<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14, 1999
REGISTRATION NO. 333-87043
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 4 TO
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTELLESALE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5961 52-2137650
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
510 RYERSON ROAD
LINCOLN PARK, NEW JERSEY 07035
(973) 686-9100
(Address, including zip code, and
telephone number, including area code,
of registrant's principal executive
offices)
</TABLE>
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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)
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COPIES OF ALL CORRESPONDENCE TO:
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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>
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C>
Common Stock, $0.0001 par value per share................... $65,550,000 $18,223
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(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.
(2) Previously paid.
------------------------
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> 2
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 DECEMBER 14, 1999
PROSPECTUS
5,700,000 SHARES
INTELLESALE LOGO
COMMON STOCK
------------------------------------
This is the initial public offering of Intellesale.com, Inc. Intellesale is
offering 4,000,000 shares, and the selling stockholder, Applied Digital
Solutions, Inc., is offering 1,700,000 shares. In addition, the underwriters may
purchase up to 600,000 additional shares from Intellesale and 255,000 additional
shares from Applied Digital Solutions to cover over-allotments. Upon completion
of this offering, Applied Digital Solutions will beneficially own approximately
49.9% 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 $8.00 and $10.00 per share. We have applied for inclusion
of our common stock on the Nasdaq National Market under the symbol "SALE."
SEE "RISK FACTORS" STARTING ON PAGE 8 TO READ ABOUT MATERIAL RISKS 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.
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PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Intellesale, before expenses.................... $ $
Proceeds to selling stockholder, before expenses............ $ $
</TABLE>
------------------------------------
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
[ ], 2000.
LADENBURG THALMANN & CO. INC. PUNK, ZIEGEL & COMPANY
------------------------------------
Prospectus dated [ ], 2000
<PAGE> 3
DESCRIPTION OF PICTURES APPEARING ON THE INSIDE FRONT AND BACK COVER PAGES:
Inside front cover page:
Three sample screens from Intellesale's website appear vertically on the page.
Above the first screen, the following text appears: "Easy navigation and
simple graphics allow for fast loading and access to purchasing pages." The
words "Easy navigation" and "access to purchasing pages" are in larger type
size than the other words.
To the right of the second screen, the following text appears: "Our 'Make Us
An Offer' feature allows our customers to pick their own price." The words
"'Make Us An Offer'" are in larger type size than the other words.
Below the third screen, the following text appears: "'Shop Your Way' lets
customers shop by brand, price and speed." The words "'Shop Your Way'" are in
larger type size than the other words.
The following text appears below the screens: "Intellesale.com, Inc. sells
refurbished and new computer equipment through our website and through
traditional channels. We are migrating most of our business to the Internet,
where we began offering products in 1998."
The Intellesale.com logo appears below the screens. Underneath the
Intellesale.com logo is our website address, "www.intellesale.com".
Inside back cover page:
Included on the inside back cover artwork is a 3/4 view photo of our
headquarters building. Below the photo is the following caption: "Our 144,000
square foot corporate headquarters and largest distribution facility located
in Lincoln Park, New Jersey."
The Intellesale.com logo is set forth on the bottom half of the page.
Underneath the Intellesale.com logo are the words "The intelligent choice".
<PAGE> 4
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 a total of 855,000 shares of
common stock from us and from Applied Digital Solutions is not exercised and
that we issue 1,629,889 shares of common stock to the sellers of businesses we
previously acquired as described under "Certain Relationships and Related
Transactions -- Acquisition of Minority Interests."
INTELLESALE.COM, INC.
OUR BUSINESS
Intellesale sells refurbished and new computer equipment and related
products. We sell products online through our website at www.Intellesale.com and
through other Internet companies, as well as through traditional channels, which
include sales made by our sales force and through products advertised via
catalogs and other conventional media advertising. Our business consists of the
operations of 14 businesses acquired by Applied Digital Solutions from 1995
through 1999 that have been operated by our senior management as a separate
operating unit of Applied Digital Solutions. These predecessor businesses
acquired by Applied Digital Solutions were combined into Intellesale in July
1999 in anticipation of this offering.
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 business to, the Internet. The Internet is our
fastest growing sales channel and we believe that the Internet will be the basis
for our future growth. In addition to selling products on our website, we
distribute products over the Internet through arrangements with other online
companies.
In addition to our Internet retail 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 to the extent
feasible.
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.
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We are not aware of any major online retailers currently focusing
principally on refurbished computer equipment. 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 result in frequent replacement of equipment. This leads to increased
quantities of off-lease and excess inventory computer equipment which vendors
and leasing companies need to dispose of in large quantities without adversely
affecting their lease or sale of new products. 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
number of people making purchases over the Internet will increase from
approximately 31 million in 1998 to approximately 183 million in 2003. According
to Jupiter Communications, another market research firm, the second largest
category of e-commerce spending is computer hardware and software, which Jupiter
projects will grow from approximately $3.1 billion in 1998 to approximately
$15.8 billion in 2003.
Our goal is to become the website of choice for consumers and businesses
seeking refurbished and new computer equipment. Our strategy to achieve our goal
includes the following:
Increase Brand Awareness. Although we only began selling products over the
Internet in the second quarter of 1998, our Internet revenues have grown to
35.8% of our total revenues for the first nine months of 1999. We have achieved
this growth 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 Cooperative Relationships. We have established cooperative
relationships with several companies, including a company which hosts auctions
of our products in exchange for a commission. We also advertise on, and sell our
products through, other Internet portals and websites. We intend to expand our
existing programs and establish new programs under which other companies 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 most of
our products can be marketed more effectively through our website. As we expand
our Internet presence, we have begun to migrate the traditional commerce segment
of our business to the Internet to the extent feasible, 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
acquire a sufficient amount of product at favorable prices. In order to continue
and expand our procurement
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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 by our parent
corporation, Applied Digital Solutions, Inc., and in July 1999 we combined the
predecessor businesses operated by our senior management as a separate operating
unit of Applied Digital Solutions into Intellesale. When we refer to "we" or
"us" in describing our business or operations, we are referring to these
businesses and operations which have been combined to make up Intellesale.
Applied Digital Solutions, which currently owns approximately 80% of our
outstanding stock and is the selling stockholder in this offering, is
principally engaged in the communications industry and is publicly traded on the
Nasdaq National Market. Following completion of this offering Applied Digital
Solutions will beneficially own approximately 49.9% of our common stock. Applied
Digital Solutions has agreed to vote its shares in proportion to the votes of
the other stockholders.
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.
RISK FACTORS
See "Risk Factors," starting on page 7, to read about factors you should
consider before you purchase shares of our common stock. These factors include
the following:
- We have transacted business over the Internet for only a short period of
time and our business model is unproven;
- We may have difficulty integrating and successfully operating the 14
companies which Applied Digital Solutions acquired since the beginning of
1995 and combined to form Intellesale, including Bostek, Inc. and its
affiliate which were acquired in June 1999;
- We must develop a strong brand identity in order for our business to
continue to grow;
- We may not be successful in establishing and maintaining relationships
with other online companies;
- The level of business we conduct with other companies may fluctuate
significantly, and we may lose customers, through disputes or otherwise;
- If we need additional financing and cannot obtain it, we may not be able
to achieve our strategic business objectives;
- In our industry, we face intense competition in each area of our
business;
- We may be subject to Internet service disruptions, which could harm our
business and damage our reputation and credibility;
- Future sales of our common stock could adversely affect the market price
of our common stock; and
- There will be immediate and substantial dilution to new investors as a
result of this offering.
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THE OFFERING
Common stock offered
By Intellesale................ 4,000,000 shares
By the selling stockholder.... 1,700,000 shares
Number of shares outstanding
after the offering.............. 20,644,889 shares
Use of proceeds we will
receive......................... - Repay approximately $17.0 million of our
outstanding indebtedness;
- Pay a total of $5.5 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, which we
anticipate will entail expenditures of
approximately $10.0 million during the 12
months following the offering; and
- General corporate purposes, including
working capital.
Proposed Nasdaq National Market
symbol........................ "SALE"
You should be aware that the total shares outstanding after this offering:
- include 1,629,889 shares of common stock to be issued immediately
following this offering to the sellers of businesses we acquired, based
on an assumed initial public offering price of $9.00 per share; and
- do not include
-- 2,335,000 shares reserved for issuance under our 1999 Flexible Stock
Plan;
-- 5,600,000 shares reserved for issuance under outstanding options; and
-- 600,000 shares issuable by us if the underwriters exercise their
over-allotment option.
The shares offered by Applied Digital Solutions do not include 255,000
shares that it will sell if the underwriters exercise their over-allotment
option.
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<PAGE> 8
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. Operating
results prior to 1999 represent the combined statements of the predecessor
companies to Intellesale. As Intellesale was not formed until December 1998, no
historical earnings per share information is provided for periods on or before
December 31, 1998. See Note 1 to our financial statements for additional
information. 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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ACTUAL PRO FORMA ACTUAL PRO FORMA
-------------------------- ------------ ---------------------------- -------------
PREDECESSOR
PREDECESSOR COMPANIES COMPANIES
TO INTELLESALE INTELLESALE TO INTELLESALE INTELLESALE INTELLESALE
-------------------------- ------------ -------------- ----------- -------------
NINE MONTHS
YEAR ENDED YEAR ENDED NINE MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------ ---------------------------- -------------
1996 1997 1998 1998 1998 1999 1999
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues....... $1,993 $39,445 $60,743 $127,848 $43,041 $87,875 $121,275
Cost of goods sold... 851 33,202 47,623 105,386 33,891 68,536 98,132
Gross profit......... 1,142 6,243 13,120 22,462 9,150 19,339 23,143
Depreciation and
amortization....... 110 342 774 5,397 551 2,530 3,844
Operating income..... 397 2,123 3,621 520 2,564 3,145 2,211
Net income (loss).... $ 168 $ 841 $ 1,453 $ (2,815) $ 1,111 $ 593 $ (759)
Earnings (loss) per
common share --
basic.............. -- -- -- $ (.19) -- $ . 04 $ (.05)
Earnings (loss) per
common share --
diluted............ -- -- -- $ (.19) -- $ .03 $ (.05)
Weighted average
common shares
outstanding --
basic.............. -- -- -- 15,000 -- 15,000 15,000
Weighted average
common shares
outstanding --
diluted............ -- -- -- 15,000 -- 17,392 15,000
</TABLE>
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The following balance sheet data give effect to our sale of 4,000,000
shares of common stock in this offering at an assumed initial public offering
price of $9.00 per share, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses, and the application of the
estimated net proceeds from this offering and on a pro forma as adjusted basis
to further reflect the issuance of 1,111,111 shares to the sellers of Bostek and
the issuance of 518,778 shares and the payment of $5,520,000 in cash in
settlement of earn-out obligations and the acquisition of minority interests in
our subsidiaries. The assumed initial public offering price is the midpoint of
the estimated range of the initial public offering price. See "Use of Proceeds."
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INTELLESALE
SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL AS ADJUSTED AS ADJUSTED
-------- ----------- -----------
($ IN THOUSANDS)
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BALANCE SHEET DATA
Cash and cash equivalents..................... $ 910 $ 16,820 $ 11,300
Working capital(1)............................ (16,952) 15,958 20,438
Goodwill, net................................. 32,742 32,742 42,322
Total assets.................................. 89,017 104,927 108,987
Due to parent company(2)...................... 34,173 17,173 17,173
Due to stockholders of Bostek................. 15,000 15,000 5,000
Stockholders' equity.......................... 18,408 51,318 65,988
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(1) Actual working capital includes amounts owed to Applied Digital Solutions.
(2) 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 $36.6 million
at December 7, 1999.
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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, our
quarterly and annual operating results or financial condition, which could cause
the market price of our stock to decline or cause substantial volatility in our
stock price, 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. We have identified all of the material risks which we believe may
affect our business and the principal ways in which we anticipate that they may
affect our business or financial condition.
RISKS RELATING TO OUR BUSINESS
BECAUSE WE HAVE TRANSACTED BUSINESS OVER THE INTERNET ONLY SINCE APRIL 1998 AND
OUR BUSINESS MODEL IS THEREFORE UNPROVEN, YOU HAVE ONLY A LIMITED BASIS ON WHICH
TO EVALUATE OUR BUSINESS AND PROSPECTS
Our Internet business began with our acquisition of Data Path Technologies
in the second quarter of 1998. 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 nine months of 1999, on a pro forma basis, Internet revenues, in which
we sell refurbished and new computer products on a retail basis through our
website, represented $26.5 million, or 20.7% of total revenues, and $44.7
million, or 36.8% of total revenues, respectively. On an actual basis, Internet
revenues were $31.4 million, or 35.8% of total revenues, for the nine months
ended September 30, 1999 compared with $4.5 million, or 10.6% of total revenues,
for the nine months ended September 30, 1998.
Because of our recent shift to focus on direct 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.
WE MAY HAVE DIFFICULTY INTEGRATING OUR RECENT ACQUISITIONS
Since the beginning of 1997, we have completed 12 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 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 58.9% for the nine months ended September 30,
1999.
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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 offerings 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
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.
GOODWILL WRITE-OFFS WILL REDUCE OUR EARNINGS
As a result of all of the acquisitions described in this prospectus and the
purchases of related minority interests to occur at the closing of this
offering, we will amortize approximately $6.6 million of goodwill annually,
which will reduce our earnings per share. Goodwill is being amortized over 7
years. As required by FAS 121, we will periodically review our goodwill for
impairment based on expected future discounted cash flows. If we determine that
there is such impairment, we would be required to write down the amount of
goodwill accordingly, which would also reduce our earnings.
WE MAY HAVE DIFFICULTY MANAGING OUR FUTURE GROWTH
If we are unable to manage our growth effectively, our business will
suffer. Our business has been growing rapidly; the number of our employees has
increased from 114 to 371 between the beginning of 1999 and December 7, 1999,
and our revenues increased from $43.0 million for the nine months ended
September 30, 1998 to $87.9 million for the nine months ended September 30,
1999. 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. 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. We plan to use approximately $10 million of the
proceeds of this offering for marketing over the next 12 months, primarily for
advertising
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on other websites and print advertisements in magazines. We expect to spend
approximately 40% on each of these activities and expect that the remaining 20%
will be divided approximately evenly among outdoor advertising, radio
advertising and promotional advertising. 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 more than 250
different vendors, although we have no formal commitments with any of them. 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 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, we may become obligated to deliver specified types of computer
equipment in a short time period and, in some cases, at specified prices, as has
been the case with our arrangement with FlashNet. 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 these obligations.
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 and Internet
companies, including OnSale, Inc., a company which hosts auctions of our
products in exchange for a commission and which was recently acquired by
Egghead.com, Inc., for marketing and building our brand, and a key element of
our strategy is to establish additional sales and 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;
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- 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.
Under a program we established with FlashNet Communications, Inc. in June
1999, under which FlashNet paid us to provide a free refurbished personal
computer to each FlashNet customer who agreed to a 24 to 36 month service
agreement to use the FlashNet Internet service, we recognized approximately $9.5
million in revenues through September 30, 1999. FlashNet discontinued its
program of offering a free refurbished personal computer to its customers in
November 1999. We have agreed with FlashNet to terminate our arrangement with
them as part of a settlement of litigation initiated by FlashNet against us
relating to the program, which litigation and settlement are described under
"Intellesale.com, Inc. -- Legal Proceedings." Under the settlement, FlashNet has
agreed to include an Intellesale promotional disk and/or pamphlet to its
customers who receive a computer we have agreed to provide to FlashNet. We have
agreed to compensate FlashNet for this promotion at the rate of $300 per
computer shipped. We cannot assure you that the FlashNet advertising program
will be an effective use of our marketing funds.
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 THAT THE VALUE OF OUR INVENTORY MAY DECLINE BEFORE WE
SELL IT OR THAT WE MAY NOT BE ABLE TO SELL THE INVENTORY AT THE PRICES WE
ANTICIPATE
We purchase and warehouse inventory, 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.
DECLINING PRICES FOR NEW COMPUTER EQUIPMENT COULD REDUCE DEMAND FOR OUR PRODUCTS
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
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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 HISTORICAL REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST, AND POTENTIAL FLUCTUATIONS IN OUR
QUARTERLY AND ANNUAL 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. In
addition, our quarterly results can be affected by changes in our business
relationships. For example, our arrangement with FlashNet, which accounted for
approximately 30% of our Internet revenue and approximately 35% of the increase
in our Internet revenue during the nine months ended September 30, 1999, has
terminated. 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.
WE DEPEND ON OUR SMALL TEAM OF SENIOR MANAGEMENT, PARTICULARLY MARC SHERMAN,
EDWARD L. CUMMINGS AND CHARLES D. NEWMAN, AND WE MAY HAVE DIFFICULTY ATTRACTING
AND RETAINING 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, consisting of Marc Sherman, our President,
Edward L. Cummings, our Chief Financial Officer, and Charles D. Newman, our
Chief Operating Officer. If we were to lose the services 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 when we need them. Competition for these
individuals is intense. Although we are not currently seeking additional
personnel, we cannot assure you that we will be able to successfully attract,
integrate or retain sufficiently qualified personnel when the need arises. 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.
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IF WE NEED ADDITIONAL FINANCING FOR UNANTICIPATED WORKING CAPITAL NEEDS OR TO
FINANCE ACQUISITIONS, WE MAY NOT BE ABLE TO OBTAIN SUCH CAPITAL, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO ACHIEVE OUR 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; 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.
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, WE COULD LOSE
CUSTOMERS
In addition to merchandise vendors, we depend on several other third
parties over which we have limited control, including, in particular, Federal
Express and United Parcel Service for delivery of products to and from our
distribution facility and to our customers. We have no long-term relationships
with any of those parties. We are therefore subject to risks, including risks of
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.
IF THE SOFTWARE WE LICENSE FROM THIRD PARTIES IS DEFECTIVE OUR BUSINESS MAY BE
ADVERSELY AFFECTED
Most of the accounting, inventory management and transaction processing
software which we use 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. If such errors or defects are not corrected in a
timely manner, we could lose customers.
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FAULTY OR DELAYED CREDIT CARD PROCESSING SERVICES FROM THIRD PARTIES MAY
ADVERSELY AFFECT OUR BUSINESS AND CUSTOMER RELATIONSHIPS
We depend on credit card processing services of third parties. If these
third parties do not properly provide these services, it may adversely affect
our ability to complete transactions with our customers, our ability to receive
payments on credit card transactions or our relationships with customers who may
be dissatisfied with such services.
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 Computer
Corporation, Dell Computer Corporation and IBM, which offer both
refurbished and new equipment through their websites;
- traditional store-based computer retailers, such as Best Buy Co., Inc.,
Circuit City(R) Stores, Inc., CompUSA and Gateway Country; and
- other online competitors, such as the Boston Computer Exchange, Buy.com
Inc., Cyberian Outpost, Inc., Egghead.com, Inc., Fairmarket, Inc.,
OnSale, uBid and Value America, Inc.
In addition, our Internet wholesale business, in which we sell to other
online retailers, allows others to compete with our Internet retail 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. The online companies who cooperate with us in offering our
products 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.
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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 INTELLESALE.COM DOMAIN NAME AND TRADENAME
AND RELATED PROPRIETARY RIGHTS, OUR BRAND AND REPUTATION COULD BE IMPAIRED AND
WE COULD LOSE CUSTOMERS
We are the registered owner of our Intellesale.com domain name and
trademark and rely on the right to use this name to operate our Internet
business. This right, and related service marks, as well as our trade secrets,
are important to establishing and maintaining our brand. We intend to use a
significant portion of the proceeds of this offering to promote the
Intellesale.com brand name. However, the steps we take to protect our
proprietary rights may be inadequate. Effective 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 our tradename and other
proprietary rights. Use of "Intellesale.com" or similar names by others could
dilute our brand identity and confuse the market, which could adversely affect
our business.
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 a change in a
name under which we formerly conducted business in response to an objection from
another company. Any future similar claim affecting the names under which we do
business, 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.
THE LEVEL OF BUSINESS WE CONDUCT WITH OTHER COMPANIES MAY FLUCTUATE
SIGNIFICANTLY, AND WE MAY LOSE CUSTOMERS, THROUGH DISPUTES OR OTHERWISE
Our programs and relationships with other websites and other customers
generally do not include fixed purchase commitments or other ongoing
undertakings from our customers. The volume of business with any particular
customer may fluctuate significantly from period to period, and we may lose
relationships with customers which represent a significant portion of our
business in a given period, because of disputes or otherwise. For example, under
a program we established with FlashNet Communications, Inc. in June 1999, under
which FlashNet paid us to provide a free personal computer to each FlashNet
customer who agreed to a 24 to 36 month service agreement to use the FlashNet
Internet service, we recognized approximately $9.5 million in revenues through
September 30, 1999. FlashNet has discontinued this program and initiated
litigation against us relating to this program, which has subsequently been
settled, as described under "Intellesale.com, Inc. -- Legal Proceedings."
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THE EXPENSE AND EFFORT WE INCUR IN DEALING WITH WARRANTY CLAIMS AND OTHER
CUSTOMER SERVICE MATTERS MAY BE SIGNIFICANT
Our principal product is refurbished personal computer equipment, which we
acquire from leasing companies on expiration or termination of leases or which
has otherwise been previously used. We generally provide a minimum six month
warranty for products not covered by factory warranty, although we will from
time to time offer longer warranties. In our program with FlashNet we provided a
three year warranty to the approximately 35,000 FlashNet customers who received
computers under that program. Litigation relating to that program, which has
been settled, is described under "Intellesale.com, Inc. -- Legal Proceedings."
During the nine months ended September 30, 1999, approximately 3% of the
products we shipped to customers have been returned to us with some type of
damage or defect. Approximately one-third of those returns were based on
shipping damage for which the shipper compensates us.
If our products have an increased incidence of defects or if we do not
successfully deal with customer returns and other customer service matters, our
results of operations may be adversely affected. We cannot assure you that
future expenses related to warranty claims will not have a material adverse
effect on 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 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:
- system failures that may require significant efforts by us or our
customers to prevent or alleviate material business disruptions; or
- 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.
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.
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In addition, because we sell refurbished computer systems, consumers may be
unwilling to purchase systems which they believe are not year 2000 compliant.
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 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.
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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, 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. While to date we are not aware of any breaches in the security of
our transmission of confidential data, 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,
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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
THE INTERESTS OF APPLIED DIGITAL SOLUTIONS, OUR PRINCIPAL STOCKHOLDER, MAY
CONFLICT WITH THOSE OF OTHER STOCKHOLDERS AND US
Following the offering, Applied Digital Solutions will own approximately
49.9% of our outstanding common stock. Of our seven directors, one, Constance
Weaver, is a director of Applied Digital Solutions; one, David Loppert, is an
executive officer of Applied Digital Solutions; and one, Garrett A. Sullivan, is
both a director and executive officer of Applied Digital Solutions. In addition
to the relationships these three directors have with Applied Digital Solutions,
our Chief Executive Officer, Marc Sherman, was Senior Vice President of Applied
Digital Solutions until August 1999. We have entered into agreements with
Applied Digital Solutions relating to voting and sales of our common stock,
registration rights relating to our common stock, and tax allocation and
sharing. In participating in decisions on the exercise or waiver of rights under
existing or future agreements between Applied Digital Solutions and us or in
other situations where our interests may diverge with the interests of Applied
Digital Solutions, these persons could have conflicts of interest because they
will owe duties to both Applied Digital Solutions and to us.
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.
We also currently rely on Applied Digital Solutions for financing and may
continue to do so in the future to the extent we are unable to establish our own
line of credit.
Applied Digital Solutions has entered into an agreement with Intellesale
under which Applied Digital Solutions has agreed to vote its shares on matters
presented to our stockholders in the same proportions as the other stockholders
vote their shares.
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 actions which benefit its financial condition and results
of operations regardless of its effect on our business. For example, Applied
Digital Solutions has the right to require us to register its shares for sale
under the Securities Act, which could adversely affect the price of our common
stock. In addition,
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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 have received a non-binding letter of intent from
an unaffiliated lending institution to provide us with an aggregate of $50
million in revolving credit financing for working capital and other purposes, we
cannot assure you that we will be able to complete this financing.
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 20,644,889 shares of common stock outstanding immediately
after this offering after giving effect to the issuance of shares to the sellers
of businesses we acquired, assuming an initial public offering price of $9.00
per share, which are to be issued within 30 days after the date of this
offering, and 5,600,000 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 Thalmann may release any or all of the shares
subject to lock-up agreements at any time without notice. Beginning July 13,
2000, 13,300,000 of the shares subject to these lock-up agreements could be sold
immediately in the public market, subject to volume limitations and other
restrictions. The remaining 1,644,889 shares subject to these lock-up
limitations could be sold at various times beginning January 2001, subject to
volume limitations and other restrictions.
After the 180-day lock-up period expires, we expect to file registration
statements covering all of the 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;
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- in connection with acquisitions; and
- to raise capital.
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
15,300,000 shares they will beneficially own after this offering, which includes
shares issuable pursuant to stock options. 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 $9.00 per share,
purchasers of our common stock will incur immediate and substantial dilution of
$7.85 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.
PROVISIONS IN OUR CORPORATE DOCUMENTS AND EMPLOYMENT AGREEMENTS AND DELAWARE LAW
COULD DELAY OR PREVENT A CHANGE IN CONTROL OF US OR LIMIT THE PRICE THAT
INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR SHARES OF OUR COMMON STOCK
Provisions in our certificate of incorporation and bylaws and Delaware law
could, together or separately:
- discourage potential acquisition proposals;
- delay or prevent a change in control; and
21
<PAGE> 24
- 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 payment obligations under
employment agreements we have with our four senior executives, which could
discourage a change in control of us both because of the amount involved and the
fact that senior management has an incentive to leave following a change in
control to collect these payments. These payments would be equal to three times
the employee's average annual compensation for the previous five years, minus
$1.00, subject to reduction if their payment would result in an additional
special tax to the executive.
22
<PAGE> 25
USE OF PROCEEDS
Our net proceeds from the sale of the 4,000,000 shares of common stock
offered by us are estimated to be approximately $32.9 million, or $38.0 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 as follows:
- We plan to repay approximately $17.0 million of our outstanding
indebtedness. As of December 7, 1999, we had outstanding borrowings from
Applied Digital Solutions of $36.6 million, and at that date the interest
rate on these borrowings was 7.48%. Our outstanding indebtedness to
Applied Digital Solutions includes $15.5 million borrowed in June 1999 to
pay a portion of the purchase price for Bostek and to refinance Bostek's
outstanding indebtedness.
We have received a non-binding letter of intent for a line of credit from
an unaffiliated lending institution, which would provide us with an
aggregate of $50 million in revolving credit financing for working capital
and other purposes, but we cannot assure you that we will be able to
complete this financing. We intend to use borrowings under this line of
credit to repay all amounts owed to Applied Digital Solutions.
- We plan to pay a total of $5.5 million to former owners of businesses
which we acquired, in connection with the settlement of their earn-out
payment rights and, in some cases, the purchase of minority interests in
our non wholly-owned subsidiaries.
- We plan to spend a portion of the proceeds for advertising and other
marketing efforts, which we anticipate will total approximately $10.0
million during the 12 months following this offering.
- We plan to use any remaining proceeds of the offering 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.
23
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999:
- on a historical basis;
- as adjusted to reflect our sale of 4,000,000 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 $9.00
per share, after deducting the estimated underwriting discounts and
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 1,629,889
shares of our common stock to the sellers of businesses we have acquired
at an assumed initial public offering price of $9.00 per share.
All of our outstanding debt is currently classified as short-term debt.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------
PRO FORMA
ACTUAL AS ADJUSTED AS ADJUSTED
------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................... $ 910 $16,820 $11,300
Due to parent company(1)....................... 34,173 17,173 17,173
Due to stockholders of Bostek(2)............... 15,000 15,000 5,000
Minority interest(3)........................... 610 610 --
======= ======= =======
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; 19,000,000
shares issued and outstanding, as
adjusted; 20,629,889 shares issued and
outstanding, pro forma as adjusted(4)..... 1 2 2
Additional paid-in capital..................... 17,814 50,723 65,393
Retained earnings.............................. 593 593 593
------- ------- -------
Total stockholders' equity................... 18,408 51,318 65,988
------- ------- -------
Total capitalization......................... $18,408 $51,318 $65,988
======= ======= =======
</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 borrower under this facility to repay
all amounts we owe to Applied Digital Solutions, which aggregated $36.6
million at December 7, 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
24
<PAGE> 27
$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 the minority interests in
our non wholly-owned subsidiaries and buy out earn-out arrangements for cash
totaling $5,520,000 and the issuance of 518,778 shares, assuming an initial
public offering price of $9.00 per share.
(4) Does not include (a) options to purchase 5,450,000 shares of our common
stock issued under our 1997 Non-Qualified Stock Option Plan and outstanding
as of September 30, 1999 or (b) 2,500,000 shares of our common stock
reserved for issuance as of September 30, 1999 upon exercise of options and
other stock awards which may be granted under our 1999 Flexible Stock Option
Plan.
The balance in goodwill, net of amortization, at September 30, 1999 is as
follows: Actual: $32,742,000; As Adjusted: $32,742,000; and Pro Forma As
Adjusted: $42,322,000.
25
<PAGE> 28
DILUTION
Our net tangible book value, as of September 30, 1999, was $(14,334,000),
or $(0.96) 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 4,000,000 shares of common
stock being offered hereby at an assumed initial public offering price of $9.00
per share, and the issuance of 1,629,889 shares of our common stock to the
sellers of businesses we have acquired assuming an initial public offering price
of $9.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma net tangible book
value as of September 30, 1999 would have been $23,666,000, or $1.15 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.11 per share to existing stockholders, and an immediate dilution of $7.85 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Net tangible book value per share at September 30,
1999................................................... $(0.96)
Increase per share attributable to new investors.......... 2.11
------
Pro forma net tangible book value per share after this
offering.................................................. 1.15
-----
Dilution per share to new investors......................... $7.85
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of September 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 businesses we have acquired, and by
the new investors purchasing shares in this offering (at an assumed initial
public offering price of $9.00 per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------- ------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 15,000,000 72.7% $17,815 26.0% $1.19
Business acquisition
stockholders(2)............ 1,629,889 7.9 14,669 21.4 9.00
New investors(1)............. 4,000,000 19.4 36,000 52.6 9.00
---------- ----- ------- -----
Total...................... 20,629,889 100.0% $68,484 100.0%
========== ===== ======= =====
</TABLE>
- -------------------------
(1) Sales by Applied Digital Solutions in this offering will cause the number of
shares held by existing stockholders to be reduced to 13,300,000, or 64.5%
of the total number of shares outstanding after the offering, and will
increase the number of shares held by new investors to 5,700,000, or 27.6%
of the total number of our shares outstanding after this offering.
(2) Represents shares issued to the sellers of businesses we have acquired,
assuming an initial public offering price of $9.00 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 13,045,000 shares, or
26
<PAGE> 29
61.4% 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 6,555,000, or 30.9% 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 December 7, 1999, there were outstanding
options to purchase 5,600,000 shares of common stock, of which 5,350,000 have an
exercise price of $0.85 per share and the remaining 250,000 have an exercise
price equal to the initial public offering price. In addition, as of December 7,
1999, there were 2,335,000 shares reserved for future grants or purchases
pursuant to our 1999 Flexible Stock Plan, and the amounts available for issuance
could increase to as many as 7,335,000 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.
27
<PAGE> 30
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 and
combined financial statements included elsewhere in this prospectus. The
information as of and for the periods ended December 31, 1995 and September 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. Operating results prior to 1999 represent the
combined statements of the predecessor companies to Intellesale. As Intellesale
was not formed until December 1998, no historical earnings per share information
is provided for periods ending on or before December 31, 1998. See Note 1 to our
financial statements for additional information. Our results for the nine months
ended September 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>
PREDECESSOR
PREDECESSOR COMPANIES TO INTELLESALE INTELLESALE COMPANIES INTELLESALE
----------------------------------------- ------------ ----------------- -------------
PRO FORMA
FOUR MONTHS PRO FORMA NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 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
wholesaling................ $ -- $ -- $ -- $ 7,334 $ 26,486 $ 4,549 $31,448 $ 44,659
Traditional commerce......... 645 1,993 39,445 53,409 101,362 38,492 56,427 76,616
---- ------ ------- ------- -------- ------- ------- --------
Total revenues............... 645 1,993 39,445 60,743 127,848 43,041 87,875 121,275
Cost of goods sold........... 312 851 33,202 47,623 105,386 33,891 68,536 98,132
---- ------ ------- ------- -------- ------- ------- --------
Gross profit................. 333 1,142 6,243 13,120 22,462 9,150 19,339 23,143
Selling, general and
administrative expense..... 150 635 3,778 8,725 16,545 6,035 13,664 17,088
Depreciation and
amortization............... -- 110 342 774 5,397 551 2,530 3,844
---- ------ ------- ------- -------- ------- ------- --------
Operating income (loss)...... 183 397 2,123 3,621 520 2,564 3,145 2,211
Interest income.............. -- 1 1 45 440 27 126 126
Interest expense............. (2) (10) (152) (341) (1,663) (263) (869) (1,324)
---- ------ ------- ------- -------- ------- ------- --------
Income before provision for
income taxes and minority
interest................... 181 388 1,972 3,325 (703) 2,328 2,402 1,013
Provision for income taxes... -- 190 884 1,646 1,876 1,050 1,723 1,686
Income before minority
interest................... 181 198 1,088 1,679 (2,579) 1,278 679 (673)
Minority interest............ -- 30 247 226 236 167 86 86
---- ------ ------- ------- -------- ------- ------- --------
Net income................... $181 $ 168 $ 841 $ 1,453 $ (2,815) $ 1,111 $ 593 $ (759)
==== ====== ======= ======= ======== ======= ======= ========
Earnings per common share --
basic...................... -- -- -- -- $ (.19) -- $ .04 $ (.05)
Earnings per common share --
diluted.................... -- -- -- -- $ (.19) -- $ .03 $ (.05)
Weighted average common
shares outstanding basic... -- -- -- -- 15,000 -- 15,000 15,000
Weighted average common
shares
outstanding -- diluted..... -- -- -- -- 15,000 -- 17,392 15,000
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
PREDECESSOR
PREDECESSOR COMPANIES INTELLESALE COMPANIES INTELLESALE
-------------------------- ----------- ----------- -----------
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------------- -------------------------
1995(1) 1996 1997 1998 1998 1999
------- ------ ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash
equivalents.............. $ 66 $ 9 $ 615 $ 571 $ 681 $ 910
Working capital............ 452 474 2,158 267 3,905 (16,952)
Goodwill, net.............. -- 1,127 2,727 7,864 3,610 32,742
Total assets............... 784 3,099 11,127 21,363 15,406 89,017
Due to parent company...... 0 178 1,242 6,022 4,506 34,173
Due to stockholders of
Bostek................... -- -- -- -- -- 15,000
Stockholders' equity....... 155 1,915 4,987 9,140 8,212 18,408
</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. Does not give effect to purchase of minority
interests in our subsidiaries or buyout of earn-out payments from holders of
minority interests.
