been no impairment at December
31, 1998.
Goodwill
Goodwill is stated on the cost basis and amortized, on a straight-line
basis, over the estimated future periods to be benefitted (not exceeding 20
years). Goodwill is periodically reviewed for impairment based on expected
future undiscounted cash flows. Management believes there has been no
impairment at December 31, 1998.
Stockholders' Equity
In January 1999, the Board of Directors authorized a 15,000 for 1 stock
split of UCC stock. Stockholders' equity has been restated to give
retroactive recognition to the stock split for all periods presented and,
accordingly, number of shares, per share amounts, and stock option data
have been restated to reflect the stock split.
Revenue Recognition
For product sales, the Company recognizes revenue upon shipment. For
programming and consulting services, the Company recognizes revenue as work
is performed based on actual labor hours in the job times the standard
billing rate and adjusted to realizable value if necessary. For
maintenance contracts, revenue is recognized ratably over the life of the
maintenance agreements. Costs of goods sold are recorded as the related
revenue is recognized.
The Company does not experience significant product returns. An allowance
for estimated sales returns is recorded in accrued expenses.
Advertising Costs
The Company expenses production costs of print advertisements as of the
first date the advertisements take place. Advertising expense, included in
selling, general and administrative expenses, was $183 in 1998 and $53 in
1997. There were no material advertising expenses in 1996.
Income Taxes
As a subsidiary of ADS, the Company's results of domestic operations are
included in consolidated federal income tax returns which also include ADS
and its other operating subsidiaries. The Company could be considered
jointly and severally liable for assessments of additional tax on the
consolidated group. The Company's provision (benefit) for income taxes is
based on income taxes the Company would have provided on a separate company
basis. The Company's domestic income taxes currently payable are reflected
in Due to Parent Company, as such taxes were paid or received by ADS on
behalf of the Company.
F-9
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes,
requiring the use of the liability method of accounting for income taxes.
The current and deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determine the amount of
taxes payable currently or in future years. Deferred income taxes are
provided for temporary differences between income tax bases for assets and
liabilities and their carrying amounts for financial reporting purposes. A
valuation allowance reduces deferred tax assets when management determines
that it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred income tax assets and liabilities
are reflected as other assets and liabilities (Note 9).
Earnings Per Common and Common Share Equivalent
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common
shares consist of incremental shares issuable upon exercise of stock
options and warrants and contingently issuable shares.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities. In 1999, FAS
137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FAS 133, was issued. As the Company does not have
any derivative instruments or hedging transactions, adoption of FAS 133 is
not expected to have any effect on the financial statements.
In 1998, the Company adopted FAS 131, Disclosures about Segments of an
Enterprise and Related Information. FAS 131 superseded FAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "Industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption
of FAS 131 did not affect results of operations or financial position but
did affect the disclosure of segment information (see Note 15).
In 1998, the Company adopted FAS 130, Reporting Comprehensive Income, which
establishes standards for reporting and disclosure of comprehensive income
and its components. Adoption of FAS 130 did not have a material effect on
the financial statements.
F-10
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
2. Acquisitions
The following represents acquisitions which occurred through 1998:
<TABLE>
<CAPTION>
EFFECTIVE FAIR VALUE
DATE OF PERCENT ACQUISITION OF NET
ACQUISITION ACQUIRED PRICE ASSETS ACQUIRED GOODWILL BUSINESS DESCRIPTION
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 Acquisition
Elite Computer Services, Inc. 09/01/95 80% $ 557 $ 10 $ 547 Remarketer of computer parts
1996 Acquisition
Universal Commodities Corp 11/01/96 80% 1,512 271 1,241 Remarketer of computer equipment
1997 Acquisitions
Norcom Resources, Inc. 01/01/97 80% 538 57 481 Remarketer of mainframe computers
Pizarro Re-Marketing, Inc. 01/01/97 80% 356 156 200 Remarketer of computer tape and
disk drives
Cybertech Station, Inc. 07/01/97 80% 467 0 467 Remarketer of computer memory
products
Port Parties, Ltd. 07/01/97 80% 3,966 82 3,884 Leasing and rental services for
meeting and convention planners
1998 Acquisitions
Blue Star Electronics, Inc. 04/01/98 80% 431 1 430 Cable assembly manufacturer
Consolidated Micro 04/01/98 100% 1,948 4 1,944 Remarketer of memory, processors
Components, Inc. and hard drives
Data Path Technologies, 04/01/98 100% 3,421 146 3,275 Remarketer of computer equipment
Inc.
GDB Software Services, Inc. 04/01/98 100% 1,931 221 1,710 Provider of data processing
consulting services
Service Transport Company 04/01/98 80% 89 (69) 158 Transporter of computer equipment
Fiscal Advantage, Inc. 10/01/98 Assets 200 25 175 Computer leasing services
</TABLE>
The stock of ADS was issued for all of the above acquisitions except the assets
of Fiscal Advantage, Inc. which were acquired by Intellesale. The above
acquisitions have been accounted for using the purchase method of accounting
and, accordingly, the consolidated financial statements reflect the results of
operations of each company from the date of acquisition. The costs of
acquisitions include all payments according to the acquisition agreements plus
costs for investment banking services, legal services and accounting services,
that were direct costs of acquiring these assets. Goodwill resulting from these
acquisitions is being amortized on a straight-line basis, over twenty years.
Certain acquisition agreements include the issuance of additional shares
contingent on profits of the acquired subsidiary. Upon earning these shares, the
value is recorded as additional goodwill. The acquisition price and goodwill
above include all such contingent payments earned. See Note 16 for unaudited pro
forma information for the above acquisitions that occurred in 1998 and 1997. See
Note 17 regarding acquisition activity subsequent to December 31, 1998.
F-11
<PAGE>
INTELLESALE.COM,INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
3. Notes Receivable
<TABLE>
<CAPTION>
1997 1998
----------------
<S> <C> <C>
Due from officers, unsecured, bears interest at 6%, $200 due $ 12 $1,073
November 1999, balance due on demand
Due from customer, unsecured, due on demand 62 62
- ------------------------------------------------------------------------------
74 1,135
Less: Current portion 74 262
- ------------------------------------------------------------------------------
$ -- $ 873
==============================================================================
</TABLE>
4. Equipment And Leasehold Improvements
<TABLE>
<CAPTION>
1997 1998
--------------
<S> <C> <C>
Equipment $ 556 $ 795
Leasehold improvements 4 152
- ----------------------------------------------------------------
560 947
Less: Accumulated depreciation and amortization 142 346
- ----------------------------------------------------------------
$ 418 $ 601
================================================================
</TABLE>
Depreciation and amortization charged against operating income amounted to
$2, $108 and $204 for the years ended December 31, 1996, 1997 and 1998,
respectively.
5. Goodwill
Goodwill consists of the excess of cost over fair value of tangible and
identifiable intangible assets of companies purchased. The Company has
applied the purchase method of accounting for acquisitions of wholly owned
and majority owned subsidiaries.
<TABLE>
<CAPTION>
1997 1998
-----------------
<S> <C> <C>
Original balance $3,139 $8,799
Accumulated amortization (152) (335)
- -------------------------------------------------------------------
Carrying value $2,987 $8,464
===================================================================
</TABLE>
The Company has entered into various earnout arrangements with the selling
stockholders of certain acquired subsidiaries. These arrangements provide
for additional consideration to be paid in future years if certain earnings
levels are met. These amounts are recognized as additional goodwill when
earned. See Notes 2 and 17 for further discussion.
6. Related Party Transactions
<TABLE>
<CAPTION>
1997 1998
------------------
<S> <C> <C>
Due to Parent Company - line of credit $ -- $5,194
Due to Parent Company - other 1,242 828
- -------------------------------------------------------------------------
Due to Parent Company $1,242 $6,022
=========================================================================
</TABLE>
F-12
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
During the third quarter of 1998, the Parent Company entered into a twenty
million dollar line of credit with a bank, collateralized by all the
domestic assets of the Parent Company and its subsidiaries, including the
Company, at the prime lending rate or at the London Interbank Offered Rate,
as elected by the Parent Company. The line of credit was scheduled to
expire on July 31, 1999 and contained standard covenants relating to the
Parent Company's financial position and performance, as well as
restrictions on the Parent Company's declaration and payment of dividends.
The amount due to Parent Company - line of credit represents that portion
of ADS's line of credit that ADS has loaned to the company. This loan bears
interest at 9.0%, as set by the Parent Company. The loan, including
interest, is repaid as funds are available. Interest expense related to
this line of credit amounted to $140 in 1998.
In May 1999, the Parent Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation and repaid the amount due to the
bank. The lending arrangement between the Parent Company and Intellesale
remains unchanged.
ADS provides certain services to and incurs certain expenses on behalf of
its subsidiaries. These costs, which include general overhead, certain
employee benefit programs, general treasury services and various business
insurance coverages are allocated to Parent Company subsidiaries, including
the Company, on a pro rata basis based upon the Company's total revenues
relative to total Parent Company revenues. The Company incurred $420 in
these costs to the Parent Company in 1998. No costs were allocated in 1996
and 1997, since the Parent Company did not provide significant services due
to the decentralized operations of the subsidiaries during those periods.
Management believes the method used to allocate expenses to the Company is
reasonable and appropriate. However, allocated expenses are not necessarily
indicative of the expenses which would have resulted if the Company
operated as a separate entity.
The amounts due to Parent Company - other represent those amounts due to
ADS for income taxes paid on the subsidiaries' behalf.
See also Note 3 regarding notes receivable from officers.
7. Notes Payable
<TABLE>
<CAPTION>
1997 1998
-----------------
<S> <C> <C>
Notes payable - banks, collateralized by business assets and
by personal guarantees of officers/stockholders of certain
subsidiaries. Interest is payable monthly at rates varying
from prime plus 1/2% to prime plus 2-1/4% in 1998. The
credit lines are due through December 1999. $1,126 $ --
Notes payable - other, unsecured, due on demand 277 80
-----------------------------------------------------------------------------------
$1,403 $ 80
===================================================================================
</TABLE>
The weighted average interest rate including amounts due to Parent Company
in Note 6 was 10.3% and 9.0% for the years ended December 31, 1997 and
1998, respectively.
8. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
Notes Receivable
The carrying value of the notes approximate fair value because either the
interest rates of the notes approximate the current rate that the Company
could receive on a similar note, or because of the short-term nature of the
notes.
F-13
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
Notes Payable
The carrying amount approximates fair value because of the short-term
nature of the notes.
Accounts Payable And Accrued Expenses
The carrying amount approximates fair value due to their short-term nature.
9. Income Taxes
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------
<S> <C> <C> <C>
Current taxes at statutory rates $ 188 $ 921 $1,618
Deferred income taxes provision (credit) 2 (37) 28
------------------------------------------------------------------
$ 190 $ 884 $1,646
==================================================================
</TABLE>
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and liabilities which are
recorded as other assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------------
<S> <C> <C>
Deferred Tax Assets - Current:
Accounts receivable $ 41 $ 9
Deferred Tax Liabilities - Long-term:
Equipment and leasehold improvements (4) --
---------------------------------------------------------
Net Deferred Tax Asset $ 37 $ 9
=========================================================
</TABLE>
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------
% % %
--------------------
<S> <C> <C> <C>
Statutory rate 34 34 34
State and local income taxes, net of federal benefits 4 8 11
--------------------
38 42 45
====================
</TABLE>
F-14
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
10. Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share -
net income available to common
stockholders $ 276 $ 993 $ 1,793
================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 15,000 15,000 15,000
Effect of dilutive securities:
Employee stock options -- -- 841
--------------------------------
Denominator for diluted earnings
per share - adjusted weighted-
average shares 15,000 15,000 15,841
================================
Basic Earnings Per Share $ .02 $ .07 $ .12
Diluted Earnings Per Share $ .02 $ .07 $ .11
</TABLE>
11. Commitments And Contingencies
Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $59, $231 and $521 for the years ended December
31, 1996, 1997, and 1998, respectively.
The Company has entered into employment contracts with key officers and
employees of the Company. The agreements are for periods of one to ten
years through June 2007. Some of the employment contracts also call for
bonus arrangements based on earnings of the particular subsidiary or the
Company.
The approximate minimum payments required under operating leases and
employment contracts that have initial or remaining terms in excess of one
year at December 31, 1998 are:
<TABLE>
<CAPTION>
MINIMUM EMPLOYMENT
YEAR RENTAL PAYMENTS CONTRACTS
-----------------------------------------
<S> <C> <C>
1999 $ 633 $ 2,440
2000 521 2,690
2001 430 2,620
2002 319 2,400
2003 24 1,890
Thereafter -- 1,350
-----------------------------------------
$1,927 $13,390
=========================================
</TABLE>
The Company has entered into put options with the selling stockholders of
various companies in which the Company acquired less than a 100% interest.
These options provide for the Company to acquire the remaining portion it
does not own after periods ranging from 4 to 5 years from the dates of
acquisition at amounts generally equal to 10%-20% of the average annual
earnings of the subsidiary before income taxes for the two-year period
ending the effective date of the put multiplied by a multiple ranging
F-15
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
from 4 to 5. See Note 17 for further discussion.
The employment agreements of four officers of the Company include certain
"change of control" provisions. An initial public offering is not
considered a "change of control." At the employee's option, he may
terminate his employment under the agreement at any time within one year
after such change of control. The Company shall pay to the employee a
severance payment based on formulas relating to parachute payment
provisions of the Internal Revenue Code and prior compensation.
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material adverse
effect on the financial position or overall trends in results of the
Company. The estimate of potential impact on the Company's financial
position, overall results of operations or cash flows for the above legal
proceedings could change in the future.
12. Profit Sharing Plan
The Company participates in the Parent Company's Section 401(k) Plan for
the benefit of eligible employees. The Company and ADS have made no
contributions to the Section 401(k) Plan.
13. Stock Options
During 1997, the Company adopted a non-qualified stock option plan (the
Option Plan) and applies APB 25 and related interpretations in accounting
for the Option Plan. In addition, the Parent Company has a non-qualified
stock option plan (the Parent Option Plan) and applies APB 25 and
interpretations. The exercise price of options granted under the Option
Plan is determined at the discretion of the Company, and is typically based
on the estimated fair value of the stock at the date of grant. Compensation
expense is recognized when the exercise price of options is less than the
fair value of the underlying stock on the date of grant. Compensation
expense in 1997 and 1998 was not material. Under the Parent Option Plan,
options are granted at an exercise price which approximates fair value on
the date of grant. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Option Plan and the Parent Option Plan been
determined based on the fair value at the grant dates for awards under the
Option Plan and the Parent Option Plan, consistent with the alternative
method set forth under FAS 123, Accounting for Stock-Based Compensation,
the Company's net income available to common stockholders and earnings per
common and common equivalent share would have been reduced.
The pro forma amounts are indicated below:
<TABLE>
<CAPTION>
1997 1998
----------------
<S> <C> <C>
Net income
As reported $ 993 $1,793
Pro forma $ 791 $1,450
Earnings per common share - basic
As reported $ .07 $ .12
Pro forma $ .05 $ .10
Earnings per common share - diluted
As reported $ .07 $ .11
Pro forma $ .05 $ .09
</TABLE>
Under the Option Plan, options for 7.5 million common shares were
authorized for issuance to certain officers and employees of the Company,
of which 5.4 million had been issued through December 31, 1998. The
options may not be exercised until one to three years after the options
have been granted, and are exercisable for a period of ten years. In
addition, options for 0.6
F-16
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
million shares of ADS stock were issued to officers and employees of the
Company through December 31, 1998 under the Parent Option Plan.
Under the Option Plan, the fair value of each option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and 1998:
dividend yield of 0% in both years; expected volatility ranging from 45% to
50%; risk-free interest rates ranging from 5.0% to 6.7%; and expected lives
of 10 years for both years. The weighted-average fair value of options
granted under the Option Plan was $0.32 for the year ended December 31,
1997 and $0.64 for the year ended December 31, 1998.
Under the Parent Option Plan, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1998: dividend yield of 0% in both years; expected volatility of 44.03% and
43.69% for 1997 and 1998, respectively; risk-free interest rate of 5.72%
and 4.74% for 1997 and 1998, respectively; and expected lives of 5 years
for both years. The weighted-average fair value of options granted under
the Parent Option Plan was $1.58 for the year ended December 31, 1997 and
$1.27 for the year ended December 31, 1998.
F-17
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
A summary of the stock option activity under the Option Plan for 1997 and
1998 follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ---------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding on January 1 -- $ -- 4,750 $ 0.85
Granted 4,750 0.85 650 0.85
Exercised -- -- -- --
Forfeited -- -- -- --
----------------------------------------------------------------------------------------------
Outstanding on December 31 4,750 0.85 5,400 0.85
----------------------------------------------------------------------------------------------
Exercisable on December 31 -- -- -- --
----------------------------------------------------------------------------------------------
Shares available on December 31, for
options that may be granted 2,750 2,100
----------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about the Company stock options
at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
--------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Exercise Price Shares Life Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------
(In thousands, except for exercise price data and contractual life)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.85 5,400 8.30 $ 0.85 -- $ --
=============================================================================================
</TABLE>
A summary of the stock option activity for ADS under the Parent Option Plan
for 1997 and 1998 with respect to employees of the Company follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ----------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding on January 1 -- $ -- 100 $ 3.83
Granted 100 3.83 410 2.21
Exercised -- -- -- --
Forfeited -- -- -- --
----------------------------------------------------------------------------------------------
Outstanding on December 31 100 3.83 510 2.53
----------------------------------------------------------------------------------------------
Exercisable on December 31 -- -- 200 2.19
----------------------------------------------------------------------------------------------
Shares available on December 31, for
options that may be granted -- --
----------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
The following table summarizes information about stock options granted to
employees of the Company under the Parent Option Plan at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
-------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range Of Exercise Prices Shares Life Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------------
(In thousands, except for exercise price data and contractual life)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00 400 5.50 2.18 200 2.19
$3.01 to $4.00 110 6.70 3.82 -- --
---------------------------------------------------------------------------------------------------
$2.00 to $4.00 510 $2.53 200 $2.19
===================================================================================================
</TABLE>
14. Supplemental Cash Flow Information
The changes in operating assets and liabilities, excluding the effects of
acquisitions, are as follows:
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------
1996 1997 1998
------------------------------------
<S> <C> <C> <C>
Increase in accounts receivable $ (115) $ (1,426) $ (204)
Increase in inventories (238) (2,277) (2,277)
(Increase) decrease in prepaid expenses (5) 2 (11)
(Increase) decrease in deferred tax asset 1 (38) 27
Increase (decrease) in due to Parent Company 391 792 (414)
Increase (decrease) in accounts payable
and accrued expenses (214) 1,708 (1,761)
----------------------------------------------------------------------------------
$ (180) $ (1,239) $ (4,640)
==================================================================================
</TABLE>
In the years ended December 31, 1996, 1997 and 1998, the Company had the
following noncash investing and financing activities:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------
<S> <C> <C> <C>
Payment of debt in exchange for common stock $ 678 $ 2,266 $ --
Assets acquired for debt -- -- 190
Assets acquired for common stock of Parent Company 985 256 2,700
Capital leases -- 158 --
</TABLE>
15. Segment Information
During 1998, the Company entered into the Internet business. The Company is
now organized into two primary operating segments as follows:
. Internet, in which we sell refurbished and new computer products
through our website. Refurbished products consist primarily of
off-lease equipment which we test, clean and prepare for sale,
and manufacturer refurbished
F-19
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
products which carry a manufacturer's warranty. Our Internet
business also includes Internet fulfillment, in which we bulk
wholesale our products to other companies that market these
products on their websites. We are transitioning away from this
wholesale distribution business and focusing on selling products
directly through our website.
. Traditional commerce and other services, in which we buy and
remarket computer equipment and components to traditional
wholesalers, retailers and value-added resellers, as well as
individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services
and transportation services for computer and other equipment. We
are transitioning our traditional commerce business to the
Internet. The leasing group provides leasing and rental services
for meeting and convention planners.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies, except that
intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices, and
segment data includes an allocated charge for the corporate headquarters
costs. It is on this basis that management utilized the financial
information to assist in making internal operating decisions. The Company
evaluates performance based on stand alone operating segment net income.
