<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Destron Fearing Corporation
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11:
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01 share of Destron Fearing Corporation
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
23,264,916
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$4.375 and $5.29. The proposed unit price is based upon the average of
the high and low sale price of the common stock, $0.01 per share of
Destron Fearing Corporation on May 30, 2000 and June 26, 2000 as
quoted by Nasdaq Small Cap.
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$102,591,936
------------------------------------------------------------------------
(5) Total fee paid:
$927 (19,592 previously paid)
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials:
----------------------------------------------------------------------------
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$927 ($19,592 previously paid)
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Amendment No. 1 to Form S-4 (and Form S-4) Registration No. 333-38068
------------------------------------------------------------------------
(3) Filing Party:
Applied Digital Solutions, Inc.
------------------------------------------------------------------------
(4) Date Filed:
June 27, 2000 and June 2, 2000
------------------------------------------------------------------------
<PAGE> 2
(DESTRON-FEARING LOGO)
June 27, 2000
Dear Destron Fearing Corporation Stockholders:
I am writing to you today about our proposed merger with Digital Angel.net
Inc., a subsidiary of Applied Digital Solutions, Inc. This merger will result in
Destron becoming a subsidiary of Applied Digital and a combined company that
will be engaged in the business of developing and marketing electronic devices
for the identification and tracking of animate and inanimate objects and the
associated collection, processing, storage and retrieval of related information
using wireline and wireless transmission technologies.
In the merger, each share of Destron common stock will be exchanged for 1.5
shares of Applied Digital common stock. Applied Digital expects to issue up to
20,469,570 shares of its common stock, $0.001 par value per share, and to assume
up to 1,863,564 options and warrants previously issued by us. Upon the exercise
of these options and warrants, the holders would receive up to 2,795,346 shares
of Applied Digital common stock. Applied Digital common stock is traded on The
Nasdaq National Market under the trading symbol "ADSX," and it closed at $3.59
per share on June 26, 2000. The merger is described more fully in the
accompanying joint proxy statement/prospectus.
You will be asked to vote upon the merger agreement, as amended, at a
special meeting of Destron stockholders to be held on August 8, 2000 at 1:00
p.m., local time, at the Sheraton Midway Hotel, 400 North Hamline Avenue, St.
Paul, Minnesota 55104. For the merger to be approved, the holders of a majority
of the outstanding shares of Destron common stock must approve and adopt the
merger agreement, as amended. Only stockholders who hold shares of Destron
common stock at the close of business on June 26, 2000 will be entitled to vote
at the special meeting.
We are very excited by the opportunities we envision for the combined
company. Your board of directors has determined that the merger agreement, as
amended, and the merger are advisable and fair to and in the best interests of
Destron and you, and unanimously recommends that you adopt the merger agreement,
as amended. Your board of directors has obtained an opinion from its independent
financial advisors, Roth Capital Partners, Inc. and AgriCapital Securities,
Inc., to the effect that, as of the date of such opinion and based upon and
subject to a number of qualifications, assumptions and limitations described in
the opinion, the exchange ratio is fair to Destron's stockholders from a
financial point of view.
The accompanying joint proxy statement/prospectus provides detailed
information about Applied Digital and the merger. Please give all of this
information your careful attention. In particular, you should carefully consider
the discussion in the section entitled "Risk Factors" on page 15 of the joint
proxy statement/prospectus.
Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card, grant your proxy by
telephone or the Internet or attend the special stockholders meeting. To approve
the merger agreement, as amended, you MUST vote "FOR" the proposal by following
the instructions stated on the enclosed proxy card. If you do not vote at all,
it will, in effect, count as a vote against the merger. We urge you to vote
"FOR" this proposal, a necessary step in the merger of Destron and Digital
Angel.
If you plan to attend the meeting, please mark the appropriate box on your
proxy card to help us plan for the meeting. You will need an admission card to
attend the meeting, which you can obtain as follows:
- If your shares are registered in your name, you are a stockholder of
record. Your admission card is attached to your proxy card, and you
will need to bring it with you to the meeting.
<PAGE> 3
- If your shares are in the name of your broker or bank, your shares
are held in street name. You will need to check the box on the proxy
card stating that you will be attending the meeting, or ask your
broker or bank for an admission card in the form of a legal proxy to
bring with you to the meeting. If you do not receive the legal proxy
in time, bring your most recent brokerage statement with you to the
meeting so that we can verify your ownership of our stock and admit
you to the meeting. However, you will not be able to vote your
shares at the meeting without a legal proxy.
UNDER THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, EACH
STOCKHOLDER WHO OBJECTS TO THE ADOPTION OF THE AGREEMENT AND PLAN OF MERGER, AS
AMENDED, IS ENTITLED TO ASSERT STATUTORY APPRAISAL RIGHTS, PROVIDED, HOWEVER,
THAT IN ORDER TO ASSERT SUCH RIGHTS, A STOCKHOLDER IS REQUIRED TO ADHERE
STRICTLY TO CERTAIN STATUTORY REQUIREMENTS. STOCKHOLDERS INTENDING TO EXERCISE
THEIR APPRAISAL RIGHTS MUST FILE WITH DESTRON BEFORE THE MEETING, OR AT THE
MEETING BUT BEFORE THE VOTE ON THE MERGER, A WRITTEN OBJECTION TO THE MERGER,
INCLUDING A STATEMENT THAT THEY INTEND TO DEMAND PAYMENT FOR THEIR SHARES IF THE
MERGER IS CONSUMMATED. MOREOVER, STOCKHOLDERS SHOULD BE AWARE THAT A PROXY OR
VOTE AGAINST THE MERGER SHALL NOT CONSTITUTE SUCH A DEMAND. A STATEMENT WITH
RESPECT TO THE RIGHTS OF DISSENTING STOCKHOLDERS IS ON PAGE 75 OF THE
ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS UNDER "THE MERGER -- APPRAISAL
RIGHTS." THE TEXT OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW, WHICH
SETS FORTH THE PROCEDURES FOR STOCKHOLDERS TO EXERCISE THEIR APPRAISAL RIGHTS,
IS ATTACHED AS ANNEX E TO THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS.
If you have questions about the merger or would like additional copies of
the accompanying joint proxy statement/prospectus, you should contact James P.
Santelli at Destron at (651) 455-1621. Even if you plan to attend the Destron
special meeting in person, please complete, sign, date and promptly return the
enclosed proxy card in the enclosed postage-prepaid envelope or grant your proxy
by telephone or the Internet.
Sincerely,
/s/ RANDOLPH GEISSLER
Randolph K. Geissler
President and Chief Executive Officer
<PAGE> 4
DESTRON FEARING CORPORATION
490 VILLAUME AVENUE
SOUTH ST. PAUL, MINNESOTA 55075
(651) 455-1621
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 8, 2000
---------------------
We will hold a special meeting of stockholders of Destron Fearing
Corporation at 1:00 p.m., local time, on August 8, 2000 in order:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of April 24, 2000, as amended, by and among Applied
Digital Solutions, Inc., Digital Angel.net. Inc., a subsidiary of Applied
Digital, and Destron under which Destron will merge with Digital Angel and will
become a subsidiary of Applied Digital, and each outstanding share of Destron
common stock will be converted into the right to receive 1.5 shares of Applied
Digital common stock as more fully described in the accompanying joint proxy
statement/prospectus; and
2. To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
Your board of directors has determined that the merger agreement, as
amended, and the merger are advisable and fair to and in the best interests of
Destron and its stockholders, and unanimously recommends that you vote to adopt
the merger agreement, as amended, and approve the merger. Your board of
directors has obtained an opinion from its independent financial advisors, Roth
Capital Partners, Inc. and AgriCapital Securities, Inc., to the effect that, as
of the date of such opinion and based upon and subject to a number of
qualifications, assumptions and limitations, the exchange ratio is fair to
Destron's stockholders from a financial point of view.