(3) Gives effect to the acquisition of Bostek and the financing of that
acquisition as if such transactions had occurred at January 1, 1998. The
actual September 30, 1999 balance sheet data includes Bostek. Does not give
effect to purchase of minority interests in our subsidiaries or buyout of
earn-out payments from holders of minority interests.
29
<PAGE> 32
The following table sets forth certain financial data for our predecessor
companies, Elite Computer Services, Inc., which Applied Digital Solutions
acquired 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
----------------- ------------------ ----------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
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)
</TABLE>
<TABLE>
<CAPTION>
ELITE PREDECESSOR BUSINESS UCC PREDECESSOR BUSINESS
--------------------------------------- --------------------------------------
AS OF DECEMBER 31, AS OF AUGUST 31, AS OF DECEMBER 31, AS OF OCTOBER 31,
------------------ ------------------ ------------------ -----------------
1994 1995 1995 1996
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
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>
30
<PAGE> 33
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited condensed consolidated statement of our
operations for the nine months ended September 30, 1999 reflects the effects of
(1) our acquisition of Bostek and the financing of that acquisition (other than
$5.0 million which will be paid in January 2000 without interest), (2) this
offering and the application of the estimated net proceeds to repay indebtedness
and (3) the purchase of the outstanding minority interests and settlement of
earn-out obligations of our non wholly-owned subsidiaries, as if those
transactions had occurred at January 1, 1998.
The following pro forma unaudited condensed combined statement of our
operations for the year ended December 31, 1998 reflects the effects of (1) the
acquisition of Bostek (other than $5.0 million which will be paid in January
2000 without interest), which was completed effective June 1, 1999, and the
financing of that acquisition, (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, (3) this offering and the application of the estimated net
proceeds to repay indebtedness and (4) the purchase of the outstanding minority
interests and settlement of earn-out obligations of our non wholly-owned
subsidiaries, 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."
The following pro forma unaudited condensed consolidated balance sheet at
September 30, 1999 reflects the effects of (1) the issuance by us of 4,000,000
shares of common stock pursuant to this offering and the application of the
estimated net proceeds to repay indebtedness and (2) the issuance of 1,629,889
shares of common stock to former owners of our subsidiaries in connection with
our purchase of Bostek, our purchase of minority interests in our subsidiaries
and the settlement of earn-out obligations we owe former owners of our
subsidiaries.
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. In addition, they do not reflect an
adjustment for services we receive from Applied Digital Solutions as they
approximate the cost that will be incurred as a stand alone company. 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 and combined
statements of operations and the accompanying notes together with the historical
financial statements of the predecessor companies of Intellesale and 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.
31
<PAGE> 34
INTELLESALE.COM, INC.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 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.............. $87,875 $33,400 $ -- $121,275 $ -- $121,275
Cost of goods sold.... 68,536 29,596 -- 98,132 -- 98,132
------- ------- ------- -------- ------- --------
Gross profit.......... 19,339 3,804 -- 23,143 -- 23,143
Selling, general and
administrative
expenses............ 13,664 3,424 -- 17,088 -- 17,088
Depreciation and
amortization........ 2,530 10 1,304(a) 3,844 1,026(d) 4,870
------- ------- ------- -------- ------- --------
Operating income
(loss).............. 3,145 370 (1,304) 2,211 (1,026) 1,185
Interest and other
income.............. 126 -- -- 126 -- 126
Interest expense...... (869) (151) (304)(b) (1,324) (961)(e) (2,285)
------- ------- ------- -------- ------- --------
Income before
provision for income
taxes and minority
interest............ 2,402 219 (1,608) 1,013 (1,987) (974)
Provision (benefit)
for income tax...... 1,723 74 (111)(c) 1,686 413(f) 2,099
------- ------- ------- -------- ------- --------
Income (loss) before
minority interest... 679 145 (1,497) (673) (2,400) (3,073)
Minority interest..... 86 -- -- 86 (86)(g) --
------- ------- ------- -------- ------- --------
Net income (loss)..... $ 593 $ 145 $(1,497) $ (759) $(2,314) $ (3,073)
======= ======= ======= ======== ======= ========
Earnings per common
share -- diluted.... $ .03(x) $ -- $ -- $ (.05)(x) $ -- $ (.15)(x)
Weighted average
common shares
outstanding --
diluted(3).......... 17,392 -- -- 15,000 5,630(h) 20,630
======= ======= ======= ======== ======= ========
</TABLE>
- -------------------------
(1) Includes four months of Bostek's operations. We acquired Bostek effective
June 1, 1999.
(2) For the five month period ended May 31, 1999.
(3) For loss periods no common equivalent shares are included in computing
diluted shares outstanding.
32
<PAGE> 35
THE PREDECESSOR COMPANIES OF INTELLESALE.COM, INC.
PRO FORMA UNAUDITED CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR BOSTEK, INC.,
ENTITIES OF 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..... 774(4) 13 1,481 (i) 2,268 46 3,083 (l)
------- ------ ------- ------- ------- -------
Operating income (loss)........... 3,621 (222) (1,481) 1,918 1,685 (3,083)
Interest and other income......... 45 3 -- 48 392 --
Interest expense.................. (341) (18) -- (359) (353) (951)(m)
------- ------ ------- ------- ------- -------
Income (loss) before provision for
income taxes and minority
interest........................ 3,325 (237) (1,481) 1,607 1,724 (4,034)
Provision (benefit) for income
tax............................. 1,646 -- (102)(j) 1,544 28 304 (n)
------- ------ ------- ------- ------- -------
Income (loss) before minority
interest........................ 1,679 (237) (1,379) 63 1,696 (4,338)
Minority interest................. 226 -- 10 (k) 236 -- --
------- ------ ------- ------- ------- -------
Net income (loss)................. $ 1,453 $ (237) $(1,389) $ (173) $ 1,696 $(4,338)
======= ====== ======= ======= ======= =======
Earnings per common
share -- diluted................ -- -- -- -- -- --
Weighted average common shares
outstanding -- diluted(5)....... -- -- -- -- -- --
======= ====== ======= ======= ======= =======
<CAPTION>
OFFERING PRO FORMA
PRO FORMA 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..... 5,397 1,443 (o) 6,840
-------- ------- --------
Operating income (loss)........... 520 (1,443) (923)
Interest and other income......... 440 -- 440
Interest expense.................. (1,663) 1,530 (p) (133)
-------- ------- --------
Income (loss) before provision for
income taxes and minority
interest........................ (703) 87 (616)
Provision (benefit) for income
tax............................. 1,876 658 (q) 2,534
-------- ------- --------
Income (loss) before minority
interest........................ (2,579) (571) (3,150)
Minority interest................. 236 (236)(r) --
-------- ------- --------
Net income (loss)................. $ (2,815) $ (335) $ (3,150)
======== ======= ========
Earnings per common
share -- diluted................ $ (0.19) -- $ (0.15)(x)
Weighted average common shares
outstanding -- diluted(5)....... 15,000 5,630 (s) $ 20,630
======== ======= ========
</TABLE>
- -------------------------
(1) Reflects 1998 operating results of all predecessor entities owned by Applied
Digital Solutions and includes the results of operations of the companies
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., Data Path
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.
(4) Includes $251 of fixed asset depreciation.
(5) For loss periods no common equivalent shares are included in computing
diluted shares outstanding.
33
<PAGE> 36
INTELLESALE.COM, INC.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTELLESALE OFFERING OTHER PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents........... $ 910 $ 15,910(t) $ 16,820 $ (5,520)(v) $ 11,300
Accounts receivable..... 26,981 -- 26,981 -- 26,981
Inventories............. 23,154 -- 23,154 -- 23,154
Notes Receivable........ 62 -- 62 -- 62
Notes
receivable -- related
parties............... 264 -- 264 -- 264
Prepaid expenses and
other current
assets................ 1,659 -- 1,659 -- 1,659
------- -------- -------- -------- --------
Total Current
Assets............. 53,030 15,910 68,940 (5,520) 63,420
Equipment & Leasehold
Improvements, net....... 1,886 -- 1,886 -- 1,886
Notes
Receivable -- related
parties................. 880 -- 880 -- 880
Goodwill, net............. 32,742 -- 32,742 9,580(v) 42,322
Other Assets.............. 479 -- 479 -- 479
------- -------- -------- -------- --------
$89,017 $ 15,910 $104,927 $ 4,060 $108,987
======= ======== ======== ======== ========
Current Liabilities
Notes payable and
current maturities of
long-term debt........ $ 89 $ -- $ 89 $ -- $ 89
Accounts payable and
accrued expenses...... 20,720 -- 20,720 -- 20,720
Due to Parent Company... 34,173 (17,000)(u) 17,173 -- 17,173
Due to shareholders of
acquired subsidiary... 15,000 -- 15,000 (10,000)(w) 5,000
------- -------- -------- -------- --------
Total Current
Liabilities........ 69,982 (17,000) 52,982 (10,000) 42,982
Notes payable............. 17 17 17
Minority interest......... 610 610 (610)(v) --
------- -------- -------- -------- --------
Stockholders Equity
Common shares........... 1 1(t) 2 -- 2
Additional paid-in
capital............... 17,814 32,909(t) 50,723 14,670(w)(v) 65,393
Retained earnings....... 593 -- 593 -- 593
------- -------- -------- -------- --------
Total Stockholders'
Equity............. 18,408 32,910 51,318 14,670 65,988
------- -------- -------- -------- --------
$89,017 $ 15,910 $104,927 $ 4,060 $108,987
======= ======== ======== ======== ========
</TABLE>
34
<PAGE> 37
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
($ 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, 1998, resulting from the acquisition of
Bostek amortized over a period of seven years, calculated as follows:
<TABLE>
<S> <C>
Pro forma goodwill at January 1, 1998................... $21,904
Divide by 7 years for annual amortization............... 3,129
-------
Multiply by 5/12 for 5 months amortization.............. $ 1,304
=======
</TABLE>
(b) Represents the net increase to our interest expense for the nine months
ended September 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 used to repay Bostek debt at closing, at an average interest rate of 7.54%
per annum, calculated as follows:
<TABLE>
<S> <C>
Net amount borrowed..................................... $14,486
Multiply by 7.54% for annual interest expense........... 1,092
Multiply by 5/12 for 5 months interest expense.......... 455
Less: Bostek historical interest expense................ (151)
-------
Net adjustment..................................... $ 304
=======
</TABLE>
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.
<TABLE>
<S> <C>
Bostek income before provision for income taxes......... $ 219
Less: Pro forma interest expense........................ (304)
-------
Adjusted (loss) before provision (benefit) for income
taxes................................................. (85)
Multiply by statutory income tax rate of 43%............ (37)
Less: Existing tax provision............................ 74
-------
Pro forma tax adjustment................................ $ (111)
=======
</TABLE>
35
<PAGE> 38
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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:
<TABLE>
<S> <C>
Total value of additional consideration (excluding
Service Transport).................................... $ 9,740
Value of 50,000 shares additional consideration due to
Service Transport minority stockholder, assuming an
initial public offering price of $9.00................ 450
Less: Minority interest................................. (610)
-------
Pro forma additional goodwill........................... 9,580
Divide by 7 years for annual amortization............... 1,369
-------
Multiply by 9/12 for 9 months amortization.............. $ 1,026
=======
</TABLE>
(e) Represents the decrease in interest expense resulting from our use of
the net proceeds to repay borrowings from Applied Digital Solutions:
<TABLE>
<S> <C>
Pro forma amount to be repaid........................... $17,000
Multiply by 7.54% for average annual interest expense... 1,282
-------
Multiply by 9/12 for 9 months interest expense.......... $ 961
=======
</TABLE>
(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.
<TABLE>
<S> <C>
Pro forma decrease in interest expense................... $ 961
Multiply by statutory income tax rate of 43%............. 413
</TABLE>
(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 (4,000,000 shares);
(2) payment to the former shareholders of Bostek in the amount of
$10,000, assuming an initial offering price of $9.00 for total shares of
1,111,111; and
(3) our purchase of the minority interests and settlement of the
earn-out obligation in the amount of $10,190 including the issuance of
518,778 shares assuming an initial public offering price of $9.00.
36
<PAGE> 39
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Represents the net increase to amortization expense for goodwill
resulting from the 1998 acquired companies and paid earnouts from prior
acquisitions amortized over a period of seven years, calculated as follows:
<TABLE>
<S> <C>
Pro forma goodwill at January 1, 1998................... $14,116
Divide by 7 years for annual amortization............... 2,016
Less: Existing amortization............................. (535)
-------
Pro forma amortization adjustment....................... $ 1,481
=======
</TABLE>
(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.
<TABLE>
<S> <C>
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)
=======
</TABLE>
(k) Represent the minority interest in the earnings and losses of two of
the 1998 acquired companies, as follows:
<TABLE>
<S> <C>
Combined net loss of less than wholly owned
subsidiaries............................................ $ (50)
Minority interest at 20%................................ (10)
</TABLE>
(l) 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, 1998, amortized over a period of seven
years, calculated as follows:
<TABLE>
<S> <C>
Pro forma goodwill at January 1, 1998................... $21,904
Divide by 7 years for annual amortization............... 3,129
Less: existing amortization............................. (46)
-------
Amortization adjustment................................. $ 3,083
=======
</TABLE>
(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 used to
repay Bostek debt at closing, borrowed at an average interest rate of 9% per
annum, calculated as follows:
<TABLE>
<S> <C>
Net amount borrowed..................................... $14,486
Multiply by 9% for annual interest expense.............. 1,304
Less: Bostek historical interest expense................ (353)
-------
Net adjustment.......................................... $ 951
=======
</TABLE>
A change in the interest rate of 1/8% would change interest expense by
approximately $13.
37
<PAGE> 40
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
<TABLE>
<S> <C>
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
=======
</TABLE>
(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 (including our purchase of the minority interest
in Elite in August 1999 for $300):
<TABLE>
<S> <C>
Total value of additional consideration (excluding
Service Transport)...................................... $10,040
Value of 50,000 shares additional consideration due
Service Transport, assuming an initial public offering
price of $9.00........................................ 450
Less: minority interest at January 1, 1998.............. (384)
Pro forma additional goodwill at January 1, 1998........ 10,106
-------
Divide by 7 years for annual amortization............... $ 1,443
=======
</TABLE>
(p) Represents the decrease in interest expense resulting from our use of
the net proceeds to repay borrowings from Applied Digital Solutions:
<TABLE>
<S> <C>
Pro forma amount to be repaid........................... $17,000
Multiply by 9% for annual interest expense.............. 1,530
</TABLE>
(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.
<TABLE>
<S> <C>
Pro forma decrease in interest expense.................. $ 1,530
Multiply by statutory income tax rate of 43%............ 658
</TABLE>
(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 -- 4,000,000 shares;
(2) payment to the former shareholders of Bostek in the amount of
$10,000, assuming an initial offering price of $9.00 for total shares of
1,111,111; and
38
<PAGE> 41
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) our purchase of the minority interests and settlement of the
earn-out obligations in the amount of $10,190 including the issuance of
518,778 shares, assuming an initial public offering price of $9.00.
(t) Represents the issuance of common stock and repayment of outstanding
debt.
<TABLE>
<S> <C>
4,000,000 shares issued assuming initial
public offering price of $9.00.......................... $36,000
Less: Amount paid in offering costs..................... (3,090)
-------
Net cash received in offering........................... $32,910
=======
Less: Amount paid to Applied Digital Solutions.......... 17,000
-------
Net cash received....................................... $15,910
=======
</TABLE>
(u) Represents repayment of outstanding debt to Applied Digital Solutions.
<TABLE>
<S> <C>
Amount paid to Applied Digital Solutions................ $17,000
</TABLE>
(v) Represents the amount to purchase minority interests and settle
earn-out obligations.
<TABLE>
<S> <C>
Total value of additional consideration
(excluding Service Transport):
Amount paid in cash................................... $ 5,520
Amount paid in stock, excluding Service Transport:.... 4,220
-------
Value of 50,000 shares additional consideration due to
Service Transport minority stockholder, assuming an
initial public offering price of $9.00................ 450
-------
10,190
Less: Minority interest................................. (610)
-------
Pro forma additional goodwill........................... $ 9,580
=======
</TABLE>
(w) Represents amount to be paid to the shareholders of Bostek and its
affiliate, Micro Components, in shares of our common stock.
<TABLE>
<S> <C>
Value of 1,111,111 shares of common stock at an initial
public offering price of $9.00.......................... $10,000
=======
</TABLE>
39
<PAGE> 42
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(x) Diluted Earnings per Share Reconciliation
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS ADJUSTED ACTUAL PRO FORMA AS ADJUSTED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)......... $(3,150) $ 593 $ (759) $(3,073)
Denominator:
Weighted average shares... 15,000 15,000 15,000 15,000
Effect of dilutive
securities employee
stock options.......... * 2,392 * *
offering adjustments... 5,630 -- -- 5,630
------- ------- ------- -------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares.................... 20,630 17,392 15,000 20,630
======= ======= ======= =======
Diluted earnings (loss) per
share..................... (0.15) 0.03 (0.05) (0.15)
</TABLE>
- -------------------------
* For loss periods no common equivalent shares are included in computing diluted
shares outstanding.
40
<PAGE> 43
FORWARD-LOOKING STATEMENTS
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, markets in which we participate and
other statements contained in this prospectus that are not historical facts.
When used in this prospectus, the words "expect," "project," "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. We will
update these forward-looking statements, to the extent required by law, to
reflect material changes in the information previously disclosed.
41
<PAGE> 44
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 nine months of 1999 include four months 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
to the extent feasible. In addition to selling products on our website, we
distribute products through other online retailers' websites.
Our business consists of our Internet segment, in which we sell refurbished
and new computer products on a retail basis through our website and through
other Internet companies, and on a wholesale basis to other Internet retailers,
and our traditional commerce and other services segment, 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. Our
service business also includes the leasing of computers and other electronic
equipment, most often for trade shows, which frequently have temporary need for
computers which we can satisfy from our inventory of used computers, which we
can then refurbish and sell. Although this portion of our business provides
higher operating profit than other portions of our business because we use
equipment in our inventory which is subsequently resold, it is not a material
portion of our business and we do not expect it to become a significant portion
of our business. We are in the process of moving a portion of our traditional
commerce business to the Internet. We have traditionally sold our products
through direct marketing, catalogs and telephone orders from brokers and retail
clients. We expect to continue making sales through these channels but at a
decreasing rate as we continue our focus on selling our products on 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.
Intellesale has grown through acquisition and has been able to grow its
profitability before depreciation and amortization, interest expense and taxes.
However, this growth has required Intellesale to invest additional working
capital which has used cash and resulted in higher interest expense. The
additional goodwill arising from the acquisitions also has increased the amount
of amortization expense being incurred.
42
<PAGE> 45
OUR HISTORY
We were incorporated in Delaware in December 1998 and are the successor to
several businesses. We are an 80%-owned subsidiary of Applied Digital Solutions,
Inc., a publicly held company which is traded on the Nasdaq National Market
under the symbol "ADSX." Our business consists of the operations of 14
businesses acquired by Applied Digital Solutions beginning in 1995 that were
operated by our senior management for Applied Digital Solutions since 1996,
including Bostek, Inc. and its affiliate which were acquired in June of 1999.
These predecessor businesses acquired by Applied Digital Solutions were combined
into Intellesale in July 1999 in anticipation of this offering. We have grown
rapidly, both internally and through acquisition. The acquisitions referred to
above were made primarily through the use of Applied Digital Solutions' common
stock. Set forth below is certain information with respect to these
acquisitions:
<TABLE>
<CAPTION>
FAIR ADDITIONAL
VALUE PURCHASE
EFFECTIVE OF NET PRICE
DATE OF PERCENT ACQUISITION ASSETS TO BE BUSINESS
ACQUISITION ACQUIRED PRICE ACQUIRED GOODWILL PAID(1) DESCRIPTION
------------ -------- ----------- -------- -------- ---------- ----------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1995 ACQUISITION
Elite Computer
Services, Inc............. September 1, 80% $ 557 $ 10 $ 547 $ 300(2) Remarketer of computer
1995 parts
1996 ACQUISITION
Universal Commodities
Corp...................... November 1, 80% 1,512 271 1,241 -- Remarketer of computer
1996 equipment
1997 ACQUISITIONS
Norcom Resources, Inc...... January 1, 80% 538 57 481 900 Remarketer of
1997 mainframe computers
Pizarro
Re-Marketing, Inc......... January 1, 80% 356 156 200 500 Remarketer of computer
1997 tape and disk drives
Cybertech Station, Inc..... July 1, 1997 80% 467 0 467 415 Remarketer of computer
memory products
Port Parties, Ltd.......... July 1, 1997 80% 3,966 82 3,884 4,000 Leasing and rental
services for meeting
and convention
planners
1998 ACQUISITIONS
Blue Star
Electronics, Inc.......... April 1, 80% 431 1 430 175 Cable assembly
1998 manufacturer
Consolidated Micro
Components, Inc........... April 1, 100% 1,948 4 1,944 -- Remarketer of memory,
1998 processors and hard
drives
Data Path
Technologies, Inc......... April 1, 100% 3,421 146 3,275 2,000 Remarketer of computer
1998 equipment
GDB Software
Services, Inc............. April 1, 100% 1,931 221 1,710 1,500 Provider of data
1998 processing consulting
services
Service Transport
Company................... April 1, 80% 89 (69) 158 450(3) Transporter of
1998 computer equipment
Fiscal Advantage, Inc...... October 1, assets 200 25 175 250 Computer leasing
1998 services
1999 ACQUISITION
Bostek, Inc. and
affiliate................. June 1, 1999 100% 25,205 3,747 21,458 -- Remarketer of computer
equipment
</TABLE>
- -------------------------
(1) Represents the amount payable in cash of $5,520 or in shares of Intellesale
equal to $4,670 (at an assumed initial public offering price of $9.00) on
completion of this
43
<PAGE> 46
offering to acquire the remaining minority interest in the acquired company
and any remaining earn-out rights of the selling stockholders.
(2) This amount has already been paid.
(3) Represents the value of the 50,000 shares being issued. Based on an assumed
initial public offering price of $9.00 per share.
On the date of acquisition, each entity listed above, other than Fiscal
Advantage, became an indirect subsidiary of Applied Digital Solutions and a part
of Applied Digital Solutions' computer equipment sales, service and leasing
business operated by Intellesale's management team. The Fiscal Advantage
acquisition was structured as an asset purchase.
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 and combined financial statements included
elsewhere herein reflect, for the predecessor businesses, the results of
operations of each company from the date of acquisition by Applied Digital
Solutions. 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,
which results in approximately $46 million of goodwill (which includes $9.6
million of goodwill resulting from our buyout of earn-out arrangements and of
minority interests in our subsidiaries). The amortization of this goodwill over
seven years will result in an annual noncash charge to our operating results of
approximately $6.6 million, or approximately $1.7 million per quarter. Because
Bostek generated $21.5 million of this goodwill and it was not acquired until
June 1999, Intellesale's historical results through September 30, 1999 do not
fully reflect these annual expected goodwill charges. See "Pro Forma Financial
Information," Note 14 to our consolidated and combined financial statements for
information on depreciation and amortization expense by operating segment, Note
15 for unaudited pro forma information relating to the above acquisitions that
occurred in 1997 and 1998 and Note 16 regarding acquisition activity in the nine
months ended September 30, 1999.
ACCOUNTING POLICIES AND TRENDS
The consolidated and combined financial statements included elsewhere
herein reflect the financial position, results of operations and cash flows of
the predecessor companies of Intellesale and of Intellesale for the periods
presented. 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.
For product sales, including sales to other online companies, 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
44
<PAGE> 47
significant product returns. During the nine months ended September 30, 1999,
approximately 3% of the products we shipped to customers were returned to us
with some type of damage or defect. Approximately one-third of those returns
were based on shipping damage for which the shipper compensates us. 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.
The predecessor companies to Intellesale and Intellesale historically have
not maintained summary records of the number of units sold or the actual per
unit sales prices. As such, we are not able to provide comparative information
on a unit basis to explain changes in revenue and gross profit. However, as
described in our analysis of operating results, the historical growth in revenue
has resulted primarily from the acquisitions made by Applied Digital Solutions
and Intellesale. Each generation of computers goes through a product life cycle.
Introduction of newer product causes the prices of older computers to decrease,
creating a constant supply and mix of new and older product. This mix gives
stability to the average revenue per unit within a product class, such as
monitors, CPUs and laptops. We have recently installed a new perpetual inventory
tracking system that will maintain detailed unit purchasing and sales data.
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.
Our leasing services have higher gross and operating margins than the
remainder of our businesses as a result of several factors. First, because of
continued demand for our leasing services, and because we are using equipment
already in inventory which we can later sell, we are able to maintain a higher
gross margin. The product mix for the remainder of our business, which consists
primarily of refurbished computers, carries a lower gross margin. Second, our
leasing business has lower selling, general and administrative expense than our
other businesses, because our leasing business requires less personnel per gross
profit dollar than these other businesses. We anticipate that revenues and
profits from our leasing services will remain relatively constant in absolute
dollar terms and, accordingly, will represent a lesser portion of the business
on a percentage basis as the rest of the business grows.
Applied Digital Solutions currently provides services to, and incurs
expenses on behalf of, Intellesale. These services include legal, internal
audit, financial reporting and human resources. These expenses include 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 Applied Digital Solutions' estimate of the cost to
provide these services. These costs were approximately $0.4 million in 1998 and
$0.5 million in the first nine months of 1999. No costs were allocated in 1996
and 1997
45
<PAGE> 48
since Applied Digital Solutions did not provide significant services. Although
management believes the amounts actually paid to Applied Digital Solutions for
these services reflect a reasonable estimate of its actual costs of providing
these services, such amounts may not necessarily be 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. Management estimates that the cost of providing these services
following the closing of this offering will be approximately equal to the
amounts we have been paying to Applied Digital Solutions for the services.
Due to our historical dependence on Applied Digital Solutions for funding
and 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.
Due to the significant level of acquisitions from 1997 through September
1999, the historical financial statements and the related management's
discussions and analysis do not fully provide an understanding of recent trends.
As a result, we have provided an analysis of trends on a pro forma basis for
1998 compared to 1997 and the nine months ended September 30, 1999 and 1998
under the heading "Management's Discussion and Analysis of Pro Forma Results of
Operations." Due to the difficulty of estimating reasonable adjustments prior to
1998, this discussion has been limited to those captions requiring no pro forma
adjustments. Accordingly, only revenue, cost of goods sold and selling, general
and administrative expenses are discussed in this presentation.
46
<PAGE> 49
INTELLESALE.COM (1999 ONLY) AND
PREDECESSOR COMPANIES TO INTELLESALE.COM
RESULTS OF OPERATIONS
The following table summarizes our combined results of operations as a
percentage of revenue for the nine month periods ended September 30, 1998 and
1999 and for the last three years:
<TABLE>
<CAPTION>
RELATIONSHIP TO REVENUE
-------------------------------------------------------
PREDECESSOR COMPANIES TO INTELLESALE INTELLESALE
-------------------------------------- -----------
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 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 78.7 78.0
----- ----- ----- ----- -----
Gross profit........................ 57.3 15.8 21.6 21.3 22.0
Selling, general and administrative
expenses.......................... 31.9 9.6 14.4 14.0 15.5
Depreciation and amortization....... 5.5 0.9 1.3 1.3 2.9
----- ----- ----- ----- -----
Operating income.................... 19.9 5.3 5.9 6.0 3.6
Interest income..................... 0.1 0.0 0.1 0.0 0.2
Interest expense.................... 0.5 0.4 0.6 0.6 1.0
Income before provision for income
taxes and minority interest....... 19.5 4.9 5.4 5.4 2.8
Provision for income taxes.......... 9.5 2.2 2.7 2.4 2.0
----- ----- ----- ----- -----
Income before minority interest..... 10.0 2.7 2.7 3.0 0.8
Minority interest................... 1.5 0.6 0.4 0.4 0.1
----- ----- ----- ----- -----
Net income.......................... 8.5% 2.1% 2.3% 2.6% 0.7%
===== ===== ===== ===== =====
</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.
Nine month periods ended September 30, 1998 and 1999. Revenue from
customers for each operating segment for the nine months ended September 30,
1998 and 1999 was:
<TABLE>
<CAPTION>
1998 % 1999 %
------- ------ ------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet...................................... $ 4,549 10.6 $31,448 35.8
Traditional commerce.......................... 38,492 89.4 56,427 64.2
------- ------ ------- -----
Consolidated.................................. $43,041 100.0 $87,875 100.0
======= ====== ======= =====
</TABLE>
Revenue for the nine month period ended September 30, 1999 was $87.9
million, an increase of $44.8 million, or 104.2%, from $43.0 million for the
first nine months of 1998. Of the $44.8 million increase, $33.4 million, or
74.6%, was contributed by Bostek, which we acquired effective June 1, 1999, and
the remainder was contributed primarily by the full nine months of revenue in
1999 from our acquisitions in 1998. Businesses acquired in
47
<PAGE> 50
the first nine months of 1998 represented $25.8 million of revenue in the first
nine months of 1999 and $10.6 million in the first nine months of 1998.
In the Internet segment, the $26.9 million increase in revenue resulted
from several factors: $15.1 million from Data Path Technologies, which was owned
for only six months in the 1998 period and expanded its business in 1999,
including $9.5 million from our program with FlashNet, which began in June 1999,
$9.1 million from Bostek, which was acquired effective June 1, 1999, and $2.7
million from expansion and migration of other parts of our business to the
Internet.
In the traditional commerce segment, the $17.9 million increase in revenue
resulted from several factors: $24.3 million from Bostek, which experienced
strong demand for its laptop products during the quarter and was acquired
effective June 1, 1999, a $1.8 million increase in the demand for memory
products, and the full nine months of revenues from the 1998 acquisitions
resulted in an approximately $0.4 million increase in revenue in the first nine
months of 1999. This increase, however, was offset by a $8.6 million decrease in
revenue from the remainder of our business. This decrease was primarily a result
of reduced demand for mainframe and storage devices that had experienced
significant sales in 1998, when customers were purchasing these products to
address the year 2000 problem and, to a lesser extent, the migration of other
parts of traditional commerce to the Internet.
Years ended December 31, 1996, 1997 and 1998. Revenue from customers for
each operating segment was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
------ ----- ------- ----- ------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
====== ===== ======= ===== ======= =====
</TABLE>
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, $34.0 million, or 90.7%, was
contributed by companies we acquired during 1997. The remaining increase is
primarily the result of revenues from Universal Commodities, which we acquired
in November 1996. Our operations in 1996 consisted only of Elite Computer
Services, which we acquired in August 1995, and two months of Universal
Commodities.
48
<PAGE> 51
GROSS PROFIT/MARGIN
Nine month periods ended September 30, 1998 and 1999. Gross profit by
operating segment, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1998 % 1999 %
------ ---- ------- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet...................................... $2,229 49.0 $10,309 32.8
Traditional commerce.......................... 6,921 18.0 9,030 16.0
------ ---- ------- ----
Consolidated.................................. $9,150 21.3 $19,339 22.0
====== ==== ======= ====
</TABLE>
Our gross profit for the first nine months of 1999 was $19.3 million, an
increase of $10.2 million, or 111.4%, from $9.1 million for the first nine
months of 1998. As a percentage of revenue, the gross margin was 22.0% for the
first nine months of 1999 and 21.3% for the first nine 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 than our traditional
commerce segment.
Gross profit in the Internet segment increased by $8.1 million. Of this
increase, $1.4 million was contributed by Bostek, $6.5 million was contributed
by Data Path Technologies, which was included for a full nine months in 1999 and
experienced significant growth in 1999 from direct website sales and our program
with FlashNet, and the remaining $0.2 million was contributed from Internet
sales that resulted from expansion and migration of other parts of our business
to the Internet.
Years ended December 31, 1996, 1997 and 1998. Gross profit by operating
segment, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
------ ---- ------ ---- ------- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
====== ==== ====== ==== ======= ====
</TABLE>
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, $3.9 million was a result of 1997
acquisitions and the
49
<PAGE> 52
remainder was due to inclusion of Universal Commodities for a full year in 1997.
Gross margin was 57.3% in 1996, but represented only the results of Elite for
the whole year and Universal Commodities for two months. Accordingly, we believe
that 1998 margins are more indicative of margins from our continuing business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in our traditional commerce segment.
This is because advertising costs, website maintenance costs and labor costs are
all significantly greater than in our traditional commerce segment. We expect
these expenses to increase in absolute dollar terms in the future as the
Internet segment grows.