The 'Eliminations' category includes all amounts recognized upon
consolidation of the Company's subsidiaries such as the elimination of
intersegment revenues, expenses and assets and liabilities.
F-20
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
<TABLE>
<CAPTION>
Traditional Commerce
------------------------
Sales And
1998 Internet Service Leasing Eliminations Consolidated
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 7,334 $ 48,556 $ 4,853 $ -- $ 60,743
Intersegment revenue -- 1,944 -- (1,944) --
----------------------------------------------------------------------------------------------
Total Revenue $ 7,334 $ 50,500 $ 4,853 $ (1,944) $ 60,743
==============================================================================================
Depreciation and amortization $ 21 $ 356 $ 57 $ -- $ 434
Operating income 782 2,174 1,149 (144) 3,961
Segment assets 1,860 15,951 4,484 (332) 21,963
Expenditures for property -- 248 -- -- 248
</TABLE>
<TABLE>
<CAPTION>
Traditional Commerce
------------------------
Sales And
1997 Internet Service Leasing Eliminations Consolidated
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ -- $ 38,040 $1,405 $ -- $ 39,445
Intersegment revenue -- 2,127 -- (2,127) --
----------------------------------------------------------------------------------------------
Total Revenue $ -- $ 40,167 $1,405 $ (2,127) $ 39,445
==============================================================================================
Depreciation and amortization $ -- $ 166 $ 24 $ -- $ 190
Operating income -- 2,003 272 -- 2,275
Segment assets -- 10,631 1,091 (335) 11,387
Expenditures for property -- 372 -- -- 372
</TABLE>
<TABLE>
<CAPTION>
Traditional Commerce
------------------------
Sales And
1996 Internet Service Leasing Eliminations Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ -- $ 1,933 $ -- $ -- $ 1,993
Intersegment revenue -- -- -- -- --
---------------------------------------------------------------------------------------------
Total Revenue $ -- $ 1,933 $ -- $ -- $ 1,993
=============================================================================================
Depreciation and amortization $ -- $ 2 $ -- $ -- $ 2
Operating income -- 505 -- -- 505
Expenditures for property -- 20 -- -- 20
</TABLE>
F-21
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
16. Pro Forma Information (Unaudited)
The following pro forma consolidated information of the Company for the
years ended December 31, 1997 and 1998 gives effect to the acquisitions,
disclosed in Notes 2 and 17, as if they were effective at January 1, 1997.
The statement gives effect to the acquisitions under the purchase method of
accounting.
The pro forma information may not be indicative of the results that would
have actually occurred if the acquisitions had been effective on the dates
indicated or of the results that may be obtained in the future. The pro
forma information should be read in conjunction with the consolidated
financial statements and notes thereto of the Company.
<TABLE>
<CAPTION>
Pro Forma
-----------------------
December 31,
-----------------------
1997 1998
-----------------------
(In Thousands, Except
Per Share Amounts)
<S> <C> <C>
Revenue $ 109,594 $ 127,848
Net income available to common stockholders 964 960
Earnings per common share - basic .06 .06
Earnings per common share - diluted .06 .06
</TABLE>
17. Subsequent Events
Amendments to Purchase Agreements
Several of the purchase agreements for the subsidiaries identified in Note
2 contained provisions whereby the sellers could put their remaining
shares and obtain additional "earnout payments" upon achievement of certain
profits. The Company has entered into agreements in 1999 to fix the amount
of these payments at $10,040 in a combination of cash and stock.
The above settlements are contingent upon the successful completion of a
planned public offering of Intellesale within one year of reaching the
agreement and will result in additional goodwill.
Marketing Agreement
In July 1999, the Company entered into an agreement with a marketing and
support firm, under which the marketing and support firm will provide
strategic services and ongoing support services relating to the development
and maintenance of the Company's brand and website. The total fees for
these services are $2,000. One of the Company's directors is a director
and the President and Chief Executive Officer of the marketing and support
firm.
Acquisitions
Effective June 1, 1999, the Company acquired all of the outstanding common
stock of Bostek, Inc. and Affiliate (Bostek) in a transaction accounted for
under the purchase method of accounting. The aggregate purchase price was
approximately $25,200 of which $10,200 was paid in cash at closing. Upon a
successful initial public offering of the common stock of Intellesale,
$10,000 will be payable in stock of the Company, and the remaining $5,000
will be payable in cash in January 2000. In the event an initial public
offering does not occur within one year from closing of the acquisition,
the $10,000 will be payable in cash. An additional $5,000 of the purchase
price is contingent upon the achievement of certain earnings targets. The
purchase price for Bostek was assigned to the assets acquired and the
liabilities assumed based on their estimated fair values at the acquisition
date. Based on such allocations, the aggregate purchase price exceeded the
estimated fair value of the net assets acquired (goodwill) by approximately
$21,400, which is being amortized over 20 years and will result in an
annual amortization charge of approximately $1,000.
Office and Warehouse Lease
In June 1999, the Company entered into a five-year office and warehouse
lease. Minimum rental payments under the lease are $48 per month for the
first three years and $60 per month for the last two years.
F-22
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
June 30, 1999
(In Thousands, Except Par Value)
(Unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Current Assets
Cash and cash equivalents $ 115
Accounts receivable (net of allowance for doubtful accounts of $467) 13,336
Inventories 15,003
Notes receivable - related parties 262
Prepaid expenses and other current assets 731
-------------
Total Current Assets 29,447
Equipment and Leasehold Improvements, net 1,735
Notes receivable 921
Goodwill, net 34,980
Other assets 272
-------------
$ 67,355
=============
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 99
Accounts payable and accrued expenses 4,150
Due to Parent Company 27,600
Due to shareholder of acquired subsidiary 15,000
-------------
Total Current Liabilities 46,849
-------------
Commitments and contingencies
Minority interest 698
-------------
Stockholders' Equity
Common shares:
Authorized 30,000 shares of $.0001 par value; issued
and outstanding 15,000 shares 1
Additional paid-in capital 15,537
Retained earnings 4,270
-------------
Total Stockholders' Equity 19,808
-------------
$ 67,355
=============
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
------------------------------
1998 1999
------------------------------
<S> <C> <C>
Revenue $ 28,199 $ 39,212
Costs of goods sold 22,337 27,816
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 5,862 11,396
- -----------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Selling, general and administrative expenses 3,559 7,772
Depreciation and amortization 188 568
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Costs and Expenses 3,747 8,340
- -----------------------------------------------------------------------------------------------------------------------
Operating income 2,115 3,056
Interest income 12 82
Interest expense (132) (363)
- -----------------------------------------------------------------------------------------------------------------------
Income before provision for income
taxes and minority interest 1,995 2,775
Provision for income taxes 809 1,273
- -----------------------------------------------------------------------------------------------------------------------
Income before minority interest 1,186 1,502
Minority interest 132 109
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 1,054 $ 1,393
=======================================================================================================================
Earnings per common share - basic $ .07 $ .09
=======================================================================================================================
Earnings per common share - diluted $ .07 $ .09
=======================================================================================================================
Weighted average number of common
shares outstanding - basic 15,000 15,000
=======================================================================================================================
Weighted average number of common
shares outstanding - diluted 15,972 16,296
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Shares Paid-In Retained Stockholders'
------------------------------
Number Amount Capital Earnings Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1998 15,000 $ 1 $ 6,862 $ 2,877 $ 9,740
Net income (unaudited) -- -- -- 1,393 1,393
Contribution of capital from
Parent Company for Parent
Company shares
issued for acquisitions (unaudited) -- -- 8,675 -- 8,675
- -----------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1999 15,000 $ 1 $15,537 $ 4,270 $19,808
=============================================================================================================================
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
------------------------------------------
1998 1999
------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,054 $ 1,393
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 188 568
Minority interest 132 109
Gain on sale of equipment -- (5)
Change in assets and liabilities:
Increase in accounts receivable (583) (2,034)
Increase in inventories (1,068) (5,358)
Increase in prepaid expenses (183) (355)
Increase in due to Parent Company 510 499
Increase (decrease) in accounts payable and
accrued expenses 346 (529)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 396 (5,712)
- -------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Increase in notes receivable - related parties (57) (60)
Proceeds from sale of property and equipment -- 6
Payments for equipment and other assets (206) (1,071)
Proceeds from (payments for) costs of asset and business
acquisitions (net of cash balances acquired) 68 (10,633)
- -------------------------------------------------------------------------------------------------------
Net Cash (Used In) Investing Activities (195) (11,758)
- -------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net paid on notes payable (50) (18)
Net amounts borrowed from Parent Company 181 17,039
Payments on long-term debt (30) (7)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 101 17,014
- -------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents 302 (456)
Cash And Cash Equivalents - Beginning Of Period 615 571
- -------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents - End Of Period $ 917 $ 115
=======================================================================================================
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 55 $ 376
Interest paid 132 363
Noncash investing and financing activities:
Fixed assets acquired for long-term debt -- 47
Due to stockholders of acquired subsidiary -- 15,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
(Unaudited)
1. Operations and Basis of Presentation
The accompanying unaudited consolidated financial statements of
Intellesale.com, Inc. (Intellesale or the "Company") as of June 30, 1999
and for the six months ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of only normal recurring
adjustments) considered necessary to present fairly the consolidated
financial statements have been made.
The consolidated statement of operations for the six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for
the entire year. These statements should be read in conjunction with the
consolidated financial statements and related notes thereto for the year
ended December 31, 1998.
Intellesale markets computer equipment and components, primarily as a re-
marketer of refurbished equipment, including sales through its Website,
Intellesale.com. Intellesale has begun to expand its online sales, has
recently acquired a subsidiary which sells its products online and to other
Internet marketers, and it intends to build the future of the Company's
business through Internet e-commerce. In addition to the primary Website,
Intellesale.com, Intellesale has entered into cooperative marketing
arrangements with OnSale.com, FlashNet, Lycos and other Internet portals
and service providers. Intellesale operates in two segments as more fully
discussed in Note 3.