We describe the merger more fully in the accompanying joint proxy
statement/prospectus, which we urge you to read.
Only Destron stockholders of record at the close of business on June 26,
2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement.
Your vote is important. To assure that your shares are represented at the
special meeting, you are urged to complete, date and sign the enclosed proxy and
mail it promptly in the postage-paid envelope provided, or call the toll-free
number or use the Internet by following the instructions enclosed with your
proxy, whether or not you plan to attend the special meeting in person. You may
revoke your proxy in the manner described in the accompanying joint proxy
statement/prospectus at any time before it has been voted at the special
meeting.
If you plan to attend the meeting, please mark the appropriate box on your
proxy card to help us plan for the meeting. You will need an admission card to
attend the meeting, which you can obtain as follows:
- If your shares are registered in your name, you are a stockholder of
record. Your admission card is attached to your proxy card, and you
will need to bring it with you to the meeting.
<PAGE> 5
- If your shares are in the name of your broker or bank, your shares
are held in street name. You will need to check the box on the proxy
card stating that you will be attending the meeting, or ask your
broker or bank for an admission card in the form of a legal proxy to
bring with you to the meeting. If you do not receive the legal proxy
in time, bring your most recent brokerage statement with you to the
meeting so that we can verify your ownership of our stock and admit
you to the meeting. However, you will not be able to vote your
shares at the meeting without a legal proxy.
By Order of the Board of Directors
/s/ JAMES P. SANTELLI
James P. Santelli
Secretary
South St. Paul, Minnesota
June 27, 2000
<PAGE> 6
JOINT PROXY STATEMENT/PROSPECTUS
(APPLIED DIGITAL LOGO) (DESTRON-FEARING LOGO)
PROPOSED MERGER -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of Applied Digital Solutions, Inc. and Destron
Fearing Corporation have approved a merger agreement, as amended, that would
have the effect of causing Destron to become a subsidiary of Applied Digital.
The enclosed proxy is solicited by the board of directors of Applied Digital and
Destron for use at their respective special meetings of shareholders. The costs
of the joint proxy solicitation will be borne equally by Applied Digital and
Destron. In addition to solicitation by mail, directors, officers and employees
of Applied Digital and directors, officers and employees of Destron may solicit
proxies personally and by telephone, telegraph and e-mail. Applied Digital and
Destron also intend to use the services of a proxy solicitation firm for
assistance in soliciting proxies for their special meetings.
BE SURE TO READ THE "RISK FACTORS" BEGINNING ON PAGE 15.
Here is what will happen to your shares if the merger is completed:
APPLIED DIGITAL SHAREHOLDERS: Each share of Applied Digital common stock
that you own will remain outstanding as a share of Applied Digital common stock.
DESTRON STOCKHOLDERS: The transaction is structured as a merger, in which
each share of Destron common stock will be exchanged for 1.5 shares of Applied
Digital common stock, $0.001 par value per share.
Applied Digital common stock is traded on The Nasdaq National Market under
the symbol "ADSX." If this merger is completed, Destron stockholders will own
approximately 31% of Applied Digital, while Applied Digital shareholders will
own approximately 69%.
THE MEETINGS
AT THE APPLIED DIGITAL SPECIAL MEETING TO BE HELD ON AUGUST 8, 2000, AT THE
CHESTERFIELD HOTEL, 363 COCOANUT ROW, PALM BEACH, FLORIDA 33480, COMMENCING AT
2:00 P.M., LOCAL TIME, WE ARE ASKING APPLIED DIGITAL SHAREHOLDERS TO APPROVE:
- A proposal to issue up to 20,469,570 shares of Applied Digital common stock in
exchange for all of the issued and outstanding Destron common stock and up to
2,795,346 shares of Applied Digital common stock upon the exercise of options
and warrants to purchase Destron common stock that Applied Digital is assuming
pursuant to the merger agreement, as amended, the approval of which is
necessary to permit the merger to occur; and
- A proposal to amend the second restated articles of incorporation of Applied
Digital, effective at the effective time of the merger, with the effect of
increasing the number of authorized shares of capital stock of Applied Digital
from 85,000,000 shares to 250,000,000 shares with 245,000,000 of such shares
designated as Applied Digital common stock.
AT THE DESTRON SPECIAL MEETING TO BE HELD ON AUGUST 8, 2000, AT THE
SHERATON MIDWAY HOTEL, 400 NORTH HAMLINE AVENUE, ST. PAUL, MINNESOTA 55104,
COMMENCING AT 1:00 P.M., LOCAL TIME, WE ARE ASKING DESTRON STOCKHOLDERS TO
APPROVE:
- The merger agreement, as amended, pursuant to which Destron will merge with
Digital Angel.net Inc., a subsidiary of Applied Digital, and the combined
company will become a subsidiary of Applied Digital.
YOUR VOTE IS IMPORTANT. Please vote on these proposals by completing and
mailing the enclosed proxy card or grant your proxy by telephone or the
Internet, even if you plan to attend your special meeting.
<PAGE> 7
This joint proxy statement/prospectus provides detailed information about the
meetings scheduled for the Destron stockholders and Applied Digital shareholders
to vote on these matters. We encourage you to read this joint proxy
statement/prospectus carefully before you vote. You may obtain more information
about Applied Digital and Destron from documents that we have filed with the
Securities and Exchange Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE APPLIED DIGITAL COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS
JOINT PROXY STATEMENT/ PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This joint proxy statement/prospectus is dated June 27, 2000 and is first
being mailed on or about June 29, 2000 to (i) shareholders of Applied Digital,
including the holders of exchangeable shares ("exchangeable shares") of Applied
Digital's Canadian subsidiary, ACT-GFX Canada, Inc., who are entitled, through a
voting trust, to vote at the Applied Digital special meeting, and (ii) the
stockholders of Destron.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 4
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 12
COMPARATIVE PER SHARE DATA.................................. 13
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 14
RISK FACTORS................................................ 15
Risks Relating to the Merger.............................. 15
Risks Inherent in the Business of Applied Digital......... 16
Risks Inherent in the Business of Destron................. 19
APPLIED DIGITAL SPECIAL MEETING............................. 22
DESTRON SPECIAL MEETING..................................... 25
THE COMPANIES............................................... 27
APPLIED DIGITAL SOLUTIONS, INC............................ 27
SELECTED FINANCIAL DATA OF APPLIED DIGITAL................ 31
APPLIED DIGITAL'S MANAGEMENT'S DISCUSSION................. 33
DESTRON FEARING CORPORATION............................... 54
SELECTED FINANCIAL DATA OF DESTRON........................ 55
DESTRON'S MANAGEMENT'S DISCUSSION......................... 56
DIGITAL ANGEL.NET INC..................................... 58
MARKET PRICE AND DIVIDEND INFORMATION....................... 59
THE MERGER.................................................. 60
Background of the Merger.................................. 60
Recommendation of the Applied Digital Board of Directors;
Reasons of Applied Digital for the Merger.............. 61
Recommendation of the Destron Board of Directors; Reasons
of Destron for the Merger.............................. 63
Opinion of Roth Capital Partners, Inc. and AgriCapital
Securities, Inc........................................ 65
Interests of Certain Persons in the Merger................ 69
Material Federal Income Tax Consequences Relating to the
Stock Options.......................................... 72
Material Federal Income Tax Consequences of the Merger.... 72
The Voting Agreement...................................... 74
Accounting Treatment...................................... 74
Regulatory Approvals...................................... 74
Federal Securities Laws Consequences...................... 74
Listing of Applied Digital Common Stock................... 75
Delisting of Destron Common Stock......................... 75
Appraisal Rights.......................................... 75
THE MERGER AGREEMENT........................................ 78
Structure of the Merger................................... 78
Conversion of Securities.................................. 78
Effective Time of the Merger.............................. 79
Representations and Warranties............................ 79
Certain Covenants......................................... 79
No Solicitation........................................... 80
Stockholders' Meetings.................................... 80
Access.................................................... 80
Indemnification of Directors and Officers................. 81
Stock Options, Warrants and Employee Benefit Plans........ 81
Options to Purchase Common Stock of Digital Angel......... 81
Certain Other Covenants................................... 81
</TABLE>
i
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Conditions to the Merger.................................. 82
Termination of the Merger Agreement....................... 83
Termination Expenses and Alternative Transaction Fees..... 84
Expenses; Finder's Fees................................... 84
Amendment and Waiver...................................... 84
Dividends and Distributions............................... 85
Lost Certificates......................................... 85
DESCRIPTION OF APPLIED DIGITAL'S CAPITAL STOCK.............. 86
Authorized Capital........................................ 86
Common Stock.............................................. 86
Preferred Stock........................................... 86
Options and Warrants...................................... 87
Indemnification........................................... 87
COMPARISON OF CAPITAL STOCK................................. 87
Authorized Capital Stock.................................. 87
Special Meetings of Shareholders.......................... 87
Number of Directors....................................... 88
Classification of the Board of Directors.................. 88
Removal of Directors; Filling Vacancies on the Board of
Directors.............................................. 88
Cumulative Voting......................................... 89
Anti-Takeover Statutes.................................... 89
Preemptive Rights......................................... 90
Dissenters' Rights........................................ 91
Stockholders' Right to Inspect............................ 91
Amendment of Articles or Certificate of Incorporation and
Bylaws................................................. 91
SHAREHOLDER PROPOSALS....................................... 92
EXPERTS..................................................... 92
LEGAL MATTERS............................................... 92
PRIOR SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 93
WHERE YOU CAN FIND MORE INFORMATION......................... 93
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPLIED DIGITAL CONSOLIDATED FINANCIAL STATEMENTS........... F-2
DESTRON CONSOLIDATED FINANCIAL STATEMENTS................... F-40
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... P-1
Annex A-1 -- Agreement and Plan of Merger (without exhibits)
Annex A-2 -- Amendment to Agreement and Plan of Merger
Annex B-1 -- Opinion of Roth Capital Partners, Inc. and
AgriCapital Securities, Inc.