Nine month periods ended September 30, 1998 and 1999. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
<TABLE>
<CAPTION>
1998 % 1999 %
------ ---- ------- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet.......................................... $1,676 36.8 $ 5,528 17.6
Traditional commerce.............................. 4,359 11.3 8,136 14.4
------ ---- ------- ----
Consolidated...................................... $6,035 14.0 $13,664 15.5
====== ==== ======= ====
</TABLE>
Selling, general and administrative expenses were $13.7 million for the
first nine months of 1999, an increase of $7.6 million, or 126.4%, from $6.0
million for the first nine months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 15.5% for the first nine months of 1999
and 14.0% for the first nine months of 1998. Of the increase, $2.2 million
resulted from the Bostek acquisition and $2.9 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, rent
at our new facility, advertising and management fees paid to Applied Digital
Solutions. Management fees paid to Applied Digital Solutions in the first nine
months of 1999 amounted to $0.5 million compared to $0.3 million in the first
nine months of 1998.
In the Internet segment, selling, general and administrative expenses
increased by $3.9 million, of which $1.1 million was due to the Bostek
acquisition and the remaining $2.7 million was primarily due to both the
inclusion of Data Path Technologies for the full nine months in 1999, migration
of our business to the Internet 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 $3.8 million. Of this amount, $2.1 million is a result of
the acquisition of Bostek and the companies acquired in 1998. The remaining
increase is primarily due to the addition of corporate management and other
personnel to support our growth.
50
<PAGE> 53
Years ended December 31, 1996, 1997 and 1998. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
---- ---- ------ --- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
==== ==== ====== === ====== ====
</TABLE>
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 $0.6
million reported in 1996. In 1996, selling, general and administrative expenses
were 31.9% of revenue, compared to 9.6% in 1997. The increase in absolute dollar
terms from 1996 to 1997 was primarily a result of acquisitions made in 1997 and
the acquisition of Universal Commodities made in November 1996. The decrease in
selling, general and administrative expenses as a percentage of revenue was
because acquisitions made in 1997 allowed us to spread our corporate overhead
expenses over a larger revenue base.
DEPRECIATION AND AMORTIZATION
Nine month periods ended September 30, 1998 and 1999. Depreciation and
amortization for each of the operating segments, and as a percentage of segment
revenues, during the first nine months of 1998 and 1999 was:
<TABLE>
<CAPTION>
1998 % 1999 %
---- --- ------ ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet............................................... $ 40 0.9 $ 879 2.8
Traditional commerce................................... 511 1.3 1,651 2.9
---- --- ------ ---
Consolidated........................................... $551 1.3 $2,530 2.9
==== === ====== ===
</TABLE>
Depreciation and amortization expense was $2.5 million for the first nine
months of 1999, an increase of $2.0 million, or 359.0%, from $0.6 million for
the first nine months of 1998. The increase is primarily due to goodwill
amortization resulting from the companies acquired in 1998 and the Bostek
acquisition.
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<PAGE> 54
Years ended December 31, 1996, 1997 and 1998. Depreciation and amortization
for each of the operating segments, and as a percentage of segment revenues,
was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
---- --- ---- --- ---- ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Internet..................................... $ -- -- $ -- -- $ 56 0.8
Traditional commerce......................... 110 5.5 342 0.9 718 1.3
---- --- ---- --- ---- ---
Consolidated................................. $110 5.5 $342 0.9 $774 1.3
==== === ==== === ==== ===
</TABLE>
Depreciation and amortization expense was $0.8 million in 1998, an increase
of $0.4 million, or 126.3%, 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 and the minority interests of
our non wholly-owned subsidiaries, our annual goodwill amortization expense will
be $6.6 million.
OPERATING INCOME
Nine month periods ended September 30, 1998 and 1999. Operating income for
each of the operating segments, and as a percentage of segment revenue, during
the first nine months of 1998 and 1999 was:
<TABLE>
<CAPTION>
1998 % 1999 %
------ ---- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet........................................... $ 513 11.3 $3,902 12.4
Traditional commerce............................... 2,051 5.3 (757) (1.3)
------ ---- ------ ----
Consolidated....................................... $2,564 6.0 $3,145 3.6
====== ==== ====== ====
</TABLE>
Operating income was $3.1 million for the first nine months of 1999, an
increase of $0.5 million, or 22.7%, from $2.6 million for the first nine months
of 1998.
Of this increase, $1.1 million was contributed by Bostek, which we acquired
effective June 1, 1999, and the remainder was contributed primarily by the full
nine months of operating income in 1999 from our acquisitions in 1998, most of
which occurred effective April 1, 1998. In the Internet segment, the $3.4
million increase in operating revenue resulted from an increase of $0.3 million
from Bostek, which was acquired effective June 1, 1999 and the remainder of the
increase was from Data Path Technologies, which we owned for six months in 1998,
and which in 1999 included our program with FlashNet. The decrease in
traditional operating income was a result of migration of business to the
Internet, additional depreciation and amortization expense and increased
selling, general and administrative expenses.
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<PAGE> 55
Years ended December 31, 1996, 1997 and 1998. Operating income for each of
the operating segments, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
---- ---- ------ --- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Internet................................ $ -- -- $ -- -- $ 746 10.2
Traditional commerce.................... 397 19.9 2,123 5.4 2,875 5.4
---- ---- ------ --- ------ ----
Consolidated............................ $397 19.9 $2,123 5.4 $3,621 6.0
==== ==== ====== === ====== ====
</TABLE>
Operating income was $3.6 million in 1998, an increase of $1.5 million, or
70.6%, from $2.1 million in 1997. The 1997 operating income represents an
increase of $1.7 million over the $0.4 million reported in 1996. The increase in
operating income in 1998 of $1.5 million over the $2.1 million reported in 1997
was from companies acquired during 1998 and from acquisitions made in 1997 that
were included for a full year in 1998. The increase in operating income of $1.7
million over the $0.4 million reported in 1996 was from companies acquired
during 1997.
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 $0.9
million for the first nine months of 1999 and $0.3 million for the first nine
months of 1998. Interest expense was $0.3 million in 1998, an increase of $0.1
million from $0.2 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 45.1% for the first nine months of
1998 and 71.7% for the first nine months of 1999. Our effective income tax rates
were 48.9% in 1996, 44.8% in 1997 and 49.5% in 1998. Changes in the effective
rate were primarily the result of acquisitions of companies in states with
higher state income tax rates and non-deductible goodwill resulting from
acquisitions. Information on income taxes can be found in Notes 1 and 9 to our
audited financial statements included herein.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations primarily through borrowings
from Applied Digital Solutions and cash from operations.
As of September 30, 1999, cash and cash equivalents totaled $0.9 million,
an increase of $0.3 million from $0.6 million at December 31, 1998. Excess cash
on hand has been applied against our indebtedness to Applied Digital Solutions.
OPERATING ACTIVITIES
Net cash used in operating activities was approximately $10.6 million for
the nine month period ended September 30, 1999. This was primarily the result of
an increase in
53
<PAGE> 56
accounts receivable of $15.7 million and an increase of $13.5 million in
inventory, partially offset by net income of $0.6 million, depreciation and
amortization of $2.6 million and an increase in accounts payable and accrued
expenses of $15.6 million and $1.0 million in current liabilities due to Applied
Digital Solutions. The higher levels of accounts receivable and inventory are a
result of increased sales and anticipated sales from the Internet. Net cash used
in operating activities for the nine months ended September 30, 1998 was
approximately $1.5 million. This was primarily the result of net income of $1.1
million, offset by an increase in inventory of $1.0 million, a decrease in
current liabilities due to Applied Digital Solutions of $1.1 million and a
decrease in accounts payable and accrued expenses of $1.3 million. We anticipate
that we will continue to use more cash than will be provided by our operations
as our business grows during the next 12 months, primarily because of our
anticipated significant increase in our marketing and promotional efforts. In
order to conduct the marketing and other efforts we have planned during this
period, we will rely on the proceeds of this offering. If this offering is not
completed, we will continue to be a part of Applied Digital Solutions and will
rely on capital provided by Applied Digital Solutions as necessary and to the
extent it continues to be available.
We do not anticipate any material capital expenditures within the next 12
months. We believe that our efforts to migrate our traditional business to the
Internet will not require significant capital expenditures. We expect to enhance
our website to accommodate the needs of our traditional customers and estimate
that these costs will be less than $0.5 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 current liabilities due to Applied
Digital Solutions of $0.4 million, offset in part by net income of $1.5 million
and depreciation and amortization of $0.8 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 net income of $0.8 million,
depreciation and amortization of $0.3 million, an increase in accounts payable
and accrued expenses of $1.7 million and an increase in current liabilities due
to Applied Digital Solutions of $0.8 million, offset by an increase in inventory
of $2.3 million and an increase in accounts receivable of $1.4 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 net income of $0.3
million and an increase in current liabilities due to Applied Digital Solutions
of $.04 million, offset by an increase in inventory of $0.2 million, an increase
in accounts receivable of $0.1 million and a decrease in accounts payable and
accrued expenses of $0.2 million.
INVESTING ACTIVITIES
Net cash used in investing activities was approximately $12.1 million for
the nine month period ended September 30, 1999. This was the result of payments
in the Bostek acquisition of $10.5 million, the purchase of furniture and
fixtures, equipment and leasehold improvements of $1.2 million and an increase
in other assets of $0.4 million. Net cash used in investing activities was
approximately $1.0 million for the nine months ended September 30, 1998. This
was primarily due to loans to our executive officers of $0.9 million.
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<PAGE> 57
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 loans to our executive 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 furniture, fixtures and equipment 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 $23.1 million for the nine
month period ended September 30, 1999. This was the result of additional
borrowings of $23.1 million from Applied Digital Solutions, including $10.1
million borrowed to acquire Bostek and an additional $4.4 million to refinance
Bostek's working capital loans. Net cash provided by financing activities was
$2.6 million for the nine months ended September 30, 1998. This was the result
of borrowings of $4.3 million from Applied Digital Solutions, a portion of which
was used to pay off $1.6 million of borrowings from financial institutions.
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 December 7, 1999, our outstanding borrowings from Applied Digital
Solutions were $36.6 million, including the amounts borrowed in connection with
the Bostek acquisition as described above. From January 1, 1999 through November
30, 1999, our average weighted interest rate on borrowings from Applied Digital
Solutions was 7.5%, and at December 7, 1999 the interest rate on these
borrowings was 7.48%. 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 and working
capital requirements for at least 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.
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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 $74.0 million, of which $27.0 million is a revolving credit line that may
be used for general working capital requirements, capital expenditures and other
permitted purposes. The U.S. tranche bears interest at a floating rate equal to
30-day LIBOR plus 1.9%. As of December 7, 1999, a total of $61.2 million was
outstanding under the U.S. tranche and $12.8 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 have received a
non-binding letter of intent for a line of credit from an unaffiliated lending
institution, which would provide us with an aggregate of $50 million in
revolving credit financing for working capital and other purposes, but we cannot
assure you that we will be able to complete such line of credit. We intend to
use borrowings under this line of credit to repay all amounts owed to Applied
Digital Solutions.
In connection with previous 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, subject to
completion of this offering, to pay 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, subject to completion of this offering, 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 $5.5
million. We intend to use $5.5 million of the proceeds from this offering to
satisfy the cash portion of those obligations, and to issue 518,778 shares of
our common stock, assuming an initial public offering price of $9.00 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.
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<PAGE> 59
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 on a
retail basis;
- Internet wholesale, in which Bostek sold products on a wholesale basis to
other Internet companies that remarket the products on a retail basis
through the Internet; and
- 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 in cash if Bostek achieves approximately
$4 million 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
cash 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 be deductible
for tax purposes. This amount of goodwill has not been finalized. We borrowed
the $10.1 million cash portion of the
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consideration from Applied Digital Solutions. We also borrowed $4.4 million from
Applied Digital Solutions to refinance Bostek's working capital loans. Assuming
an initial public offering price of $9.00, we will issue 555,556 shares of
common stock to each of the two former Bostek stockholders within 30 days of the
closing of this offering, which will represent approximately 2.7% of our
outstanding common stock after giving effect to this offering and the issuance
of shares of common stock to satisfy earn-out obligations and to purchase
minority interests in acquired subsidiaries. Both of the former Bostek
stockholders are employees 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 7 years and
will result in an annual amortization charge of approximately $3.1 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.
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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:
<TABLE>
<CAPTION>
RELATIONSHIP TO REVENUE
-----------------------------------------
FIVE MONTHS
YEARS ENDED ENDED
----------------------- --------------
DECEMBER 31, MAY 31,
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.......................... 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%
===== ===== ===== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1998 % 1999 %
------- ----- ------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet....................................... $ 1,475 6.2 $ 7,321 22.0
Internet wholesale............................. 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
======= ===== ======= =====
</TABLE>
Revenue for the first five months of 1999 was $33.4 million, an increase of
$9.5 million, or 40.0%, from $23.9 million for the first five months of 1998.
This increase is primarily attributable to more transactions conducted over the
Internet. Bostek's Internet segment began operating in April 1998 and accounted
for 61.3% of the increase.
Years ended December 31, 1996, 1997 and 1998. Revenue from customers for
each operating segment was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
------- ----- ------- ----- ------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Internet........................ $ -- -- $ -- -- $ 7,789 12.8
Internet wholesale.............. -- -- -- -- 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
======= ===== ======= ===== ======= =====
</TABLE>
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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 wholesale 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 $54.4 million reported
in 1996. This decrease was a result of significant changes within the personal
computer market, primarily the introduction of the Intel Pentium(R) processor
which severely impacted the demand for older processors.
GROSS PROFIT/MARGIN
Five month periods ended May 31, 1998 and 1999. Gross profit by operating
segment, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1998 % 1999 %
------ ---- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet........................................... $ 201 13.6 $ 878 12.0
Internet wholesale................................. 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
====== ==== ====== ====
</TABLE>
Gross profit for the first five months of 1999 was $3.8 million, an
increase of $0.9 million, or 30.9%, from $2.9 million for the first five months
of 1998. As a percentage of revenue, gross margin was 11.4% for the first five
months of 1999 and 12.2% for the first five months of 1998. Overall gross margin
decreased in the 1999 period primarily because Bostek shifted its product mix to
newer, higher-end systems, where there is higher demand but increased
competition that results in lower margins for such products on both the Internet
and through traditional channels. Because Bostek has completed the shift of its
product mix to newer, higher-end products, we do not expect such downward
pressure on Bostek's margins to continue.
Years ended December 31, 1996, 1997 and 1998. Gross profit by operating
segment, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
------ ---- ------ ---- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Internet.............................. $ -- -- $ -- -- $ 857 11.0
Internet wholesale.................... -- -- -- -- 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
====== ==== ====== ==== ====== ====
</TABLE>
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 $7.0 million reported in 1996. Overall gross
margin decreased in 1998 primarily because Bostek shifted its product mix to
newer, higher-end systems, where there is higher demand but increased
competition that results in lower margins for such products on both the Internet
and through traditional channels.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in Bostek's traditional and Internet
wholesale segments. All labor costs are included in this category, as are
website maintenance costs and advertising costs, both of which are significantly
greater than in Bostek's traditional commerce and Internet wholesale segments.
Five month periods ended May 31, 1998 and 1999. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
<TABLE>
<CAPTION>
1998 % 1999 %
------ ---- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet........................................... $ 163 11.1 $ 921 12.6
Internet wholesale................................. 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
====== ==== ====== ====
</TABLE>
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 $1.8
million for the first five months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 10.3% for the first five months of 1999
and 7.5% for the first five months of 1998. The increased expense in absolute
dollar terms and as a percentage of revenue is due to the expansion of the
corporate infrastructure necessary to support continued growth and the entry
into the Internet market.
Years ended December 31, 1996, 1997 and 1998. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
------ --- ------ ---- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Internet............................... $ -- -- $ -- -- $1,114 14.3
Internet wholesale..................... -- -- -- -- 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
====== === ====== ==== ====== ====
</TABLE>
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 $3.9 million reported
in 1996. As a percentage of revenue, selling, general and administrative
expenses increased from 7.1% in 1996 to 10.1% in 1997 but decreased 9.4% in
1998. During these periods, Bostek expanded its corporate infrastructure to
support continued growth, entered the Internet market and lowered sales prices
to meet increased competition.
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OPERATING INCOME
Five month periods ended May 31, 1998 and 1999. Operating income for each
of the operating segments, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1998 % 1999 %
------ --- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet.............................................. $ 38 2.6 $(43) (0.6)
Internet wholesale.................................... 109 3.2 80 1.4
Traditional commerce.................................. 964 5.1 333 1.6
------ --- ---- ----
Consolidated.......................................... $1,111 4.7 $370 1.1
====== === ==== ====
</TABLE>
Operating income was $0.4 million for the first five months of 1999, a
decrease of $0.7 million, or 66.7%, from $1.1 million for the first five months
of 1998. The operating loss in the Internet segment for the five months ended
May 31, 1999 was primarily the result of increased advertising.
Years ended December 31, 1996, 1997 and 1998. Operating income for each of
the operating segments, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
------ --- ------ --- ------ ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Internet................................ $ -- -- $ -- -- $ (257) (3.3)
Internet wholesale...................... -- -- -- -- 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
====== === ====== === ====== ====
</TABLE>
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 wholesale segments, its need to finance its working capital
increased, resulting in greater amounts borrowed and higher interest expense
over 1997 and 1996.
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
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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
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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.
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 have substantially completed our Year 2000 review. We spent
approximately $20,000 in 1998 on our Year 2000 compliance plan and approximately
$30,000 in 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.
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. We believe that all of our systems and
equipment are Year 2000 compliant.
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
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suppliers, and we cannot be certain that Year 2000 problems with these systems
will not cause a material disruption to our business.
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.
Products Sold to Consumers. With regard to our manufacturer's excess
product, in addition to oral assurances, we have reviewed the publicly available
information of the following vendors of our most popular products (Sony, Compaq,
Toshiba, NEC and Fujitsu) to ensure Year 2000 compliance. For Intellesale's
refurbished products, we have reviewed the publicly available information of the
manufacturers of our most popular products which are IBM, Sony, Compaq, Toshiba,
NEC, Fujitsu and Hewlett-Packard. We do not rely on any assurances from vendors
of refurbished products because such vendors do not necessarily have any
expertise with computers. The refurbished product compliance varies with model
number. Some products are compliant as is, and some require a free "patch."
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.
Contingency Plans. As noted above, our Year 2000 compliance program has
been completed. We have not developed any specific contingency plan to deal with
unanticipated Year 2000 problems. We believe that our computer refurbishing
operations do not depend on technology which is subject to Year 2000 disruption.
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.
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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, 1998. This analysis is presented to show business trends without the
effects caused by the acquisitions we completed in 1998 and 1999. These amounts
do not reflect any effects of purchase accounting adjustments such as increased
depreciation or goodwill amortization.
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, 1998 or (2) what we expect our results of
operations to be in the future. They do not reflect an adjustment for services
Intellesale receives from Applied Digital Solutions as they approximate the cost
that will be incurred by Intellesale as a stand alone company. This discussion
of results of operations does not reflect the effects of this offering or the
application of the net proceeds therefrom. Due to the difficulty in making
factually supportable pro forma adjustments, this pro forma presentation is
limited to revenues, cost of goods sold, selling, general and administrative
expenses, as no pro forma adjustments in any period are required.
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 interest expense and income taxes. 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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1999
---------------- -----------------
$ % $ %
------- ----- -------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues........................................ $94,071 100.0% $121,275 100.0%
Cost of goods sold.............................. 76,718 81.6% 98,132 80.9%
------- ----- -------- -----
Gross profit.................................... 17,353 18.4% 23,143 19.1%
Selling, general and administrative expenses.... 11,467 12.2% 17,087 14.1%
======= ===== ======== =====
</TABLE>
PRO FORMA REVENUE
We and Bostek began operating over the Internet in the second quarter of
1998. However, Data Path Technologies, which we acquired effective April 1,
1998, began its Internet operations in 1996 and was our platform for beginning
Internet operations.
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Pro forma nine month periods ended September 30, 1998 and 1999. Pro forma
revenue for each operating segment for the first nine months of 1998 and 1999
was:
<TABLE>
<CAPTION>
1998 % 1999 %
------- ----- -------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet
Direct Internet............................. $13,433 14.3 $ 38,769 32.0
Internet wholesale.......................... 6,037 6.4 5,890 4.8
------- ----- -------- -----
Total Internet................................ $19,470 20.7 $ 44,659 36.8
Traditional commerce.......................... 74,601 79.3 76,616 63.2
------- ----- -------- -----
Consolidated.................................. $94,071 100.0 $121,275 100.0
======= ===== ======== =====
</TABLE>
Pro forma revenue for the nine month period ended September 30, 1999 was $121.3
million, an increase of $27.2 million, or 28.9%, from $94.1 million for the nine
month period ended September 30, 1998.
Direct Internet segment pro forma revenue increased by $25.3 million or
188.6% due primarily to an increase in number of units sold as a result of the
acquisitions and the addition of higher end, higher priced products in the
Intellesale product line. 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! Inc. and Lycos and retail sales through
websites such as OnSale which was recently acquired by Egghead.com. Sales
through OnSale represented approximately 5.4% of our pro forma revenues for the
nine months ended September 30, 1999. Each generation of computers goes through
a life cycle. Introduction of newer product causes the prices of older computers
to decrease, creating a constant supply and mix of newer and older product. This
mix gives stability to the average revenue per product, within a product class,
such as monitors, CPUs and laptops.
Internet wholesale segment pro forma revenue decreased by $0.1 million or
2.4%. Internet wholesale sales are sales in which Bostek sells products on a
wholesale basis to other Internet companies that remarket the products through
the Internet on a retail basis. This decrease in pro forma revenues resulted
from our transitioning away from this wholesale distribution business to focus
on selling products on a retail basis directly through our website. We have no
contractual relationships with Internet wholesale customers and we plan to
gradually reduce this business.
Traditional commerce segment pro forma revenue increased $2.0 million or
2.7%, primarily as a result of an increase in sales of our notebook and desktop
personal computer products.
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PRO FORMA GROSS PROFIT/MARGIN
Pro forma nine month periods ended September 30, 1998 and 1999. Pro forma
gross profit by operating segment, and as a percentage of segment revenue, was:
<TABLE>
<CAPTION>
1998 % 1999 %
------- ---- ------- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet
Direct Internet................................ $ 3,933 29.3 $11,187 28.9
Internet wholesale............................. 796 13.2 658 11.2
------- ---- ------- ----
Total Internet................................... $ 4,729 42.5 $11,845 40.1
Traditional commerce............................. 12,624 16.9 11,298 14.7
------- ---- ------- ----
Consolidated..................................... $17,353 18.4 $23,143 19.1
======= ==== ======= ====
</TABLE>
Pro forma gross profit for the first nine months of 1999 was $23.1 million,
an increase of $5.7 million, or 33.4%, from $17.4 million for the first nine
months of 1998. As a percentage of pro forma revenue, the pro forma gross margin
was 19.1% for the first nine months of 1999 and 18.4% for the first nine 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 wholesale pro forma gross profit decreased by approximately 17.3%,
while gross margin decreased by 2.0 percentage points. This decrease resulted
from price competition in the Internet wholesale market. We note that this
margin is significantly below the margin achieved from distributing products on
a retail basis through direct Internet sales. Accordingly, we plan to gradually
reduce this business over time and focus on retail sales through our website and
other Internet companies.
Traditional commerce pro forma gross profit decreased by approximately
10.5%, while gross margin decreased by 2.2 percentage points. This was primarily
the result of Bostek shifting its product mix to newer, higher-end systems,
where there is higher demand but increased competition, resulting in lower
margins.
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 services and incurred expenses on
our behalf and on behalf of our subsidiaries. We believe the amounts charged to
Intellesale and its predecessor companies approximates the costs we would have
separately incurred. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Trends and Accounting Policies."
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Pro forma nine month periods ended September 30, 1998 and 1999. Pro forma
selling, general and administrative expenses by operating segment, and as a
percentage of pro forma segment revenue, were:
<TABLE>
<CAPTION>
1998 % 1999 %
------- ---- ------- ----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Internet
Direct Internet............................ $ 3,284 24.4 $ 6,447 16.6
Internet wholesale......................... 408 6.8 576 9.8
------- ---- ------- ----
Total Internet............................... $ 3,692 31.2 $ 7,023 26.4
Traditional commerce......................... 7,775 10.4 10,064 13.1
------- ---- ------- ----
Consolidated................................. $11,467 12.2 $17,087 14.1
======= ==== ======= ====
</TABLE>
Pro forma selling, general and administrative expenses were $17.1 million
for the nine month period ended September 30, 1999, an increase of $5.6 million,
or 49.0%, from $11.5 million for the nine month period ended September 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 14.1% and 12.2% for the nine month
periods ended September 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 24.4% to 16.6%. This decrease is due
to the fact that selling, general and administrative expenses in the Internet
segment only approximately doubled, while revenue almost tripled, in the first
nine months of 1999 compared to the first nine months of 1998.
Pro forma selling, general and administrative expenses include management
fees paid to Applied Digital Solutions. Management fees paid to Applied Digital
Solutions in the nine months ended September 30, 1999 amounted to $0.5 million
compared to $0.3 million in the nine months ended September 30, 1998.
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INTELLESALE.COM, INC.
ABOUT US
Intellesale sells refurbished and new computer equipment and related
products. We sell products online through our website at www.Intellesale.com as
well as through traditional channels, most of which we are migrating to the
Internet. In addition to selling products on our website, we distribute products
over the Internet through programs with OnSale.com, which was recently acquired
by Egghead.com and which hosts auctions of our products in exchange for a
commission, as well as 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 on a
retail basis 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 wholesale, in which we bulk
wholesale our products to other companies that market these products on a
retail basis through their websites. We are transitioning away from this
wholesale distribution business and focusing on selling products on a
retail basis 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. Our service business also includes the leasing of
computers and other electronic equipment, most often for tradeshows,
which frequently have temporary need for computers which we can satisfy
from our inventory of used computers which we can then refurbish and
sell. We are transitioning our traditional commerce business to the
Internet to the extent feasible.
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
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 markets refurbished
computer products through the
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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
nine months ended September 30, 1999, pro forma for our acquisition of Bostek,
Inc. and its affiliate, were $121.3 million. Of this amount, approximately 32%
were direct Internet sales and approximately 4.8% were Internet wholesale
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.
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 number 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 142 million
in 1998 to 502 million in 2003. IDC further estimates that the number of people
making purchases over the Internet will increase from approximately 31 million
in 1998 to approximately 183 million in 2003. According to Jupiter
Communications, another market research firm, the second largest category of
e-commerce spending is computer hardware and software, which Jupiter projects
will grow from approximately $3.1 billion in 1998 to approximately $15.8 billion
in 2003.
In recent years, the number of companies leasing rather than purchasing
computer equipment has increased significantly, primarily due to shorter product
life cycles. Corporate leases generally have a three-year term after which the
equipment is replaced and a new lease cycle begins. 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, which
management of Intellesale believes is a result of the frequent introductions of
new models with incremental increases in features or capacity which characterize
the personal computer industry. These 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
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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 these products, 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.
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 anticipate spending approximately $10 million on
marketing over the next twelve months. 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 Cooperative Relationships. We intend to expand existing sales
programs and establish new programs under which other companies 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 a program with OnSale,
which conducts web auctions of our products in exchange for a commission. We
also advertise on Lycos and sell our products on Amazon.com's Z-Shops and on
eBay. These types of arrangements and cooperative 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 have now
completed the combination of Bostek's PickADW.com website with our
Intellesale.com website. 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 September 30, 1999, on a pro forma basis including Bostek, approximately
32% of our sales were conducted on a retail basis directly through the Internet.
As we expand our Internet presence, we intend to migrate the traditional
commerce segment of our business to the Internet to the extent possible, which
should allow us to expand our customer base,
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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. No single supplier provided us with more than 10% of our
products during 1998 or the first nine months of 1999.
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. Substantially all of the
products we offer are brand name products manufactured by IBM, Compaq, Sony,
Fujitsu, Hewlett-Packard and other major manufacturers. For the first nine
months of 1999, approximately 75% of our retail Internet product sales were
laptops, desktop PCs and monitors. For the nine months ended September 30, 1999,
new products represented approximately 18% of our revenues.
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, although we
will from time to time offer longer warranties. In our program with FlashNet, we
provided a three year warranty to the approximately 35,000 FlashNet customers
who received computers under the program. 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.
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, based on
purchase price, 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
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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 and
our predecessor companies have established over approximately the last eight
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
the completion of refurbishment and sale of that item was approximately 30 days
for the nine months ended September 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.
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
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- 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
The time required for the refurbishment process depends on the condition of
the equipment. The labor cost relating to refurbishment is relatively low,
averaging, for a desktop computer, approximately $12 in wages and other
benefits.
HOW WE DETERMINE SELLING PRICES
We determine our selling prices, both wholesale and retail, on the basis of
current market conditions and the number 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. For the nine
month period ended September 30, 1999, our inventory writedowns were
approximately $95,000.
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 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.
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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 online companies, as well as
employing various media and promotional activities to achieve these goals.
Relationships with Online Companies. We have established strategic
relationships and cooperative programs 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 specified
conditions, or for additional fees and/or increased revenue sharing. Some of our
relationships include:
- OnSale. We have an arrangement with OnSale.com, which was recently
acquired by Egghead.com, under which OnSale hosts web auctions of
Intellesale products. In these web auctions, online bidders are allowed
to submit bids according to the time limits and minimum bid amounts shown
for the particular item, and the product is sold to the highest bidder.
We pay a commission to the company which hosts the auction for us. Under
the agreement, OnSale is responsible for managing the auction, providing
firstline customer support and, on completion of each auction, forwarding
information on the winning bidders to us electronically. We then process
and complete the entire transaction. In accordance with the agreement, 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. Links to
OnSale appear on our website. This relationship was established by our
subsidiary Data Path Technologies in 1996. The current agreement may be
terminated by either party on sixty days notice. We believe that we are
the primary source for refurbished computer equipment available on
OnSale.com.
- Amazon. We have an arrangement with Amazon, under which customers can
buy products we have listed on the new Z-Shops area of their website. We
pay Amazon for listing these products. Each listing contains information
about the product and a link to other products sold by us on the Z-Shops
site.
In June 1999, we entered into an agreement with FlashNet Communications,
Inc., under which we jointly promoted refurbished computers and Internet
services. Under this program, FlashNet paid us to provide a free refurbished
personal computer to each FlashNet customer who agreed to a 24 to 36 month
service agreement to use the FlashNet Internet service. We recognized
approximately $9.5 million in revenues through the program through September 30,
1999. FlashNet discontinued its program of offering a free refurbished personal
computer to its customers in November 1999. We have agreed with FlashNet to
terminate our arrangement with them as part of a settlement of litigation
initiated by FlashNet against us relating to the program, which litigation and
settlement are described under "Intellesale.com, Inc. -- Legal Proceedings."
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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 a contract with the Yahoo! Internet portal,
under which we pay a fee 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 WHOLESALE
In our Internet wholesale business, we sell our products to other Internet
companies that remarket these products on their websites. Some of our Internet
wholesale 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 all of our Internet wholesale 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 under "Shop Intellesale" on our opening page are "Complete Systems,"
"Specials," "Hardware," "Software," "Accessories" and "Auctions." Our website
also displays a number of featured links to information about us, our customer
service, technical support, corporate services and terms and conditions of sale,
as well as a link to a general description of refurbished products and buttons
to check out all purchases and to check order status.
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Our website also displays a number of featured specials, as well as our
"Make Us an Offer" link, where customers can make an offer for specified new and
refurbished products at a price lower than the listed price. Customers can also
subscribe to our electronic mail list.
When a customer is shopping for products, 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.
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. Purchases from this vendor are made
under separate purchase orders, and we have no written agreement relating to
this arrangement. For each purchase from this vendor, we mark up such products
the lesser of $50 or 5% of our purchase price.
We generally do not include operating systems or software with our
refurbished products, although we offer Windows installation as an option.
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. To select an appropriate
extended warranty, the customers can search for "warranty" using the search tool
and add the warranty to their shopping carts.
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 carts. The customers then
select the quantity, review the pricing information and are shown the current
status of the shopping cart and total purchases. Customers can add and subtract
products from their shopping baskets as they browse with the "View Cart"
feature, just as in a physical store. To complete orders, customers click on the
"Check Out" button, and are 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 assist the customer in making an alternative purchase.
Customer Service. The customer service area of our website allows
customers to check the status of their orders, provides Intellesale contact
information and permits customers to e-mail us. 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 customer
service 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.
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Future Enhancements and Improvements. We intend to continue enhancing the
Intellesale.com experience through ongoing upgrades and improvements to our
website. We have completed the combination of Bostek's PickADW.com website with
our Intellesale.com website. The combined website is Intellesale.com, and
visitors to PickADW.com are automatically redirected to the combined website. We
plan to add new features to the website 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 high capacity connection to the Internet, with redundancy to
protect against interruptions if the primary connection becomes unavailable.
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 service provider with two redundant
facilities located in Hawthorne, N.Y. and in Jersey City, N.J, provides us with
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 Hawthorne, N.Y., and we
believe Cube has the capacity to support our foreseeable growth.
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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.
We have traditionally sold these products through direct marketing,
catalogs and telephone orders from brokers and retail clients. We expect to
continue making sales through these channels, but at a decreasing rate as we
continue our focus on selling our products on the Internet.
In our traditional commerce business, we also offer our corporate customers
the ability to hire us as consultants to do custom programming and the ability
to lease electronic equipment through a third party leasing company. In
addition, we provide leasing and rental services of computers and electronic
equipment for meetings and conventions. We expect the service and leasing
business to remain relatively constant in terms of revenue and profitability.
We intend to migrate our traditional commerce business to the Internet to
the extent feasible. 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 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.
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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.
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.
Until we complete phasing out our Internet wholesale 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
retail 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 December 7, 1999, we had a total of 371 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
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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 the "Intellesale.com" and "PickADW.com" domain names, as
well as rights to two other domain names, which are not related to our current
businesses and which we do not expect to use.
FACILITIES
At December 7, 1999, we leased a total of approximately 244,000 square feet
for our operations. Of this space, 28,000 square feet is used for office
facilities and 216,000 square feet is for factory/warehouse use. These leases
expire at various dates through 2004.