Intellesale is a majority-owned subsidiary of Applied Digital Solutions,
Inc. (ADS or the Parent Company), formerly Applied Cellular Technology,
Inc. ADS owns 80% of Intellesale. Intellesale was incorporated in December
1998 and had no operations until July 1999, when it was merged with
Universal Commodities Corp. (UCC), one of its predecessors. Prior to
merging into Intellesale, UCC had identical ownership as Intellesale. In
July 1999, ADS contributed the stock of Elite Computer Services, Inc.
(Elite), the other predecessor, to Intellesale.
Accordingly, the historical results included herein present the results of
UCC and subsidiaries and Elite prior to the merger of UCC into Intellesale
and the contribution of Elite to Intellesale, and the results of
Intellesale after the occurrence of those events. As used herein, "the
Company" refers to Intellesale, UCC and subsidiaries and Elite,
collectively. All significant intercompany transactions have been
eliminated in consolidation. Stockholders' equity has been restated to
give effect to the merger of UCC into Intellesale and the contribution of
Elite to Intellesale as if they had occurred at November 1, 1996 and
September 1, 1995, the dates that ADS acquired UCC and Elite, respectively.
The accompanying financial statements reflect the carved-out financial
position, results of operations and cash flows of the Company for the
periods presented. The financial statements have been prepared as if the
Company had operated as a stand-alone entity for the periods presented, and
include those assets, liabilities, revenues and expenses directly
attributable to the Company. The determination and presentation of assets,
liabilities, revenues and expenses of the Company have been made on a basis
consistent with the policies of ADS used for purposes of consolidation.
Historically, the Company operated as a stand-alone entity. However, as a
subsidiary, the Company did receive certain services from ADS.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities. In 1999, FAS 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FAS 133, was issued. As the Company does not have any derivative
instruments or hedging transactions, adoption of FAS 133 will not have any
effect on the financial statements.
F-27
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands, except per share data)
2. Earnings Per Share
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------------
1998 1999
--------------------------------------
<S> <C> <C>
Numerator:
Numerator
Net income $ 1,054 $ 1,393
============================================================================================
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 15,000 15,000
Effect of dilutive securities -
Employee stock options 972 1,296
- --------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - Adjusted
Weighted-average shares 15,972 16,296
============================================================================================
Basic earnings per share $ .07 $ .09
============================================================================================
Diluted earnings per share $ .07 $ .09
============================================================================================
</TABLE>
3. Segment Information
During 1998, in connection with its acquisition strategy, the Company
entered into the Internet business. The company is now organized into two
primary operating segments as follows:
. Internet, in which we sell refurbished and new computer products
through our website. Refurbished products consist primarily of
off-lease equipment which we test, clean and prepare for sale,
and manufacturer refurbished products which carry a
manufacturer's warranty. Our Internet business also includes
Internet fulfillment, in which we bulk wholesale our products to
other companies that market these products on their websites. We
are transitioning away from this wholesale distribution business
and focusing on selling products directly through our website.
. Traditional commerce and other services, in which we buy and
remarket computer equipment and components to traditional
wholesalers, retailers and value-added resellers, as well as
individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services
and transportation services for computer and other equipment. We
area transitioning our traditional commerce business to the
Internet.
F-28
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands)
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the
Company's December 31, 1998 financial statements, except that
intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices, and
segment data includes an allocated charge for the corporate
headquarters costs. It is on this basis that management utilized the
financial information to assist in making internal operating decisions.
The Company evaluates performance based on stand alone operating
segment net income.
The following segment information is for the six month periods ended
June 30:
<TABLE>
<CAPTION>
Traditional
Commerce
-------------------------
Sales and
1998 Internet Service Leasing Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 2,439 $ 23,186 $ 2,574 $ -- $ 28,199
Intersegment revenue -- 532 -- (532) --
- -----------------------------------------------------------------------------------------------------------------------
Total Revenue $ 2,439 $ 23,718 $ 2,574 $ (532) $ 28,199
=======================================================================================================================
Depreciation and amortization $ 6 $ 155 $ 27 $ -- $ 188
Operating income 437 1,259 499 (80) 2,115
</TABLE>
<TABLE>
<CAPTION>
Traditional
-------------------------
Sales and
1999 Internet Service Leasing Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 12,817 $ 22,131 22,897 $ 3,498 -- $39,212
Intersegment revenue -- 2,188 -- (2,188) --
- -----------------------------------------------------------------------------------------------------------------------
Total Revenue $ 13,583 $ 24,319 $ 3,498 $(2,188) $ 39,212
=======================================================================================================================
Depreciation and amortization $ 236 $ 215 $ 117 $ -- $ 568
Operating income 1,741 838 860 (383) 3,056
Segment assets 7,112 25,901 968 33,374 67,355
</TABLE>
4. Acquisition
In June 1999, Intellesale purchased all of the shares of Bostek, Inc. and
Micro Components International, Incorporated (collectively, "Bostek") for
approximately $25,200 includes expenses, of which $10,200 was paid in cash
at closing. Upon a successful initial public offering of Intellesale,
$10,000 will be payable in stock of Intellesale and the remaining $5,000
will be payable in cash in January, 2000. In the event an initial public
offering does not occur within one year from closing of the acquisition,
the $10,000 will be payable in cash. An additional $5,000 is contingent
upon the achievement of certain earnings targets. The transaction was
accounted for under the purchase method of accounting. The fair value of
net assets acquired and liabilities assumed was $3,747, resulting in
goodwill of $21,458. This goodwill will be amortized over 20 years.
F-29
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands, except per share data)
Unaudited pro forma results of operations for the six months ended June 30,
1999 and 1998 are included below. Such pro forma information assumes that
the above transactions had occurred as of January 1, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
For The Six
Months
Ended June 30,
---------------------------------
1998 1999
---------------------------------
<S> <C> <C>
Revenues $ 58,050 $ 72,612
Net income 1,439 891
Earnings per common share - basic .10 .06
Earnings per common share - diluted .09 .05
</TABLE>
5. Related Party Transactions
<TABLE>
<CAPTION>
June 30, 1999
-------------------
<S> <C>
Due to Parent Company - line of credit $26,273
Due to Parent Company - other 1,327
----------------------------------------------------------------
Due to Parent Company $27,600
=====================================================================
</TABLE>
During the third quarter of 1998, the Parent Company entered into a twenty
million dollar line of credit with a bank, collateralized by all the
domestic assets of the Parent Company and its subsidiaries, including the
Company, at the prime lending rate or at the London Interbank Offered Rate,
as elected by the Parent Company. The line of credit was scheduled to
expire on July 31, 1999 and contained standard covenants relating to the
Parent Company's financial position and performance, as well as
restrictions on the Parent Company's declaration and payment of dividends.
The amount due to Parent Company- line of credit represents that portion of
ADS's line of credit that ADS has loaned to the company. For 1998, this
loan bore interest at 9.0%, as set by the Parent Company. In 1999, this
loan bore interest at the pass through rate of the parent and averaged
7.85% for the six months ended June 30, 1999. The loan, including interest,
is repaid as funds are available. Interest expense related to this line of
credit amounted to $140 in 1998.
In May 1999, the Parent Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation and repaid the amount due to the
bank. The lending arrangement between the Parent Company and Intellesale
remains unchanged. In connection with the Bostek acquisition (Note 4), the
Company borrowed approximately $10,200 from the Parent Company.
ADS provides certain services to and incurs certain expenses on behalf of
its subsidiaries. These costs, which include general overhead, certain
employee benefit programs, general treasury services and various business
insurance coverages are allocated to Parent Company subsidiaries, including
the Company, on a pro rata basis based upon the Company's total revenues
relative to total Parent Company revenues. The Company incurred $210 and
$300 in these costs to the Parent Company in the six months ended June 30,
1998 and 1999, respectively. Management believes the method used to
allocate expenses to the Company is reasonable and appropriate. However,
allocated expenses are not necessarily indicative of the expenses which
would have resulted if the Company operated as a separate entity.
F-30
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands)
The amounts due to Parent Company - other represent those amounts due
to ADS for income taxes paid on the subsidiaries' behalf.
6. Commitments and Contingencies
In June 1999, the Company entered into a five-year office and
warehouse lease. Minimum rental payments under the lease are $48 per
month for the first three years and $60 per month for the last two
years.
Several of the purchase agreements for the subsidiaries contained
provisions whereby the sellers could put their remaining shares and
could obtain additional "earnout payments" upon achievement of certain
profits. The Company has entered into agreements to fix the amount of
these payments at $10,040 in a combination of cash and stock.
The above settlements are contingent upon the successful completion of
a planned public offering of Intellesale within one year and will
result in additional goodwill.
The employment agreements of four officers of the Company include
certain "change of control" provisions. An initial public offering is
not considered a "change of control." At the employee's option, he may
terminate his employment under the agreement at any time within one
year after such change of control. The Company shall pay to the
employee a severance payment based on formulas relating to parachute
payment provisions of the Internal Revenue Code and prior
compensation.
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material
adverse effect on the financial position or overall trends in results
of the Company. The estimate of potential impact on the Company's
financial position, overall results of operations or cash flows for
the above legal proceedings could change in the future.
F-31
<PAGE>
April 6, 1999
(Except for Note 13, which is as of June 4, 1999)
To the Board of Directors
Bostek, Inc. and Affiliate
Hanover, MA
Re: Independent Auditor's Report
Bostek, Inc.
Micro Components International, Inc.
Gentlemen:
We have audited the accompanying combined balance sheet of Bostek, Inc.(a
Massachusetts corporation) and affiliate as of December 31, 1998, and the
related combined statements of income and retained earnings, and cash flows for
the year then ended. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit include examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Bostek, Inc. and
affiliate as of December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountant
F-32
<PAGE>
April 1, 1998
To the Board of Directors
Bostek, Inc.
Hanover, Massachusetts
Re: Independent Auditor's Report
Gentlemen:
We have audited the accompanying balance sheet of Bostek, Inc. as of December
31, 1997, and the related statements of income, retained earnings, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bostek, Inc. as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountants
F-33
<PAGE>
July 23, 1999
To the Board of Directors
Bostek, Inc.