Annex B-2 -- Opinion Letter Supplement of Roth Capital
Partners, Inc. and AgriCapital Securities, Inc.
Annex C -- Amended and Restated Voting Agreement and
Irrevocable Proxy
Annex D -- Form of Proposed Amendment to Second Restated
Articles of Incorporation of Applied Digital
Solutions, Inc.
Annex E -- Section 262 of the Delaware General Corporation
Law
</TABLE>
ii
<PAGE> 10
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT ARE THE BENEFITS OF THE MERGER?
A: Both the Applied Digital board of directors and the Destron board of
directors believe the merger is in the best interests of their respective
companies and will provide significant benefits to the holders of their
common stock, customers and employees. To review the background and reasons
for the merger in greater detail, see pages 60 through 65.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: For Applied Digital shareholders, each of the shares of Applied Digital
common stock held by Applied Digital shareholders will remain outstanding
at the time of the merger.
For Destron stockholders, under the merger agreement, as amended, you will
receive 1.5 shares of Applied Digital common stock for each share of
Destron common stock that you own.
For example:
- If you own 100 shares of Destron common stock, then after the merger you
will receive 150 shares of Applied Digital common stock.
- If you own 33 shares of Destron common stock, then after the merger you
will receive 49 shares of Applied Digital common stock and a check for
0.5 times the average price of Applied Digital common stock for a period
prior to closing.
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "Risk Factors" beginning on page 15.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: Destron stockholders. We expect that the exchange of shares by Destron
stockholders generally will be tax-free for U.S. federal income tax
purposes. Destron stockholders will, however, recognize gain or loss on
cash received for fractional shares or shares which have been exchanged for
cash in connection with the exercise of dissenters' rights. To review the
tax consequences to Destron stockholders in greater detail, see pages 72
through 73.
Your tax consequences will depend on your personal situation. You should
consult your tax advisor for a full understanding of the tax consequences
of the merger to you.
Applied Digital shareholders. The merger will have no tax consequences to
Applied Digital shareholders.
Q: WHAT AM I BEING ASKED TO VOTE UPON AND WHAT IS THE REQUIRED
SHAREHOLDER VOTE?
A: Destron stockholders. You are being asked to approve the merger agreement,
as amended, which provides for Applied Digital's acquisition of Destron
through a merger of Digital Angel, a subsidiary of Applied Digital, into
Destron. Following the merger, Destron will be a subsidiary of Applied
Digital and will be re-named "Digital Angel.net Inc." Approval of the
proposal requires the affirmative vote of a majority of the outstanding
shares of Destron common stock.
The Destron board of directors has unanimously approved and adopted the
merger agreement, as amended, and recommends that Destron stockholders vote
"FOR" the approval of the merger agreement, as amended.
1
<PAGE> 11
Applied Digital shareholders. You are being asked to approve the issuance
of up to 20,469,570 shares of Applied Digital common stock in exchange for
all of the issued and outstanding shares of Destron common stock and up to
2,795,346 shares of Applied Digital common stock issuable upon the exercise
of options and warrants to purchase Destron common stock that Applied
Digital is assuming pursuant to the merger agreement, as amended. Approval
of this proposal will require the affirmative vote of a majority of the
outstanding shares of Applied Digital common stock and preferred stock
present in person or by proxy at the Applied Digital special meeting,
voting as a single class. The failure to vote and abstentions by shares
present will have the same effect as a vote against this proposal and
broker non-votes will have no effect on the voting for this proposal.
In addition, you are also being asked to amend the second restated articles
of incorporation of Applied Digital to increase the number of authorized
shares of capital stock from 85,000,000 to 250,000,000 with 245,000,000 of
such shares designated as Applied Digital common stock. This amendment is
necessary for the merger to go forward. Approval of this proposal will
require the affirmative vote of a majority of the outstanding shares of
Applied Digital common stock and preferred stock, voting as a single class.
The failure to vote, abstentions and broker non-votes will have the same
effect as a vote against such proposal.
The Applied Digital board of directors has approved and adopted the merger
agreement, as amended, and the issuance of Applied Digital common stock in
connection with the merger and the amendment to the Applied Digital second
restated articles of incorporation and recommends that Applied Digital
shareholders vote "FOR" the approval of these two proposals to be presented
at the Applied Digital special meeting. The proposals are described in
detail in the accompanying joint proxy statement/ prospectus.
Q: WHAT DO I NEED TO DO NOW?
A: After you read and consider carefully the information contained in this
document, please fill out and sign your proxy card. Then mail your signed
proxy card in the enclosed return envelope or grant your proxy by telephone
or the Internet as soon as possible so that your shares may be represented
at the Applied Digital special meeting or the Destron special meeting, as
applicable. The board of directors of Destron unanimously recommends that
Destron stockholders vote "FOR" approval of the merger agreement, as
amended, and the board of directors of Applied Digital recommends that
Applied Digital shareholders vote "FOR" the proposals described in this
document to be voted on by the Applied Digital shareholders in connection
with the merger.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how
to vote. The failure to instruct your broker to vote will have the same
effect as a vote against the merger proposals. You should follow the
instructions provided by your broker regarding how to instruct your broker
to vote your shares.
Q: CAN I CHANGE MY VOTE OR REVOKE MY PROXY AFTER I HAVE MAILED MY SIGNED
PROXY CARD OR GRANTED MY PROXY BY TELEPHONE OR THE INTERNET?
A: You can change your vote at any time before your proxy is voted at the
Applied Digital special meeting or the Destron special meeting, as the case
may be. You can do this in one of three ways. First, you can send a written
notice stating that you want to revoke your proxy. Second, you can complete
and submit a new proxy card. If you choose either of these methods, you
must timely submit your notice of revocation or your new proxy card to the
appropriate company at the address shown on page 4. Third, you can attend
the Applied Digital special meeting or the Destron special meeting, as the
case may be, and vote in person. Simply attending a meeting, however, will
not revoke your proxy. If you have instructed a broker to vote your shares,
you must contact the broker to revoke that proxy and obtain a legal proxy.