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
warehouse/distribution; and operations center
8,000 s.f. office space
Pleasantville, New York 21,000 s.f. warehouse; Technical service center,
3,000 s.f. office space customer service center
and warehouse
Hayward, California 20,000 s.f. Warehouse
Dallas, Texas 1,400 s.f. Office
Cherry Hill, New Jersey 3,400 s.f. Sales office
Newtown, Pennsylvania 2,825 s.f. Sales office
Syosset, New York 240 s.f. Sales office
Minneapolis, Minnesota 2,000 s.f. Sales office
</TABLE>
We also lease space in various other locations, representing a total of
46,700 additional square feet, under leases which expire at various times
through December 2000. 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
$83,000. We do not intend to renew these leases when they expire.
Our current total lease obligations are $1.6 million per year.
LEGAL PROCEEDINGS
On November 11, 1999, we were advised that FlashNet Communications, Inc.
had initiated litigation against us relating to the program under which FlashNet
paid us to provide a free refurbished personal computer to each FlashNet
customer who agreed to a
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service agreement to use the FlashNet Internet service. As described below, this
dispute has been resolved.
In its complaint, FlashNet asserted that we had breached our agreement with
FlashNet in failing to supply computers to FlashNet customers within the time
requirements and the quality requirements of our agreement with FlashNet, and in
failing to provide customer support in accordance with the agreement. FlashNet
claimed damages based on these alleged failures in unspecified amounts, and
disputed each outstanding invoice submitted by Intellesale to FlashNet in the
aggregate amount of approximately $2.9 million.
On November 22, 1999, we settled the litigation with FlashNet. Under this
settlement:
- FlashNet and Intellesale released each other from all claims and
liabilities relating to our agreement with FlashNet except the
obligations under the settlement agreement.
- Our agreement with FlashNet was terminated.
- FlashNet paid all of our outstanding invoices, aggregating $2.9 million.
- We agreed that our three-year warranty for each of the approximately
35,000 computers we sold under our agreement with FlashNet will remain in
effect. Under these warranties, we will replace any of these computers
which fail, within three years from the date of delivery, at our cost.
- We will sell up to 5,000 new personal computers to FlashNet for $400
each, of which $100 will be paid in cash and the remaining $300 will be
paid in the form of a $300 advertising credit, which we will use to
compensate FlashNet for promoting Intellesale to its customers who
receive these personal computers, by including our promotional disk
and/or pamphlet with the computers. Although FlashNet is not obligated to
purchase these computers, we expect that they will be sold to FlashNet
over a period of approximately 12 months.
- We will furnish replacement computers or computer components to up to
approximately 1,080 FlashNet customers who received computers under our
agreement with FlashNet and who have submitted claims.
- We have provided a performance bond to FlashNet in the amount of $3.0
million to secure performance of our obligations under the settlement
agreement.
In settling this matter, neither Intellesale nor FlashNet has admitted
liability to the other.
As a result of this settlement, we expect to incur advertising expense
under the promotional program related to the additional computers we are selling
to FlashNet of up to approximately $1.5 million. The advertising program with
FlashNet will be part of the $10 million increase in advertising and other
marketing efforts during the 12 months following the offering being funded with
a portion of the proceeds of this offering. We cannot assure you that the
FlashNet advertising program will be a cost-effective use of our funds.
We are a party to various other 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 effect 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)........... 47 Director
David A. Loppert..................... 45 Director
Alexander H. Good (2)................ 49 Director
Timothy C. O'Brien (1)............... 51 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
1999. 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
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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, the National Investor Relations Institute and
Buy & Hold.com. 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
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 as a director of several
companies, 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.
Timothy C. O'Brien has served as a director of Intellesale since November
1999. Mr. O'Brien has been Vice President and Chief Financial Officer of
Ziff-Davis, Inc., a technology media company, since 1995. From 1985 to 1994, Mr.
O'Brien was Chief Financial Officer of Reed Elsevier Inc. and Reed Publishing
USA, publishing and information providing companies. From 1992 to 1994, he was
also Executive Vice President of Cahners Publishing Company, a publisher of
business to business and special consumer magazines, which he joined in 1980.
From 1970 to 1980, Mr. O'Brien was employed by PricewaterhouseCoopers LLP.
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. He was the President and General
Manager of Keats Ford from 1985 to 1996, when he sold this business.
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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. O'Brien 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 shares of
our common stock, exercisable at the initial public offering price beginning on
the first anniversary of such director joining the board of directors. The
restricted stock awards will be valued at the expected initial offering price of
$9.00 per share, or a total of $135,000. This amount will be recognized as
expense over one year from the grant date. 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.
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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. For periods prior to July 1999, when Intellesale began operations,
this compensation was paid to these executives in their capacities as employees
of Universal Commodities Corp., one of the predecessors of Intellesale.
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 1997 125,000 -- 50,941(1) 1,060,000(2)
Executive Officer 1996 67,215 -- -- 50,000(2)
Edward L. Cummings........... 1998 77,885 76,600 55,664(3) --
Executive Vice President
and 1997 75,000 -- 45,054(3) 1,040,000(4)
Chief Financial Officer 1996 56,538 -- 33,500(4)
Charles D. Newman............ 1998 104,000 19,150 1,237(5) --
Executive Vice President
and 1997 70,000 -- 7,200(5) 300,000(6)
Chief 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 Mr.
Sherman 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 Mr. Sherman 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 Mr.
Cummings 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 Mr.
Cummings 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
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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 Mr.
Newman 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.
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.
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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 YEAR END 1998 AT YEAR END 1998(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marc Sherman................... 1,000,000 -- $8,150,000 --
Edward L. Cummings............. 1,000,000 -- 8,150,000 --
Charles D. Newman.............. 300,000 -- 2,445,000 --
</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 $9.00 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 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
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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 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, Mr. Sherman purchased a residence and obtained a mortgage
loan through an unaffiliated commercial bank in the amount of approximately
$1,250,000. Applied Digital Solutions guaranteed the loan. This satisfied the
agreement of Intellesale in Mr. Sherman's employment agreement to provide such a
guarantee. Mr. Sherman has agreed to indemnify Applied Digital Solutions for any
amounts which it is required to pay under the guarantee, and his agreement is
secured by a pledge of other real estate he owns.
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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 5,450,000 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 may be issued under the plan. 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. There are currently
2,335,000 shares available for grant under the plan.
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
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set forth in the option grant, if 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. O'Brien, who are members of our board of directors. The
exercise price under each option will be equal to the initial public offering
price 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
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- 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION OF MINORITY INTERESTS
Intellesale is the successor to a number of businesses that were acquired
primarily through the use of the common stock of our principal stockholder,
Applied Digital Solutions. In most cases, Applied Digital Solutions purchased
80% of the stock of the businesses acquired. In addition, Applied Digital
Solutions generally agreed to make earn-out payments to the sellers of the
businesses acquired, including instances where Applied Digital Solutions
acquired 100% of the stock of those businesses. We subsequently assumed these
earn-out obligations. We have now agreed to purchase, upon the closing of this
offering, all of the minority interests in these businesses and to settle all of
the earn-out payments for fixed amounts, using a combination of cash and
Intellesale common stock. We will issue an aggregate of 518,778 shares of our
common stock in acquiring these minority interests, assuming an initial offering
price of $9.00 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. Elite sells parts to service
companies for the repair of computers and computer equipment. In July 1999,
Applied Digital Solutions contributed the stock of Elite to Intellesale. In
August 1999, Intellesale purchased the remaining 20% 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., a seller of refurbished computer
equipment, from Mr. Sherman, our current President and Chief Executive Officer
and the sole shareholder of Universal Commodities. In this transaction, Applied
Digital Solutions issued 735,000 shares of its common stock, having a fair value
of approximately $1.5 million, to Mr. Sherman. Mr. Sherman retained the
remaining 20% of the common stock of Universal Commodities, although he
subsequently transferred 2% of the common stock of Universal Commodities to Mr.
Cummings. On July 13, 1999, Applied Digital Solutions 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,
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having the same relative rights and preferences as such exchanged shares.
Applied Digital Solutions received 12,000,000 shares of Intellesale common stock
in exchange for the shares of Universal Commodities which it had acquired in
November 1996. Mr. Sherman and Mr. Cummings received 2,700,000 and 300,000
shares, respectively, of Intellesale common stock in exchange for the shares of
Universal Commodities common stock they held at the time of the reorganization.
Norcom Resources Incorporated
In January 1997, Applied Digital Solutions acquired 80% of the outstanding
stock of Norcom Resources Incorporated. Norcom buys and sells mainframe computer
processors. The Norcom shareholders were granted the right to require Applied
Digital Solutions to purchase their remaining 20% interest in Norcom. In
December 1999, Applied Digital Solutions amended its agreement with the Norcom
shareholders to provide that Intellesale will purchase their remaining interests
in Norcom for $900,000. We are obligated to pay that amount in cash, shares of
our common stock or a combination of cash and stock. We intend to pay $450,000
of the $900,000 in cash, which we intend to pay from the proceeds of this
offering, and to issue to the shareholders $450,000 of our common stock, valued
at the initial public offering price in this offering, within 30 days following
the completion of this offering.
Pizarro Re-Marketing, Inc.
In January 1997, Applied Digital Solutions acquired 80% of the outstanding
stock of Pizarro Re-Marketing, Inc. Pizarro Re-Marketing buys and sells computer
tape and disk storage devices. Donna W. Pizarro, the sole stockholder of Pizarro
Re-Marketing, was granted the right to require Applied Digital Solutions to
purchase her remaining 20% interest in Pizarro Re-Marketing. In March 1999,
Applied Digital Solutions amended its agreement with Ms. Pizarro to provide that
Intellesale 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.
Cybertech Station, Inc.
In July 1997, Applied Digital Solutions acquired 80% of the outstanding
stock of Cybertech Station, Inc. Cybertech Station buys and sells computer
memory chips. Ms. Sheerr, the sole stockholder of Cybertech Station, was granted
the right to require Applied Digital Solutions to purchase her remaining 20%
interest in Cybertech Station. In August 1999, Applied Digital Solutions amended
its agreement with Sherri Sheerr to provide that Intellesale 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.
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Port Parties, Ltd.
Effective July 1997, Applied Digital Solutions acquired 80% of the
outstanding stock of Port Parties, Ltd., which provides leased computers and
related equipment to meeting and convention planners. 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 Applied Digital
Solutions to purchase their remaining 20% interest in Port Parties. In July
1999, Applied Digital Solutions transferred its shares in Port Parties to us,
and amended the agreement with Messrs. Newman and Zuckerman. The amendment
provides that Intellesale will pay them $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, Applied Digital Solutions acquired 80% of the outstanding
stock of Blue Star Electronics, Inc., a manufacturer of custom computer cables
and cable assemblies. Applied Digital Solutions 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 Applied Digital Solutions
to purchase his remaining 20% interest in Blue Star. In August 1999, Applied
Digital Solutions amended its agreement with Mr. Pappas to provide that
Intellesale 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 in shares of our common stock,
valued at the initial public offering price in this offering.
Service Transport Company
In April 1998, Applied Digital Solutions acquired 80% of the outstanding
stock of Service Transport Company, a trucking company. Under the acquisition
agreement, Erich Nigl and Carl C. Saracino, the stockholders of Service
Transport, had the right to require Applied Digital Solutions to purchase their
remaining 20% interest in Service Transport. Applied Digital Solutions purchased
Mr. Nigl's remaining interest in December 1998 for nominal consideration. In
August 1999, Applied Digital Solutions amended its agreement with Mr. Saracino
to provide that Intellesale 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, Applied Digital Solutions acquired all of the outstanding
stock of Data Path Technologies, Inc., a seller of refurbished computer
products, including sales made
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through the Internet. Applied Digital Solutions 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, Applied Digital Solutions
amended its agreement with the Data Path stockholders to provide that
Intellesale 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 in
cash 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, Applied Digital Solutions acquired all of the stock
of GDB Software Services, Inc., a provider of consulting services relating to
software and computer equipment. Applied Digital Solutions 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, Applied Digital
Solutions amended its agreement with the selling stockholders to provide that
Intellesale 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 in
cash 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, Applied Digital Solutions acquired substantially
all of the assets of Fiscal Advantage Corporation, which acts as a broker in
arrangements between buyers of computers and leasing companies. 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, Applied Digital Solutions amended its agreement with Mr. Phillips to
provide that Intellesale 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 in
cash 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 "tag along" and put sales
rights for their shares of our common stock, which are described in the
following paragraphs.
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. 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
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proposes to sell of its shares, and would be entitled to receive the same per
share amount as Applied Digital Solutions.
In the absence of this offering, beginning November 1, 2001, 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. Upon
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 $9.00
per share and after giving effect to the issuance of 1,629,889 shares of our
common stock to the sellers of Bostek and our other subsidiaries, Applied
Digital Solutions will own approximately 49.9% of our outstanding common stock,
or approximately 47.3% 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 our 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 having or seeking the ability to direct
control of Intellesale;
- 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 our 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
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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 except for registration statements we file pursuant to
our registration rights agreement with applied Digital Solutions, described
below.
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 rights with respect to the registration of their shares under the
Securities Act. These three stockholders will beneficially own a total of
15,300,000 shares of our common stock after this offering, including 2,000,000
options to purchase shares of our common stock held by Messrs. Sherman and
Cummings, assuming the underwriters do not exercise their over-allotment option.
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 selling 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 services
to us and incurs expenses on our behalf. These services consist of legal,
internal audit and financial reporting. We incurred approximately $0.4 million
of these costs in 1998 and approximately $0.5 million in the first nine months
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. We believe that the cost of providing these services will be
approximately the same as the fees which Applied Digital Solutions has been
charging us for these services.
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<PAGE> 101
Applied Digital Solutions has agreed that it will make the services of its
general counsel, Michael Krawitz, available to Intellesale at a rate of $100 per
hour if and to the extent required by Intellesale. There is no formal written
agreement in place with respect to such services, and Intellesale is not
obligated to use Mr. Krawitz's services.
Financing. As of December 7, 1999, the outstanding amount of our
borrowings from Applied Digital Solutions was $36.6 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 and from which we plan
to repay all amounts outstanding to Applied Digital Solutions. We cannot provide
assurance that we will be able to establish such line of credit on favorable
terms or at all. We intend to use $17.0 million of the proceeds from this
offering to repay outstanding indebtedness; to the extent our new line of credit
is not established, these proceeds will be used to pay amounts owing to Applied
Digital Solutions.
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. Following completion of this offering, we will no
longer be a part of the Applied Digital Solutions consolidated group. The
agreement 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
not attributable to us, and we have agreed to indemnify Applied Digital
Solutions against any of our tax liabilities.
Conflicts of Interest. Our directors include one person who is a director
of Applied Digital Solutions, one who is an executive officer of Applied Digital
Solutions, and who one 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, representing less than 1% 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
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<PAGE> 102
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.
Finders Fees. In respect of acquisitions that took place in 1997 and 1998,
Applied Digital Solutions paid finder's fees to Messrs. Sherman, Cummings and
Newman, as set forth under "Management -- Summary Compensation Table."
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 November 30, 1999:
<TABLE>
<CAPTION>
ACCRUED AND
UNPAID
INTEREST AS OF
OUTSTANDING NOVEMBER 30,
OFFICER PRINCIPAL 1999 TOTAL
------- ----------- -------------- --------
<S> <C> <C> <C>
Marc Sherman................................. $595,000 $52,218 $647,218
Edward L. Cummings........................... 52,515 264 52,779
Charles D. Newman............................ 26,505 10,833 37,338
-------- ------- --------
$674,020 $63,315 $737,335
======== ======= ========
</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."
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<PAGE> 103
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of December 7, 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. A person is deemed to beneficially own shares of common stock
subject to options, warrants and convertible securities held by the person if
the options, warrants or convertible securities are currently exercisable or
convertible or are 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 1,111,111 shares of our common stock to the
sellers of Bostek in connection with our acquisition of Bostek; and
- the issuance of 518,778 shares of our common stock in settlement of
earn-outs in connection with 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
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<PAGE> 104
shares of common stock, except to the extent authority is shared by spouses
under applicable law.
<TABLE>
<CAPTION>
SHARES OWNED PRIOR SHARES OWNED AFTER
TO THE OFFERING THE OFFERING
--------------------- ---------------------
NAME OF BENEFICIAL OWNERS 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 79.9% 1,700,000 10,300,000 49.9%
Marc Sherman(1)................. 3,700,000 23.1 -- 3,700,000 17.1
Edward L. Cummings(1)........... 1,300,000 8.1 -- 1,300,000 6.0
Garrett A. Sullivan(2).......... 500,000 3.2 -- 500,000 2.4
David A. Loppert(2)............. 500,000 3.2 -- 500,000 2.4
Charles D. Newman(3)............ 300,000 2.0 -- 300,000 1.4
Constance K. Weaver(2).......... 100,000 * -- 100,000 *
Alexander H. Good............... 7,500 * -- 7,500 *
Timothy C. O'Brien.............. 7,500 * -- 7,500 *
All directors and executive
officers as a group (9
persons)(4)................... 6,540,000 35.3% -- 6,540,000 27.1%
========== ==== ========= ========== ====
</TABLE>
- -------------------------
* Less than 1%.
(1) Includes 1,000,000 shares of common stock issuable to each of Messrs.
Sherman and Cummings upon the exercise of stock options which are
exercisable within 60 days of the date of this table. 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 which are exercisable within 60 days of the date of this table. Such
shares would be subject to the limitations of the lock-up agreements
described below under "Shares Available for Future Sale."
(3) Consists of shares of common stock issuable upon the exercise of stock
options which are exercisable within 60 days of the date of this table. 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 3,525,000 shares of common stock issuable upon the exercise of
stock options which are exercisable within 60 days of the date of this
table.
If the underwriters exercise their over-allotment option in full, Applied
Digital Solutions will own 10,045,000 shares of our common stock representing
approximately 47.3% of our common stock.
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<PAGE> 105
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 the date of this prospectus, 15,015,000 shares of our common stock
were outstanding and held of record by five stockholders. As of the date of this
prospectus, options to purchase 5,350,000 shares of our common stock at an
exercise price of $0.85 per share, and options to purchase 250,000 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 20,644,889 shares of
common stock, after giving effect to the issuance of 1,629,889 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 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
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<PAGE> 106
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 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 any of the following
wrongful acts:
- any breach of the director's duty of loyalty to us or to our
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- any actions under Section 174 of the Delaware General Corporation Law; or
- any transaction from which the director derives an improper personal
benefit.
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<PAGE> 107
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 to the maximum extent
permitted by Delaware law for liabilities they incur serving as our directors
and officers. We believe that these provisions and agreements will assist us in
attracting and retaining qualified individuals to serve as directors and
officers.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Equiserve LP.
LISTING
There is currently no active trading market for our common stock. We have
applied to have our common stock approved for quotation on the Nasdaq National
Market under the symbol "SALE."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 20,644,889 shares of our
common stock outstanding, assuming no exercise of the underwriters'
over-allotment offering, no exercise of options and the issuance of 1,629,889
shares to owners of minority interests in 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 14,949,889 shares eligible
for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- -------------------------------------------------
<C> <S>
0 After the date of this prospectus.
13,300,000 After July 13, 2000, subject, in all cases, to
volume limitations.
1,644,889 At various times after January 2001, subject in
all cases to volume limitations.
</TABLE>
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
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<PAGE> 108
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 206,000 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.
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.
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<PAGE> 109
REGISTRATION RIGHTS
Upon completion of this offering, Applied Digital Solutions, Marc Sherman
and Edward L. Cummings and their transferees, will be entitled to 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 beneficially own
15,300,000 shares of our common stock (including 2,000,000 shares of common
stock issuable upon exercise of outstanding stock options) after this offering,
after giving effect to the sale of the 1,700,000 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 on
the terms specified in our agreement with those shareholders. 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 -- Transaction with Applied
Digital Solutions and Its Affiliates -- Registration Rights."
STOCK OPTIONS
We intend to file a registration statement under the Securities Act
covering 5,600,000 shares of common stock reserved for issuance under our 1997
Non-Qualified Stock Option Plan and the 15,000 shares issued and 2,485,000
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 restricted stock awards or 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.
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............................................ 5,700,000
=========
</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.
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<PAGE> 110
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. The underwriting discounts and commissions per share are the
public offering price per share less the amount paid by the underwriters to us
and to Applied Digital Solutions per share of common stock. 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
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <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 approximately
$750,000.
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 600,000 additional shares from Intellesale and up to 255,000 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.
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. These liabilities generally consist of
damages which the underwriters may be required to pay in connection with, and
expenses incurred in responding to or defending, claims which may be asserted
against the underwriters and which arise out of or relate to the offer, purchase
or sale of our common stock in this offering.
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
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<PAGE> 111
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:
- 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
- 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 this
paragraph 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 has been 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 are 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 have applied 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.
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<PAGE> 112
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 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 Thalmann has in the past performed investment banking services
for Applied Digital Solutions, for which it has received customary compensation,
including a fee of $1.175 million in connection with the closing of the credit
facility which Applied Digital Solutions entered into with IBM Credit
Corporation in 1999.
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 and combined financial statements for the year ended
December 31, 1998 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
combined 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 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 herein in reliance
on the report of DiPesa & Company, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
110
<PAGE> 113
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
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.
111
<PAGE> 114
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INTELLESALE.COM, INC. AND PREDECESSOR COMPANIES TO
INTELLESALE.COM, INC.
Financial Statements for the years ended December 31, 1996,
1997 and 1998
Reports of Independent Accountants.......................... F-2
Financial Statements
Consolidated and Combined Balance Sheet................... F-5
Combined Statements of Operations......................... F-6
Combined Statements of Stockholders' Equity............... F-7
Combined Statements of Cash Flows......................... F-8
Notes to Consolidated and Combined Financial Statements... F-9
Financial Statements (unaudited) for the nine months ended
September 30, 1999 and 1998
Consolidated Balance Sheet................................ F-27
Consolidated and Combined Statements of Operations........ F-28
Consolidated and Combined Statements of Stockholders'
Equity................................................. F-29
Consolidated and Combined Statements of Cash Flows........ F-30
Notes to Consolidated and Combined Financial Statements... F-31
BOSTEK, INC. AND AFFILIATE
Financial Statements for the years ended December 31, 1996,
1997 and 1998
Independent Auditor's Report................................ F-39
Financial Statements
Balance Sheet............................................. F-40
Statements of Income and Retained Earnings................ F-41
Statement of Cash Flows................................... F-42
Notes to Financial Statements............................. F-43
Financial Statements (unaudited) for the five months ended
May 31, 1999 and May 31, 1998
Balance Sheet............................................. F-49
Statements of Income...................................... F-50
Statements of Cash Flows.................................. F-51
Notes to Financial Statements............................. F-52
UNIVERSAL COMMODITIES CORP.
Financial Statements for the ten months ended October 31,
1996
Report of Independent Accountants........................... F-54
Financial Statements
Balance Sheet............................................. F-55
Statement of Operations................................... F-56
Statement of Cash Flows................................... F-57
Notes to Financial Statements............................. F-58
</TABLE>
F-1
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Intellesale.com, Inc.
In our opinion, the accompanying consolidated balance sheet presents
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, in conformity with generally accepted
accounting principles. This balance sheet is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is 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, the second paragraph of Note 10 and
Note 16 which are as of August 23, 1999)
F-2
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of the Predecessor Companies
of Intellesale.com, Inc.
In our opinion, the accompanying combined statements of operations, of
investment in predecessor companies and stockholders' equity, and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of the predecessor companies of Intellesale.com, Inc. (all of which are
wholly or majority-owned subsidiaries of Applied Digital Solutions, Inc.) for
the year ended December 31, 1998 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, the second paragraph of Note 10 and
Note 16 which are as of August 23, 1999)
F-3
<PAGE> 117
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
of the Predecessor Companies of
Intellesale.com, Inc.
We have audited the accompanying combined balance sheet of the predecessor
companies of Intellesale.com, Inc. (all of which are majority-owned subsidiaries
of Applied Digital Solutions, Inc.) as of December 31, 1997, and the related
combined statements of operations, investment in predecessor companies 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
predecessor companies of Intellesale.com, Inc. as of December 31, 1997, and the
combined results of their operations, their investment in predecessor companies
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-4
<PAGE> 118
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
COMBINED PREDECESSOR
COMPANIES TO CONSOLIDATED
INTELLESALE.COM, INC. INTELLESALE.COM, INC.
--------------------- ---------------------
DECEMBER 31, 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................................. 2,727 7,864
OTHER ASSETS.................................. 68 125
------- -------
$11,127 $21,363
======= =======
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 30,000,000 shares of $.0001 par
value; issued and outstanding 15,000,000
shares................................... 1
Additional paid-in capital.................... 9,139
Equity of predecessor companies............... 4,987 --
TOTAL STOCKHOLDERS' EQUITY.................. 4,987 9,140
------- -------
$11,127 $21,363
======= =======
</TABLE>
See the accompanying notes to financial statements
F-5
<PAGE> 119
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
COMBINED 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........................ 110 342 774
------ ------- -------
Operating income..................................... 397 2,123 3,621
Interest income...................................... 1 1 45
Interest expense..................................... (10) (152) (341)
------ ------- -------
Income before provision for income taxes and minority
interest........................................... 388 1,972 3,325
Provision for income taxes........................... 190 884 1,646
------ ------- -------
Income before minority interest...................... 198 1,088 1,679
Minority interest.................................... 30 247 226
------ ------- -------
Net income........................................... $ 168 $ 841 $ 1,453
====== ======= =======
</TABLE>
See the accompanying notes to financial statements
F-6
<PAGE> 120
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
COMBINED STATEMENTS OF INVESTMENT IN PREDECESSOR COMPANIES
AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL EQUITY OF
---------------- PAID-IN PREDECESSOR
NUMBER AMOUNT CAPITAL COMPANIES TOTAL
------ ------ ---------- ----------- ------
<S> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1995..... -- $-- $ -- $ (152) $ (152)
Net income....................... -- -- -- 168 168
Contribution of capital from
Parent Company for Parent
Company shares issued for
acquisitions................... -- -- -- 336 336
------ -- ------ ------- ------
BALANCE -- DECEMBER 31, 1996..... -- -- -- 352 352
Net income....................... -- -- -- 841 841
Contribution of capital from
Parent Company for Parent
Company shares issued for
acquisitions................... -- -- -- 3,794 3,794
------ -- ------ ------- ------
BALANCE -- DECEMBER 31, 1997..... -- -- -- 4,987 4,987
Net income....................... -- -- -- 1,453 1,453
Contribution of capital from
Parent Company for Parent
Company shares issued for
Universal Commodities Corp..... -- -- -- 2,700 2,700
Contribution of Predecessor
Companies to Intellesale.com,
Inc. effective December 31,
1998........................... 15,000 1 9,139 (9,140) --
------ --- ------ ------- ------
BALANCE -- DECEMBER 31, 1998..... 15,000 $ 1 $9,139 $ -- $9,140
====== === ====== ======= ======
</TABLE>
F-7
<PAGE> 121
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
COMBINED 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........................................... $ 168 $ 841 $ 1,453
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 110 342 774
Minority interest.................................. 30 247 226
Gain on sale of equipment.......................... -- -- (21)
Net change in operating assets and liabilities
(Note 13)........................................ (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-8
<PAGE> 122
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements of the predecessor companies to
Intellesale.com Inc. and Intellesale.com, Inc. (Intellesale or the Company)
present the financial position, operating results and cash flows of the wholly
and majority owned subsidiaries of Applied Digital Solutions, Inc. (ADS or the
Parent Company) involved in sales, service and leasing of new and refurbished
computer equipment and related components (see Note 2 for a detailed listing of
these individual predecessor businesses and the dates of their acquisition by
ADS). The individual operations of the predecessor businesses have been included
in these financial statements since their acquisition by ADS or Universal
Commodities Corp. (UCC), as described in Note 2.
In December 1998, Intellesale.com, Inc. was incorporated and later merged
with Universal Commodities Corp. (UCC), one of the predecessor businesses.
Additionally, ADS contributed its ownership in each of the other predecessor
businesses to Intellesale.com in July 1999. For financial statement presentation
purposes these transactions have been accounted for at their historical carrying
values as transactions involving entities under common control and effective as
of December 31, 1998. As a result of these transactions and this effective date,
the consolidated balance sheet at December 31, 1998 is that of Intellesale.com.
The combined balance sheet at December 31, 1997 and the combined statements of
operations, of investment in predecessor companies, and of cash flows for each
of the three years ended December 31, 1998, represent those of the predecessor
companies. As Intellesale did not exist prior to December 31, 1998, no earnings
per share information is provided.
OPERATIONS
Intellesale and its predecessor companies sell refurbished and new computer
equipment and related components. The Company sells products online through its
website at www.Intellesale.com as well as through traditional channels, which
the Company is migrating to the Internet. In addition to selling products on its
website, the Company distributes products through marketing arrangements with
OnSale.com, which hosts auctions of the Company's products in exchange for a
commission, as well as Lycos and other Internet portals and service providers.
Intellesale operates in two segments as more fully discussed in Note 14.
F-9
<PAGE> 123
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATION AND COMBINATION POLICY
The Companies included in these consolidated and combined financial
statements are all wholly owned or majority owned subsidiaries of ADS as
described above. Each entity has been included since the date of its acquisition
by ADS as described in Note 2. In preparing these financial statements all
significant intercompany balances and transactions have been eliminated.
Minority interest represents the minority shareholders' proportionate share in
the equity or income of the majority-owned subsidiaries of ADS included herein.
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 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 the life of
leases ranging from 1 to 5 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 life of 7 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.
F-10
<PAGE> 124
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
For all product sales, the Company recognizes revenue upon shipment to the
customer. 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.
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).
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.
F-11
<PAGE> 125
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 14).
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-12
<PAGE> 126
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
The following represents all of the acquisitions made by ADS which occurred
through 1998 and which comprise these financial statements from the date of
their acquisition:
<TABLE>
<CAPTION>
FAIR VALUE
EFFECTIVE OF NET
DATE OF PERCENT ACQUISITION ASSETS BUSINESS
ACQUISITION ACQUIRED PRICE ACQUIRED GOODWILL 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 Components,
Inc. .............................. 04/01/98 100% 1,948 4 1,944 Remarketer of
memory,
processors and
hard drives
Data Path Technologies, Inc. ........ 04/01/98 100% 3,421 146 3,275 Remarketer of
computer
equipment
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 was acquired by ADS for cash. The
original ADS shares will remain outstanding and will not be converted to
Intellesale shares. The above acquisitions have been accounted for using the
purchase method of accounting and, accordingly, the
F-13
<PAGE> 127
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated and combined financial statements reflect the results of operations
of each company from the date of acquisition. The costs of acquisitions reflect
the Parent Company's basis in the assets and liabilities and 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. These acquisitions did not include separate
non-compete agreements. Additionally, none of these entities had any patents,
trademarks or other identifiable intangible assets. Therefore, the excess cost
over the fair value of the tangible assets acquired has been recorded as
goodwill. Goodwill resulting from these acquisitions is being amortized on a
straight-line basis, over seven 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 through December 31, 1998. See Note 16 which describes
subsequent amendments to these Agreements. In summary, these Agreements were
modified to result in Intellesale paying $5,520 in cash and $4,670 in its stock
to pay the earnout agreements and purchase minority interests contingent on the
successful completion of a public offering of Intellesale's stock. Upon payment
of these additional amounts, the value will be recorded as goodwill. See Note 15
for unaudited pro forma information for the above acquisitions that occurred in
1998 and 1997.
3. NOTES RECEIVABLE
<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Due from officers, unsecured, bears interest at 6%, $200 due
November 1999, balance due on demand........................ $12 $1,073
Due from customer, unsecured, due on demand................. 62 62
--- ------
74 1,135
Less: Current portion....................................... 74 262
--- ------
$-- $ 873
=== ======
</TABLE>
As provided in his employment agreement, ADS has guaranteed a $1,250
mortgage loan to the President of Intellesale. This guaranty will be retained by
ADS.
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 expense amounted to $2, $109 and $251 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-14
<PAGE> 128
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.................................... (412) (935)
------ ------
Carrying value.............................................. $2,727 $7,864
====== ======
</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. The
Company entered into agreements with those sellers who are entitled to these
payments under which the Company has agreed to pay fixed amounts, in a
combination of cash and shares of stock, in lieu of earnout payments. Some of
these individuals retained minority interests in these subsidiaries, and in
those cases the Company has also agreed to repurchase their minority interests,
also for a combination of cash and stock. See Notes 2 and 16 for further
discussion.
Goodwill amortization amounted to $108, $233 and $523 for the years ended
December 31, 1996, 1997 and 1998, respectively.
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>
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. In
March 1999, the loan began to bear interest at the same rate as paid 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.
F-15
<PAGE> 129
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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,
based upon the Parent Company's estimate of its actual cost to provide these
services. 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.
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.
F-16
<PAGE> 130
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES RECEIVABLE
The carrying value of the notes approximate fair value because either the
interest rates of the notes approximate the current rate that the Company could
receive on a similar note, or because of the short-term nature of the notes.
NOTES PAYABLE
The carrying amount approximates fair value because of the short-term
nature of the notes.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value.
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.............................................. 34.0 34.0 34.0
Non-deductible goodwill amortization........................ 9.5 11.8 15.7
State and local income taxes, net of federal benefits....... 3.8 3.8 3.8
Other....................................................... 1.7 (4.8) (4.0)
---- ---- ----
49.0 44.8 49.5
==== ==== ====
</TABLE>
F-17
<PAGE> 131
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. 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 from 4 to 5. The stockholders have agreed to
eliminate the put option. See Note 2 and Note 16 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.
F-18
<PAGE> 132
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. PROFIT SHARING PLAN
The Company participates in the Parent Company's Section 401(k) Plan for
the benefit of eligible employees. Essentially all full-time employees with six
months of service are eligible to participate. Company matching contributions
are completely discretionary. The Company and ADS have made no contributions to
the Section 401(k) Plan in 1996 through 1998.
12. STOCK OPTIONS
During 1997, UCC adopted a non-qualified stock option plan (the Option
Plan) that was assumed by the Company upon the merger of UCC into the Company.
The Company 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 to purchase Parent Company stock 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 would have been reduced.