Hanover, Massachusetts
Re: Independent Auditor's Report
Gentlemen:
We have audited the accompanying statements of income, retained earnings and
cash flows of Bostek, Inc. for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Bostek, Inc.
for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountants
F-34
<PAGE>
BOSTEK, INC.
------------
BALANCE SHEET
-------------
AS OF DECEMBER 31, 1997 AND 1998
--------------------------------
<TABLE>
<CAPTION>
ASSETS
------
1997 1998
---- ----
CURRENT ASSETS (combined)
- --------------
<S> <C> <C>
Cash $1,068,101 $ 105,096
Account Receivable Trade, Net 3,937,315 4,739,295
Inventory 3,469,951 5,454,646
Prepaid Expenses 38,496 75,645
Due from Employees 66,103 130,691
Due from Realty Trust -- 93,695
---------- -----------
TOTAL CURRENT ASSETS 8,579,966 10,599,068
--------------------
PROPERTY AND EQUIPMENT, NET 96,396 258,501
- --------------------------- ---------- -----------
TOTAL ASSETS $8,676,362 $10,857,569
- ------------ ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Line-of-Credit $3,000,000 $ 6,115,000
Accounts Payable 906,107 426,505
Warranty Reserve 652,777 250,000
Accrued Expenses 284,082 14,334
Accrued State Taxes -- 64,939
---------- -----------
TOTAL CURRENT LIABILITIES 4,842,966 6,870,778
------------------------- ---------- -----------
LONG-TERM LIABILITIES
- ---------------------
Subordinated Stockholder Debt 482,789 --
----------
TOTAL LONG-TERM LIABILITIES 482,789 --
--------------------------- ----------
TOTAL LIABILITIES 5,325,755 6,870,778
----------------- ---------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common Stock 250,714 280,914
Less: Treasury Stock, At Cost (81,000) (81,000)
Retained Earnings 3,180,893 3,786,877
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,350,607 3,986,791
-------------------------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,676,362 $10,857,569
- ------------------------------------------ ========== ===========
</TABLE>
See Independent Auditor's Report and accompanying notes.
F-35
<PAGE>
BOSTEK, INC.
------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(combined)
<S> <C> <C> <C>
REVENUE $54,400,011 $42,930,016 $60,772,443
- -------
COST OF SALES 47,366,335 37,014,620 53,366,139
- ------------- ----------- ----------- -----------
GROSS PROFIT ON SALES 7,033,676 5,915,396 7,406,304
- ---------------------
OPERATING EXPENSES 3,858,219 4,354,385 5,720,778
- ------------------ ----------- ----------- -----------
INCOME FROM OPERATIONS 3,175,457 1,561,011 1,685,526
- ---------------------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
- ----------------------
Gain on Sale of Investments -- -- 381,665
Interest Income 18,259 16,324 10,800
Interest Expense (139,200) (33,590) (353,250)
----------- ----------- -----------
(120,941) (17,266) 39,215
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR TAXES 3,054,516 1,543,745 1,724,741
-----------------------
PROVISION FOR INCOME TAXES 50,000 45,000 27,972
- -------------------------- ----------- ----------- -----------
NET INCOME 3,004,516 1,498,745 1,696,769
- ----------
RETAINED EARNINGS - BEGINNING BALANCE 1,635,651 4,183,363 3,180,893
- -------------------------------------
LESS: DIVIDENDS PAID (456,804) (2,501,215) (1,090,785)
- --------------------- ----------- ----------- -----------
RETAINED EARNINGS - ENDING BALANCE $ 4,183,363 $ 3,180,893 $ 3,786,877
- ---------------------------------- =========== =========== ===========
</TABLE>
See Independent Auditor's Report and accompanying notes.
F-36
<PAGE>
BOSTEK, INC.
-------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING 1996 1997 1998
---- ---- ----
ACTIVITIES (combined)
----------
<S> <C> <C> <C>
Net Income $ 3,004,516 $ 1,498,745 $ 1,696,769
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation 35,000 42,070 45,500
Allowance for Bad Debts 191,388 141,901 ( 294,613)
Changes in Assets and Liabilities: (
Accounts Receivable ( 82,704) 258,494 638,364)
Inventory 1,050,153 (1,484,947) (1,984,695)
Prepaid Expenses 23,230 ( 32,298) ( 37,149)
Due from Employees ( 47,405) ( 43,260) ( 64,588)
Officer Loans 29,579 - --
Accounts Payable ( 374,089) 343,152 ( 479,602)
Warranty Reserve 147,223 ( 147,223) ( 402,777)
Accrued Expenses 145,831 ( 519,079) ( 224,748)
Accrued State Taxes -- -- 19,939
Due from Related Parties -- -- 37,302
------------ ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 4,122,722 57,555 (2,327,026)
-------------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of Fixed Assets ( 26,643) ( 29,917) ( 207,605)
------ ------ -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ( 26,643) ( 29,917) ( 207,605)
-------------------- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Dividends Paid ( 456,804) (2,501,215) (1,090,785)
Loans from Officers -- 271,804 ( 482,789)
Net Borrowings on Line of Credit (2,900,000) 2,700,000 3,115,000
Proceeds from Issuance of Common Stock -- -- 200
Capital Contributions -- -- 30,000
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (3,356,804) 470,589 1,571,626
-------------------- ----------- ----------- -----------
NET CHANGE IN CASH 739,275 498,227 ( 963,005)
- ------------------
CASH - BEGINNING OF YEAR ( 169,401) 569,874 1,068,101
- ------------------------ ----------- ----------- -----------
CASH - END OF YEAR $ 569,874 $ 1,068,101 $ 105,096
- ------------------
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
-------------------------------------------------
Interest Expense Paid $ 139,200 $ 33,590 $ 353,250
Taxes Paid - State $ 397 $ 159,267 $ 98,230
</TABLE>
See Independent Auditor's Report and accompanying notes.
F-37
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A. Nature of Operations
--------------------
Bostek, Inc. and its affiliate Micro Components International,
Inc. were incorporated in the Commonwealth of Massachusetts in
1990 and 1998, respectively. The Companies operate as a single
segment as wholesalers/retailers of personal computer hardware
and peripheral products. Micro Components International, Inc.
the affiliate, is not a subsidiary of Bostek, Inc. but does
have the same shareholders and directors.
In March 1998, Bostek established a new method of distribution
for personal computer products and components, American
Discount Warehouse ("ADW"). ADW sells personal computer related
equipment to individual consumers over the Internet. For 1998,
ADW was treated as a DBA (Doing Business As) of Bostek.
B. Combined Statements
-------------------
The accompanying financial statements include the combined
accounts of Bostek, Inc. and Micro Components International,
Inc. for the year ended December 31, 1998, the first year of
operations of Micro Components International, Inc.
The Companies are affiliated by virtue of having the same
stockholders and not through parent subsidiary stock ownership.
All significant intercompany balances have been eliminated and
there were no intercompany sales transactions for the year
ended December 31, 1998.
C. Method of Accounting
--------------------
The financial statements are prepared using the accrual basis
of accounting in compliance with generally accepted accounting
principles. They accordingly reflect all significant
receivables, payables and other liabilities.
D. Revenue Recognition
-------------------
Bostek and Micro Components recognize revenues when the product
is shipped. The Companies' return policy provides for money
back guarantees on certain items. An allowance for potential
product returns based upon historical trends has been
established.
F-38
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(Continued)
E. Accounts Receivable
-------------------
The Companies provide for bad debts on the allowance method of
accounting. The allowance for uncollectible accounts was
$778,000 and $483,387 at December 31, 1997 and 1998,
respectively.
F. Inventories
-----------
Inventories consist of computer hardware and components and are
stated at historical cost (determined under the first-in,
first-out cost method) or market whichever is lower. All
inventories are of goods available for immediate resale, with
no raw materials or work in process inventory. The personal
computer industry is characterized by rapid technological
advancement and declining market prices. Should demand for the
current generation of personal computers prove to be
significantly less than anticipated, the ultimate realizable
value of such products could be substantially less than the
amount shown on the balance sheet.
G. Income Taxes
------------
In 1995, Bostek elected to be treated as an S Corporation under
provisions of the current Internal Revenue Code. The federal
income tax liability for Bostek's income is the responsibility
of the individual shareholders. Massachusetts laws vary from
Federal in that a company having receipts of $6,000,000 or more
is liable for the income measure of the corporate excise tax.
Therefore, Bostek has made a provision for income taxes of
$50,000, $45,000 and $27,972 for the years ending December 31,
1996, 1997 and 1998, respectively. Micro Components
International, Inc. (a C Corporation) provides for income taxes
under the provisions of SFAS No. 109 "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability based
approach in accounting for income taxes. Bostek has a net
operating loss of $430,870 for the year ended December 31,
1998. The deferred tax asset associated with the potential
future benefit from this net operating loss is fully offset by
a valuation allowance. There are no other temporary
differences.
F-39
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(Continued)
H. Property and Equipment
----------------------
The Companies record property and equipment at cost. These
assets are depreciated using straight-line and accelerated
methods over the estimated lives of the respective assets,
ranging from 5 to 7 years. The difference in depreciation
calculated under current tax laws as compared to generally
accepted accounting principles is not material.
The following is a summary of property and equipment at cost,
less accumulated depreciation:
<TABLE>
<CAPTION>
1997 1998
-----------------------------------
<S> <C> <C>
Furniture and Fixtures $ 268,080 $ 475,685
Vehicles 108,224 108,224
--------- ---------
Total 376,304 583,909
-----
Accumulated Depreciation (279,908) (325,408)
--------- ---------
Net Property and Equipment $ 96,396 $ 258,501
--------------------------
========= =========
</TABLE>
I. Cash and Cash Equivalents
-------------------------
For the purpose of the Statement of Cash Flows, the Companies
consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The
Companies did not have any cash equivalents for the year ended
December 31, 1996, 1997 and 1998.
J. Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses for the period. Actual
results may differ from those estimates.