If your shares are held in street name, you will not be able to vote your
shares at the meeting without a legal proxy. If you granted your proxy by
telephone or the Internet, you can change your vote by submitting a
2
<PAGE> 12
proxy at a later date, using the same procedures, in which case your later
submitted proxy will be recorded and your earlier proxy revoked.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After we have completed the merger, we will send Destron stockholders
written instructions informing them how to exchange their stock
certificates. Applied Digital shareholders will keep their stock
certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as soon as possible. We hope
to complete the merger during the third quarter of 2000. However, if
conditions to the merger are not satisfied, the merger may be completed
later.
Q: WHAT IF I HAVE QUESTIONS?
A: If you are an Applied Digital shareholder, please call Robert Jackson,
Director of Investor Relations at Applied Digital, at (561) 366-4800.
If you are a Destron stockholder, please call James P. Santelli at Destron
at (651) 455-1621.
3
<PAGE> 13
SUMMARY
Because this is a summary, it does not contain all of the information that
may be important to you. You should carefully read this entire joint proxy
statement/prospectus and its annexes and the other documents to which we have
referred you before you decide how to vote. See "Where You Can Find More
Information" on pages 93 through 94.
THE COMPANIES
APPLIED DIGITAL SOLUTIONS, INC.
400 Royal Palm Way
Suite 410
Palm Beach, FL 33480
(561) 366-4800
Applied Digital is a leading edge, single source provider of e-business
solutions. Applied Digital differentiates itself in the marketplace by enabling
e-business through Computer Telephony Internet Integration (CTII(TM)). Beginning
in the fourth quarter of 1998 and continuing into 2000, Applied Digital
reorganized to refocus its strategic direction, organizing into four core
business groups: Internet, Telephony, Network and Applications. With CTII,
Applied Digital provides the full range of services and skills companies need to
conduct business online. Through its four integrated business groups, Applied
Digital designs and deploys complete, front to back, web-enabled e-business
systems, all with a single point of contact for the customer.
Applied Digital currently operates in the United States, Canada and the
United Kingdom. Applied Digital is a Missouri corporation and was incorporated
on May 11, 1993.
DESTRON FEARING CORPORATION
490 Villaume Avenue
South St. Paul, MN 55075
(651) 455-1621
Destron develops, manufactures and markets a broad line of electronic and
visual identification devices and information systems for the companion animal,
livestock, laboratory animal, fish and wildlife markets worldwide. Destron's
radio frequency identification products consist of miniature electronic
microchips, readers and injection systems. Destron holds patents on its
syringe-injectable microchip, which is encased in a glass or glass-like material
capsule and incorporates an antenna and a microchip with a unique permanent
identification code for the animal in which it is implanted. An associated
reader device uses radio frequency to interrogate the microchip and read the
code. The microchip is typically injected under the skin using a hypodermic
syringe, without requiring surgery. Destron's visual identification products,
such as numbered ear tags, are marketed under the Fearing brand name,
principally to livestock producers.
DIGITAL ANGEL.NET INC.
350 Motor Parkway
Hauppage, NY 11788
(631) 951-3366
Digital Angel.net Inc., which we refer to in this document as "Digital
Angel," is a subsidiary of Applied Digital. In December 1999, Applied Digital
announced that, through Digital Angel, it had acquired the patent rights to a
miniature digital transceiver -- which it has named Digital Angel. While still
in its development stage, Applied Digital believes that this technology may be
used for a variety of purposes, such as providing a tamper-proof means of
identification for enhanced e-commerce security, locating lost or missing
individuals, tracking the location of valuable property and pets, and monitoring
the medical conditions of at-risk patients. It is anticipated that the
implantable device will send and receive data and would be able to use GPS
(Global Positioning Satellite) technology for continuous tracking.
4
<PAGE> 14
The proposed merger of Digital Angel and Destron will result in Destron
becoming a subsidiary of Applied Digital operating under the "Digital Angel.net
Inc." name.
The combined company will be engaged in the business of developing and
marketing electronic devices for the identification and tracking of animate and
inanimate objects and the associated collection, processing, storage and
retrieval of related information using wireline and wireless transmission
technologies.
PURPOSES OF THE SPECIAL MEETINGS
(PAGES 22 THROUGH 26)
Applied Digital. The purpose of the Applied Digital special meeting is to
consider and vote upon:
- the approval of the issuance of up to 20,469,570 shares of Applied
Digital common stock in exchange for all of the issued and outstanding
shares of Destron common stock and up to 2,795,346 shares of Applied
Digital common stock issuable upon the exercise of options and warrants
to purchase Destron common stock that Applied Digital is assuming
pursuant to the merger agreement, as amended; and
- the amendment of article three of the Applied Digital second restated
articles of incorporation, effective at the effective time of the merger,
with the effect of increasing the number of authorized shares of capital
stock of Applied Digital from 85,000,000 to 250,000,000 with 245,000,000
designated as Applied Digital common stock.
Destron. The purpose of the Destron special meeting is to consider and
vote upon a proposal to approve and adopt the merger agreement, as amended.
DATE, TIMES AND PLACES OF THE SPECIAL
MEETINGS (PAGES 22 THROUGH 26)
Applied Digital. The Applied Digital special meeting will be held on
August 8, 2000, at the Chesterfield Hotel, 363 Cocoanut Row, Palm Beach, Florida
33480, commencing at 2:00 p.m., local time.
Destron. The Destron special meeting will be held on August 8, 2000, at
the Sheraton Midway Hotel, 400 North Hamline Avenue, St. Paul, Minnesota 55104,
commencing at 1:00 p.m., local time.
STOCKHOLDERS ENTITLED TO VOTE AT THE SPECIAL MEETINGS
(PAGES 22 THROUGH 26)
Applied Digital. The close of business on June 26, 2000 is the record date
for the Applied Digital special meeting. Only Applied Digital shareholders on
the record date are entitled to notice of and to vote at the Applied Digital
special meeting. On the record date, there were 52,982,886 shares of Applied
Digital common stock outstanding and one share of Applied Digital Class B Voting
Preferred Stock outstanding. Each share of Applied Digital common stock will be
entitled to one vote on each matter to be acted upon at the Applied Digital
special meeting. The share of Class B Voting Preferred Stock will be entitled to
503 votes. As of June 26, 2000, current directors and executive officers of
Applied Digital and their affiliates may be deemed to be beneficial owners of
approximately 9,552,163 shares of Applied Digital common stock (including
presently exercisable options), or approximately 18.0% of the shares of Applied
Digital common stock entitled to vote at the Applied Digital special meeting.
Destron. The close of business on June 26, 2000 is the record date for the
Destron special meeting. Only Destron stockholders on the record date are
entitled to notice of and to vote at the Destron special meeting. On the record
date, there were 13,646,380 shares of Destron common stock outstanding. Each
share of Destron common stock will be entitled to one vote on each matter to be
acted upon at the Destron special meeting. As of June 26, 2000, current
directors and executive officers of Destron and their affiliates were the owners
of approximately 863,800 shares of Destron common stock, or approximately 6.3%
of the shares of Destron common stock entitled to vote at the Destron special
meeting. Pursuant to an amended and restated voting agreement and irrevocable
proxy in the form of Annex C attached hereto, Destron's directors and
5
<PAGE> 15
executive officers have agreed to vote all of their shares of Destron common
stock for approval of the merger agreement, as amended.