The pro forma amounts are indicated below:
<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Net income
As reported............................................... $841 $1,453
Pro forma................................................. $639 $1,110
</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 options to purchase 5.4 million shares had been granted through December
31, 1998. Each of these options was originally issued in the predecessor entity
UCC which was later merged into Intellesale (see Note 1). The UCC options were
converted into Intellesale options at the merger date under identical terms. The
options may not be exercised until one to four years after the options have been
granted, and are exercisable for a period of ten years. In addition, options for
0.6 million shares of ADS stock were granted 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
F-19
<PAGE> 133
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
A summary of the stock option activity under the Option Plan for 1997 and
1998 follows:
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding on January 1.............. -- $ -- 4,750,000 $0.85
Granted............................... 4,750,000 0.85 650,000 0.85
Exercised............................. -- -- -- --
Forfeited............................. -- -- -- --
--------- ----- --------- -----
Outstanding on December 31............ 4,750,000 0.85 5,400,000 0.85
--------- -- --------- -----
Exercisable on December 31............ -- -- -- --
--------- ----- --------- -----
Shares available on December 31, for
options that may be granted......... 2,750,000 2,100,000
========= ===== ========= =====
</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 WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES 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>
F-20
<PAGE> 134
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding on January 1................. -- $ -- 100,000 $3.83
Granted.................................. 100,000 3.83 410,000 2.21
Exercised................................ -- -- -- --
Forfeited................................ -- -- -- --
------- ----- ------- -----
Outstanding on December 31............... 100,000 3.83 510,000 2.53
------- ----- ------- -----
Exercisable on December 31............... -- -- 200,000 2.19
------- ----- ------- -----
Shares available on December 31, for
options that may be granted............ -- --
======= ===== ======= =====
</TABLE>
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 WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ ------- ----------- --------- ------- ---------
(IN THOUSANDS, EXCEPT FOR EXERCISE PRICE DATA
AND CONTRACTUAL LIFE)
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00................ 400,000 5.50 $2.18 200,000 $2.19
$3.01 to $4.00................ 110,000 6.70 3.82 -- --
------- ---- ----- ------- -----
$2.00 to $4.00................ 510,000 $2.53 200,000 $2.19
======= ==== ===== ======= =====
</TABLE>
F-21
<PAGE> 135
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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 current liabilities 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>
14. 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 the Company sells refurbished and new computer
products through its website. Refurbished products consist primarily of
off-lease equipment which the Company tests, cleans and prepares for
sale, and manufacturer refurbished products which carry a manufacturer's
warranty. The Company's Internet business also includes Internet
wholesale, in which the Company sells its products to other companies
that market these products on their websites. The Company is
transitioning away from this wholesale distribution business and focusing
on selling products directly through the Company's website.
- Traditional commerce and other services, in which the Company buys and
remarkets computer equipment and components to traditional wholesalers,
retailers and value-added resellers, as well as individual and corporate
end users, and provides integration and consulting services, computer
recycling, parts-on-demand services and transportation services for
computer and other equipment. The
F-22
<PAGE> 136
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company is transitioning the traditional commerce business to the
Internet to the extent feasible. 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-23
<PAGE> 137
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<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................. $ 56 $ 602 $ 116 $ -- $ 774
Operating income............... 747 1,928 1,090 (144) 3,621
Segment assets................. 1,809 15,515 4,362 (323) 21,363
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................. $-- $ 288 $ 54 $ -- $ 342
Operating income............... -- 1,881 242 -- 2,123
Segment assets................. -- 10,389 1,066 (328) 11,127
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................. $-- $ 110 $-- $-- $ 110
Operating income............... -- 397 -- -- 397
Expenditures for property...... -- 20 -- -- 20
</TABLE>
F-24
<PAGE> 138
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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 Note 2 as if they were effective at January 1, 1997. The statement
gives effect to the acquisitions under the purchase method of accounting. The
1997 pro forma acquisitions include: Norcom Resources, Inc., Pizarro
Remarketing, Inc., Cybertech Station, Inc. and Port Parties, Ltd. The 1998 pro
forma acquisitions include: Blue Star Electronics, Inc., Consolidated Micro
Components, Inc., Data Path Technologies, Inc., GDB Software Services, Inc.,
Service Transport Company and Fiscal Advantage, Inc.
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)
<S> <C> <C>
Revenue...................................... $67,307 $67,076
Net income available to common
stockholders............................... 525 (173)
</TABLE>
16. 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 $9,740 in a combination of $5,820 in cash and $4,220 in stock of Intellesale
plus 50,000 shares of Intellesale stock to Service Transport.
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.
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 on January 3, 2000. In the event an initial public offering does
not occur within one year from closing of the acquisition, the $10,000 will be
F-25
<PAGE> 139
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
payable in cash. An additional $5,000 of the purchase price, payable in cash, 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 by approximately $21,500 (goodwill), which is being
amortized over 7 years and will result in an annual amortization charge of
approximately $3,100.
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.
17. CAPITAL STRUCTURE
COMMON STOCK
The Company has 30,000,000 shares of $0.0001 par value stock authorized
with 15,000,000 shares outstanding at December 31, 1998. All shares outstanding
are fully paid and nonassessable. Each holder of common stock is entitled to one
vote for each share held of record on all stockholder voting matters. The common
stock does not have cumulative voting rights, preemptive rights, conversion
rights, redemption provisions, or sinking fund provisions.
PREFERRED STOCK
The Company has 5,000,000 shares of $0.01 par value preferred stock with no
shares outstanding at December 31, 1998. The Company's Board of Directors is
authorized to determine the terms, limitations and relative rights and
preferences of the preferred stock. If issued, the preferred stock would have
priority over the rights of common stock.
F-26
<PAGE> 140
INTELLESALE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 910
Accounts receivable (net of allowance for doubtful accounts
of $612).................................................. 26,981
Inventories................................................. 23,154
Notes receivable............................................ 326
Prepaid expenses and other current assets................... 1,659
-------
TOTAL CURRENT ASSETS...................................... 53,030
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET................... 1,886
NOTES RECEIVABLE............................................ 880
GOODWILL, NET............................................... 32,742
OTHER ASSETS................................................ 479
-------
$89,017
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt...... $ 89
Accounts payable and accrued expenses....................... 20,720
Due to parent company....................................... 34,173
Due to shareholders of acquired subsidiary.................. 15,000
-------
TOTAL CURRENT LIABILITIES................................. 69,982
-------
NOTES PAYABLE............................................... 17
-------
MINORITY INTEREST........................................... 610
-------
STOCKHOLDERS' EQUITY
Common shares:
Authorized 30,000,000 shares of $.0001 par value; issued
and outstanding 15,000,000 shares...................... 1
Additional paid-in capital.................................. 17,814
Retained earnings........................................... 593
-------
TOTAL STOCKHOLDERS' EQUITY................................ 18,408
-------
$89,017
=======
</TABLE>
See the accompanying notes to financial statements.
F-27
<PAGE> 141
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------------
1998 1999
--------------------- ---------------------
COMBINED
PREDECESSOR
COMPANIES OF CONSOLIDATED
INTELLESALE.COM, INC. INTELLESALE.COM, INC.
--------------------- ---------------------
<S> <C> <C>
REVENUE..................................... $43,041 $87,875
COSTS OF GOODS SOLD......................... 33,891 68,536
------- -------
GROSS PROFIT................................ 9,150 19,339
------- -------
OPERATING COSTS AND EXPENSES
Selling, general and administrative
expenses.................................. 6,035 13,664
Depreciation and amortization............... 551 2,530
------- -------
TOTAL OPERATING COSTS AND EXPENSES.......... 6,586 16,194
------- -------
OPERATING INCOME............................ 2,564 3,145
INTEREST INCOME............................. 27 126
INTEREST EXPENSE............................ (263) (869)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST......................... 2,328 2,402
PROVISION FOR INCOME TAXES.................. 1,050 1,723
------- -------
INCOME BEFORE MINORITY INTEREST............. 1,278 679
MINORITY INTEREST........................... 167 86
------- -------
NET INCOME.................................. $ 1,111 $ 593
======= =======
EARNINGS PER COMMON SHARE -- BASIC.......... $ .04
=======
EARNINGS PER COMMON SHARE -- DILUTED........ $ .03
=======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -- BASIC...................... 15,000
=======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -- DILUTED.................... 17,392
=======
</TABLE>
See the accompanying notes to financial statements.
F-28
<PAGE> 142
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
NUMBER AMOUNT CAPITAL EARNINGS EQUITY
---------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31,
1998........................ 15,000,000 $1 $ 9,139 $ -- $ 9,140
Net income (unaudited).... -- -- -- 593 593
Contribution of capital
from Parent for Parent
shares issued for
acquisitions
(unaudited)............ -- -- 8,675 -- 8,675
---------- -- ------- ---- -------
BALANCE -- SEPTEMBER 30,
1999
(UNAUDITED)............... 15,000,000 $1 $17,814 $593 $18,408
========== == ======= ==== =======
</TABLE>
See the accompanying notes to financial statements.
F-29
<PAGE> 143
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998
--------------------- ---------------------
COMBINED
PREDECESSOR
COMPANIES OF CONSOLIDATED
INTELLESALE.COM, INC. INTELLESALE.COM, INC.
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 1,111 $ 593
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization................... 551 2,530
Minority interest............................... 167 86
(Gain) loss on sale of equipment................ 19 (5)
Change in assets and liabilities:
(Increase) decrease in accounts receivable... 304 (15,680)
Increase in inventories...................... (1,011) (13,509)
Increase in prepaid expenses................. (224) (1,282)
Increase (decrease) in current liabilities
due to Parent Company...................... (1,074) 1,003
Increase (decrease) in accounts payable and
accrued expenses........................... (1,347) 15,631
------- --------
NET CASH USED IN OPERATING ACTIVITIES............. (1,504) (10,633)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable -- officers.......... (912) (82)
(Increase) decrease in other assets............... 47 (356)
Proceeds from sale of property and equipment...... 65 6
Payments for equipment and other assets........... (275) (1,162)
Proceeds from (payments for) costs of asset and
business acquisitions (net of cash balances
acquired)....................................... 68 (10,497)
------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (1,007) (12,091)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net paid on notes payable......................... (1,613) (35)
Proceeds from parent company...................... 4,338 23,109
Payments on long-term debt........................ (148) (11)
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 2,577 23,063
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 66 339
CASH AND CASH EQUIVALENTS -- BEGINNING OF
PERIOD.......................................... 615 571
------- --------
CASH AND CASH EQUIVALENTS -- END OF PERIOD........ $ 681 $ 910
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid................................. $ 62 $ 623
Interest paid..................................... 263 869
Noncash investing and financing activities:
Fixed assets acquired for long-term debt........ -- 72
Due to shareholders of acquired subsidiary...... -- 15,000
------- --------
</TABLE>
See the accompanying notes to financial statements.
F-30
<PAGE> 144
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(DOLLARS 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 and for the nine months
ended September 30, 1999 and of the Predecessor Companies of Intellesale.com,
Inc. for the nine months ended September 30, 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X under the Securities Exchange Act of 1934. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the consolidated financial statements
have been made.
The consolidated statement of operations for the nine months ended
September 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.
In December 1998, Intellesale.com, Inc. was incorporated and later merged
with Universal Commodities Corp. (UCC), one of the predecessor businesses.
Additionally, Applied Digital Solutions (ADS or Parent Company) contributed its
ownership in each of the other predecessor businesses to Intellesale in July
1999. For financial statement presentation purposes these transactions have been
accounted for at their historical carrying values as transactions involving
entities under common control and effective as of December 31, 1998. As a result
of these transactions and this effective date, the consolidated balance sheet,
at September 30, 1999, and the consolidated statement of operations of
stockholders' equity, and of cash flows for the nine months then ended are that
of Intellesale. The combined statement of operations and of cash flows for the
nine months ended September 30, 1998 represent those of the predecessor
companies.
Intellesale and its predecessor companies sell refurbished and new computer
equipment and related components. The Company sells products online through its
Website, at www.Intellesale.com as well as through traditional channels the
Company is migrating to the internet. In addition to selling products on its
website, the Company distributes products through marketing arrangements with
OnSale.com, which hosts auctions of the Company's products in exchange for a
commission, as well as Lycos and other internet portals and service providers.
Intellesale operates in two segments as more fully discussed in Note 3.
CONSOLIDATION AND COMBINATION POLICY
The Companies included in these consolidated and combined financial
statements are all wholly owned or majority owned subsidiaries of ADS or
Intellesale.com as described above. Each entity has been included since the date
of its acquisition by ADS. In preparing these financial statements all
significant intercompany balances and transactions have been eliminated.
Minority interest represents the minority shareholders' proportionate share in
the equity or income of the majority-owned subsidiaries of ADS or
Intellesale.com included herein.
F-31
<PAGE> 145
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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. EPS for 1998 is not presented as
Intellesale was not incorporated until 1998.
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.
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
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999
-----------------
<S> <C>
Numerator:
Net income................................................ $ 593
==========
Denominator:
Denominator for basic earnings per share --
Weighted-average shares................................ 15,000,000
Effect of dilutive securities --
Employee stock options.................................... 2,392,000
----------
Denominator for diluted earnings per share -- Adjusted
Weighted-average shares................................ 17,392,000
==========
Basic earnings per share.................................... $ .04
==========
Diluted earnings per share.................................. $ .03
==========
</TABLE>
F-32
<PAGE> 146
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 the Company sells refurbished and new computer
products through its website. Refurbished products consist primarily of
off-lease equipment which the Company tests, cleans and prepares for
sale, and manufacturer refurbished products, which carry a manufacturer's
warranty. The Company's Internet business also includes Internet
wholesale, in which the Company sells its products to other companies
that market these products on their websites. The Company is
transitioning away from this wholesale distribution business and focusing
on selling products directly through the Company's website.
- Traditional commerce and other services, in which the Company buys and
remarkets computer equipment and components to traditional wholesalers,
retailers, value added retailers as well as individual and corporate end
users, and provides integration and consulting services, computer
recycling, parts-on-demand services and transportation services for
computer and other equipment. The Company is transitioning the
traditional commerce business to the Internet to the extent feasible. 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 in the December 31,
1998 financial statements of the Company and its predecessor companies, 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 nine month periods ended
September 30:
<TABLE>
<CAPTION>
TRADITIONAL
-------------------
SALES AND
1998 INTERNET SERVICE LEASING ELIMINATIONS CONSOLIDATED
---- -------- --------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers........................ $4,549 $34,506 $3,986 $ -- $43,041
Intersegment revenue............. 4 919 -- (923) --
------ ------- ------ ----- -------
Total Revenue.................... $4,553 $35,425 $3,986 $(923) $43,041
====== ======= ====== ===== =======
Depreciation and amortization.... $ 40 $ 451 $ 60 $ -- $ 551
Operating income................. 513 1,250 801 -- 2,564
</TABLE>
F-33
<PAGE> 147
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TRADITIONAL
-------------------
SALES AND
1999 INTERNET SERVICE LEASING ELIMINATIONS CONSOLIDATED
---- -------- --------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers....................... $31,448 $51,778 $4,649 $ -- $87,875
Intersegment revenue............ 2,045 2,962 -- (5,007) --
------- ------- ------ ------- -------
Total Revenue................... $33,493 $54,740 $4,649 $(5,007) $87,875
======= ======= ====== ======= =======
Depreciation and amortization... $ 879 $ 1,460 $ 191 $ -- $ 2,530
Operating income................ 3,902 (1,272) 515 -- 3,145
Segment assets.................. 29,440 54,929 5,292 (536) 89,125
</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, 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 on January
3, 2000. In the event an initial public offering does not occur, 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 7 years.
Unaudited pro forma results of operations for the nine months ended
September 30, 1999 and 1998 are included below. Such pro forma information
assumes that the above transactions had occurred as of January 1, 1998.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
Revenues.................................................... $94,071 $121,275
Net income (loss)........................................... 765 (759)
Earnings per common share -- basic.......................... -- .05
Earnings per common share -- diluted........................ -- .05
</TABLE>
5. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Due to Parent Company -- line of credit..................... $32,343
Due to Parent Company -- other.............................. 1,830
-------
$34,173
=======
</TABLE>
F-34
<PAGE> 148
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 due 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 had loaned to the
Company. In March 1999, the loan began to bear interest at the same interest
rate as paid by the Parent Company. This loan bore interest at 9.0%, as set by
the Parent Company. The loan, including interest, was repaid as funds were
available.
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. 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,
based upon ADS's estimate of the actual cost to provide these services. The
Company incurred approximately $315 and $450 in these costs to the Parent
Company in the nine month periods ended September 30, 1998 and 1999,
respectively. Management believes the method used to allocate expenses to the
Company is reasonable and appropriate.
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 annual rental payments under the lease are $48 per month for the
first three years and $60 per month for the last two years.
In connection with certain acquisitions, the Company agreed to pay
additional amounts to sellers of the acquired businesses depending on the
performance of the businesses. The Company recently entered into agreements with
those sellers who are entitled to these payments under which the Company has
agreed to pay fixed amounts, in a combination of cash and shares of stock, in
lieu of earnout payments. Some of those individuals also retained minority
interests in the subsidiaries, and in those cases the Company has also agreed to
repurchase their minority interests, also for a combination of cash and stock.
Upon successful completion of the Company's pending initial public offering, the
Company will pay $9,740 in cash and stock and increase goodwill by approximately
$9,130 to record the transactions resulting from these agreements.
F-35
<PAGE> 149
INTELLESALE.COM, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. SUBSEQUENT EVENTS
On November 11, 1999, a customer initiated litigation against the Company.
On November 22, 1999, the litigation with the customer was settled. In entering
into the settlement of this matter, neither the Company nor the customer has
admitted liability to the other.
As a result of this settlement, the Company expects to incur advertising
costs under a promotional program related to additional computers the customer
can purchase in future periods. The customer is not required to purchase these
additional computers. The Company does not anticipate that the obligation
related to the sale of these computers will otherwise have any material effect
on the financial statements.
F-36
<PAGE> 150
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 includes 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
Boston, Massachusetts
F-37
<PAGE> 151
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
Boston, Massachusetts
F-38
<PAGE> 152
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
Boston, Massachusetts
F-39
<PAGE> 153
BOSTEK, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997 AND 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
---------- -----------
(COMBINED)
<S> <C> <C>
CURRENT ASSETS
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-40
<PAGE> 154
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-41
<PAGE> 155
BOSTEK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
(COMBINED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
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-42
<PAGE> 156
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 business unit as
wholesalers/retailers of personal computer hardware and peripheral products.
Micro Components International, Inc. the affiliate, is not a subsidiary of
Bostek, Inc. but has 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. Both companies have identical ownership by two individuals,
each owning exactly 50% of the stock of each company and who exercise common
control. Additionally, Micro Components International was managed by Bostek for
its entire existence.
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.
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-43
<PAGE> 157
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-44
<PAGE> 158
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1999................................................ $197,120
2000................................................ 179,649
2001................................................ 160,884
2002................................................ 144,000
2003................................................ 144,000
--------
$825,653
========
</TABLE>
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-45
<PAGE> 159
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS -- (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.
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
F-46
<PAGE> 160
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-47
<PAGE> 161
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 COMMON STOCK AND TREASURY STOCK
<TABLE>
<CAPTION>
MICRO
COMPONENTS
INTERNATIONAL, INC.
BOSTEK, INC. NO PAR, NO PAR 10,000
15,000 SHARES AUTHORIZED AUTHORIZED SHARES
------------------------------------------- -------------------
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-48
<PAGE> 162
BOSTEK, INC
BALANCE SHEET
AS OF MAY 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
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
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 163
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................................. 2,906,064 3,804,064
Operating Expenses.................................... 1,795,462 3,434,201
----------- -----------
Income from Operations................................ 1,110,602 369,863
Interest Expense...................................... 204,854 150,873
----------- -----------
Income before provision for income taxes.............. 905,748 218,990
Provision for income taxes............................ 77,972 74,000
----------- -----------
Net income............................................ $ 827,776 $ 144,990
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 164
BOSTEK, 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........................................... 270,198 2,059,064
Other Assets........................................ (72,220) 65,895
Increase (Decrease) in:
Accounts payable and Accrued expenses............... 833,166 2,093,712
Net Cash Flows from Operations...................... (998,246) 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-51
<PAGE> 165
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.
F-52
<PAGE> 166
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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-53
<PAGE> 167
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-54
<PAGE> 168
UNIVERSAL COMMODITIES CORP.
BALANCE SHEET
OCTOBER 31, 1996
<TABLE>
<S> <C>
ASSETS
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-55
<PAGE> 169
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-56
<PAGE> 170
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 paid on notes payable........................... (123,278)
--------
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-57
<PAGE> 171
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.
F-58
<PAGE> 172
UNIVERSAL COMMODITIES CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 which 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, Inc. (formerly Applied Cellular Technology, Inc.).
F-59
<PAGE> 173
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........................ 8
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 26
Selected Financial Data............. 28
Pro Forma Financial Information..... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 42
Management's Discussion and Analysis
of Pro Forma Results of
Operations........................ 66
Intellesale.com, Inc................ 70
Management.......................... 84
Certain Relationships and Related
Transactions...................... 93
Principal and Selling
Stockholders...................... 101
Description of Capital Stock........ 102
Shares Eligible for Future Sale..... 105
Underwriting........................ 107
Legal Matters....................... 110
Experts............................. 110
Change In Independent Accountants... 110
Where You Can Find Additional
Information....................... 111
Index to Financial Statements....... F-1
</TABLE>
-------------------------
UNTIL [ ], 2000, 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.
5,700,000 SHARES
INTELLESALE LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
LADENBURG THALMANN & CO. INC.
PUNK, ZIEGEL & COMPANY
[ ], 2000
<PAGE> 174
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................................... $ 18,223
NASD filing fee........................................ 7,055
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................................. 64,722*
--------
Total............................................. $750,000*
========
</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.
II-1
<PAGE> 175
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 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 1.1) 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, consultants and directors 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.
II-2
<PAGE> 176
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 Agreement, 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 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 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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment to 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 December 13, 1999.
INTELLESALE.COM, INC.
By: /s/ MARC SHERMAN
-----------------------------------
Marc Sherman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARC SHERMAN Director, President and December 13, 1999
- ------------------------------------------ Chief Executive Officer
(Marc Sherman) (Principal Executive
Officer)
/s/ EDWARD L. CUMMINGS Director, Vice President, December 13, 1999
- ------------------------------------------ Chief Financial Officer
(Edward L. Cummings) and Secretary
(Principal Financial
and Accounting Officer)
ALEXANDER H. GOOD* Director December 13, 1999
- ------------------------------------------
(Alexander H. Good)
DAVID A. LOPPERT* Director December 13, 1999
- ------------------------------------------
(David A. Loppert)
TIMOTHY C. O'BRIEN* Director December 13, 1999
- ------------------------------------------
(Timothy C. O'Brien)
GARRET A. SULLIVAN* Director December 13, 1999
- ------------------------------------------
(Garrett A. Sullivan)
CONSTANCE K. WEAVER* Director December 13, 1999
- ------------------------------------------
(Constance K. Weaver)
*By: /s/ MARC SHERMAN
------------------------------------
Marc Sherman
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 178
SCHEDULE II
PREDECESSOR COMPANIES TO 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> 179
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of the Predecessor Companies
To Intellesale.com, Inc.
Our audit of the combined financial statements referred to in our reports
dated June 10, 1999 (except as to the second paragraph of Note 1, Note 10 and
Note 16, which are as of August 23, 1999) appearing on pages F-2 and F-3 of this
Registration Statement on Form S-1 also included an audit of the December 31,
1998 balance of valuation and qualifying accounts and the related changes in
those accounts for the year then ended included in the financial statement
schedule listed in Item 16 of this Registration Statement, 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 combined
financial statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 10, 1999
<PAGE> 180
REPORTS OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of the Predecessor Companies
To Intellesale.com, Inc.
Our audit of the combined financial statements referred to in our report
dated February 24, 1998 appearing on page F-4 of this Registration Statement on
Form S-1 also included an audit of the December 31, 1997 and 1996 balances of
valuation and qualifying accounts and the related changes in those accounts for
the years then ended included in the financial statement schedule listed in Item
16 of this Registration Statement. 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 combined financial statements.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
<PAGE> 181
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of underwriting agreement
2.1+ Agreement of Purchase and Sale, dated as of June 4, 1999,
among the Registrant, Applied Digital Solutions, Inc., David
Romano and Eric Limont
2.2+ Amendment No. 1, dated as of June 9, 1999, among the
Registrant, Applied Digital Solutions, David Romano 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+ See 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 July 30, 1999,
among the Registrant, Marc Sherman and Edward L. Cummings
4.6+ Voting and Standstill Agreement dated as of September 10,
1999, between Applied Digital Solutions and the Registrant
4.5 Specimen Stock Certificate
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+ Form of Tax Allocation and Tax Sharing Agreement, dated as
of December , 1999, between the Registrant and Applied
Digital Solutions, Inc.
10.8+ Agreement, dated as of August 23, 1999, between the
Registrant and Paul Pappas
10.9+ Agreement, dated as of August 23, 1999, between the
Registrant and Sherri Sheerr
10.10+ Agreement, dated as of August 23, 1999, between the
Registrant and Harvey H. Newman
10.11+ Agreement, dated as of August 23, 1999, between the
Registrant and Martin D. Zuckerman
10.12+ Agreement, dated as of August 23, 1999, between the
Registrant and Carl C. Saracino
</TABLE>
<PAGE> 182
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.13+ Agreement, dated as of August 23, 1999, between the
Registrant and Donna W. Pizarro
10.14 Form of Agreement, dated as of December , 1999, between
the Registrant and Joel Owens
10.15 Form of Agreement, dated as of December , 1999, between
the Registrant and Michael Erickson
10.16+ 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.
10.17+ Amendment to Asset Purchase Agreement, dated as of April 1,
1999, by and among the Registrant, Charles J. Phillips and
Fiscal Advantage Corporation
10.18+ Amendment to Agreement and Plan of Class B Reorganization,
dated as of April 1, 1999, by and among Applied Cellular
Technology, Inc., Universal Commodities Corp. (as
predecessor-in-interest to the Registrant), Data Path
Technologies, Inc., Donn J. Wagner, Angela S. Wagner, Edward
M. Kelly and Eilleen E. Kelly
10.19+ Form of Indemnification Agreement between the Registrant and
each of its Directors
10.20+ Business Lease, dated April 1999, between 510 Ryerson Road
Corp. and the Registrant
10.21+ Agreement, dated March 1994, between Shirley B. DiPace and
Data Path Technologies, Inc.
10.22+ Agreement, dated September 14, 1998, between Shirley B.
DiPace and Data Path Technologies, Inc.
10.23+ Agreement, dated March 6, 1998, between Shirley B. DiPace
and Data Path Technologies, Inc.
10.24+ Agreement, dated September 14, 1998, between Shirley B.
DiPace and Data Path Technologies, Inc.
10.25+ Amendment to Employment Agreement, dated September 9, 1999,
between the Registrant and Marc Sherman
10.26 Agreement for Termination of Computer Supply Agreement,
dated November 22, 1999, between the Registrant and FlashNet
Communications, 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)
</TABLE>
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
24.1+ Power of Attorney (included on signature page of
Registration Statement)
24.2+ Power of Attorney of Timothy C. O'Brien
27+ Financial Data Schedule for the Registrant for the year
ended December 31, 1998
27+ Financial Data Schedule for the Registrant for the nine
months ended September 30, 1999
</TABLE>
- -------------------------
+ Previously filed
* To be filed by amendment
<PAGE> 1
EXHIBIT 1.1
INTELLESALE.COM, INC.
5,700,000 Shares*
Common Stock
UNDERWRITING AGREEMENT
LADENBURG THALMANN & CO. INC.
PUNK, ZIEGEL & COMPANY, L.P.
As Representatives of the Several Underwriters
c/o Ladenburg Thalmann & Co. Inc.
590 Madison Avenue, 35th Floor
New York, New York 10022
Ladies and Gentlemen:
Intellesale.com, Inc., a Delaware corporation (the "Company"), and Applied
Digital Solutions, Inc., a Missouri corporation (the "Selling Stockholder"),
hereby confirm their agreement with the underwriters named in Schedule I hereto
(the "Underwriters"), for which you are acting as representatives (the
"Representatives"), with respect to (a) the sale by the Company and the purchase
by the Underwriters of 4,000,000 shares (the "Company Shares") of the Company's
common stock, $.0001 par value (the "Common Stock"), and (b) the sale by the
Selling Stockholder and the purchase by the Underwriters of 1,700,000 shares of
Common Stock (the "Selling Stockholder Shares"). The Company Shares and the
Selling Stockholder Shares are collectively referred to herein as the "Firm
Shares." The Company and the Selling Stockholder have also agreed to sell up to
an aggregate of 855,000 shares (the "Additional Shares") of Common Stock to
cover over-allotments, if any, of which up to 600,000 shares are to be issued
and sold by the Company and 255,000 shares are to be sold by the Selling
Stockholder. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares."
You have advised us that, subject to the terms and conditions herein
contained, you desire to purchase the Firm Shares and that you propose to make
an initial public offering of the Firm Shares as soon as you deem advisable
after the Registration Statement referred to below becomes effective.
- --------
* Plus an option to purchase from the Company and the Selling Stockholder
up to 600,000 Additional Shares and 255,000 Additional Shares, respectively, to
cover over-allotments.
<PAGE> 2
The terms that follow, when used in this Agreement, shall have the meanings
indicated. "Preliminary Prospectus" shall mean each prospectus subject to
completion included in the Company's registration statement on Form S-1 referred
to in Section 1(a)(i) below or any amendment or post-effective amendment thereto
(including the prospectus subject to completion included in the Registration
Statement (as defined below) on the date that the Registration Statement becomes
effective (the "Effective Date") that omits Rule 430A Information (as defined
below)). "Registration Statement" shall mean the registration statement referred
to in Section 1(a)(i) below, including all financial statement schedules and
exhibits, as amended at the Representation Date (as defined in Section 1(a)
hereof) (or, if not effective at the Representation Date, in the form in which
it shall become effective) and, if any post-effective amendment thereto becomes
effective prior to the Closing Date (as defined in Section 2 hereof), shall also
mean such registration statement as so amended. The term "Registration
Statement" shall include Rule 430A Information deemed to be included therein at
the Effective Date as provided by Rule 430A (as defined below). If the Company
files an abbreviated registration statement to register additional shares of
Common Stock pursuant to Rule 462(b) (the "Rule 462 Registration Statement")
under the Securities Act of 1933, as amended (the "Act"), then any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462 Registration Statement. "Prospectus" shall mean (x) if the Company relies on
Rule 434 under the Act, the Term Sheet (as defined below) relating to the Shares
that is first filed pursuant to Rule 424(b)(7) under the Act, together with the
Preliminary Prospectus identified therein that the Term Sheet supplements, or
(y) if the Company does not rely on Rule 434 under the Act, the prospectus first
filed with the Securities and Exchange Commission (the "Commission") pursuant to
Rule 424(b) under the Act, or, if no prospectus is required to be filed pursuant
to Rule 424(b) under the Act, the prospectus included in the Registration
Statement. "Term Sheet" shall mean any term sheet that satisfies the
requirements of Rule 434 under the Act. "Rule 158," "Rule 424," "Rule 434" and
"Rule 430A" refer to such rules under the Act. "Act Regulations" refer to the
rules and regulations under the Act. "Rule 430A Information" means information
with respect to the Shares and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule 430A. For
purposes of the representations and warranties contained herein, to the extent
reference is made to the Prospectus and at the relevant time the Prospectus is
not yet in existence, such reference shall be deemed to be to the most recent
Preliminary Prospectus. For purposes of this Agreement, all references to the
Registration Statement, Prospectus, Preliminary Prospectus or Term Sheet or to
any amendment or supplement to any of the foregoing shall be deemed to include
the copy filed with the Commission pursuant to its Electronic Data Gathering
Analysis and Retrieval system ("EDGAR").
1. Representations and Warranties.
(a) The Company and the Selling Stockholder, jointly and severally,
represent and warrant to, and agree with, each of the Underwriters as of the
date hereof (such date being referred to as the "Representation Date"), as
follows:
(i) The Company meets the requirements for use of Form S-1 under the
Act and has filed with the Commission a registration statement (Registration No.
333-87043) on such form, including a prospectus subject to completion, for the
registration under the Act of the offering and sale of the Shares. The Company
may have filed one or more amendments thereto, including the
<PAGE> 3
related prospectus subject to completion, each of which has previously been
furnished to the Underwriters. After the execution of this Agreement, the
Company will file with the Commission either (A) prior to effectiveness of such
registration statement, a further amendment to such registration statement
(including a form of prospectus), a copy of which amendment has been furnished
to and approved by the Underwriters prior to the execution of this Agreement, or
(B) after effectiveness of such registration statement, either (1) if the
Company relies on Rule 434 under the Act, a Term Sheet relating to the Shares
that shall identify the Preliminary Prospectus that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b) under
the Act or (2) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no amendment shall have been filed, in such
registration statement) in accordance with Rules 430A and 424(b) of the Act
Regulations and as have been provided to and approved by the Underwriters prior
to execution of this Agreement.