F-40
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 2 - OPERATING LEASES
----------------
Bostek leases office space, vehicles and equipment under certain
operating leases in excess of one year. Rent expense under leases
was $188,891, $173,240 and $176,369 for 1996, 1997 and 1998,
respectively.
The following is a schedule of future minimum rental payments
required under the above leases:
Year Ending
December 31
1999 $197,120
2000 179,649
2001 160,884
2002 144,000
2003 144,000
--------
$825,653
========
NOTE 3 - RELATED PARTY TRANSACTIONS
--------------------------
Bostek leases its corporate headquarters and warehouse facilities
from a trust controlled by the shareholders of the company. The
lease is classified as an operating lease and provides for
minimum annual rentals of $144,000. There is also a mortgage on
the property of $250,000 payable to Citizens Bank of
Massachusetts that is guaranteed by Bostek.
Advances from officers represent advances made by the
shareholders of Bostek and bore an interest rate of 7%. In
accordance with the terms of the line-of-credit, the advances
were subordinate to the line-of-credit.
During 1998, the shareholders loans totaling $482,789 were paid.
F-41
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
--------------------------
Bostek had sales to an entity in which the shareholders owned greater
than 40% of the stock. Effective May, 1998, shareholders no longer
owned stock in this entity. The following is a summary of
transactions and balances with related parties.
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales to Related Parties $ -- $1,443,153 $212,956
Due from Affiliate -- 130,997 --
Due from Realty Trust 149,382 -- 93,695
</TABLE>
During 1998, the shareholders of Bostek established Micro Components
International, Inc. The operations of the affiliate are similar to
those of Bostek. The shareholders are in a position to, and in the
future may, influence the sales volume of Bostek for the benefit of
the other company in the same line of business that are under their
control.
NOTE 4 - LINE-OF-CREDIT
--------------
On January 24, 1997, Bostek entered into a revolving line-of-credit
agreement with a financial institution providing a maximum loan
balance of $8,000,000. The outstanding balance bears interest at a
rate equal to the bank's prime rate. The Loan Agreement is
collateralized by substantially all of Bostek's assets. Additionally,
one of the principal shareholders pledged stock in Bostek as
collateral. The Loan Agreement provides for certain covenants
including among others, minimum levels of working capital and certain
ratios. At December 31, 1997 and 1998, the outstanding balance was
$3,000,000 and $6,115,000, respectively, bearing interest of 8.50%
and 8.00% respectively. This revolving line-of-credit replaced all
existing lines of credit.
On March 24, 1998, Bostek increased its line-of-credit from
$8,000,000 to $10,000,000. All other terms of the loan remained
substantially the same.
The loan agreement on the revolving line-of-credit contains various
covenants pertaining to minimum requirements for accounts receivables
and inventory balances. At December 31, 1998, Bostek had borrowings
in excess of its borrowing base. The bank has waived that requirement
of the agreement as of April 6, 1999.
F-42
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 5 - WARRANTY RESERVE
----------------
Bostek has an allowance for warranty products and returns. This
allowance is based upon the cost of handling returns and warranty
items using historical return rates and costs. The allowance for
warranty approximated $652,777 and $250,000 at December 31, 1997
and 1998, respectively.
NOTE 6 - RETIREMENT PLAN
---------------
Bostek provides a 401(k) deferred contribution plan for all full-
time employees who are over the age of twenty-one and have
completed one year of service. An employee is fully vested in
matching contributions after six years of service. Employees may
contribute up to 15% of their salary to the plan. Bostek has the
option to make a discretionary matching contribution equal to a
percentage of each employee's contribution, the exact percentage to
be determined each year by Bostek. Bostek's contributions for any
plan year shall not exceed the maximum amount allowable as a
deduction to Bostek. Retirement expense for the years ended 1996,
1997 and 1998 was $135,155, $100,000 and $- 0 -, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
-----------------------------
Bostek and its affiliate are involved in various claims arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material
adverse effect on Bostek's financial position, operating results,
or cash flows.
NOTE 8 - GAIN ON SALE OF INVESTMENT
--------------------------
During 1998, Bostek accepted stock in lieu of payment of an account
receivable. The stock subsequently appreciated and Bostek sold the
stock for a $381,665 gain in 1998.
NOTE 9 - ADVERTISING COSTS
-----------------
Advertising costs are charged to operations when incurred. The
advertising expense for Bostek for 1996, 1997 and 1998 amounted to
$12,322, $762 and $436,644, respectively.
F-43
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable
and line-of-credit approximates fair value because of the short
maturity of those instruments. The fair value of the amounts due
from employees does not differ materially from the carrying value
recorded in the accompanying balance sheet.
NOTE 11 - NEW ACCOUNTING STANDARDS
------------------------
In 1998, the Financial Accounting Standards Board (FASB) issued FAS
133, Accounting for Derivative Instruments and Hedging Activities.
In 1999, the FASB issued FAS 137, Accounting for Derivative
Instruments - Deferral of the Effective Date of FAS 133. As Bostek
does not have any derivative instruments or hedging transactions,
adoption of FAS 133 is not anticipated to have a material effect on
the financial statements.
Bostek and Micro Components International, Inc. operate in a single
segment. Accordingly, there are no disclosure requirements under
FAS 131, Disclosures about Segments of an Enterprise and Related
Information.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (FAS) 130, Reporting Comprehensive
Income (SFAS 130). Implementation of the standard had no material
impact on Bostek's financial statements as presented.
F-44
<PAGE>
NOTE 12 COMMON STOCK AND TREASURY STOCK
-------------------------------
<TABLE>
<CAPTION>
Micro Components
International, Inc.
Bostek, Inc. no par, no par 10,000 shares
15,000 shares authorized authorized
------------------------ ----------
Outstanding Treasury Stock Outstanding
----------- -------------- -----------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 4,000 $250,714 (2,000) $(81,000) -- --
Balance, December 31, 1996 4,000 250,714 (2,000) (81,000) -- --
Balance, December 31, 1997 4,000 250,714 (2,000) (81,000) -- --
Formation of Micro Components
International, Inc. -- -- -- -- 2,000 $30,200
Balance, December 31, 1998 4,000 $250,714 (2,000) $(81,000) 2,000 $30,200
===== ======== ====== ======== ===== =======
</TABLE>
NOTE 13 - SALE OF COMPANY
---------------
In June, 1999, Intellesale.com, Inc. a subsidiary of Applied Cellular
Technology, Inc., purchased all of the outstanding shares of common
stock, no par value of Micro Components International, Incorporated
and Bostek, Inc. for the aggregate purchase price of $25,055,000,
excluding expense, and subject to adjustment as set forth in the
Agreement of Purchase and Sale.
F-45
<PAGE>
Bostek, Inc
Balance Sheet
As of May 31, 1999
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ -
Accounts receivable 6,654,040
Inventory 3,395,582
Prepaid expenses and other assets 234,136
------------
Total current assets 10,283,758
Property and equipment, net 352,515
------------
Total Assets $ 10,636,273
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line-of-credit $ 4,040,000
Accounts payable and accrued expenses 2,599,490
Warranty reserve 250,000
------------
Total current liabilities 6,889,490
Stockholders' equity:
Common Stock 280,914
Less: Treasury Stock, At Cost (81,000)
Retained Earnings 3,546,869
------------
Total stockholders' equity 3,746,783
------------
Total Liabilities and Stockholders' Equity $ 10,636,273
============
See accompanying notes to financial statements.
F-46
<PAGE>
Bostek, Inc
Statements of Income
For the five months ended May 31, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
May 31, 1998 May 31, 1999
<S> <C> <C>
Revenue $ 23,864,262 $ 33,400,242
Cost of Sales 20,958,198 29,596,178
------------ ------------
Gross Profit on Sales 2,906,083 3,804,066
Operating Expenses 1,795,462 3,434,201
------------ ------------
Income from Operations 1,110,601 369,885
Interest Expense 204,854 150,873
------------ ------------
Income before provision for
income taxes 905,747 218,992
Provision for income taxes 77,972 74,000
------------ ------------
Net income $ 827,775 $ 144,992
============ ============
</TABLE>
See accompanying notes to financial statements
F-47
<PAGE>
Bostak, Inc.
Statements of Cash Flows
For the Five Months Ended May, 31 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
May 31, 1998 May 31, 1999
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 827,775 $ 144,992
Add items not affecting cash flows
Depreciation 10,000 10,000
(Increase) Decrease in
Accounts receivable (2,867,165) (1,914,745)
Inventory 270,199 2,059,064
Other Assets (72,219) 65,895
Increase (Decrease) in:
Accounts payable and Accrued
expenses 833,166 2,093,712
Net Cash Flows from Operations (50,268) 2,458,918
Cash Flows from investing
Purchase of fixed assets (50,266) (104,014)
Cash Flows from Financing:
Dividends paid (385,000)
Payment of stockholders loans (11,489)
Increase (decrease) in line of credit 925,000 (2,075,000)
Net Cash Flows from Financing 913,511 (2,460,000)
Net Change in Cash and cash
equivalents (135,001) 105,096
Cash and cash equivalents, Beginning
of period 1,068,101 105,096
Cash and cash equivalents, Ending
of period $ 933,100 $ --
</TABLE>
See accompanying notes to financial statements
F-48
<PAGE>
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS
For the five months ended May 31, 1998 and 1999
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations
Bostek, Inc. and its affiliate Micro Components International, Inc. were
incorporated in the Commonwealth of Massachusetts in 1990 and 1998,
respectively. The Companies operate as a wholesaler/retailer of personal
computer hardware and peripheral products. Micro Components International, Inc.
the affiliate, is not a subsidiary of Bostek, Inc. but does have the same
shareholders and directors.
In March 1998, Bostek developed a website under the name American Discount
Warehouse at PickADW.com to sell its products over the Internet. For 1998, ADW
was treated as a DBA (Doing Business As) of Bostek.
B. Combined Statements
The accompanying financial statements include the combined accounts of Bostek,
Inc. and Micro Components International, Inc. The Companies are affiliated by
virtue of having the same stockholders and not through parent subsidiary stock
ownership. All significant intercompany balances have been eliminated and there
were no intercompany sales transactions for the 5 months ended May, 1999.