VOTES REQUIRED (PAGES 22 THROUGH 26)
Applied Digital. The affirmative vote of the majority of the shares of
Applied Digital capital stock present in person or by proxy at the Applied
Digital special meeting is required to approve the issuance of shares of Applied
Digital common stock pursuant to the merger agreement, as amended. The
affirmative vote of the majority of the outstanding shares of Applied Digital
capital stock is required to approve the proposal to amend the Applied Digital
second restated articles of incorporation to increase the number of authorized
shares of Applied Digital capital stock to 250,000,000 shares with 245,000,000
designated as common stock.
Destron. The affirmative vote of the holders of a majority of the
outstanding shares of Destron common stock is required to approve the merger
agreement, as amended. Such approval is a condition to the consummation of the
merger. Pursuant to an amended and restated voting agreement and irrevocable
proxy in the form of Annex C attached hereto, Destron's directors and executive
officers have agreed to vote all of their shares of Destron common stock for
approval of the merger agreement, as amended.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
(PAGES 61 THROUGH 65)
Applied Digital. The Applied Digital board of directors has determined
that the merger is fair to, and in the best interests of, Applied Digital and
its shareholders and has approved the merger agreement, as amended, and the
proposal to issue shares of Applied Digital common stock in connection with the
merger, and the proposal to amend the Applied Digital second restated articles
of incorporation. Accordingly, the Applied Digital board of directors recommends
that Applied Digital shareholders vote "FOR" the proposal to issue shares of
Applied Digital common stock in connection with the merger and "FOR" the
proposal to amend the Applied Digital second restated articles of incorporation.
Destron. The Destron board of directors has determined that the merger is
fair to, advisable and in the best interests of, Destron and its stockholders
and has unanimously approved the merger agreement, as amended. Accordingly, the
Destron board of directors recommends that Destron stockholders vote "FOR" the
approval and adoption of the merger agreement, as amended.
OPINION OF FINANCIAL ADVISORS
(PAGES 65 THROUGH 69)
In deciding to approve the merger, the board of directors of Destron
considered an opinion from its financial advisors as to the fairness, from a
financial point of view, of the exchange ratio. Destron received an opinion from
its financial advisors, Roth Capital Partners, Inc. and AgriCapital Securities,
Inc., that, as of the date of that opinion, the consideration to be received by
the stockholders of Destron was fair, from a financial point of view. Copies of
the fairness opinion of Roth Capital Partners, Inc. and AgriCapital Securities,
Inc., as supplemented, is attached to this joint proxy statement/prospectus as
Annexes B-1 and B-2. WE URGE THE STOCKHOLDERS OF DESTRON TO READ THIS OPINION,
AS SUPPLEMENTED, CAREFULLY.
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<PAGE> 16
RISK FACTORS (PAGES 15 THROUGH 21)
There are risk factors that should be considered by the Applied Digital
shareholders in deciding how to vote at the Applied Digital special meeting and
by the Destron stockholders in deciding how to vote at the Destron special
meeting. Such risk factors include the following:
- Destron stockholders may receive shares of Applied Digital common stock
with a market value lower than anticipated;
- Integrating the business operations of Destron and Digital Angel may be
difficult and may have a negative impact on Applied Digital's business,
and there are uncertainties in realizing benefits from the combination;
- Risks generally associated with acquisitions and the expansion of the
existing operations of Applied Digital; and
- Risks inherent in the industry, the business of, or particular to Applied
Digital, Digital Angel or Destron, including dependence on proprietary
technology and risks related to competition and government regulation.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGES 69 THROUGH 72)
Applied Digital. In considering the recommendation of the Applied Digital
board of directors regarding approval of the proposal to issue Applied Digital
common stock pursuant to the merger agreement, as amended, and the proposal to
amend the Applied Digital second restated articles of incorporation to increase
the number of authorized shares of Applied Digital capital stock and common
stock, Applied Digital shareholders should be aware of interests that some of
the officers and directors of Applied Digital have in the merger that may be
different from your and their interests as shareholders generally. The Applied
Digital board of directors has recognized such interests and has determined that
such interests neither support nor detract from the fairness of the merger to
Applied Digital's shareholders. These interests include the prior grant to
officers and directors of Applied Digital of options to purchase, at an exercise
price of $0.05 per share, 2,500,000 shares of the common stock of Digital Angel,
in the aggregate.
Destron. In considering the recommendation of the Destron board of
directors regarding approval of the proposal to approve and adopt the merger
agreement, as amended, Destron stockholders should be aware of interests that
some of the officers and directors of Destron have in the merger that may be
different from your and their interests as stockholders generally. The Destron
board of directors has recognized such interests and has determined that such
interests neither support nor detract from the fairness of the merger to
Destron's stockholders. These interests include the following:
- Officers, directors and employees of Destron may receive options to
purchase, in the aggregate, up to 10% of the common stock of Digital
Angel pursuant to the merger agreement, as amended.
- As of the record date, approximately 840,500 shares of Destron common
stock were subject to options granted to executive officers and directors
under Destron's equity based compensation plans and an additional 105,000
shares of Destron common stock were subject to options granted to
directors outside Destron's plans. All such stock options are subject to
accelerated vesting upon a change of control of Destron. All outstanding
options to purchase Destron common stock will be assumed by Applied
Digital and will become options to purchase Applied Digital common stock,
with appropriate adjustments to be made to the number of shares and the
per share exercise price under such options based on the exchange ratio.
- Applied Digital will enter into an employment agreement with Randolph K.
Geissler, President and Chief Executive Officer of Destron, effective
upon the consummation of the merger. The employment agreement provides
for Mr. Geissler's appointment as the Chief Executive Officer of Digital
Angel.
7
<PAGE> 17
- Applied Digital will enter into an employment agreement with James P.
Santelli, Chief Financial Officer of Destron, effective upon the
consummation of the merger. The employment agreement provides for Mr.
Santelli's appointment as Chief Financial Officer of Digital Angel.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGES 72 THROUGH 73)
It is expected that the merger generally will be tax-free to Applied
Digital shareholders and Destron stockholders for federal income tax purposes
(other than with respect to cash that stockholders of Destron may receive
instead of fractional shares or in connection with exercise of appraisal
rights). It is a condition to the merger that Applied Digital and Destron each
have received an opinion of counsel to the effect that the merger will
constitute a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, which is referred to in this document
as the "Code."
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISORS FOR
A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER AS IT APPLIES TO YOU.
ACCOUNTING TREATMENT (PAGE 74)
The merger will be accounted for as the acquisition of Destron by Applied
Digital under the "purchase" method of accounting in accordance with generally
accepted accounting principles.
REGULATORY APPROVALS (PAGE 74)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which
we refer to in this document as the "HSR Act," and the rules and regulations of
the Federal Trade Commission, provide that some merger transactions, including
the merger, may not be consummated until required information and materials have
been furnished to the Department of Justice and the Federal Trade Commission and
the applicable waiting periods have expired or been terminated. On June 1, 2000
Applied Digital and Destron received notification that the FTC terminated the
waiting period for the pre-merger notification effective June 1, 2000.
FEDERAL SECURITIES LAWS CONSEQUENCES (PAGE 74)
All shares of Applied Digital common stock received by Destron stockholders
in the merger will be freely transferable, except for shares of Applied Digital
common stock received by persons who are deemed to be affiliates of Destron
prior to the merger. The shares of Applied Digital common stock held by
affiliates of Destron may be resold by them only in transactions permitted by
the resale provisions of Rule 145 promulgated under the Securities Act of 1933,
as amended, which we refer to in this document as the "Securities Act," or Rule
144 promulgated under the Securities Act, in the case of such persons who become
affiliates of Applied Digital, or otherwise in compliance with, or pursuant to
an exemption from, the registration requirements of the Securities Act.
THE NASDAQ NATIONAL MARKET QUOTATION (PAGE 75)
It is a condition to the merger that the shares of Applied Digital common
stock to be issued pursuant to the merger agreement, as amended, be approved for
listing on The Nasdaq National Market, subject to official notice of issuance.