(ii) Neither the Commission nor any "blue sky" or securities
authority of any jurisdiction in which the Shares have been offered has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto. When any Preliminary
Prospectus was filed with the Commission it (A) complied in all material
respects with the applicable requirements of the Act and the Act Regulations and
(B) did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and each Preliminary Prospectus and the Prospectus
delivered to the Underwriters for use in connection with the offering of Shares
will, at the time of such delivery, be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T under the Act. On the Effective Date,
the Representation Date and each Closing Date, the Registration Statement did
and will, and when the Prospectus or any Term Sheet that is a part thereof is
first filed (if required) in accordance with Rule 424(b) and on the
Representation Date and each Closing Date, the Prospectus will, comply in all
material respects with the applicable requirements of the Act and the Act
Regulations; on the Effective Date, the Representation Date and each Closing
Date, the Registration Statement did not and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; on the Effective Date, the Representation Date and each Closing
Date, and on the date of any filing pursuant to Rule 424(b), the Prospectus or
any Term Sheet that is a part thereof did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, that the Company makes no
representations or warranties as to the information provided in writing to the
Company by or on behalf of the Underwriters expressly for use in any Preliminary
Prospectus, the Registration Statement or the Prospectus, and the Company agrees
that the only information provided in writing by or on behalf of the
Underwriters to the Company expressly for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus is that information contained in the
table of Underwriters set forth under the caption "Underwriting" in the
Prospectus, the amounts of the selling concession and reallowance set forth in
the Prospectus and the eighth, thirteenth, fourteenth and fifteenth paragraphs
under the caption "Underwriting." On the Effective Date, the Representation Date
and each Closing Date, the Company's registration statement on Form
<PAGE> 4
8-A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
complied and will comply in all material respects with the Exchange Act and the
rules and regulations of the Commission thereunder.
(iii) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware, with all requisite
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature or location of its
properties (owned or leased) or the conduct of its business requires such
qualification, except where the failure so to qualify would not have an adverse
effect on the condition (financial or other), business, properties, prospects,
net worth or results of operations of the Company or any Subsidiary (as defined
below) that is or would be, singly or in the aggregate, material to the Company
and its Subsidiaries taken as a whole, whether or not occurring in the ordinary
course of business (a "Material Adverse Effect").
(iv) All the subsidiaries (as defined in the Act Regulations) of the
Company are listed on Exhibit 21.1 to the Registration Statement and are
referred to herein individually as a "Subsidiary" and collectively as the
"Subsidiaries." Each Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of the state in which it is
incorporated, with all requisite corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus, and is duly qualified to conduct its
business and is in good standing in each jurisdiction or place where the nature
or location of its properties (owned or leased) or the conduct of its business
requires such qualification, except where the failure to so qualify would not
have a Material Adverse Effect.
(v) Each of the Company and each Subsidiary possesses all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from, and has made all declarations and filings with, all
regulatory or governmental officials, bodies and tribunals ("Permits") to own,
lease or operate its respective property and to conduct its respective
businesses described in the Registration Statement and the Prospectus, except
where failure to have obtained or made the same would not have a Material
Adverse Effect, and neither the Company nor any Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
Permits. Each of the Company and each Subsidiary has fulfilled and performed all
its current material obligations with respect to such Permits and no event has
occurred that allows, or after notice or lapse of time, or both, would allow,
revocation or termination thereof or result in any other material impairment of
the rights of the holder of any such Permit and such Permits contain no
restrictions that are materially burdensome to the Company or such Subsidiary
and each of the Company and each Subsidiary is in compliance with all applicable
laws, rules, regulations, orders and consents, the violation of which could have
a Material Adverse Effect. The respective properties and businesses of each of
the Company and each Subsidiary conform in all material respects to the
descriptions thereof contained in the Registration Statement and the Prospectus.
(vi) All of the Company's issued and outstanding capital stock
(including the Selling Stockholder Shares and the Additional Shares to be sold
by the Selling Stockholder) has been duly authorized, validly issued and is
fully paid and nonassessable, and the Common Stock and
<PAGE> 5
the capitalization of the Company conform to the descriptions thereof and the
statements made with respect thereto in the Registration Statement and the
Prospectus as of the date set forth therein. None of the issued shares of Common
Stock (including the Selling Stockholder Shares and the Additional Shares to be
sold by the Selling Stockholder) have been issued in violation of any preemptive
or other rights to subscribe for or purchase shares of capital stock of the
Company. Except as described in the Registration Statement and the Prospectus,
there are no outstanding securities convertible into or exchangeable for, and no
outstanding options, warrants or other rights to purchase, any shares of the
capital stock of the Company, nor any agreements or commitments to issue any of
the same and there are no preemptive or other rights to subscribe for or to
purchase, and no restrictions upon the voting or transfer of, any capital stock
of the Company pursuant to the Company's certificate of incorporation or by-laws
or any agreement or other instrument to which the Company is a party. All offers
and sales of the Company's capital stock prior to the date hereof were at all
relevant times exempt from the registration requirements of the Act, and were
duly registered or the subject of an available exemption from the registration
requirements of the applicable state securities or blue sky laws.
(vii) All the outstanding shares of capital stock of each Subsidiary
have been duly authorized and validly issued and are fully paid and
nonassessable, and, except as described in the Registration Statement and
Prospectus, are owned of record and beneficially by the Company, free and clear
of any security interests, liens, encumbrances, equities or other claims. There
are no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock or other
equity interest in any Subsidiary other than the Company's right to acquire the
remaining 20% of the capital stock of certain of its Subsidiaries, 80% of the
capital stock of which is owned by the Company, as described in the Registration
Statement and the Prospectus. Except as described in the Registration Statement
and the Prospectus or as may be restricted by the law of the state in which such
Subsidiary is incorporated with respect to the need for sufficient surplus, each
Subsidiary is not currently prohibited, directly or indirectly, from paying any
dividends to the Company, from making any other distribution on its capital
stock, from repaying to the Company any loan or advance to such Subsidiary from
the Company or from transferring any of such Subsidiary's property or assets to
the Company.
(viii) Each of the Company and each Subsidiary has good and marketable
title to, and is possessed of, each property, right, interest or estate
constituting the properties and assets described in the Registration Statement
and the Prospectus as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the Registration
Statement and the Prospectus or such as are not burdensome and do not interfere
with the use or proposed use of the property or the conduct of the business of
the Company or such Subsidiary in a manner that is or would be material to the
business of the Company and its Subsidiaries taken as a whole. Each of the
Company and each Subsidiary has valid, subsisting and enforceable leases for the
properties described in the Registration Statement and the Prospectus as leased
by it and no event has occurred which, with the passage of time or the giving of
notice or both, would cause a material breach of, or default under, any such
leases.
(ix) The Company has all requisite power, authority, authorizations,
approvals, orders, licenses, certificates and permits to enter into this
Agreement and to carry out the
<PAGE> 6
provisions and conditions hereof, including the issuance and delivery of the
Shares to be issued and sold by the Company to the Underwriters as provided
herein. This Agreement has been duly and validly authorized by the Company, and
this Agreement has been duly executed and delivered by the Company and
constitutes a legal, valid and binding agreement of the Company, enforceable
against it in accordance with its terms, except to the extent rights to
indemnity hereunder may be limited by Federal or state securities laws or public
policy underlying such laws and except to the extent the enforcement hereof may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
equitable principles.
(x) Except as disclosed in the Registration Statement and the
Prospectus, each of the Company and each Subsidiary owns or possesses adequate
licenses or other rights to use, free and clear of all liens, charges, claims,
encumbrances and restrictions of any kind whatsoever, all patents, trademarks,
service marks, trade names, domain names, copyrights, trade secrets, technology
and licenses, and rights with respect to the foregoing, used by it or which are
necessary in the conduct of its business as currently or proposed to be
conducted by the Company or such Subsidiary, as described in the Prospectus, and
except as disclosed in the Registration Statement and the Prospectus, neither
the Company nor any Subsidiary is obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to any owner or
licensee of, or other claimant to, any patent, trademark, service mark, trade
name, domain name, copyright, trade secret, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise. None of the technology employed by the
Company or any Subsidiary has been obtained or is being used by the Company or
such Subsidiary in violation of any contractual fiduciary obligation binding on
the Company or such Subsidiary or, to the knowledge of the Company, each
Subsidiary and the Selling Stockholder or their respective officers, directors
or employees, otherwise in violation of the rights of any persons. Except as
disclosed in the Registration Statement and the Prospectus, neither the Company
nor any Subsidiary has received any notice of infringement of or conflict with
(or knows of any such infringement of or conflict with) asserted rights of
others with respect to any patents, trademarks, service marks, trade names,
domain names, copyrights, trade secrets, technology or licenses, or rights with
respect to the foregoing which could result in any Material Adverse Effect; and,
except as disclosed in the Registration Statement and the Prospectus, the
discoveries, inventions, products or processes of the Company and its
Subsidiaries referred to in the Prospectus do not infringe or conflict with any
right or patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third party,
known to the Company, any Subsidiary or the Selling Stockholder.
(xi) Each of the Company and each Subsidiary has reviewed its
operations and the operations of any third parties with which it has a material
relationship to evaluate the extent to which its business or operations will be
affected by Year 2000 issues (as defined below). Based on such review, the
disclosure in the Registration Statement relating to Year 2000 issues is
accurate and complies in all material respects with the Act Regulations. "Year
2000 issues" as used herein means Year 2000 issues described in or contemplated
by the Commission's Interpretation: Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies, and
Municipal Securities Issuers (Release No. 33-7558).
<PAGE> 7
(xii) The Shares to be sold by the Company have been duly and validly
authorized for issuance by the Company and the Company has the corporate power
and authority to issue, sell and deliver such Shares; and, when such Shares are
issued and delivered against payment therefor as provided by this Agreement,
such Shares will have been validly issued, fully paid and nonassessable, and the
issuance of such Shares will not be subject to any preemptive or similar rights.
All corporate action required to be taken by the stockholders or the Board of
Directors of the Company for the authorization, issuance and sale of such Shares
has been duly and validly taken.
(xiii) PricewaterhouseCoopers LLP, Rubin, Brown, Gornstein & Co., LLP
and DiPesa & Company, whose reports are filed with the Commission as part of the
Registration Statement, are independent certified public accountants with
respect to the Company and its Subsidiaries within the meaning of and as
required by the Act and the Act Regulations.
(xiv) The consolidated financial statements and related schedules and
notes included in the Registration Statement and the Prospectus comply in all
material respects with the requirements of the Act and present fairly the
financial position of the Company and its Subsidiaries, on the basis stated in
the Registration Statement, as of the respective dates thereof and the results
of operations and cash flows of the Company and its Subsidiaries, for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Registration Statement and the
Prospectus. The other financial and statistical information and data set forth
in the Registration Statement and Prospectus are accurately presented and, to
the extent such information and data is derived from the financial books and
records of the Company and its Subsidiaries, is prepared on a basis consistent
with such financial statements and books and records. The selected consolidated
financial information included under the caption "Selected Financial Data" in
the Prospectus presents fairly the information shown therein and has been
compiled on a basis consistent with that of the audited consolidated financial
statements of the Company and its Subsidiaries included therein. No other
financial statements or schedules of the Company or any Subsidiary are required
by the Act or the Act Regulations to be included in the Registration Statement
or Prospectus. Neither the Company nor any Subsidiary is currently planning any
acquisition for which disclosure of pro forma financial information would be
required by the Act.
(xv) The pro forma financial statements of the Company and the related
notes thereto set forth in the Registration Statement and the Prospectus have
been prepared on a basis consistent with the historical financial statements of
the Company, give effect to the assumptions used in the preparation thereof on a
reasonable basis and in good faith and present fairly the historical
transactions contemplated by the Registration Statement and the Prospectus. Such
pro forma financial statements have been prepared in accordance with the
applicable requirements of Rule 11-02 of Regulation S-X promulgated by the
Commission and the assumptions used in preparing such information are
reasonable. The other pro forma financial and statistical information and data
set forth in the Registration Statement and the Prospectus are accurately
presented and prepared on a basis consistent with the pro forma financial
statements.
(xvi) Each of the Company and each Subsidiary maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (A)
transactions are
<PAGE> 8
executed in accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xvii) Each of the Company and each Subsidiary maintains insurance
covering its properties, operations, personnel and businesses, including
business interruption insurance. Such insurance insures against such losses and
risks and in such amounts as are prudent and customary in the business in which
it is engaged. Neither the Company nor any Subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect. All such
insurance is outstanding and duly in force on the date hereof.
(xviii) Each of the Company and each Subsidiary is in compliance with
all Federal, state, local or foreign laws or regulations relating to pollution
or protection of human health or the environment ("Environmental Laws"), except
where the failure to be in compliance would not have a Material Adverse Effect.
Neither the Selling Stockholder, the Company nor any Subsidiary has authorized,
conducted or has any knowledge of the generation, transportation, storage, use,
treatment, disposal or release of any hazardous substance, hazardous waste,
hazardous material, hazardous constituent, toxic substance, pollutant,
contaminant, petroleum product, natural gas, liquified gas or synthetic gas,
defined or regulated under any Environmental Law on, in or under any property
currently leased or owned or by any means controlled by the Company or any
Subsidiary (the "Real Property") in violation of any applicable law, except for
any violation which would not have a Material Adverse Effect; there is no
pending or, to the Company's, any Subsidiary's or the Selling Stockholder's
knowledge, threatened claim, action, litigation or any administrative agency
proceeding involving the Company or any Subsidiary, nor has the Company or any
Subsidiary received any written notice, or any oral notice to any executive
officer of the Company or any Subsidiary or any other employee responsible for
receipt of any such notice, from any governmental entity or third party, that
(A) alleges a violation of any Environmental Laws by the Company or any
Subsidiary or any person or entity whose liability for a violation of an
Environmental Law the Company or any Subsidiary has retained or assumed either
contractually or by operation of law, which liability or violation could have a
Material Adverse Effect; (B) alleges the Company or any Subsidiary is a liable
party under the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Section 9601 et seq., or any state superfund law; (C) alleges
possible contamination of the environment by the Company or any Subsidiary; or
(D) alleges possible contamination of the Real Property.
(xix) Neither the Company nor any Subsidiary is in violation of their
respective charters or by-laws. Neither the Company nor any Subsidiary is, or
with the passage of time or the giving of notice or both will be, in violation
of any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any Subsidiary, or of any judgment,
<PAGE> 9
order or decree of any court or governmental agency or body or of any arbitrator
having jurisdiction over the Company or any Subsidiary which could have a
Material Adverse Effect, or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any mortgage, loan
agreement, note, bond, debenture, credit agreement or any other evidence of
indebtedness or in any agreement, contract, indenture, lease or other instrument
to which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary is bound, or to which any of the property or assets of the Company or
any Subsidiary is subject, the effect of which violation or default in
performance or observance could have a Material Adverse Effect.
(xx) There is no action, suit or proceeding before or by any court,
arbitrator or governmental agency or body pending or, to the Company's, any
Subsidiary's or the Selling Stockholder's knowledge, threatened, against the
Company or any Subsidiary, (A) that is required to be described in the
Registration Statement or the Prospectus but is not described as required or (B)
that, if adversely determined, could have a Material Adverse Effect. There is no
agreement, contract, indenture, lease or other document or instrument that is
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that is not described or
filed as required. All such agreements to which the Company or any Subsidiary is
a party have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary, and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
(xxi) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) the Company (1) has not issued any securities other than in
connection with the exercise of any outstanding options or warrants, (2)
incurred any material liability or obligation, direct or contingent, for
borrowed money, (3) entered into any transaction, not in the ordinary course of
business, that is material to the Company and its Subsidiaries taken as a whole,
(4) entered into any transaction with an affiliate of the Company or any
Subsidiary (as the term "affiliate" is defined in Rule 405 promulgated by the
Commission pursuant to the Act), which would otherwise be required to be
disclosed in the Registration Statement and the Prospectus, or (5) declared or
paid any dividend on its capital stock or made any other distribution to its
equity holders, (B) there has not been any material change in the capital stock
or other equity, or material increase in the short-term debt or long-term debt,
of the Company and its Subsidiaries and (C) there has been no change or
development with respect to the condition (financial or otherwise), business,
properties, prospects, net worth or results of operations of the Company or any
Subsidiary that could have a Material Adverse Effect.
(xxii) Neither the execution, delivery or performance of this
Agreement, the offer, issuance, sale or delivery of the Shares, nor the
consummation of the other transactions contemplated hereby (A) requires the
consent, approval, authorization or order of any court or governmental agency or
body, except such as have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters or such as may be
required by the National Association of Securities Dealers, Inc. (the "NASD")
and such other approvals as have been obtained, (B) will conflict with, result
in a breach or violation of, or constitute a default under the terms of any
agreement, contract, indenture, lease or other instrument to which the Company
or any Subsidiary is a
<PAGE> 10
party or by which any of them or any of their respective properties may be
bound, or the charter or by-laws of the Company or any Subsidiary, (C) will
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Subsidiary or an acceleration of
indebtedness pursuant to the terms of any agreement or instrument to which any
of them may be bound or to which any of them is a party or by which any of the
property or assets of any of them is subject, (D) will conflict with or violate
any law, statute or regulation, or any judgment, order, consent or memorandum of
understanding applicable to the Company or any Subsidiary of any court,
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any Subsidiary or their respective properties,
or (E) result in the suspension, termination or revocation of any Permit.
(xxiii) The Company has not distributed and, prior to the later to
occur of (A) the Closing Date or (B) completion of the distribution of the
Shares, will not distribute without the prior written consent of Ladenburg
Thalmann & Co. Inc. ("Ladenburg") any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, any
Preliminary Prospectus, the Prospectus or other materials, if any, permitted by
the Act and the Act Regulations.
(xxiv) Neither the Company nor any Subsidiary nor any employee or
agent of the Company or any Subsidiary has made any payment of funds of the
Company or any Subsidiary or received or retained any funds, in violation of any
law, rule or regulation, or which payment, receipt or retention of funds is of a
character required to be disclosed in the Registration Statement or the
Prospectus.
(xxv) There is no (i) unfair labor practice complaint, grievance or
arbitration proceeding pending or, to the Company's, any Subsidiary's or the
Selling Stockholder's knowledge, threatened against the Company or any of its
Subsidiaries before the National Labor Relations Board or any state or local
labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending
or, to the Company's, any Subsidiary's or the Selling Stockholder's knowledge,
threatened against the Company or any of its Subsidiaries or (iii) union
representation question existing with respect to the employees of the Company
and its Subsidiaries, except for such actions specified in clause (i), (ii) or
(iii) above, which, singly or in the aggregate, would not have a Material
Adverse Effect. To the Company's, any Subsidiary's or the Selling Stockholder's
knowledge, no collective bargaining organizing activities are taking place with
respect to the Company or any of its Subsidiaries.
(xxvi) Each of the Company and each Subsidiary has filed (or have
obtained extensions thereto) all Federal, state and local tax returns that are
required to be filed (other than returns with respect to which failure to so
file would not have a Material Adverse Effect), which returns are complete and
correct in all material respects and have paid all taxes shown on such returns
and all assessments received by them with respect thereto to the extent that the
same have become due, except those taxes that are being contested or protested
in good faith by the Company or any Subsidiary and as to which any reserves
required under generally accepted accounting principles have been established;
and neither the Company, any Subsidiary nor the Selling Stockholder has any
knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company or any Subsidiary which could have a Material
Adverse Effect.
<PAGE> 11
(xxvii) Except for the shares of capital stock of each Subsidiary,
neither the Company nor any Subsidiary owns or controls (directly or
indirectly), or owns or holds any right to acquire any share of stock or any
other securities of any corporation, other than the right to acquire the
remaining 20% of the capital stock of certain of its Subsidiaries, 80% of the
capital stock of which is owned by the Company, as described in the Registration
Statement and the Prospectus, or has any equity interest in any firm,
partnership, association or other entity other than as reflected in the
consolidated financial statements included in the Registration Statement and the
Prospectus.
(xxviii) No holder of any security of the Company has the right (other
than a right which has been waived in writing or complied with) to have any
security owned by such holder included in the Registration Statement and, except
as described in the Registration Statement and the Prospectus, no holder of any
security of the Company has the right to demand registration of any security
owned by such holder during the period ending 12 months after the date of the
Prospectus.
(xxix) Neither the Company nor any Subsidiary or their respective
officers, directors, employees or agents has taken or will take, directly or
indirectly, (A) any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares, or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (2) paid or agreed to
pay any person any compensation for soliciting another to purchase any
securities of the Company.
(xxx) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and is not subject to
registration under such act, and will not be treated as such by reason of its
receipt and application of the net proceeds from the offering.
(xxxi) The Company has obtained from each of the Company's officers,
directors and stockholders (including the Selling Stockholder, the former
stockholders of Bostek, Inc. and the persons who are to receive shares of Common
Stock in connection with the Company's acquisition of minority interests in
certain subsidiaries and the buy-out of earn-out arrangements) and any person
who holds options to purchase the Company's Common Stock a written agreement
(the "Lock-Up Agreements"), in form and substance satisfactory to counsel for
the Underwriters, that, for a period of 180 days from the date of the
Prospectus, he, she or it will not, without Ladenburg's prior written consent,
(a) (x) 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 Common Stock or any security convertible into or exchangeable or
exercisable for shares of Common Stock or (y) enter into any swap or other
arrangement that transfers all or a portion of the economic consequences
associated with ownership of any Common Stock and (b) 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.
<PAGE> 12
(xxxii) No transfer tax stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Firm Shares and the 600,000 Additional Shares to be issued and
sold by the Company, (ii) the purchase by the Underwriters of the Firm Shares or
Additional Shares from the Company or (iii) the consummation by the Company of
any of its obligations under this Agreement.
(xxxiii) No relationship, direct or indirect, exists between or among
the Company or any of its Subsidiaries on the one hand, and the directors,
officers, stockholders (including the Selling Stockholder), customers or
suppliers of the Company or any of its Subsidiaries on the other hand, which is
required by the Act to be so described in the Registration Statement or the
Prospectus which is not so described.
(xxxiv) To the Company's, each Subsidiary's and the Selling
Stockholder's knowledge, no officer, director or stockholder has any affiliation
or association with the National Association of Securities Dealers, Inc. or any
member thereof.
(xxxv) The Shares have been duly approved for quotation on the NASDAQ
National Market.
(b) The Selling Stockholder represents and warrants to, and agrees with,
each Underwriter that:
(i) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the Custody Agreement (as defined below) and the
power of attorney appointing _____ and ______ as power of attorney for the
Selling Stockholder (the "Power of Attorney") and to sell, assign, transfer and
deliver to the Underwriters the Selling Stockholder Shares and 255,000
Additional Shares to be sold by the Selling Stockholder in accordance with the
terms of this Agreement. This Agreement, the Custody Agreement and the Power of
Attorney have been duly authorized, executed and delivered by the Selling
Stockholder and are valid and binding agreements of the Selling Stockholder,
enforceable against the Selling Stockholder in accordance with their respective
terms.
(ii) The Selling Stockholder is the sole registered and beneficial
owner of 12,000,000 shares of Common Stock and upon sale and delivery of, and
payment for, the Selling Stockholder Shares and 255,000 Additional Shares to be
sold by the Selling Stockholder, as provided herein, the Selling Stockholder
will convey good and marketable title to such Shares, free and clear of all
security interests, liens, encumbrances, equities, claims or other defects.
(iii) Other than as permitted by the Act and the Act Regulations, the
Selling Stockholder has not distributed and will not distribute any Preliminary
Prospectus, the Prospectus or any other offering material in connection with the
offering and sale of the Shares. The Selling Stockholder has not, directly or
indirectly, (A) taken and will not, directly or indirectly, take any action
designed to cause or result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares, or (B) since the filing of the Registration Statement (1) sold, bid for,
<PAGE> 13
purchased or paid anyone any compensation for soliciting purchases of, the
Shares or (2) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(iv) Neither the execution, delivery or performance of this Agreement,
the Custody Agreement or the Power of Attorney by the Selling Stockholder, the
compliance by the Selling Stockholder with the provisions hereof nor the
consummation of the transactions contemplated hereby (A) requires the consent,
approval, authorization or order of any court or regulatory agency or body
(except such as have been obtained under the Act and such as may be required by
the NASD or under state securities or blue sky laws in connection with the
purchase and distribution by the Underwriters of the Selling Stockholder Shares
and 255,000 Additional Shares to be sold by the Selling Stockholder), or (B)
conflict with, or result in a breach or violation of, or constitute a default
under (i) the certificate of incorporation or by-laws of the Selling Stockholder
or (ii) the terms of any agreement, contract, indenture, lease or other
instrument to which the Selling Stockholder is a party or by which the Selling
Stockholder or any of the Selling Stockholder's properties are bound, or (C)
will conflict with or violate any law, statute or regulation, or any judgment,
order, consent or memorandum of understanding applicable to the Selling
Stockholder of any court, regulatory body, administrative agency or governmental
body or arbitrator having jurisdiction over the Selling Stockholder or the
property of the Selling Stockholder.
(v) Certificates representing the Selling Stockholder Shares and
255,000 Additional Shares to be sold by the Selling Stockholder, accompanied by
a duly executed instrument of transfer, have been placed in custody, for
delivery pursuant to the terms of this Agreement, under a custody agreement duly
authorized, executed and delivered by the Selling Stockholder, in the form
heretofore furnished to you (the "Custody Agreement"), with ____________,** as
Custodian (the "Custodian"); the Selling Stockholder Shares and 255,000
Additional Shares to be sold by the Selling Stockholder represented by the
certificates so held in custody for the Selling Stockholder are for the benefit
of and coupled with and subject to the interests hereunder of the Custodian and
the Underwriters; the arrangements for custody and delivery of such certificates
made by the Selling Stockholder hereunder and under the Custody Agreement and
Power of Attorney are not subject to termination by any acts of the Selling
Stockholder, by operation of law or by the occurrence of any other event,
including without limitation the bankruptcy, liquidation or dissolution of the
Selling Stockholder; and if any such event shall occur before the delivery of
the Shares to be sold by the Selling Stockholder hereunder, certificates for
such Shares will be delivered by the Custodian in accordance with the terms and
conditions of this Agreement, the Custody Agreement and the Power of Attorney as
if such event had not occurred, regardless of whether or not the Custodian shall
have received notice of such event.
(vi) All information furnished or to be furnished by the Selling
Stockholder specifically for use in connection with the preparation of the
Preliminary Prospectus, the Registration Statement and the Prospectus, insofar
as it relates to the Selling Stockholder, is and on the Effective Date, the
Representation Date and each Closing Date will be true and correct in all
material respects
- -------------------
** Transfer Agent
<PAGE> 14
and, with respect to the Registration Statement and Prospectus, does not and on
the Effective Date, the Representation Date and each Closing Date will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading.
(vii) At the Closing Dates, all stock transfer or other taxes (other
than income taxes) which are required to be paid in connection with the sale and
transfer of the Selling Stockholder Shares and 255,000 Additional Shares to be
sold by the Selling Stockholder hereunder will have been fully paid or provided
for by the Selling Stockholder and all laws imposing such taxes will have been
fully complied with.
(c) Any certificate signed by any officer of the Company or by the
Selling Stockholder delivered to the Underwriters or to counsel for the
Underwriters pursuant to the terms of this Agreement shall be deemed a
representation and warranty by the Company or the Selling Stockholder, as the
case may be, to the Underwriters as to the matters covered thereby.
2. Sale and Delivery to the Underwriters; Closing.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company (with respect to
the Company Shares) and the Selling Stockholder (with respect to the Selling
Stockholder Shares) agree severally, and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to purchase
from the Company and the Selling Stockholder, at a purchase price of $__________
per share (the "Initial Price"), the number of Firm Shares set forth opposite
such Underwriter's name in Schedule I hereto. The number of Firm Shares to be
purchased from the Company and the Selling Stockholder, respectively (as
adjusted by the Representatives to avoid fractions), by each of the Underwriters
shall bear the same proportion to the total number of shares to be sold by the
Company or the Selling Stockholder pursuant to this Agreement as the number of
Firm Shares set forth opposite the name of such Underwriter on Schedule I bears
to the total number of Firm Shares to be purchased by the Underwriters pursuant
to this Agreement.
(b) The Company and the Selling Stockholder, severally and not jointly,
grant to the Underwriters an option to purchase, and the Underwriters shall have
the right to purchase, severally and not jointly, from the Company and the
Selling Stockholder all or any part of the Additional Shares at the Initial
Price. Additional Shares shall be purchased from the Company and the Selling
Stockholder for the accounts of the Underwriters in proportion to the number of
Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter. Such option may be exercised only to cover over-allotments in the
sale of the Firm Shares by the Underwriters and may be exercised in whole or in
part at any time and from time to time within 30 days after the date of this
Agreement, in each case upon written or facsimile notice, or verbal or
telephonic notice confirmed by written or telegraphic notice, by the
Underwriters to the Company no later than 12:00 noon, New York City time, on the
business day before the Firm Shares Closing Date (as hereinafter defined) or at
least two business days before the Additional Shares Closing Date (as
hereinafter defined), as the case may be, setting forth the number of Additional
Shares to be purchased and the time and date (if other than the Firm Shares
Closing Date) of such purchase. The number of Additional Shares to be
<PAGE> 15
sold by each of the Company and the Selling Stockholder shall equal (i) the
maximum number of Additional Shares which may be purchased from each of the
Company and the Selling Stockholder pursuant to the option (as indicated in the
first paragraph of this Agreement) multiplied by (ii) a fraction, the numerator
of which is the aggregate number of Additional Shares as to which the option is
being exercised, and the denominator of which is 855,000 (subject, in each case,
to adjustment by the Underwriters to eliminate fractional shares). The
respective number of Additional Shares to be sold by the Company and the Selling
Stockholder to each Underwriter shall be the number which bears the same
proportion to the aggregate number of Additional Shares being purchased from
each of the Company and the Selling Stockholder, as the case may be, as the
number of Firm Shares set forth opposite the name of such Underwriter on
Schedule I bears to the total number of Firm Shares (subject, in each case, to
adjustment by the Underwriters to eliminate fractional shares).
(c) Payment of the purchase price for, and delivery of, the Firm Shares
to be purchased by the Underwriters shall be made at the offices of Ladenburg
Thalmann & Co. Inc., 590 Madison Avenue, 35th Floor, New York, New York 10022,
or at such other place as shall be agreed upon by the Underwriters, the Company
and the Selling Stockholder at 10:00 A.M. on the third (fourth, if the pricing
occurred after 4:30 p.m. on any given day) business day after the date of this
Agreement, or such other time not later than ten business days after such date
as shall be agreed upon by the Underwriters, the Company and the Selling
Stockholder (such time and date of payment and delivery being herein called the
"Firm Shares Closing Date"). Payment shall be made to the Company and the
Selling Stockholder by wire transfer and payable in immediately available funds
to the order of the Company or the Selling Stockholder, as the case may be,
against delivery to the Underwriters of the Company Shares and the Selling
Stockholder Shares, respectively.
(d) Payment of the purchase price for, and delivery of, the Additional
Shares to be purchased by the Underwriters shall be made at the office as set
forth above or at such other place as shall be agreed upon by the Underwriters,
the Company and the Selling Stockholder at the time and on the date (which may
be the same as, but in no event shall be earlier than, the Firm Shares Closing
Date) specified in the notice referred to in Section 2(b) hereof (such time and
date of delivery and payment are called the "Additional Shares Closing Date").
The Firm Shares Closing Date and the Additional Shares Closing Date are called,
individually, a "Closing Date" and together, the "Closing Dates." Payment shall
be made to the Company and the Selling Stockholder by wire transfer and payable
in immediately available funds to the order of the Company or the Selling
Stockholder, as the case may be, against delivery to the Underwriters of the
Additional Shares to be sold by the Company and the Selling Stockholder,
respectively.
(e) The Shares shall be in such denominations and registered in such
names as the Underwriters may request in writing at least two business days
before the Firm Shares Closing Date or, in the case of the Additional Shares, on
the day of notice of exercise of the option as described in Section 2(b) hereof.
The Shares will be made available for examination and packaging by the
Underwriters not later than 1:00 P.M. on the last business day prior to the Firm
Shares Closing Date (or the Additional Shares Closing Date in the case of the
Additional Shares) at such place as is designated by the Underwriters. If the
Underwriters so elect, delivery of the Shares may be made by credit through full
FAST transfer to the accounts of The Depository Trust Company designated by the
Underwriters.
<PAGE> 16
3. Covenants.
(a) The Company covenants with each Underwriter as follows:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Representation Date, and any amendment
thereto, to become effective as promptly as possible after the filing thereof.
The Company will not file any amendment to the Registration Statement or
amendment or supplement to the Prospectus to which the Underwriters shall
reasonably object in writing after a reasonable opportunity to review such
amendment or supplement. Subject to the foregoing sentences in this clause
3(a)(i), if the Registration Statement has become or becomes effective pursuant
to Rule 430A, or filing of the Prospectus or any Term Sheet that constitutes a
part thereof or supplement to the Prospectus is otherwise required under Rule
424(b), the Company will cause the Prospectus or any Term Sheet that constitutes
a part thereof, properly completed, or such supplement thereto, to be filed with
the Commission pursuant to Rule 434 and the applicable paragraph of Rule 424(b)
within the time period prescribed and will provide evidence satisfactory to the
Underwriters of such timely filing. The Company will promptly advise the
Underwriters and, if requested, confirm such advice in writing, (A) when the
Registration Statement, if not effective at the Representation Date, and any
amendment thereto, shall have become effective, (B) when the Prospectus or any
Term Sheet that constitutes a part thereof, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule 434 and
424(b), (C) when any amendment to the Registration Statement shall have been
filed or become effective, (D) of any request by the Commission for any
amendment of or supplement to the Registration Statement or any Prospectus or
for any additional information, (E) of the receipt by the Company of any
notification of, or if the Company otherwise has knowledge of, the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding for
that purpose, (F) if the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and (G) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Shares for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain as soon as
possible the lifting thereof.
(ii) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act or the Act Regulations, any event occurs
as a result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be necessary to amend
the Registration Statement or amend or supplement the Prospectus to comply with
the Act or the Act Regulations, the Company promptly will prepare and file with
the Commission, at the Company's expense, subject to the second sentence of
Section 3(a)(i) hereof, an amendment or supplement which will correct such
statement or omission or effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and in case any
Underwriter is required to deliver a prospectus after the nine-month period
referred to in Section 10(a)(3) of the Act, the Company upon request, but
<PAGE> 17
at the expense of such Underwriter, will promptly prepare such amendment or
amendments to the Registration Statement and such Prospectus as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the Act.
Neither consent to, nor delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 5.
(iii) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to each Underwriter or mail to its order copies of the
Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents, in each case as soon as
available and in such quantities as such Underwriter may request, for the
purposes contemplated by the Act.