C. Unaudited Interim Financial Statements
The accompanying unaudited financial statements as of May 31, 1999 and for the
five months ended May 31, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, all adjustments (consisting of only
normal recurring adjustments) considered necessary to present fairly the
consolidated financial statements have been made.
The consolidated statement of operations for the five months ended May 31, 1999
are not necessarily indicative of the results that may be expected for the
entire year. These statements should be read in conjunction with the financial
statements and related notes thereto for the year ended December 31, 1998.
D. Accounts Receivable
The Companies provide for bad debts on the allowance method of accounting.
The allowance for uncollectible accounts was $253,385 at May 31, 1999.
E. New Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities. In 1999, the FASB
issued FAS 137, Accounting for Derivative Instruments - Deferral of the
Effective
F-49
<PAGE>
Date of FAS 133. As Bostek does not have any derivative instruments or
hedging transactions, adoption of FAS 133 is not anticipated to have a material
effect on the financial statements.
NOTE 2 - SALE OF COMPANY
Effective June 1, 1999, Intellesale.com, Inc. a subsidiary of Applied Cellular
Technology, Inc., purchased all of the outstanding shares of common stock, no
par value, of Micro Components International, Incorporated and Bostek, Inc. for
the aggregate purchase price of $25,055,000, excluding expenses, and subject to
adjustments as set forth in the Agreement of Purchase and Sale.
F-50
<PAGE>
Report of Independent Accountants
Board of Directors and Shareholders
Universal Commodities Corp.
We have audited the accompanying balance sheet of Universal Commodities Corp. as
of October 31, 1996, and the related statements of operations, retained earnings
and cash flows for the ten months ended October 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Universal Commodities Corp. as
of October 31, 1996, and the results of their operations and their cash flows
for the ten months ended October 31, 1996, in conformity with generally accepted
accounting principles.
Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
July 9, 1999
F-51
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
BALANCE SHEET
October 31, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents $ 12,399
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $63,000) 602,501
Inventories 150,000
Deposits 19,800
--------
$784,700
========
Liabilities and Stockholders' Equity
Liabilities
Notes payable - bank $100,000
Accounts payable and accrued expenses 577,535
--------
Total Liabilities 677,535
--------
Stockholders' Equity
Common Stock - Authorized 1,000,000 shares of $1 par value,
1,000 shares issued and outstanding 1,000
Additional paid-in capital 34,311
Retained earnings 71,854
--------
Total Stockholders' Equity 107,165
--------
$784,700
========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-52
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Ten Months Ended October 31, 1996
<TABLE>
<S> <C>
Revenue $4,575,131
Cost of Goods Sold 3,689,237
----------
Gross Profit 885,894
Selling, General and Administrative Expenses 936,436
----------
Operating Loss (50,542)
Interest Expense 12,766
----------
Net Loss $ (63,308)
==========
Statement of Retained Earnings
Balance - Beginning of Period $ 135,162
Net Loss (63,308)
----------
Balance - End of Period $ 71,854
==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-53
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the Ten Months Ended October 31, 1996
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net loss $ (63,308)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Change in assets and liabilities:
Increase in accounts receivable (427,962)
Decrease in inventories 129,000
Increase in accounts payable and accrued
expenses 438,314
----------
Net Cash Provided By Operating Activities 76,044
----------
Cash Flows From Financing Activities
Net amounts borrowed on notes payable 5,111
----------
Net Decrease In Cash And Cash Equivalents (47,234)
Cash And Cash Equivalents - Beginning Of Period 59,633
----------
Cash And Cash Equivalents - End Of Period $ 12,399
==========
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 12,285
----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-54
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
1. Organization And Summary Of Significant Accounting Policies
Organization
Universal Commodities Corp. purchases new, used and scrapped computer
systems or components either to custom order or prospective sale. The
company also engages in metals reclamation and other computer part
commodity reclamation and sale.
Use of Estimates
In conformity with generally accepted accounting principles, the
preparation of financial statements requires management to make certain
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Although these estimates are based on
the knowledge of current events and actions the Company may undertake in
the future, they may ultimately differ from actual results.
Inventories
Inventories consist of supplies and finished goods. Inventory is valued at
the lower of cost or market, determined by the first-in, first-out method.
The Company closely monitors and analyzes inventory for potential
obsolescence and slow-moving items based upon the aging of the inventory
and the inventory turns by product.
Revenue Recognition
For product sales, the Company recognizes revenue upon shipment.
The Company does not experience many product returns, and therefore,
Company management is of the opinion that no allowance for sales returns
is necessary. The Company has no obligation for warranties on hardware
sales, because the warranty is provided by the manufacturer. The Company
does not offer a warranty policy for services to customers.
Income Taxes
The Company has elected under Subchapter S of the Internal Revenue Code,
and similar provisions of the New Jersey tax laws, not to be subject to
corporate income taxes, but rather to have the stockholders report their
share of the Company's taxable income or losses on their personal income
tax returns. Therefore, no liability for federal and state income taxes is
reflected in the accompanying financial statements.
2. Notes Payable
The note payable to the bank in the amount of $100,000 at October 31, 1996
is a demand note secured by the business assets. Interest on the note is
payable monthly at 2% above the bank's prime rate.
3. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
________________________________________________________________________________
F-55
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
Accounts Receivable
The carrying amounts approximate fair value.
Notes Payable
The carrying amount approximates fair value because of the short-term
nature of the notes.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
The estimated fair value amounts presented herein have been determined
using available market information and appropriate valuation methodologies
and are not necessarily indicative of the amount could be realized in a
current market exchange.
4. Commitments
The Company is obligated under real estate leases, expiring through 2000.
The total future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------
<S> <C>
1996 $ 14,000
1997 93,000
1998 99,600
1999 104,580
2000 26,460
-----------------------------------------
$337,640
=========================================
</TABLE>
5. Subsequent Events
Effective November 1, 1996, 80% of the Company was acquired by Applied
Digital Solutions (formerly Applied Cellular Technology, Inc.).
________________________________________________________________________________
F-56
<PAGE>
================================================================================
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate as
of the date on the front cover of this prospectus only. Our business, financial
condition, results of operations and prospects may have changed since that date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................................... 2
Risk Factors.............................................................................. 6
Use of Proceeds........................................................................... 18
Dividend Policy........................................................................... 18
Capitalization............................................................................ 19
Dilution.................................................................................. 20
Selected Financial Data................................................................... 21
Pro forma Financial Information........................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations..... 29
Management's Discussion and Analysis of Pro Foma Results of Operations.................... 46
Intellesale.com, Inc...................................................................... 52
Management................................................................................ 64
Certain Relationships and Related Transactions............................................ 71
Principal and Selling Stockholders........................................................ 77
Description of Capital Stock.............................................................. 78
Shares Eligible for Future Sale........................................................... 81
Underwriting.............................................................................. 83
Legal Matters............................................................................. 85
Experts................................................................................... 85
Change In Independent Accountants......................................................... 85
Where You Can Find Additional Information................................................. 86
Index to Financial Statements............................................................. F-1
</TABLE>
_______________________________________________________
Until [___________], 1999, all dealers effecting transactions in the common
stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
[________] Shares
[logo]
Common Stock
_______________
PROSPECTUS
_______________
LADENBURG THALMANN & CO. INC.
PUNK, ZIEGEL & COMPANY
[______________], 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
discounts and commissions) which, other than the SEC registration fee, are
estimates, payable by the Registrant in connection with the sale and
distribution of the shares registered hereby:
<TABLE>
<S> <C>
SEC registration fee............................$ 15,895
NASD filing fee................................. 6,250*
Nasdaq National Market listing fee.............. 95,000*
Printing and engraving expenses................. _200,000*
Accounting fees and expenses.................... 150,000*
Legal fees and expenses......................... 200,000*
Transfer Agent and Registrar fees and expenses.. 15,000*
Miscellaneous expenses.......................... 42,855*
-------
Total......................................$ 725,000*
=======
</TABLE>
_____________
* Estimated
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law permits the indemnification by a
Delaware corporation of its directors, officers, employees and other agents
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than derivative
actions which are by or in the right of the corporation) if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard of care is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with defense or settlement of such an action and requires
court approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation.
As permitted by Delaware law, the Registrant's Amended and Restated
Certificate of Incorporation provides that no director of the Registrant will be
personally liable to the Registrant or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (a) for any breach
of duty of loyalty to the Registrant or to its stockholders, (b) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the Delaware General Corporation Law,
or (d) for any transaction from which the director derived an improper personal
benefit.
The Registrant's Amended and Restated Certificate of Incorporation further
provides that the Registrant must indemnify its directors and executive officers
and may indemnify its other officers and employees and agents to the fullest
extent permitted by Delaware law. The Registrant believes that indemnification
under its Amended and Restated Certificate of Incorporation covers negligence
and gross negligence on the part of indemnified parties.
The Registrant has entered into indemnification agreements with each of its
directors and officers. These agreements, among other things, require the
Registrant to indemnify such directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any
II-1
<PAGE>
such person in any action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director or
officer of the Registrant, any subsidiary of the Registrant or any other company
or enterprise to which the person provides services at the request of the
Registrant.
The Underwriting Agreement (Exhibit 1) will provide for indemnification by
the underwriters of the Registrant, its directors, its officers who sign the
registration statement, and the Registrant's controlling persons for certain
liabilities, including certain liabilities arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to such provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
The common stock and options of the Registrant issued to stockholders and
option holders of Universal Commodities Corp., a New Jersey corporation, in
connection with the reincorporation of the Registrant into Delaware did not
constitute a "sale" pursuant to Rule 145(a)(2) promulgated under the Securities
Act. The following sets forth information regarding all securities sold by the
Registrant's New Jersey predecessor since its inception (December 1994).
(1) As of September 10, 1999, the Registrant's predecessor had granted
stock options to purchase 5,450,000 shares of its common stock to employees
pursuant to its 1997 Stock Option Plan. Of these options to purchase, no
shares have been exercised, 100,000 have been canceled, and the remainder
are outstanding.
(2) In December 1994, the Registrant's predecessor issued an aggregate
of 1,000 shares of its common stock to Marc Sherman, its founder, for
nominal cash consideration.