An application will be filed for listing the shares of Applied Digital common
stock to be issued in connection with the merger on The Nasdaq National Market.
APPRAISAL RIGHTS (PAGES 75 THROUGH 77)
In accordance with the Delaware General Corporation Law, there will be
appraisal rights available to holders of Destron common stock in connection with
the merger. Shareholders of Applied Digital will not have appraisal rights in
connection with the merger.
8
<PAGE> 18
STRUCTURE OF THE MERGER (PAGE 78)
At the effective time of the merger, Digital Angel will be merged with and
into Destron, with Destron as the surviving corporation and as a subsidiary of
Applied Digital immediately after the merger. At the effective time of the
merger, Destron will change its name to "Digital Angel.net Inc." A copy of the
merger agreement, as amended, is attached to this joint proxy
statement/prospectus as Annexes A-1 and A-2. We encourage you to read this
agreement because it is the legal document that governs the proposed merger.
CONVERSION OF SECURITIES
(PAGES 78 THROUGH 79)
At the effective time of the merger, each issued and outstanding share of
Destron common stock will be converted into the right to receive 1.5 shares of
Applied Digital common stock.
No fractional shares of Applied Digital common stock will be issued to any
Destron stockholder upon surrender of certificates previously representing
Destron common stock. Applied Digital will pay cash in lieu of issuing such
fractional shares.
Promptly after the effective time of the merger, Applied Digital will cause
the exchange agent to mail letters of transmittal and exchange instructions to
each holder of record of Destron common stock to be used to surrender and
exchange certificates formerly evidencing shares of Destron common stock for
certificates evidencing the shares of Applied Digital common stock to which such
holder has become entitled. DESTRON STOCKHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM. APPLIED DIGITAL SHAREHOLDERS
SHOULD NOT SEND IN THEIR CERTIFICATES.
Assuming all Destron stock options and warrants issued as of the merger
date are exercised as a result of the merger, Applied Digital would issue
approximately 23,264,916 shares of Applied Digital common stock in connection
with the merger. Applied Digital estimates Destron stockholders will own
approximately 31% and Applied Digital shareholders will own approximately 69%,
respectively, of the outstanding shares of Applied Digital common stock
immediately following consummation of the merger, assuming the exercise of all
of the Destron options and warrants to be assumed in the merger.
STOCK OPTIONS AND WARRANTS OF DESTRON
(PAGE 81)
Stock options issued to purchase Destron common stock and warrants issued
to purchase Destron common stock will be automatically converted into stock
options or warrants, as the case may be, to purchase Applied Digital common
stock. The number of shares and the per share exercise price of these converted
options or warrants will be subject to the exchange ratio. Applied Digital
intends to register for resale the shares of Applied Digital common stock
issuable upon exercise of such stock options and warrants.
CONDITIONS TO THE MERGER
(PAGES 82 THROUGH 83)
The respective obligations of Applied Digital, Destron and Digital Angel to
effect the merger are subject to the satisfaction or waiver of the following
conditions on or prior to the closing date of the merger:
- The merger agreement, as amended, having been duly approved and adopted
by the stockholders of Destron and the issuance of Applied Digital common
stock pursuant to the merger agreement, as amended, shall have been duly
approved by the shareholders of Applied Digital;
- The proposal to amend the Applied Digital second restated articles of
incorporation to increase the number of authorized shares of Applied
Digital common stock having been duly approved by the shareholders of
Applied Digital;
- The waiting period (and any extension thereof) applicable to the merger
under the HSR Act and other similar laws having expired or been
terminated;
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<PAGE> 19
- No governmental order, writ, injunction or decree being in effect that
would make the merger illegal or otherwise prohibit the consummation of
the merger; and
- The Applied Digital Registration Statement on Form S-4 having become
effective and not being the subject of a stop order or proceedings
seeking a stop order.
The obligations of Applied Digital and Digital Angel to effect the merger
are subject to the satisfaction or waiver of the following additional
conditions:
- Each of the representations and warranties of Destron set forth in the
merger agreement, as amended, being true and correct when made and on and
as of the effective time of the merger as if made on and as of such time,
and Applied Digital having received a certificate signed by an officer of
Destron to such effect;
- Destron having performed in all material respects all of the obligations
required to be performed by it at or prior to the effective time of the
merger, and Applied Digital having received a certificate signed by an
officer of Destron to such effect;
- Applied Digital having received the opinion of Akerman, Senterfitt &
Eidson, P.A. to the effect that the merger will be treated for federal
income tax purposes as a reorganization qualifying under the provisions
of Section 368(a) of the Code, and that Applied Digital, Digital Angel
and Destron are each a party to the reorganization within the meaning of
Section 368(a) of the Code;
- The employment agreements with each of Randolph K. Geissler and James P.
Santelli becoming effective at the effective time of the merger; and
- There not having occurred any events or circumstances since April 24,
2000 that would have a material adverse effect on Destron.
The obligations of Destron to effect the merger are subject to the
satisfaction or waiver of the following additional conditions:
- Each of the representations and warranties of Applied Digital and Digital
Angel set forth in the merger agreement, as amended, being true and
correct when made and on and as of the effective time of the merger as if
made on and as of such time, and Destron having received a certificate
signed by an officer of Applied Digital and Digital Angel to such effect;
- Applied Digital having performed in all material respects all of the
obligations required to be performed by it at or prior to the effective
time of the merger, and Destron having received a certificate signed by
an officer of Applied Digital and Digital Angel to such effect;
- Destron having received the opinion of Winthrop & Weinstine, P.A. to the
effect that the merger will be treated for federal income tax purposes as
a reorganization qualifying under the provisions of Section 368(a) of the
Code, and that Applied Digital, Digital Angel and Destron are each a
party to the reorganization within the meaning of Section 368(a) of the
Code; and
- There not having occurred any events or circumstances since April 24,
2000 that would have a material adverse effect on Applied Digital.
TERMINATION OF THE MERGER AGREEMENT
(PAGES 83 THROUGH 84)
The merger agreement, as amended, may be terminated at any time before the
closing of the merger. This termination may occur before or after approval of
the merger by the Applied Digital shareholders or the Destron stockholders in
the following manner:
- Mutual written consent of both Destron and Applied Digital;
10
<PAGE> 20
- By either Destron or Applied Digital if:
(1) the merger has not been consummated on or before September 30,
2000 (although the right to terminate under this clause is not available to
a party whose failure to fulfill an obligation under the merger agreement,
as amended, is the cause of the failure of the merger to occur);
(2) a court or a governmental entity has issued a nonappealable final
order or taken any other nonappealable final action (i) permanently
restraining or prohibiting any transaction contemplated by the merger
agreement, as amended, or (ii) compelling Applied Digital, Digital Angel or
Destron to dispose of or hold separate all or a material portion of the
respective business or asset of Applied Digital or Destron, or sell or
license any material product of Applied Digital or Destron;
(3) the other party has breached, or failed to comply with, in any
material respect any of its obligations under the merger agreement, as
amended, or any representation or warranty made by the other party shall
have been incorrect in any material respect when made or shall have since
ceased to be true and correct in any material respect, and such breach,
failure or misrepresentation is not cured within 30 days after notice of it
has been given and these breaches, failures or misrepresentations,
individually or in the aggregate, result or would reasonably be expected to
result in a material adverse effect;
(4) the Destron stockholders and Applied Digital shareholders have not
approved the merger as required;
(5) the Applied Digital shareholders have not approved the necessary
increase in the authorized capital stock of Applied Digital; or
(6) holders of 5% or more of the issued and outstanding shares of
Destron common stock demand and perfect dissenters' rights of appraisal
under Section 262 of the DGCL.
- By Applied Digital, if the Destron board has withdrawn or modified in any
adverse manner its recommendation of the merger.
TERMINATION EXPENSES (PAGE 84)
Destron will be required to pay Applied Digital a termination expense of $2
million if the merger agreement, as amended, is terminated by Applied Digital
because the board of directors of Destron recommends a third-party competing
transaction.