(iv) The Company consents to the use of the Prospectus in accordance
with the provisions of the Act and with the securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriters and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with the sales by any
Underwriter or dealer. The Company will comply with all requirements imposed
upon it by the Act, as now and hereafter amended, so far as necessary to permit
the continuance of sales of or dealing in the Shares in accordance with the
provisions hereof and the Prospectus.
(v) As soon as practicable, but in any event not later than forty-five
(45) days after the end of the 12-month period beginning at the end of the
fiscal quarter of the Company during which the Effective Date occurs (or 90
days, if such 12-month period coincides with the Company's fiscal year) the
Company will make generally available to its security holders and to the
Underwriters a consolidated earnings statement or statements of the Company and
its Subsidiaries covering a twelve-month period beginning with the first full
calendar quarter following the Effective Date which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 thereunder.
(vi) The Company will, without charge, furnish (A) to the
Underwriters, three signed copies of the Registration Statement (including
exhibits thereto), (B) to each Underwriter, a conformed copy of such
Registration Statement (without exhibits thereto) and (C) so long as delivery of
a prospectus by an Underwriter or dealer may be required by the Act, as many
copies of the Prospectus and all amendments and supplements thereto as the
Underwriters may reasonably request. The copies of the Registration Statement,
and each amendment thereto, and the copies of the Prospectus, and any amendments
or supplements thereto, furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(vii) During the period of five years hereafter the Company will
furnish to the Underwriters as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and the Company
will furnish to the Underwriters (i) as soon as available, a copy of each report
or definitive proxy statement of the Company filed with the Commission under the
Exchange Act or mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as the Underwriters may reasonably request,
provided that prior to the
<PAGE> 18
Company's furnishing any such other information that is nonpublic the
Underwriters shall enter into such agreement respecting the confidentiality
thereof as the Company may reasonably request.
(viii) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in accordance with the description
set forth in the "Use of Proceeds" section of the Prospectus.
(ix) The Company will cooperate with the Underwriters and their
counsel in connection with endeavoring to obtain and maintain the qualification
or registration, or exemption from qualification, of the Shares for offer and
sale under the applicable securities laws of such states and other jurisdictions
of the United States as the Underwriters may designate; provided, that in no
event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to taxation or general service of process in any jurisdiction where
it is not now so subject.
(x) The Company will not at any time, directly or indirectly (A) take
any action designed to cause or result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of any
of the Shares, or (B) (1) sell, bid for, purchase or pay anyone any compensation
for soliciting purchases of, the Shares or (2) pay or agree to pay any person
any compensation for soliciting another to purchase any other securities of the
Company.
(xi) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(xii) The Company will not, directly or indirectly, for a period of
180 days following the date of the Prospectus, without the prior written consent
of Ladenburg, 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 Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or 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 this paragraph are to be settled by the delivery of Common Stock,
or such other securities, in cash or otherwise, other than (A) pursuant to any
employee stock option plan of the Company in effect at the Representation Date,
or (B) upon exercise of any options outstanding at the Representation Date. The
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days following the date of the
Prospectus without the prior written consent of Ladenburg.
(xiii) The Company shall cause the Shares to be quoted on the Nasdaq
National Market and shall use its best efforts to maintain such trading while
the Shares are outstanding.
<PAGE> 19
(xiv) The Company will not, prior to the later of 25 days after the
Effective Date or any Additional Shares Closing Date, as the case may be, issue
any press release or other communication, directly or indirectly, or hold any
press conferences with respect to the Company or any Subsidiary or the offering
without the prior written consent of Ladenburg, which consent will not be
unreasonably withheld.
(xv) Until the expiration of three years from the Effective Date, the
Company will not effect a change in the independent certified public accountants
for the Company unless either the Company has received Ladenburg's prior written
consent, which consent will not be unreasonably withheld, or such substitute
independent certified public accountant is one of the "big five" firms.
(xvi) If the Registration Statement at the time of effectiveness of
this Agreement does not cover all of the Shares, the Company will file a Rule
462(b) Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the
date of this Agreement and will pay to the Commission the filing fee for such
Rule 462(b) Registration Statement at the time of the filing thereof or will
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
(b) The Selling Stockholder covenants and agrees with each of the
Underwriters that:
(i) The Selling Stockholder will not, directly or indirectly (A) take
any action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares, or (B) (1) sell, bid for, purchase, attempt to induce any person to
purchase, or pay anyone any compensation for soliciting purchases of the Shares
or (2) pay or agree to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(ii) As soon as the Selling Stockholder is advised thereof, the
Selling Stockholder will advise the Underwriters and confirm such advice in
writing, (A) of receipt by the Selling Stockholder, or by any representative or
agent of the Selling Stockholder, of any communication from the Commission
relating to the Registration Statement, the Prospectus or any Preliminary
Prospectus, or any notice or order of the Commission relating to the Company or
the Selling Stockholder in connection with the transactions contemplated by this
Agreement and (B) of the happening of any event which makes or may make any
statement made in the Registration Statement, the Prospectus or any Preliminary
Prospectus untrue or that requires the making of any change in the Registration
Statement, Prospectus or Preliminary Prospectus, as the case may be, in order to
make such statement not misleading.
(iii) The Selling Stockholder will not, directly or indirectly, for a
period of 180 days following the date of the Prospectus, without the prior
written consent of Ladenburg, 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
<PAGE> 20
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or 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 this paragraph are to be settled by the delivery
of Common Stock, or such other securities, in cash or otherwise. The Selling
Stockholder also agrees 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 for a period of
180 days following the date of the Prospectus without the prior written consent
of Ladenburg.
(iv) The Selling Stockholder will deliver to the Underwriters prior to
the Firm Shares Closing Date a properly completed and executed United States
Treasury Department Form W-9.
4. Payment of Expenses.
(a) The Company covenants and agrees with the Underwriters that the
Company will pay (directly or by reimbursement): (i) the fees, disbursements and
expenses of counsel and accountants for the Company, and all other expenses, in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus, the Prospectus and any amendments or
supplements thereto, and the furnishing of copies thereof, including charges for
mailing, air freight and delivery and counting and packaging thereof to the
Underwriters and dealers; (ii) the cost of printing this Agreement, the
Agreement Among Underwriters, the Selling Agreement, communications with the
Underwriters and selling group and the Preliminary and Supplemental Blue Sky
Memorandum, if any, and any other documents in connection with the offering,
purchase, sale and delivery of the Shares; (iii) all expenses in connection with
the qualification of the Shares for offering and sale under securities laws as
provided in Section 3(a) hereof, including filing and registration fees and the
fees, disbursements and expenses for counsel for the Underwriters in connection
with such qualification and in connection with Blue Sky surveys or similar
advice with respect to sales; (iv) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review and clearance by the NASD of the terms of the sale of the
Shares; (v) all fees and expenses in connection with quotation of the Shares on
the Nasdaq National Market; (vi) the cost of publication of
"tombstone"advertisements with respect to the offering; (vii) the cost of at
least five sets of bound volumes of the Registration Statement and all related
materials to the individuals designated by the Underwriters; (viii) and all
other costs and expenses incident to the performance of the obligations of the
Company and the Selling Stockholder under this Agreement which are not otherwise
specifically provided for in this Section 4, including the fees of the Company's
transfer agent and registrar, the cost of any stock issue or transfer taxes on
sales of the Shares to the Underwriters, the cost of the Company's personnel and
other internal costs, the cost of printing and engraving the certificates
representing the Shares and all expenses and taxes incident to the sale and
delivery of the Shares to be sold by the Company to the Underwriters hereunder,
but excluding the Selling Stockholder's indemnification and contribution
obligations under Section 6 below. The provisions of this section shall not
supersede or otherwise affect any agreement that the Company and the Selling
Stockholder may otherwise have for allocation of such expenses between
themselves.
<PAGE> 21
(b) The Selling Stockholder shall pay (directly or by reimbursement)
all fees and expenses incident to the performance of the Selling Stockholder's
obligations under this Agreement that are not otherwise specifically provided
for herein, including but not limited to any fees and expenses of counsel for
the Selling Stockholder, all underwriting discounts and applicable state
transfer taxes involved in the transfer to the several Underwriters of the
Shares to be purchased by them from the Selling Stockholder.
(c) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to Sections
8 or 9(a)(iii) hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company or the
Selling Stockholder to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all
out-of-pocket expenses (including reasonable fees and expenses of counsel for
the Underwriters) reasonably incurred by them in connection herewith.
Notwithstanding termination of this Agreement, the Company shall be liable for
all expenses it has agreed to pay pursuant to Section 4(a) hereof.
5. Conditions of the Underwriters' Obligation.
The obligation of the Underwriters to purchase the Shares hereunder is
subject to the continued accuracy of the representations and warranties of the
Company and the Selling Stockholder herein contained as of the date hereof and
on each Closing Date, to the accuracy of the statements of the Company and the
Selling Stockholder made in any certificate or certificates pursuant to the
provisions hereof as of the date hereof and on each Closing Date and to the
performance by the Company and the Selling Stockholder of their respective
obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M. on the date hereof, or at such later time and date as may be
approved by the Representatives and the Company and shall remain effective at
each Closing Date. No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Act or proceedings
therefor initiated or threatened by the Commission. No order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or blue sky laws of any jurisdiction shall be
in effect or proceedings therefor initiated or threatened by the Commission or
the authorities of any such jurisdiction. If the Company has elected to rely
upon Rule 430A, the price of the Shares and any price-related or other
information previously omitted from the effective Registration Statement
pursuant to Rule 430A shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) within the prescribed time period, and prior to the Firm
Shares Closing Date, the Company shall have provided evidence satisfactory to
the Underwriters of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order
<PAGE> 22
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been commenced or shall be
pending before or contemplated by the Commission.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall not have occurred (i) any
change, or any development involving a prospective change, in or affecting the
business, properties, prospects, condition (financial or other) or results of
operations of the Company and its Subsidiaries taken as a whole, which, in the
judgment of the Representatives, materially affects the market for the Shares or
(ii) any event or development relating to or involving the Company, any officer
or director of the Company or the Selling Stockholder, which makes any statement
made in the Prospectus untrue or which, in the opinion of the Company and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in the opinion of the
Representatives, materially adversely affect the market for the Shares.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any Subsidiary or any of
their respective officers or directors in their capacities as such, before or by
any Federal, state or local court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, or arbitrator, in which
litigation or proceeding an unfavorable ruling, decision or finding could have a
Material Adverse Effect.
(e) Each of the representations and warranties of the Company or the
Selling Stockholder contained herein shall be true and correct at each Closing
Date, as if made at such Closing Date, and all covenants and agreements
contained herein to be performed on the part of the Company or the Selling
Stockholder and all conditions contained herein to be fulfilled or complied with
by the Company or the Selling Stockholder at or prior to each Closing Date,
shall have been duly performed, fulfilled or complied with.
(f) You shall have received on the Closing Date, a certificate dated
such Closing Date, signed by Marc Sherman and Ed Cummings, in their capacities
as Chief Executive Officer and Chief Financial Officer of the Company, and a
certificate dated such Closing Date signed by Richard J. Sullivan and Michael
Krawitz, in their capacities as the Chief Executive Officer and Vice
President-General Counsel of the Selling Stockholder, confirming the matters set
forth in sections 1(a)(xxi) and 5(e) and that the Company and the Selling
Stockholder, respectively, have complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by the Company or the Selling Stockholder on or prior to such
Closing Date, as applicable.
(g) Bryan Cave LLP, counsel for the Company, shall have furnished to
the Underwriters their opinion, satisfactory in form and substance to counsel
for the Underwriters, dated
<PAGE> 23
the Firm Shares Closing Date (and, if applicable, the Additional Shares Closing
Date), to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to conduct its business
and is in good standing in each jurisdiction or place where the nature or
location of its properties (owned or leased) or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify would not have a Material Adverse Effect.
(ii) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state in
which it is incorporated, with full corporate power and authority to own,
lease and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus, and is duly qualified to
conduct its business and is in good standing in each jurisdiction or place
where the nature or location of its properties (owned or leased) or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify would not have a Material
Adverse Effect.
(iii) All the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable, and are owned of record and, to such counsel's
knowledge, beneficially by the Company directly, or indirectly through one
of the other Subsidiaries, free and clear of any perfected security
interest or any other lien, adverse claim, equity or other encumbrance,
except as disclosed in the Registration Statement and the Prospectus.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the
Prospectus, and the authorized capital stock of the Company conforms in all
material respects to the description thereof and the statements made with
respect thereto in the Registration Statement and the Prospectus under the
caption "Description of Capital Stock." All the shares of the capital stock
of the Company outstanding prior to the issuance of the Shares to be sold
by the Company (including the Selling Stockholder Shares) have been duly
authorized and validly issued, are fully paid and nonassessable and were
issued and sold in compliance with all applicable federal securities laws.
Except as set forth in the Prospectus, no options, warrants or other rights
to purchase from the Company or any Subsidiary, agreements or other
obligations of the Company or any Subsidiary to issue or other rights to
convert any obligation into, or exchange any securities for, shares of
capital stock of or ownership interest in the Company or any Subsidiary are
outstanding.
(v) There are no preemptive or other rights to subscribe for or to
purchase shares of capital stock of the Company pursuant to any statute,
the certificate of incorporation or by-laws of the Company or any agreement
or other instrument known to counsel to which
<PAGE> 24
the Company is a party as to which any person can successfully maintain an
action, suit or proceeding against the Company for violation of his or her
preemptive rights with respect to the issuance of any shares of capital
stock of the Company.
(vi) The Shares to be sold by the Company have been duly and validly
authorized by the Company for issuance, and the Company has full corporate
power and authority to issue, sell and deliver such Shares; and, when the
Shares to be sold by the Company are issued and delivered against payment
therefor as provided by this Agreement, such Shares will have been validly
issued and will be fully paid and nonassessable, and the issuance of such
Shares will not be subject to any statutory preemptive rights or similar
statutory rights or, to such counsel's knowledge, any other preemptive or
similar rights. The Shares to be sold by the Company, when issued, will
conform in all material respects to the description thereof contained in
the Registration Statement and the Prospectus under the caption
"Description of Capital Stock."
(vii) The certificates for the Shares are in due and proper form under
Delaware law and the by-laws of the Company and conform with the form of
certificate duly authorized by the Board of Directors of the Company.
(viii) To the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or any
Subsidiary required to be disclosed in the Prospectus that is not disclosed
in the Prospectus, and there is no contract or other document required to
be described in the Registration Statement or the Prospectus, or to be
filed as an exhibit, which is not described or filed as required.
(ix) The Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) have been made in the manner and within the time
period required by Rule 424(b); to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has been
issued, no proceedings for that purpose have been instituted or threatened,
and the Registration Statement and the Prospectus (other than the financial
statements and other financial information contained therein as to which
such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act and the applicable Act
Regulations.
(x) The statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other legal
documents, or summaries of matters of law or legal conclusions, are
accurate in all material respects and present fairly the information
required to be shown.
(xi) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Shares to be sold by it
to the Underwriters as provided herein. This Agreement has been duly
authorized, executed and delivered by the Company, is a valid and binding
agreement of the Company, enforceable in accordance with
<PAGE> 25
its terms (except to the extent rights to indemnity hereunder may be
limited by Federal or state securities laws or public policy underlying
such laws and except to the extent the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by equitable
principles).
(xii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated hereby, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares
by the Underwriters or such as may be required in connection with the
clearance of this offering by the NASD and such other approvals (specified
in such opinion) as have been obtained.
(xiii) Neither the execution and delivery of this Agreement, the issue
and sale of the Shares, the consummation of any other of the transactions
herein contemplated, nor the fulfillment of the terms hereof, will conflict
with, or result in a breach or violation of, or constitute a default under,
or result in the creation or imposition of any lien, charge, claim or
encumbrance upon, any of the property or assets of the Company or any
Subsidiary pursuant to (a) the terms of any agreement, contract, indenture,
lease or other instrument known to such counsel to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary is bound or
to which any of the property or assets of the Company or any Subsidiary is
subject, (b) any law, statute, rule or regulation, or any judgment, order,
consent or memorandum of understanding known to such counsel of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Company or any Subsidiary, or (c) the charter
or by-laws of the Company and each Subsidiary.
(xiv) All of the Shares have been approved for quotation on the Nasdaq
National Market.
(xv) To such counsel's knowledge, neither the Company nor any
Subsidiary is in violation of its charter or by-laws. To such counsel's
knowledge, neither the Company nor any Subsidiary is in breach of or
otherwise in default in the performance of any obligation, agreement or
condition contained in any bond, debenture, note, indenture, loan agreement
or any other contract, lease or other instrument known to such counsel to
which it is subject or by which it may be bound, or to which any of the
property or assets of the Company or any Subsidiary is subject, except for
such breach or default which could not reasonably be expected to have a
Material Adverse Effect.
(xvi) Each of the Company and each Subsidiary has all necessary
Permits (except where the failure to so have any such Permits, individually
or in the aggregate, would not have a Material Adverse Effect) to own its
properties and to conduct its business as now being conducted as described
in the Prospectus.
(xvii) Neither the Company nor any of its Subsidiaries is, and after
giving effect to the offering and sale of the shares and the application of
the proceeds thereof as
<PAGE> 26
described in the Prospectus, will not be, an "investment company" or person
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(xviii) Except as set forth in the Registration Statement and the
Prospectus, to the knowledge of such counsel no holder of any securities of
the Company or any other person has the right, contractual or otherwise, to
cause the Company to sell or otherwise issue to such person, or to permit
such person to underwrite the sale of, any of the Shares or the right to
have any Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares
of Common Stock or other securities of the Company that has not been waived
or lapsed.
In addition, such counsel shall also state that such counsel has
participated in conferences with representatives of the Underwriters, officers
and representatives of the Company and the Selling Stockholder and
representatives of the independent certified public accountants of the Company,
at which conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and that, although such counsel is
not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus (except as set forth in Section 5(g)(iv), (vii) and
(x)), on the basis of the foregoing, no facts have come to the attention of such
counsel which lead such counsel to believe that the Registration Statement at
the time it became effective (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) or at the
Representation Date and at the Firm Shares Closing Date (and, if applicable, the
Additional Shares Closing Date) contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, as of its
date and at the Firm Shares Closing Date (and, if applicable, the Additional
Shares Closing Date), included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, that such counsel need not express any comment
with respect to the financial statements, supporting schedules or other
financial data contained in the Registration Statement or the Prospectus.
(h) [Bryan Cave LLP], counsel for the Selling Stockholder, shall have
furnished to the Underwriters their opinion, satisfactory in form and substance
to the Underwriters, dated the Firm Shares Closing Date (and, if applicable, the
Additional Shares Closing Date), to the effect that:
(i) The Selling Stockholder has full corporate power and authority to
enter into this Agreement, the Custody Agreement, the Power of Attorney and
the Lock-Up Agreement. Each of this Agreement, the Custody Agreement, the
Power of Attorney and the Lock-Up Agreement have been duly authorized,
executed and delivered by the Selling Stockholder; this Agreement, the
Custody Agreement, the Power of Attorney and the LockUp Agreement are valid
and binding agreements of the Selling Stockholder, enforceable in
accordance with their respective terms (except to the extent rights to
indemnity hereunder or thereunder may be limited by Federal or state
securities laws or public policy underlying
<PAGE> 27
such laws and except to the extent the enforcement hereof or thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
equitable principles). The Selling Stockholder has full corporate power and
authority and any approval required by law to sell, transfer and deliver in
the manner provided in this Agreement, the Custody Agreement and the Power
of Attorney the Shares being sold by the Selling Stockholder hereunder.
(ii) Immediately prior to delivery of any Shares being sold by the
Selling Stockholder, the Selling Stockholder was the sole registered and,
to such counsel's knowledge, beneficial owner of such Shares, and upon
delivery of and payment for the Shares being sold by the Selling
Stockholder hereunder, the Underwriters will receive good and valid title
to such Shares, free and clear of all liens, encumbrances, equities,
security interests, claims or other defects arising through the Selling
Stockholder.
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Custody Agreement, the Power of Attorney
and the Lock-Up Agreement and the sale of the Shares being sold by the
Selling Stockholder hereunder except such as may be required under the Act
and such as may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Shares by the
Underwriters and such as may be required in connection with the clearance
of the offering by the NASD (as to which such counsel need express no
opinion) and such other approvals (specified in such opinion) as have been
obtained.
(iv) The execution, delivery and performance of this Agreement, the
Custody Agreement, the Power of Attorney and the Lock-Up Agreement and the
sale of Shares being sold by the Selling Stockholder will not conflict
with, result in a breach or violation of, or constitute a default under any
(A) statute, order, rule or regulation (except that such counsel need
express no opinion with respect to the compliance with state securities and
Blue Sky laws), (B) the terms of any indenture or other agreement or
instrument known to such counsel and to which the Selling Stockholder is a
party or bound, (C) any judgment, order or decree known to such counsel to
be applicable to the Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over the Selling Stockholder or any the Selling Stockholder's properties,
or (D) the Selling Stockholder's certificate of incorporation or by-laws.
(v) There are no transfer or other taxes (other than income taxes and
New York transfer taxes) known to such counsel payable in connection with
the sale and delivery of the Shares being sold by the Selling Stockholder
to the several Underwriters.
(i) Fulbright & Jaworski L.L.P., counsel for the Underwriters, shall have
furnished to the Underwriters an opinion with respect to such matters as may be
reasonably requested by the Underwriters, dated the Firm Shares Closing Date
(and, if applicable, the Additional Shares Closing Date).
<PAGE> 28
(j) At the Effective Date, the Representation Date and at each Closing
Date, PricewaterhouseCoopers LLP, Rubin, Brown, Gornstein & Co. LLP and DiPesa &
Company shall have furnished to the Underwriters a letter or letters, dated
respectively as of the Effective Date, the Representation Date and each Closing
Date, in form and substance satisfactory to the Underwriters, containing
statements and information of the type customarily included in accountants'
"comfort letters" to underwriters with respect to the historical and pro forma
financial statements and certain financial and statistical information
pertaining to the Company and the Subsidiaries contained in the Registration
Statement and the Prospectus.
(k) At each Closing Date, counsel for the Underwriters shall have been
furnished with such information, certificates and documents as they may
reasonably require for the purpose of enabling them to pass upon the issuance
and sale of the Shares as contemplated herein and related proceedings, or to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained, or otherwise in
connection with the offering contemplated hereby; and all opinions and
certificates mentioned above or elsewhere in this Agreement shall be reasonably
satisfactory in form and substance to the Underwriters and counsel for the
Underwriters.
(l) On or prior to the Representation Date, the Company shall have
furnished to the Underwriters a Stop Transfer Order letter addressed to the
Company's transfer agent in form and substance reasonably satisfactory to the
Underwriters and a Lock-Up Agreement from the Company's officers and directors,
each stockholder of the Company (including the Selling Stockholder, the former
stockholders of Bostek, Inc. and the persons who are to receive shares of Common
Stock in connection with the Company's acquisition of minority interests in
certain subsidiaries and the buy-out of earn-out arrangements) and any person
who holds options to purchase the Company's Common Stock.
6. Indemnification and Contribution.
(a) The Company and the Selling Stockholder (collectively, the
"Sellers"), jointly and severally, agree to indemnify, defend and hold harmless
each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, to the fullest extent
lawful from and against any losses, expenses, claims, damages or liabilities
(including any and all investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted), which, jointly or severally, any of
them may become subject under the Act, the Exchange Act or otherwise, as such
expenses are incurred, insofar as such losses, expenses, claims, damages or
liabilities arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, or
in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or in any Blue Sky application or other document executed by
a Seller specifically for that purpose or based upon information furnished by a
Seller filed in any state or other jurisdiction in order to qualify any or all
of the Shares under the securities laws thereof or filed with the Commission or
any securities association or securities exchange (each, an "Application"), or
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement made in
<PAGE> 29
Section 1 of this Agreement; provided, however, that the Sellers will not be
liable in any such case to the extent that any such loss, expense, claim, damage
or liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with the written information furnished to the Company by any
Underwriter expressly for use in the Registration Statement or the Prospectus;
and provided, further, that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this Section 6(a) shall not inure to the
benefit of any such Underwriter, the directors, officers, employees or agents of
such Underwriter or any person controlling such Underwriter and the Sellers
shall not be liable to any such Underwriter, the directors, officers, employees
or agents of such Underwriter or any persons controlling such Underwriter, from
whom the person asserting any such losses, expenses, claims, damages or
liabilities purchased the Shares concerned, to the extent that any such loss,
expense, claim, damage or liability results from the fact that there was not
sent or given to such person, at or prior to the written confirmation of the
sale of such Shares to such person, a copy of the Prospectus, as the same may be
amended or supplemented, within the time required by the Act (if required
thereby), and the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in such Prospectus and the Company had
previously furnished copies thereof to such Underwriter on a timely basis in
order to permit the Prospectus (as the same may be amended or supplemented) to
be sent or given. The foregoing indemnity agreement shall be in addition to any
liability that the Company and the Selling Stockholder may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, the Selling Stockholder, each person, if any, who controls the Company
or the Selling Stockholder within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, each director of the Company and each officer
who signs the Registration Statement, to the same extent as the foregoing
indemnities from the Company and the Selling Stockholder to each Underwriter,
the directors, officers, employees and agents of such Underwriter and any person
controlling such Underwriter, but only insofar as such loss, expense, claim,
damage or liability arises out of or is based upon any untrue statement or
omission or alleged untrue statement or omission made in reliance or in
conformity with information relating to such Underwriter furnished in writing to
the Company by such Underwriter expressly for use in the Registration Statement
or the Prospectus. This indemnity agreement will be in addition to any liability
that any Underwriter may otherwise have. The Company and the Selling Stockholder
agree that the information contained in the table of Underwriters set forth
under the heading "Underwriting" in the Prospectus, the amounts of the selling
concession and reallowance set forth in the Prospectus and the eighth,
thirteenth, fourteenth and fifteenth paragraphs under the caption "Underwriting"
constitute the only information provided in writing by any Underwriter expressly
for use in the Registration Statement or the Prospectus.
(c) If any action is brought against an indemnified party under this
Section 6, the indemnified party or parties shall promptly notify the
indemnifying party in writing of the institution of such action (provided that
the failure to give such notice shall not relieve the indemnifying party of any
liability which it may have pursuant to this Agreement, unless and to the extent
the indemnifying party did not otherwise learn of such action and such failure
has resulted in the forfeiture of substantive rights or defenses by the
indemnifying party) and the indemnifying party shall assume the
<PAGE> 30
defense of such action, including the employment of counsel and payment of
reasonable expenses. The indemnified party or parties shall have the right to
employ separate counsel (including local counsel) in any such case and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying party in connection with the defense of such action, (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to take charge of the defense of such action within a
reasonable time after notice of the institution of such action, (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to the indemnifying party or (iv) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest (in which case the indemnifying party shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be borne
by the indemnifying party and paid as incurred; provided that the indemnifying
party shall only be responsible for the fees and expenses of one counsel for the
indemnified party or parties hereunder. Anything in this paragraph to the
contrary notwithstanding, the indemnifying party shall not be liable for any
settlement of any such claim or action effected without its written consent,
which consent shall not be unreasonably withheld. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) If the indemnification provided for in this Section 6 is unavailable
to an indemnified party under subsections (a) or (b) of this Section 6 or is
insufficient to hold harmless a party indemnified thereunder, in respect of any
losses, expenses, claims, damages or liabilities referred to therein, then each
applicable indemnifying party shall contribute to the amount paid in settlement
of any action, suit or proceeding or any claims asserted, but after deducting in
the case of losses, expenses, claims, damages and liabilities suffered by the
Company or the Selling Stockholder, any contribution received by the Company or
the Selling Stockholder from persons other than the Underwriters who may also be
liable for contribution, including persons who control the Company or the
Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, officers of the Company who signed the Registration Statement
and directors of the Company, to which the Company, the Selling Stockholder and
one or more of the Underwriters may be subject, in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholder on the one hand, and the Underwriters on the other hand,
from the offering of the Shares or, if, but only if, such allocation is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to above but also the relative fault of the
Company and the Selling Stockholder on the one hand, and the Underwriters on the
other hand, in connection with the statements or omissions which resulted in
such losses, expenses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Selling Stockholder on the one hand, and the Underwriters on the other
hand, shall be deemed to be in the same proportion as the total proceeds from
the offering (net of
<PAGE> 31
underwriting discounts but before deducting expenses) received by the Company
and the Selling Stockholder bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company and the
Selling Stockholder on the one hand, and the Underwriters on the other hand,
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
Selling Stockholder or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, expenses, claims and liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action. The Company, the
Selling Stockholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant hereto were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this Section
6(d) no Underwriter shall be required to contribute any amount in excess of the
underwriting discount received by it by reason of such untrue statement or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 6(d)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The Company and the Selling Stockholder hereby agree that in
addition to their other respective obligations under subsection (a) of this
Section 6, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission described in
subsection (a) of this Section, it will reimburse the Underwriters on a monthly
basis for all reasonable legal fees and other expenses reasonably incurred in
connection with investigating or defending such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 6 and the possibility that such payments might later be held to be
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payments to the Company or the Selling Stockholder,
as applicable.
7. Survival. The respective indemnity and contribution agreements contained
in Section 6 hereof and the covenants, warranties and other representations of
the Company and the Selling Stockholder contained in this Agreement or contained
in certificates of officers of the Company or the Selling Stockholder or
submitted pursuant hereto, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, or any of their
respective officers, employees, directors, stockholders or person who controls
the Underwriters within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, or by or on behalf of the Company or any of its directors,
officers, employees or any person who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of
the Selling Stockholder, or any person who controls the Selling Stockholder
within the meaning of
<PAGE> 32
Section 15 of the Act or Section 20 of the Exchange Act, and shall survive
delivery of and payment for the Shares.
8. Default by an Underwriter. If one or more of the Underwriters shall fail
or refuse at a Closing Date to purchase and pay for any of the Shares agreed to
be purchased by such Underwriter or Underwriters hereunder on such date and the
aggregate number of Firm Shares or Additional Shares, as the case may be, which
such defaulting Underwriter or Underwriters, as the case may be, agreed but
failed or refused to purchase is not more than one-tenth of the total number of
Shares to be purchased on such date by all Underwriters, each nondefaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm Shares set forth opposite its name in Schedule I bears to the total number
of Firm Shares which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as the Underwriters may
specify, to purchase the Firm Shares or Additional Shares, as the case may be,
which such defaulting Underwriter or Underwriters, as the case may be, agreed
but failed or refused to purchase on such date; provided that in no event shall
the number of Firm Shares or Additional Shares, as the case may be, which any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 8 by an amount in excess of one-tenth of such number of
Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If on the Firm Shares Closing Date or on the
Additional Shares Closing Date, as the case may be, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares, or Additional Shares,
as the case may be, and the aggregate number of Firm Shares or Additional
Shares, as the case may be, with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares to be purchased on such date by
all Underwriters in the event of a default by an Underwriter and arrangements
satisfactory to the Underwriters, the Selling Stockholder and the Company for
purchase of such Shares are not made within 48 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter, the Selling Stockholder and the Company. In any such case which
does not result in termination of this Agreement, either the Underwriters or the
Company shall have the right to postpone the Firm Shares Closing Date, or the
Additional Shares Closing Date, as the case may be, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such Underwriter
under this Agreement.
9. Termination of Agreement.
(a) The Underwriters may terminate this Agreement, by written notice to
the Company and the Selling Stockholder prior to the Firm Shares Closing Date
(or, if applicable, the Additional Shares Closing Date), (i) if there shall
occur any default or breach by the Company or the Selling Stockholder hereunder
or the failure to satisfy any of the conditions contained in Section 5 hereof,
(ii) if there has been, since the date of this Agreement or since the respective
dates as of which information is provided in the Registration Statement and
prior to the Firm Shares Closing Date (or, if applicable, the Additional Shares
Closing Date), there shall have been any material adverse change, or any
development involving a prospective material adverse change (including, without
limitation, a change in the management or control of the Company), in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company, or (iii) if, since the date of this
<PAGE> 33
Agreement and prior to the Firm Shares Closing Date (or, if applicable, the
Additional Shares Closing Date), (A) there has occurred any material adverse
change in the financial markets of the United States or in political, financial
or economic conditions in the United States or any outbreak or escalation of
hostilities or declaration by the United States of a national emergency or war
or other calamity or crisis, the effect of which on the financial securities
markets of the United States is such as to make it, in the judgment of the
Underwriters, impracticable or inadvisable to market the Shares on the terms and
in the manner contemplated by the Prospectus, or (B) trading in any of the
securities of the Company has been suspended by the Commission, or trading
generally on the New York Stock Exchange or the Nasdaq National Market has been
suspended (other than by limitation on hours or number of days of trading), or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by the New York Stock Exchange or the
Nasdaq National Market or by order of the Commission or any other governmental
authority or (C) a banking moratorium has been declared by any of the Federal or
New York authorities.
(b) If this Agreement is terminated pursuant to this Section 9 or any
other provision of this Agreement, such termination shall be without liability
of any party to any other party except as provided in Sections 4 and 6. Sections
4 and 6 shall survive any termination of this Agreement.
10. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Underwriters shall be
directed to the Underwriters, c/o Ladenburg Thalmann & Co. Inc., 590 Madison
Avenue, 35th Floor, New York, NY 10022, attention David Boris, with a copy to
Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New York 10103,
attention Paul Jacobs, Esq.; notices to the Company shall be directed to 510
Ryerson Road, Lincoln Park, New Jersey 07035, attention Marc Sherman, with a
copy to Bryan Cave LLP, 211 North Broadway, Suite 3600, St. Louis, Missouri
63102, attention Denis P. McCusker, Esq., and notices to the Selling Stockholder
shall be directed to _________________________________, attention
_________________, with a copy to___________________________.
11. Parties. This Agreement shall inure to the benefit of and be binding
upon the Underwriters, the Company, the Selling Stockholder and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to provide any person, firm or
corporation, other than the Underwriters, the Company, the Selling Stockholder
and their respective successors and legal representatives and the controlling
persons and officers, employees, directors and stockholders referred to in
Sections 6 and 7 and their respective heirs and legal representatives, any legal
or equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the
Underwriters, the Company, the Selling Stockholder and their respective
successors and legal representatives, and said controlling persons,
stockholders, officers and directors and their respective heirs and legal
representatives, and for the benefit of no other person, firm or corporation. No
purchaser of Shares from the Underwriters shall be deemed to be a successor by
reason merely of such purchase.