(3) In June 1999, the Registrant's predecessor issued an aggregate of
14,999,000 shares of its common stock to its existing stockholders in a
15,000 for 1 stock split, effected as a stock dividend.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of Rule
701 of the Securities Act in that they were offered and sold either pursuant to
a written compensatory benefit plan or pursuant to a written contract relating
to compensation, as provided by Rule 701. The sales and issuances of securities
described in paragraphs (2) and (3) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) and Section
3(a)(9), respectively. Appropriate legends are affixed to the stock certificates
issued in the aforementioned transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
Item 16. Exhibits and Financial Statements.
See Exhibit Index and Financial Statements schedule.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
II-2
<PAGE>
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lincoln Park, State of
New Jersey, on September , 1999.
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
----------------------------
Marc Sherman
President and Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Marc Sherman and Edward L. Cummings, and each of them, his or her true and
lawful attorneys-in-fact and agents, with full power of substitution, to sign
any amendments (including post-effective amendments) and supplements to this
Registration Statement, and to file such amendments and any related documents
with the Securities and Exchange Commission, and ratifies and confirms the
actions that any such attorney-in-fact and agents, or their substitutes, may
lawfully do or cause to be done under this power of attorney.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Director, President and
Chief Executive Officer
(Principal Executive Officer) September 13, 1999
/s/ Marc Sherman
- -------------------------
(Marc Sherman)
Director, Vice President,
Chief Financial Officer and
Secretary (Principal
Financial and Accounting September 13, 1999
Officer)
/s/ Edward L. Cummings
- -------------------------
(Edward L. Cummings)
Director September 13, 1999
/s/ Alexander H. Good
- -------------------------
(Alexander H. Good)
Director September 13, 1999
/s/ David A. Loppert
- -------------------------
(David A. Loppert)
Director September 13, 1999
/s/ Glenn Meyers
- -------------------------
(Glenn Meyers)
Director September 13, 1999
/s/ Garrett A. Sullivan
- -------------------------
(Garrett A. Sullivan)
Director September 13, 1999
/s/ Constance K. Weaver
- -------------------------
(Constance K. Weaver)
II-4
<PAGE>
SCHEDULE II
INTELLESALE.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance At Charged To Valuation Balance At
Beginning Cost and Accounts End of
Description of Period Expenses Acquired Deductions Period
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation reserve deducted in the balance
sheet from the asset to which it applies:
Accounts Receivable:
1998 Allowance for doubtful accounts $ 100 $ 294 $ 24 $ 56 $ 362
1997 Allowance for doubtful accounts 63 15 100 78 100
1996 Allowance for doubtful accounts -- -- 63 -- 63
Inventory:
1998 Allowance for excess and obsolescence -- 26 24 -- 50
1997 Allowance for excess and obsolescence -- -- -- -- --
1996 Allowance for excess and obsolescence -- -- -- -- --
</TABLE>
<PAGE>
Report of Independent Accountants on
------------------------------------
Financial Statement Schedule
----------------------------
To the Board of Directors and Stockholders
of Intellesale.com, Inc.
Our audit of the consolidated and combined financial statements as of and for
the year ended December 31, 1998 referred to in our report dated June 10, 1999
(except as to the second paragraph of Note 1, Note 11 and Note 17, which is as
of August 23, 1999) (which report and consolidated and combined financial
statements are included in this Registration Statement on Form S-1) also
included an audit of the financial statement schedule included herein. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated and combined financial statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 10, 1999 (except as to the second paragraph of Note 1, Note 11 and Note 17,
which is as of August 23, 1999)
<PAGE>
Reports of Independent Accountants on
-------------------------------------
Financial Statement Schedule
----------------------------
Board of Directors and Stockholders
Intellesale.com, Inc.
Our audits of the consolidated and combined financial statements as of and for
the two years ended December 31, 1997 referred to in our report dated February
28, 1998 (which report and consolidated and combined financial statements are
included in this Registration Statement on Form S-1) also included an audit of
the financial statement schedule included herein. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated and combined financial statements.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 28, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1.1* Form of underwriting agreement.
2.1* Agreement of Purchase and Sale, dated as of June 4, 1999, by an
among the Registrant, Applied Digital Solutions, Inc., David Roman and
Eric Limont.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Amended and Restated Bylaws of the Registrant.
4.1* Refer to Exhibits 3.1 and 3.2.
4.2* Registration Rights Agreement, dated as of June 30, 1999, between the
Registrant and Applied Digital Solutions, Inc.
4.3* Registration Rights Agreement, dated as of June 30, 1999, among the
Registrant, Marc Sherman and Edward L. Cummings.
4.4* Stockholders' Agreement dated as of June 30, 1999, among Applied
Digital Solutions, Inc., Marc Sherman and Edward L. Cummings.
4.5* Voting and Standstill Agreement dated as of September 10, 1999,
between Applied Digital Solutions and the Registrant.
5.1* Opinion of Bryan Cave llp regarding the validity of the Common Stock
10.1* 1997 Non-Qualified Stock Option Plan of Registrant.
10.2* 1999 Flexible Stock Plan.
10.3* Employment Agreement, dated as of July 1, 1999, between the Registrant
and Marc Sherman.
10.4* Employment Agreement, dated as of July 1, 1999, between the Registrant
and Edward L. Cummings.
10.5* Employment Agreement, dated as of July 1, 1999, between the Registrant
and Charles D. Newman.
10.6* Employment Agreement, dated as of July 1, 1999, between the Registrant
and Joseph S. Keats.
10.7* Tax Allocation and Tax Sharing Agreement, dated as of September __,
1999, between the Registrant and Applied Digital Solutions, Inc.
10.8* Agreement, dated as of July 7, 1999, between the Registrant and Rare
Medium, Inc.
10.9* Agreement, dated as of August 23, 1999, between the Registrant and
Paul Pappas.
10.10* Agreement, dated as of August 23, 1999, between the Registrant and
Sherri Sheerr.
10.11* Agreement, dated as of August 23, 1999, between the Registrant and
Harvey H. Newman.
10.12* Agreement, dated as of August 23, 1999, between the Registrant and
Martin D. Zuckerman.
10.13* Agreement, dated as of August 23, 1999, between the Registrant and
Carl C. Saracino.
10.14* Agreement, dated as of August 23, 1999, between the Registrant and
Donna W. Pizarro.
10.15* Agreement, dated as of August 23, 1999, between the Registrant and
Joel Owens.
10.16* Agreement, dated as of August 23, 1999, between the Registrant and
Michael Erickson.
<PAGE>
10.17* Amendment to Agreement of Sale, dated as of April 1, 1999, by and
among Applied Cellular Technology, Inc., Universal Commodities Corp.
(as predecessor-in-interest to the Registrant), Patrick C. Chai,
Robert W. Borra and GDB Software Services, Inc.
10.18* Amendment to Asset Purchase Agreement, dated as of April 1, 1999, by
and among the Registrant, Charles J. Phillips and Fiscal Advantage
Corporation.
10.19* Amendment to Agreement and Plan of Merger, dated as of April 1, 1999,
by and among Applied Cellular Technology, Inc., Universal Commodities
Corp. (as predecessor-in-interest to the Registrant), Port Parties of
Delaware, Inc., Port Parties, Ltd., Harvey H. Newman and Martin D.
Zuckerman.
10.20* Form of Indemnification Agreement between the Registrant and each of
its Directors.
10.21* Business Lease, dated April 1999, between 510 Ryerson Road Corp. and
the Registrant.
10.22* Agreement, dated March 1994, between Shirley B. DiPace and Data Path
Technologies, Inc.
10.23* Agreement, dated _______________, between Shirley B. DiPace and Data
Path Technologies, Inc.
10.24* Agreement, dated March 6, 1998, between Shirley B. DiPace and Data
Path Technologies, Inc.
10.25* Agreement, dated September 14, 1998, between Shirley B. DiPace and
Data Path Technologies, Inc.
16.1* Letter from Rubin, Brown, Gornstein & Co., LLP ("RBG") concurring with
the statements made by the Registrant herein concerning RBG's
resignation as the Registrant's principal accountant.
21.1* List of subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Rubin, Brown, Gornstein & Co. LLP.
23.3 Consent of DiPesa & Company.
23.4 Consent of Rubin, Brown, Gornstein & Co. LLP.
23.5* Consent of Bryan Cave LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page of Registration
Statement).
27.1* Financial Data Schedule for the Registrant.
27.2* Financial Data Schedule for Bostek, Inc.
_____________
* To be filed by amendment
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated June 10, 1999 (except as to the second paragraph of Note 1, Note 11
and Note 17, which is as of August 23, 1999) relating to the financial
statements and financial statement schedule of Intellesale.com, Inc., which
appear in such Registration Statement. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
St. Louis, Missouri
September 13, 1999
<PAGE>
Exhibit 23.2
------------
CONSENT OF INDEPENDENT AUDITOR
------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 24, 1998, relating to the financial statements and
financial statement schedule of Intellesale.com, Inc. for the years ended
December 31, 1996, and 1997, which appear in such Registration Statement. We
also consent to the references to us under the heading "Experts" in such
Registration Statement.
RUBIN, BROWN, GORNSTEIN & CO., LLP
St.Louis, Missouri
September 13, 1999
<PAGE>
EXHIBIT 23.3
------------
CONSENT OF INDEPENDENT AUDITOR
------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated April 6, 1999 (Except for Note 13, which is as of June 4, 1999),
April 1, 1998 and July 23, 1999, relating to the financial statements of Bostek,
Inc. for the years ended December 31, 1998, 1997 and 1996, respectively, which
appear in such Registration Statement. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
DI PESA & COMPANY
Certified Public Accountants
September 13, 1999
<PAGE>
Exhibit 23.4
------------
CONSENT OF INDEPENDENT AUDITOR
------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated July 9, 1999, relating to the financial statements of Universal
Commodities Corp. for the ten months ended October 31, 1996 which appear in
such Registration Statement. We also consent to the references to us under the
heading "Experts" in such Registration Statement.
RUBIN, BROWN, GORNSTEIN & CO., LLP
St.Louis, Missouri
September 13, 1999