COMPARISON OF CAPITAL STOCK (PAGES 87 THROUGH 92)
The rights of holders of Applied Digital common stock are currently
governed by Missouri General Business Corporation Law (which we refer to in this
document as the "MGBCL"), the Applied Digital second restated articles of
incorporation and the Applied Digital bylaws. The rights of holders of Destron
common stock are currently governed by Delaware General Corporation Law (which
we refer to in this document as the "DGCL"), the Destron certificate of
incorporation and the Destron bylaws. When the merger is completed, holders of
Destron common stock will become holders of Applied Digital common stock.
11
<PAGE> 21
SUMMARY UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary unaudited pro forma condensed combined financial information
gives effect to the merger as if it had been consummated on March 31, 2000. The
summary unaudited pro forma condensed combined statement of operations
information gives effect to the merger as if it occurred at the beginning of
each company's complete fiscal year. Applied Digital's fiscal year ended on
December 31, 1999 while Destron's fiscal year ended September 30, 1999. The
summary unaudited pro forma financial information does not necessarily indicate
what the operating results or financial position would have been if the merger
between Applied Digital and Destron had been completed at the beginning of the
companies' fiscal years or the financial position as of March 31, 2000.
Moreover, this data does not necessarily indicate what the future operating
results or financial position of the combined company will be. You should read
this summary unaudited pro forma condensed combined financial information in
conjunction with the "Unaudited Pro Forma Condensed Combined Financial Data"
included elsewhere in this document and with the historical financial statements
of Applied Digital and Destron and the related notes thereto that are included
in this document.
<TABLE>
<CAPTION>
MARCH 31,
2000
---------
<S> <C>
Balance Sheet Data:
Working capital........................................... $ 43,824
Total assets.............................................. 300,328
Total debt................................................ 47,014
Total liabilities......................................... 114,725
Stockholders' equity...................................... 183,309
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
Statement of Operations Data:
Net operating revenue..................................... $388,689 $89,336
Gross profit.............................................. 106,307 22,901
Income (loss) before provision for income taxes, minority
interest and extraordinary loss........................ 7,741 (2,554)
Income (loss) before extraordinary loss................... 4,330 (1,616)
Earnings (loss) per common share -- basic.................
Income (loss) before extraordinary loss................ 0.06 (0.02)
Earnings (loss) per common share -- diluted
Income (loss) before extraordinary loss................ 0.06 (0.02)
</TABLE>
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<PAGE> 22
SUMMARY UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
COMPARATIVE PER SHARE DATA
We have set forth below information concerning earnings and book value per
share data for Applied Digital and Destron on both a historical and pro forma
combined basis and on a per share equivalent pro forma basis for Destron.
Neither Applied Digital nor Destron has paid or declared cash dividends on its
common stock in the past. We have derived the pro forma combined earnings per
share from the "Summary Unaudited Pro Forma Condensed Combined Financial
Information" presented elsewhere in this document (which give effect to the
merger under the purchase accounting method). Book value per share for the pro
forma combined presentation is based upon outstanding Applied Digital common
shares, adjusted to include the estimated number of Applied Digital common
shares to be issued in the merger for outstanding shares of Destron common stock
at the time the merger is completed. The per share pro forma equivalent combined
data for shares of Destron common stock is based on the assumed conversion of
each share of Destron common stock into 1.5 shares of Applied Digital common
stock based upon the exchange ratio in the merger agreement, as amended. You
should read the information set forth below in conjunction with the respective
audited and unaudited financial statements of Applied Digital and Destron
included in this document and the "Summary Unaudited Pro Forma Condensed
Combined Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- ------------------
<S> <C> <C>
Applied Digital Historical
Income (loss) before extraordinary loss-basic............. $ .12 $(.02)
Income (loss) before extraordinary loss-diluted........... .11 (.02)
Dividends per common share................................ -- --
Book value per common share............................... 1.93 1.93
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
Destron Historical
Income before extraordinary gain-basic................... $.23 $.04
Income before extraordinary gain-diluted................. .23 .04
Dividends per common share............................... -- --
Book value per common share.............................. .63 .67
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- ------------------
<S> <C> <C>
Applied Digital Pro Forma Combined
Income (loss) before extraordinary loss-basic............. $ .06 $(.02)
Income (loss) before extraordinary loss-diluted........... .06 (.02)
Dividends per common share................................ -- --
Book value per common share............................... -- 2.58
</TABLE>
<TABLE>
<S> <C> <C>
Destron Pro Forma Equivalent
Income (loss) before extraordinary gain-basic............ $ .09 $ (.03)
Income (loss) before extraordinary gain-diluted.......... .09 (.03)
Dividends per common share............................... -- --
Book value per common share.............................. 2.90 3.87
</TABLE>
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<PAGE> 23
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Some of the statements included or incorporated by reference in this joint
proxy statement/prospectus that are not statements of historical fact are
"forward-looking statements" within the meaning of the Securities Litigation
Reform Act of 1995. Forward-looking statements include those preceded by,
followed by or that include the words "expects", "intends", "plans", "projects",
"believes", "estimates", "anticipates" and variations of these and similar
expressions. Such statements refer to, among other things, the plans, strategies
and prospects, both business and financial, of Applied Digital and Destron and
of Digital Angel after completion of the merger. These statements are based
largely on management's expectations in light of their experience in their
respective industries and are not guarantees of performance or results.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in or implied by
such statements, including those described in the documents incorporated by
reference in or annexed to this joint proxy statement/prospectus and the
following risks and uncertainties:
- the merger not being completed;
- expected benefits from the merger not being fully realized or not being
realized within the expected time frames;
- combined revenues of Destron and Digital Angel after completion of the
merger being lower than expected;
- costs or operational difficulties related to integrating Destron and
Digital Angel into one combined company being greater than expected;
- excessive or unanticipated demands placed on management by the increase
in Applied Digital's size;
- unanticipated increases in financing and financing-related costs;
- the inability of Applied Digital to accomplish its strategic objectives
for external expansion, including through selective acquisitions, and
internal expansion, including through sales and marketing activities;
- general economic or business conditions affecting Applied Digital or the
surviving corporation;
- regulatory authorities making adverse determinations regarding the
merger; and
- other developments described more fully under the caption "Risk Factors."
Applied Digital and Destron make no commitments to disclose any revisions
to forward-looking statements, or any facts, events or circumstances after the
date hereof that may bear upon forward-looking statements.
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RISK FACTORS
The following risk factors, in addition to the other information contained
or incorporated by reference in this joint proxy statement/prospectus, should be
considered by holders of Applied Digital common stock and by holders of Destron
common stock in determining how to vote at the Applied Digital special meeting
and the Destron special meeting.
RISKS RELATING TO THE MERGER
Destron stockholders may receive shares of Applied Digital common stock
with a market value lower than anticipated. Destron stockholders are not
assured of receiving consideration in the merger having a set dollar value. As a
result, at the time of the Applied Digital special meeting and the Destron
special meeting, you will not know the exact dollar value of the Applied Digital
common stock that Destron stockholders will receive when the merger is
completed. If the merger is completed, each share of Destron common stock will
be converted into 1.5 shares of Applied Digital common stock.
The market prices of Destron common stock and Applied Digital common stock
when the merger takes place may vary from their prices at the date of this joint
proxy statement/prospectus and from their prices at the time their respective
stockholders vote on the proposals relating to the merger. Changes in such
market prices may result from, among other things:
- period-to-period variations in operating results;
- changes in earnings estimates by analysts;
- market conditions in the electronic identification and tracking devices
markets;
- general economic conditions;
- fluctuations in the securities markets in general; and
- problems relating to achieving revenue.