<PAGE> 34
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.
13. Counterparts. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
[Remainder of page intentionally left blank]
* * * * *
<PAGE> 35
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
the Underwriters and the Company in accordance with its terms.
Very truly yours,
INTELLESALE.COM, INC.
By:
-------------------------------
APPLIED DIGITAL SOLUTIONS, INC.
By:
-------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
LADENBURG THALMANN & CO. INC.
PUNK, ZIEGEL & COMPANY, L.P.
By: LADENBURG THALMANN & CO. INC.
By:
-------------------------------
Name: David Boris
Title: Director Investment Banking
<PAGE> 36
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter To Be Purchased
----------- ---------------
<S> <C>
Ladenburg Thalmann & Co. Inc.
Punk, Ziegel & Company, L.P.
</TABLE>
<PAGE> 1
EXHIBIT 4.5
NUMBER SHARES
* ***
[SEAL OF THE STATE OF DELAWARE]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
INTELLESALE.COM, INC.
AUTHORIZED CAPITAL STOCK 30,000,000 COMMON SHARES WITH A PAR VALUE OF $0.0001
PER SHARE
THIS CERTIFIES THAT *Specimen* is the owner of ***
fully paid and non-assessable Shares of the Capital
Stock of the above named Corporation transferable only on the books of the
Corporation by the holder hereof in person or by duly authorized Attorney upon
surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this day of A.D. 19 .
- ------------------------------ [SEAL} ------------------------------
Marc Sherman SECRETARY Marc Sherman PRESIDENT
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws and regulations:
<TABLE>
<S> <C> <C>
UNIF GIFT MIN ACT- Custodian UNIF TRAN MIN ACT- CUSTODIAN
TEN COM - as tenants in common -------- -------- -------- --------
TEN ENT - as tenants by the entireties (Cust) (Minor) (Cust) (Minor)
JT TEN - as joint tenants with right
of survivorship and not as under Uniform Gifts to Minors under Uniform Transfers to Minors
tenants in common
TOD - transfer on death direction Act Act
in event of owner's death, --------------------------- -----------------------------------
to person named on face (State) (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
---------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
shares
----------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
----------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------------------
X
--------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
X
--------------------------------
----------------------------------
ALL GUARANTEES MUST BE MADE BY A
FINANCIAL INSTITUTION (SUCH AS A
BANK OR BROKER) WHICH IS A
PARTICIPANT IN THE SECURITIES
TRANSFER AGENTS MEDALLION PROGRAM
("STAMP"), THE NEW YORK STOCK
EXCHANGE, INC. MEDALLION SIGNATURE
PROGRAM ("MSP"), OR THE STOCK
EXCHANGES MEDALLION PROGRAM
("SEMP") AND MUST NOT BE DATED.
GUARANTEES BY A NOTARY PUBLIC ARE
NOT ACCEPTABLE.
----------------------------------
<PAGE> 1
Exhibit 10.14
[INTELLESALE LETTERHEAD]
December , 1999
Joel Owens
c/o Pizarro Re-Marketing
6717 Levelland Dr.
Dallas, TX 75252
Dear Joel:
This letter is to confirm our agreement as follows:
1. On or before December 30, 1999, you shall transfer all
of your shares of capital stock in Norcom Resources
Incorporated (free and clear of all claims, liens or
encumbrances) to Intellesale.com, Inc. ("Intellesale") by
sending the following:
(a) the certificate or certificates representing the
shares of capital stock of Norcom Resources
Incorporated owned by you, and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction
(except as provided in Paragraph 6) of all future obligations
to you under the Agreement of Sale, dated March 27, 1997 (the
"Agreement"), Intellesale will, within 30 days of the closing
of an initial public offering of common stock of Intellesale
(an "IPO"), do the following:
(a) pay you, by check or wire
transfer, the amount of $90,000, and
(b) issue to you shares of common
stock of Intellesale having an aggregate value of
$90,000 (such value being based on the per share
offering price of common stock in the IPO).
<PAGE> 2
3. You must notify the Company your wire transfer
information in case the Company chooses to pay this amount by
wire transfer.
4. If an IPO has not occurred by February 25, 2002, then
you may require Intellesale, by delivery of written notice, to
pay you $180,000 in cash within 30 days of receipt of such
notice and all obligations to you hereunder or under the
Agreement will terminate (except as provided in Paragraph 6).
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity
security in Norcom Resources Incorporated and you waive any
right of first refusal or other right to acquire equity in
Norcom Resources Incorporated.
6. This letter shall not modify any obligation of Applied
Digital Solutions to grant to you stock options as provided in
the Agreement.
The share certificates and stock power referred to in Paragraph 1
should be sent BY OVERNIGHT MAIL to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By:_________________________
Name:
Title:
Agreed to and accepted:
By:_________________________
Joel Owens
<PAGE> 1
Exhibit 10.15
[INTELLESALE LETTERHEAD]
December , 1999
Michael Erickson
2333 Waters Drive
St. Paul, MN 55120
Dear Mike:
This letter is to confirm our agreement as follows:
1. On or before September 10, 1999, you shall transfer all
of your shares of capital stock in Norcom Resources
Incorporated (free and clear of all claims, liens or
encumbrances) to Intellesale.com, Inc. ("Intellesale") by
sending the following:
(a) the certificate or certificates representing the
shares of capital stock of Norcom Resources
Incorporated owned by you, and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of
all future obligations to you under the Agreement of Sale,
dated March 27, 1997, as amended (the "Agreement"),
Intellesale will, within 30 days of the closing of an initial
public offering of common stock of Intellesale (an "IPO"), do
the following:
(a) pay you, by check or wire
transfer, the amount of $360,000, and
(b) issue to you shares of common
stock of Intellesale having an aggregate value of
$360,000 (such value being based on the per share
offering price of common stock in the IPO).
3. You must notify Intellesale your wire transfer
information in case Intellesale chooses to pay this amount by
wire transfer. If paid in Common Stock of Intellesale, such
shares of Common Stock shall be valued at the offering price
to the public in the IPO.
4. If an IPO has not occurred by February 25, 2002, then
you may require Intellesale, by delivery of written notice, to
pay you $720,000 in cash. Each such payment shall be made
within 30 days of receipt of such
<PAGE> 2
notice and all obligations to you hereunder or under the
Agreement will terminate.
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity
security in Norcom Resources Incorporated.
6. This letter shall not modify any obligation of Applied
Digital Solutions to grant to you a stock option to acquire
40,000 shares of common stock of Applied Digital Solutions at
an exercise price of $4.00 on the terms and conditions set
forth in your employment agreement entered into
contemporaneously with the Agreement.
The share certificates and stock power referred to in Paragraph 1
should be sent BY OVERNIGHT MAIL to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By:____________________________
Name:
Title:
Agreed to and accepted:
By:_________________________
Michael Erickson
<PAGE> 1
EXHIBIT 10.26
AGREEMENT FOR TERMINATION
OF COMPUTER SUPPLY ARRANGEMENT
THIS AGREEMENT FOR TERMINATION OF COMPUTER SUPPLY ARRANGEMENT
("Agreement for Termination of Computer Supply Arrangement") is entered into by
and between Intellesale.com, Inc. ("Intellesale"), a Delaware corporation with
its principal place of business at 510 Ryerson Road, Lincoln Park, New Jersey
07035, and FlashNet Communications, Inc. ("FlashNet"), a Texas corporation with
its principal place of business at 3001 Meacham Boulevard, Suite 100, Fort
Worth, Texas 76137. Intellesale and FlashNet are sometimes collectively referred
to herein as "the Parties."
WHEREAS, the Parties executed a letter agreement dated on or about June
2, 1999, amended twice thereafter by amendment signed by Russell A. Wiseman, of
FlashNet, and Charles Newman, for Intellesale, and amendment dated on or about
July 7, 1999 (as amended, the "Original Agreement"), in order to effect
FlashNet's "Free PC" program, whereby FlashNet would give new FlashNet customers
a refurbished personal computer, purchased by FlashNet from Intellesale, as a
rebate following the customer's execution of a 24- or 36-month Internet service
contract with FlashNet;
WHEREAS, disputes have arisen between FlashNet and Intellesale relating
to, among other things, performance under the Original Agreement;
WHEREAS, FlashNet has entered into an agreement with Prodigy
Communications Corp. providing for sale of FlashNet to Prodigy Communications
Corp. and in connection therewith, FlashNet desires to modify the arrangement
between Intellesale and FlashNet.
================================================================================
Agreement For Termination of Computer Supply Arrangement Page 1
<PAGE> 2
WHEREAS, FlashNet has filed an action styled FlashNet
Communications, Inc. v. Intellesale.com, Inc., numbered Cause Number
141-180756-99, before the 141st Judicial District Court, Tarrant County, Texas
("the Texas Lawsuit"); and
WHEREAS, as more fully described below, Intellesale and FlashNet now
desire to compromise, resolve and settle the outstanding liabilities as set
forth below, finally and forever, to avoid the uncertainty, time and expense of
litigation, by and through the execution of this Agreement for Termination of
Computer Supply Arrangement;
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements set forth herein, including the recitals stated below, the receipt
and sufficiency of which are hereby acknowledged, Intellesale and FlashNet agree
as follows:
1. Intellesale, on behalf of itself and its agents, assigns,
owners, representatives, brokers, officers, directors,
shareholders, insurers, reinsurers, attorneys, subsidiaries,
affiliates, and all persons in privity with such individuals
or organizations, does hereby RELEASE, acquit, and forever
discharge FlashNet, and each of its agents, assigns, owners,
representatives, brokers, officers, directors, shareholders,
insurers, reinsurers, attorneys, subsidiaries, affiliates
(including, without limitation, parent companies), and all
persons in privity with such individuals or organizations
(the "Released FlashNet Parties"), from each and every,
joint and several, claim, demand, action and/or cause of
action which: (i) relates in any way to the filing of the
Texas Lawsuit; or (ii) has been or could have been asserted
by Intellesale against the Released FlashNet Parties through
the date of this Agreement for Termination of Computer
Supply Arrangement relating in any way to the Original
Agreement, including, without limitation, any demands for
payments that were or could have been made; by way of
invoice or otherwise, upon FlashNet for computers and/or
computer hardware provided under the Original Agreement or
charges relating to such computers and/or computer hardware;
provided, however, FlashNet is not released from (i) any
claim by Intellesale against FlashNet relating in any way to
claims against Intellesale by any third party (including,
without limitation, individuals and governmental entities)
in respect of FlashNet's obligations under the Original
Agreement; or (ii) its obligations under this Agreement for
Termination of Computer Supply Arrangement or (iii) any
agreements or contracts entered into between Intellesale and
FlashNet executed after the date of this Agreement for
Termination of Computer Supply Arrangement. The parties
hereto further agree that each party hereto shall bear its
own attorneys' fees in the above-referenced dispute.
Intellesale expressly agrees to indemnify and hold harmless
FlashNet, its agents,
================================================================================
Agreement For Termination of Computer Supply Arrangement Page 2
<PAGE> 3
assigns, owners, representatives, brokers, officers,
directors, shareholders, insurers, reinsurers, attorneys,
subsidiaries, affiliates, and all persons in privity with
such individuals or organizations, of, from and against any
and all liability, including costs, damages (whether arising
in contract, tort or otherwise), attorney's fees, and expert
fees in connection with any third-party claims in any way
relating to Intellesale's obligations under the Original
Agreement or the computers and/or computer hardware furnished
by Intellesale in the past, present or future. The
indemnifying party shall have the right to settle any claims
in its sole discretion. The indemnified party may settle any
claims with the written consent of the indemnifying party,
which consent shall not be unreasonably withheld.
2. FlashNet, on behalf of itself and its agents, assigns,
owners, representatives, brokers, officers, directors,
shareholders, insurers, reinsurers, attorneys, subsidiaries,
affiliates, and all persons in privity with such individuals
or organizations, does hereby RELEASE, acquit, and forever
discharge Intellesale, and each of its agents, assigns,
owners, representatives, brokers, officers, directors,
shareholders, insurers, reinsurers, attorneys, subsidiaries,
affiliates (including, without limitation, parent companies),
and all persons in privity with such individuals or
organizations (the "Released Intellesale Parties"), from each
and every, joint and several, claim, demand, action and/or
cause of action which has been or could have been asserted by
FlashNet against the Released Intellesale Parties through the
date of this Agreement for Termination of Computer Supply
Arrangement relating in any way to the Original Agreement;
provided, however, notwithstanding the foregoing, FlashNet
does not release the Released Intellesale Parties from: (i)
any claim by FlashNet against Intellesale relating in any way
to claims against FlashNet by any third party (including,
without limitation, individuals and governmental entities) in
respect of Intellesale's obligations under the Original
Agreement; (ii) any claim for damages relating to the failure
of computers and/or computer hardware furnished under the
Original Agreement to be Y2K compliant which is suffered by
FlashNet following the date of this Agreement for Termination
of Computer Supply Arrangement; (iii) Intellesale's
obligations under this Agreement for Termination of Computer
Supply Arrangement; or (iv) Intellesale's obligations under
any agreements or contracts entered into between Intellesale
and FlashNet executed after the date of this Agreement for
Termination of Computer Supply Arrangement. The parties hereto
further agree that each party hereto shall bear its own
attorneys' fees in the above-referenced dispute. FlashNet
expressly agrees to indemnify and hold harmless Intellesale,
its agents, assigns, owners, representatives, brokers,
officers, directors, shareholders, insurers, reinsurers,
attorneys, subsidiaries, affiliates, and all persons in
privity with such individuals or organizations, of, from and
against any and all liability, including costs, damages
(whether arising in contract, tort or otherwise), attorney's
fees, and expert fees, in connection with any third-party
claims in any way relating to FlashNet's obligations under the
Original Agreement. The indemnifying party shall have the
right to settle any claims in its sole discretion. The
indemnified party may settle any claims with the written
consent of the indemnifying party, which consent shall not be
unreasonably withheld.
================================================================================
Agreement For Termination of Computer Supply Arrangement Page 3
<PAGE> 4
3. In exchange for the various commitments by Intellesale
pursuant to this Agreement for Termination of Computer Supply
Arrangement, FlashNet shall pay to Intellesale the sum of TWO
MILLION NINE HUNDRED THOUSAND DOLLARS ($2,900,000.00) by wire
transfer within one business day following execution of this
Agreement for Termination of Computer Supply Arrangement by
the Parties and delivery by Intellesale of an original,
fully-executed performance bond in the form attached hereto as
Exhibit A.
4. The Parties agree that the Original Agreement is hereby
terminated effective on he date on which the payment provided
in the preceding Section is made.
5. FlashNet shall, through its attorneys, file a voluntary
nonsuit, within one business day following the date on which
this Agreement for Termination of Computer Supply Arrangement
is fully executed by the Parties, with the 141st Judicial
District Court, Tarrant County, Texas, of the action styled
FlashNet Communications, Inc. v. Intellesale.com, Inc.,
numbered Cause Number 141-180756-99.
6. Intellesale agrees to provide a 3 Year Warranty with
respect to each and every computer ever furnished to FlashNet
or customers of FlashNet pursuant to the Original Agreement
(or furnished pursuant to Intellesale's warranty obligation
pursuant to this Agreement for Termination of Computer Supply
Arrangement) such that if any such computer or computer
hardware fails for any reason covered by Intellesale's
warranty obligations as described in the Original Agreement on
such computer or computer hardware within 3 years following
original delivery of such computer to any FlashNet customer,
FlashNet or such FlashNet customer may receive a replacement
at no extra cost; provided, however, Intellesale shall not be
responsible for replacing any computers or computer hardware
or software licenses pursuant to this paragraph if the
original of such computer or computer hardware or software
licenses is not returned unless FlashNet pays Intellesale the
amounts listed in paragraph 7b reflecting the cost to FlashNet
of such computers and computer hardware. FlashNet will use its
commercially reasonable best efforts to determine if software
media (disks) were also supplied to such FlashNet customer and
will request the return of any such software media along with
the computer or computer hardware as appropriate. FlashNet
will also use its commercially reasonable best efforts to
avoid the return of nondefective computer and/or computer
hardware. Computers and computer hardware delivered by
Intellesale pursuant to this Agreement for Termination of
Computer Supply Arrangement shall at all times be Y2K
compliant and meet the specifications and configurations
specified in Exhibit B hereto, and the definition of
"Refurbished" or "Manufacturer Refurbished" attached hereto as
Exhibit C. Following the expiration of three years after the
date hereof, no further warranty obligation of Intellesale
shall accrue; provided, however, the terms of this clause
shall not affect Intellesale's warranty obligation accruing
prior to the date of such expiration. Intellesale hereby
acknowledges that, although FlashNet may assist with
Intellesale's warranty fulfillment obligations as provided
below, all warranty obligations described in this paragraph
are, and shall at all times remain, the sole and exclusive
obligation of Intellesale.
================================================================================
Agreement For Termination of Computer Supply Arrangement Page 4
<PAGE> 5
7. Beginning tow days after the effective date hereof Intellesale
agrees to permit FlashNet to assist Intellesale in the following manner
with fulfillment of its Intellesale warranty obligations to persons who
have received computers and/or computer hardware pursuant to the
Original Agreement. Such assistance by FlashNet may be terminated by
FlashNet at any time in FlashNet's sole and absolute discretion on 30
days' written notice to Intellesale. For so long as FlashNet shall, in
its discretion, assist in the fulfillment of Intellesale's warranty
obligations, the parties agree as follows:
a. FlashNet shall provide telephone support for all customer
calls relating to computers furnished pursuant to the
Original Agreement. In the event a replacement computer or
replacement computer hardware must be forwarded to a customer
pursuant to Intellesale's warranty obligation, FlashNet shall
effect such replacement, at Intellesale's cost, from computers
and computer hardware provided in advance by Intellesale to
FlashNet at a site managed and controlled by FlashNet in Fort
Worth, Texas ("FlashNet's Warehouse") in accordance with the
provisions set forth below.
b. In order to effect FlashNet's assistance with the
fulfillment of Intellesale's warranty obligations herein,
Intellesale agrees to supply FlashNet with an inventory (such
inventory, from time to time, the "Replacement Inventory") of
not less than 500 computers, keyboards, mice and 250 monitors
delivered to FlashNet's Warehouse (including additional
computers and computer hardware sent by Intellesale from time
to time, the "Refurbished PCs"), beginning within 5 days
following the execution of this Agreement for Termination of
Computer Supply Arrangement. FlashNet shall provide
Intellesale with a certificate of insurance, naming
Intellesale as an additional insured, covering such
Replacement Inventory. Computers and computer hardware
delivered pursuant to this Agreement for Termination of
Computer Supply Arrangement shall at all times be Y2K
compliant and meet the specifications and configurations
specified in Exhibit B hereto, and the definition of
"Refurbished" or "Manufacturer Refurbished" attached hereto as
Exhibit C. For the first two months following the date hereof,
whenever the Replacement Inventory falls below 400 PCs and/or
180 monitors, FlashNet may request in writing that Intellesale
replenish the Replacement Inventory. Two months following the
date hereof, and each two-month anniversary thereafter, the
number of computers and computer hardware required to be
supplied at the FlashNet Warehouse pursuant to Section 7b
shall be adjusted to equal the actual number and type of
pieces shipped by FlashNet pursuant to Intellesale's warranty
obligation during the preceding two-month period (from time to
time "the Two Month Usage"). FlashNet, upon obtaining returned
computers or computer hardware ("Returned Equipment"), may
ship customers replacements for the product returned in
accordance with Intellesale's warranty obligation set forth
herein, which replacements shall be taken from the Replacement
Inventory. After the first two months following
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Agreement For Termination of Computer Supply Arrangement Page 5
<PAGE> 6
the date hereof, whenever the Replacement Inventory falls
below 1/2 of the Two Month Usage, FlashNet may request in
writing that Intellesale replenish the Replacement Inventory.
Within 10 business days following any request by FlashNet for
replenishment of Replacement Inventory, an Intellesale
representative or its designated shipping agent shall collect
the Returned Equipment and replace each piece of Returned
Equipment with a replacement (e.g., a returned keyboard will
be replaced with a replacement keyboard ) at FlashNet's
Warehouse. Intellesale shall have the right to have an
employee work at the FlashNet Warehouse to inspect, along with
FlashNet employees, any Returned Equipment to (i) determine
whether or not it qualifies for the Intellesale warranty as
provided herein, and (ii) determine the configuration so that
appropriate products can be shipped to the FlashNet Warehouse
in connection with replenishing the Replacement Inventory.
Intellesale agrees to provide and keep in force at all times
all necessary insurance coverage in connection with this
employee, including but not limited to workers' compensation
insurance. Intellesale further agrees to indemnify and hold
harmless FlashNet, its agents, employees, assigns,
representatives, brokers, officers, directors, shareholders,
insurers, reinsurers, attorneys, subsidiaries, affiliates and
all persons in privity with such individuals or organizations
of, from and against any and all claims, loss, costs, damages
(whether arising under contract, tort or otherwise),
attorney's fees, expert fees and/or any and all liability in
connection with any claims by third parties and/or
Intellesale's employees or representatives in any way arising
out of or otherwise related to Intellesale maintaining an
employee or other representative on FlashNet's premises.
Intellesale's representative or its designated shipping agent
shall prepare a list inventorying each item of Returned
Equipment and shall provide a copy of such inventory to
FlashNet before leaving FlashNet's premises, with such list to
be signed off on by FlashNet. If FlashNet does not obtain the
Returned Equipment and ships equipment from the Replacement
Inventory, FlashNet shall pay to Intellesale the following for
each piece listed: CPU, $142; monitor, $50; keyboard, $5;
mouse, $3; Windows license, $60 within third (30) days
following invoice by Intellesale. FlashNet agrees to present
Intellesale with a statement on or about the fifth business
day of each month, or more often as necessary, showing, as of
the last day of the preceding month or as of the date of the
last statement, as applicable.
(i) The number of Refurbished PCs sent to FlashNet
customers by FlashNet pursuant to Intellesale's
warranty obligations;
(ii) The number of Refurbished PCs in FlashNet's
possession; and
(iii) The Handling Fee Charge (as defined below).
c. Intellesale will be solely responsible for all shipping costs
associated with shipping Refurbished PCs to FlashNet, to
FlashNet customers, to Intellesale, or any other shipping
reasonably necessary to effectuate the delivery of Refurbished
PCs to FlashNet, FlashNet customers or, upon return, to
Intellesale. If FlashNet, in its sole discretion, elects to use
an item from the
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Agreement For Termination of Computer Supply Arrangement Page 6
<PAGE> 7
Replacement Inventory for a use other than to satisfy
Intellesale's warranty obligation as provided herein, then (in
addition to paying the applicable amounts set forth in Section
7b), FlashNet shall be responsible for all shipping charges in
connection therewith. FlashNet agrees not to use more than 200
pieces per month for purposes other than to satisfy
Intellesale's warranty obligation as provided herein without
the prior written consent of Intellesale. Intellesale may
choose, at its reasonable discretion, any nationally recognized
delivery service to use for shipping Refurbished PCs and/or
Returned Equipment. Intellesale agrees to maintain a direct
bill relationship with such delivery service such that all
shipping of Refurbished PCs pursuant to this Agreement for
Termination of Computer Supply Arrangement shall be paid for by
Intellesale. For each Refurbished PC or monitor shipped by
FlashNet pursuant to this section in fulfillment of
Intellesale's warranty obligations, Intellesale agrees to pay
FlashNet the sum of $20 (the "Handling Fee Charge") within
fifteen (15) business days following FlashNet's invoice
therefor.
d. On the third anniversary of the date hereof, Intellesale
shall have the right to pick up any Replacement Inventory
remaining in FlashNet's Warehouse with any shipping costs
to be borne by Intellesale.
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Agreement For Termination of Computer Supply Arrangement Page 7
<PAGE> 8
8. Intellesale agrees to furnish and deliver to FlashNet,
and FlashNet agrees to accept, at FlashNet's sole and
unfettered discretion, any amount up to an aggregate of 5000
new personal computers with the hardware and software listed on
the Schedule attached to this Agreement for Termination of
Computer Supply Arrangement as Exhibit D, and incorporated by
reference the same as if fully copied and set forth at length
(the "New PCs"); provided, however, FlashNet shall be entitled
to alter the specific configurations of the New PCs to be
received from Intellesale in response to market conditions to
the extent such alteration does not raise the price to
Intellesale of each New PC above $500. Intellesale agrees to
deliver to FlashNet the 5000 new PCs within thirty (30) days
following request by FlashNet; provided, however, FlashNet's
first request shall not be made prior to December 5 (for
delivery January 5) and shall not exceed 2,500 New PCs per
quarter. FlashNet shall make payment for delivery of such New
PCs at a cost of $400 per New PC (including all applicable tax
and shipping charges, but plus any applicable sales tax unless
FlashNet provides Intellesale with a sales tax exemption
certificate and corresponding indemnity in connection
therewith) within fifteen (15) days following receipt of the
New PCs and invoices requesting payment for the New PCs from
Intellesale; provided, however, FlashNet shall receive a $300
advertising credit for each New PC sold pursuant to this
Agreement for Termination of Computer Supply Arrangement, which
FlashNet may use to offset its payment obligation to
Intellesale for the New PCs. The advertising credit shall be to
compensate FlashNet for commercially reasonable promotional
activities undertaken at no cost to FlashNet, which shall be
limited to promotion of the New PCs, inclusion of Intellesale's
name on the box for each New PC, and, if Intellesale elects,
for inclusion of an Intellesale marketing disk and/or pamphlet
with each New PC; provided, however, each New PC must be
shipped to FlashNet in an unopened box from the original
equipment manufacturer and, provided further, FlashNet shall
have the right to consent to the content or distribution of any
Intellesale marketing materials, which consent shall not
unreasonably be withheld. Intellesale warrants that it has and
will have good title to the New PCs sold and to be sold
pursuant to this Agreement for Termination of Computer Supply
Arrangement and that Intellesale has and will have the right to
sell the New PCs to FlashNet free of any proprietary rights of
any other party or any other lien or encumbrance. Title to the
New PCs shall pass to FlashNet on the date which FlashNet
receives the New PCs, and Intellesale agrees to take all
necessary steps to effectuate the passage of title. Prior to
the physical receipt of the New PCs by FlashNet, Intellesale
shall bear all risk of loss or damage to the New PCs. The risk
of loss or damage shall pass to FlashNet upon receipt of the
New PCs at the FlashNet Warehouse. Each New PC shall have a
manufacturer's warranty which shall be no less than, under
normal use and service, a standard manufacturer's warranty that
the New PC furnished pursuant to this Agreement for Termination
of Computer Supply Arrangement is free from defects in
materials and workmanship for a warranty period of no less than
one year from the date the computer is delivered by FlashNet to
a FlashNet customer.
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Agreement For Termination of Computer Supply Arrangement Page 8
<PAGE> 9
9. Intellesale represents that it is aware of approximately 1080
RMA's, representing requests by FlashNet customers for PCs or
computer hardware. Within one day of the execution of this
Agreement for Termination of Computer Supply Arrangement,
Intellesale will deliver to FlashNet a list of all RMA's it
believes to be outstanding. Within two days of receipt of
Intellesale's list, FlashNet will deliver to Intellesale a
Final List of all outstanding RMA's which must be filled by
Intellesale. The parties will work in good faith during that
two day period to compile a list accurately reflecting all
outstanding RMA "s (the "Final List"). Intellesale agrees to
forward to such customers of FlashNet on the Final List the
replacement computers and/or computer hardware requested by
such FlashNet customers within 5 business days for the first
1080 RMA's following receipt of such Final List from FlashNet
and within 15 days for any RMA's over 1080, with such computers
and computer hardware being Y2K compliant and meeting the
specifications and configuration specified in Exhibit B hereto,
and the definition of "Refurbished" or "Manufacturer
Refurbished" attached hereto as Exhibit C. FlashNet agrees to
use commercially reasonable, good faith efforts to require the
applicable customers to return to Intellesale such originally
shipped PCs or computer hardware, but FlashNet shall have no
liability for failure of any customer to return same.
10. Intellesale hereby represents that it has obtained an
irrevocable performance bond in the form attached hereto as
Exhibit A for the benefit of FlashNet to secure Intellesale's
performance of its obligations pursuant to paragraphs 6, 7, 8
and 9 herein and will provide FlashNet a copy of same within
four business days following execution of this Agreement for
Termination of Computer Supply Arrangement.
11. FlashNet hereby represents that it has obtained and provided
to Intellesale a sales tax exemption certificate in the form
attached hereto as Exhibit E. FlashNet shall indemnify and hold
harmless Intellesale from and against any liability relating to
sales taxes assessed in connection with FlashNet's sales to its
customers, prior to the date hereof, of PCs under the Original
Agreement.
12. Each signatory hereto hereby warrants and represents that such
person has authority to bind the party or parties for whom such
person acts.
13. The parties hereto and their counsel agree to cooperate with
each other in the drafting and execution of such additional
documents, if any, as are reasonably requested or required to
implement the provisions and spirit of this Agreement for
Termination of Computer Supply Arrangement.
14. The parties hereto agree that this Agreement for Termination
of Computer Supply Arrangement is made and is performable in
the State of Texas, and shall be construed in accordance with
the laws of the State of Texas. The parties agree that the
obligations, duties and/or rights arising under this Agreement
for Termination of Computer Supply Arrangement are performable
in, and only in, Tarrant County, Texas. The parties further
agree that this transaction is a "major transaction" as defined
in TEX.CIV.PRAC.&REM.CODEss. 15.020 and that no litigation
relating in
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Agreement For Termination of Computer Supply Arrangement Page 9
<PAGE> 10
any way to this Agreement for Termination of Computer Supply
Arrangement shall be brought in any forum other than Texas
State Court in Tarrant County, Texas, which shall have
exclusive jurisdiction over such litigation.
15. If litigation is brought to construe or enforce this Agreement
for Termination of Computer Supply Arrangement, the prevailing
party shall be entitled to recover attorneys' fees, as well as
costs and expenses, including the costs of mediation and expert
fees.
16. The parties hereby further understand and agree that neither
Intellesale nor FlashNet is admitting liability, and, in fact,
is denying liability and has agreed to this Agreement for
Termination of Computer Supply Arrangement purely and simply as
the compromise of claims asserted under the Original Agreement
in order to effect an amicable settlement, and in order to
avoid the time, expense and uncertainty which would accompany
further litigation.
17. The undersigned hereby further understand and agree that the
statements and representations contained herein are considered
to be contractual in nature and not merely recitals.
18. The undersigned hereby further understand and agree that this
Agreement for Termination of Computer Supply Arrangement shall
be binding upon the undersigned's agents, employees, officers,
directors, shareholders, partners, successors, assigns and
agents of the parties hereto forever.
19. This Agreement for Termination of Computer Supply Arrangement
may be executed in counterparts by one or more of the
undersigned parties and all such counterparts when executed by
both parties shall together be deemed to constitute one final
Agreement for Termination of Computer Supply Arrangement and
each such original counterpart, upon execution and delivery
thereof, shall be deemed to be a complete, original and binding
Agreement for Termination of Computer Supply Arrangement upon
the parties subscribed thereto.
20. This Agreement for Termination of Computer Supply Arrangement
may not be amended or modified except in writing, signed by the
party or parties to be bound thereby, or signed by their
respective attorneys, if authorized, and their respective
successors and assigns.
21. Except for an assignment by FlashNet to any parent
corporation, affiliate, subsidiary, successor in interest to
it, or the assignment to a purchaser of all or substantially
all of FlashNet's assets, neither party may assign or delegate
its rights or obligations hereunder without the prior written
consent of the other, which consent shall not be unreasonably
withheld.
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Agreement For Termination of Computer Supply Arrangement Page 10
<PAGE> 11
22. Each party hereby warrants and represents that it has not
transferred or assigned any claims or causes of action against
the other, or any part thereof, if any, such claims have ever
existed.
23. This Agreement for Termination of Computer Supply Arrangement
constitutes the entire understanding and agreement of the
parties hereto and supersedes prior understandings and
agreements, if any, between such parties with respect to the
subject matter hereof. There are no representations,
agreements, arrangements or understandings, oral or written,
concerning the subject matter hereof between the parties
hereto, which are not fully expressed or incorporated by
reference herein.
24. The parties hereto acknowledge that they and their attorneys
had substantial input into the drafting of this Agreement for
Termination of Computer Supply Arrangement and that, as a
result, its terms should not be construed against any of them
on the basis of the identity of the drafter.
Dated this day of November, 1999.
INTELLESALE.COM, INC. FLASHNET COMMUNICATIONS, INC.
By: By:
------------------------------------- ------------------------
Name: Name:
------------------------------------- ------------------------
Title: Title:
------------------------------------- ------------------------
Date: Date:
------------------------------------- ------------------------
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Agreement For Termination of Computer Supply Arrangement Page 11
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No. 4 to
Registration Statement on Form S-1 of our report dated June 10, 1999 (except as
to the second paragraph of Note 1, Note 10 and Note 16, which is as of August
23, 1999) relating to the financial statements and financial statement schedule
of Intellesale.com, Inc. and its predecessor companies, which appear in such
Registration Statement. We also consent to the references to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 13, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No. 4 to
Registration Statement on Form S-1 of our report dated February 24, 1998,
relating to the financial statements and financial statement schedule of the
predecessor companies to 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.
/s/ Rubin, Brown, Gornstein & Co. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
December 13, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the use in this Pre-Effective Amendment No. 4 to
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.
/s/ Di Pesa & Company
DI PESA & COMPANY
Certified Public Accountants
December 13, 1999
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No. 4 to
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.
/s/ Rubin, Brown, Gornstein & Co. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
December 13, 1999