On April 24, 2000 (the last trading day prior to the announcement of the
definitive merger agreement), the closing market prices of Applied Digital
common stock and Destron common stock were $5.81 and $4.37, respectively; on
June 26, 2000 (the most recent practicable date prior to the printing of this
joint proxy statement/prospectus), the closing market prices of Applied Digital
common stock and Destron common stock were $3.59 and $5.25, respectively. During
the twelve month period ending on June 26, 2000, the sales price of Applied
Digital common stock varied from a low of $1.63 to a high of $18.00 and the
sales price of Destron common stock varied from a low of $0.75 to a high of
$15.00.
Applied Digital's stock price could be volatile. In addition, after the
effective time of the merger, the market price of Applied Digital common stock
could fluctuate significantly in response to various factors, including the
factors listed above and problems with the integration of the companies.
Integrating business operations may be difficult and may have a negative
impact on Applied Digital's business. The combination of Destron and Digital
Angel involves the integration of separate companies that have previously
operated independently and have different corporate cultures. The process of
combining the companies may be disruptive to their businesses and may cause an
interruption of, or a loss of momentum in, such businesses as a result of the
following difficulties, among others:
- loss of key employees or customers;
- possible inconsistencies in standards, controls, procedures and policies
among the companies being combined and the need to implement and
harmonize company-wide financial, accounting, information and other
systems;
- failure to maintain the quality of products and services that such
companies have historically provided;
- the need to coordinate geographically diverse organizations; and
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- the diversion of management's attention from the day-to-day business of
Digital Angel and Destron as a result of the need to deal with the above
disruptions and difficulties and/or the possible need to add management
resources to do so.
Such disruptions and difficulties, if they occur, may cause Applied Digital
to fail to realize the benefits that it currently expects to result from such
integration and may cause material adverse short and long-term effects on the
operating results and financial condition of Applied Digital.
Uncertainties in realizing benefits from the combination. Even if Applied
Digital is able to integrate the operations of the companies successfully, there
can be no assurance that such integration will result in the realization of the
full benefits that it currently expects to result from such integration or that
such benefits will be achieved within the time frame that Applied Digital
currently expects. Potential risks relating to the integration of the companies
include:
- revenue enhancements from cross-selling complementary products and
services may not materialize as expected;
- the benefits from the merger may be offset by costs incurred in
integrating the companies; and
- the benefits from the transaction may also be offset by increases in
other expenses, by operating losses or by problems in the business
unrelated to the transaction.
RISKS INHERENT IN THE BUSINESS OF APPLIED DIGITAL
In addition to the other information contained herein, the following
factors should be considered in evaluating Applied Digital and its business.
Applied Digital cannot be certain of future financial results. While
Applied Digital has been profitable for the last three fiscal years, future
financial results are uncertain. During the three months ended March 31, 2000,
Applied Digital recognized a net loss. There can be no assurance that Applied
Digital will continue to be operated in a profitable manner. Profitability
depends upon many factors, including the success of Applied Digital's various
marketing programs, the maintenance or reduction of expense levels and its
ability to successfully coordinate the efforts of the different segments of its
business.
Future sales of shares of Applied Digital common stock could adversely
affect the market price of Applied Digital common stock. As of June 26, 2000,
there were 52,982,886 shares of Applied Digital common stock outstanding. In
addition, 503 shares of Applied Digital common stock are reserved for issuance
in exchange for certain exchangeable shares issued by Applied Digital's Canadian
subsidiary. Since January 1, 2000, Applied Digital has issued an aggregate of
4,723,263 shares of common stock, of which 1,942,549 shares of common stock were
issued as earnout payments in acquisitions, 45,925 shares were issued in
exchange for the exchangeable shares of Applied Digital's Canadian subsidiary
and the exchangeable shares of its former Canadian subsidiary, TigerTel
Services, Limited, 983,793 shares of common stock were issued for acquisitions,
1,291,090 shares were issued upon the exercise of options, 317,500 shares were
issued upon the exercise of warrants, and 142,406 shares were issued under its
employee stock purchase program.
Applied Digital has effected, and will continue to effect, acquisitions or
contract for certain services through the issuance of common stock or its other
equity securities, as Applied Digital has typically done in the past. In
addition, Applied Digital has agreed to certain "price protection" provisions in
prior acquisition agreements which may result in additional shares of common
stock being issued. Such issuances of additional securities may be dilutive of
the value of the common stock in certain circumstances and may have an adverse
impact on the market price of the common stock.
Applied Digital faces significant competition. Each segment of Applied
Digital's business is highly competitive, and Applied Digital expects that
competitive pressures will continue. Many of the competitors of Applied Digital
have far greater financial, technological, marketing, personnel and other
resources than Applied Digital. The areas which Applied Digital has identified
for continued growth and expansion are also target market segments for some of
the largest and most strongly capitalized companies in the United States, Canada
and Europe. There can be no assurance that Applied Digital will have the
financial, technical, marketing and other resources required to compete
successfully in this environment in the future.
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Applied Digital faces risks associated with acquisitions and
expansion. Applied Digital has engaged in a continuing program of acquisitions
of other businesses which are considered to be complementary to its lines of
business, and it anticipates that such acquisitions will continue to occur.
Applied Digital's total assets were approximately $209.1 million as of March 31,
2000 and $229.0 million, $124.1 million, $61.3 million, $33.2 million and $4.1
million as of December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Net
operating revenue was approximately $85.2 million and $51.6 million for the
three months ended March 31, 2000 and 1999, respectively, and $336.7 million,
$207.1 million, $103.2 million, $19.9 million and $2.3 million for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Managing these
dramatic changes in the scope of its business will present ongoing challenges to
the management of Applied Digital, and there can be no assurance that its
operations as currently structured, or as affected by future acquisitions, will
be successful.
It is the policy of Applied Digital to retain existing management of
acquired companies, under the overall supervision of Applied Digital's senior
management. The success of the operations of these subsidiaries will depend, to
a great extent, on the continued efforts of the management of the acquired
companies.
Applied Digital has entered into earnout arrangements with certain sellers
under which they are entitled to additional consideration for their interests in
the companies they sold to Applied Digital. Under these agreements, assuming
that all earnouts are achieved, Applied Digital is contingently liable for
additional consideration of approximately $8.8 million in 2001, $3.0 million in
2002 and $2.0 million in 2004, of which $1.0 million would be payable in cash
and $12.8 million would be payable in stock.
Applied Digital has entered into put options with the sellers of those
companies in which Applied Digital acquired less than a 100% interest. These
options require Applied Digital to purchase the remaining portion Applied
Digital does not own after periods ranging from four to five years from the
dates of acquisition at amounts per share generally equal to 10% to 20% of the
average annual earnings per share of the acquired company before income taxes
for, generally, a two-year period ending on the effective date of the put
multiplied by a multiple ranging from four to five. The purchases under these
put options are recorded as changes in minority interest based upon current
operating results. In June 2000, Applied Digital entered into agreements to
issue, in the aggregate, 2,252,070 shares of its common stock, 1,114,864 of
which have been issued, to acquire $10.0 million in put options and to settle
earnout payments in certain companies owned by its subsidiary IntelleSale.com.
These agreements superseded agreements entered into during the second quarter of
1999.
Goodwill write-offs will reduce the earnings of Applied Digital. As a
result of the acquisitions Applied Digital has completed through March 31, 2000,
it has approximately $65.7 million of goodwill, $24.4 million of which is
deductible for tax purposes, which is currently being amortized over 20 years at
the rate of approximately $3.5 million per year, which reduces its net income
and earnings per share. In addition, future acquisitions may also increase the
existing goodwill and the amount of annual amortization, further reducing net
income and earnings per share. As required by Statement of Financial Accounting
Standards No. 121, Applied Digital will periodically review its goodwill for
impairment based on expected future undiscounted cash flows. If Applied Digital
determines that there is such impairment, it would be required to write down the
amount of goodwill accordingly, which would also reduce its earnings.
Applied Digital's need for additional capital could adversely affect
earnings and shareholder rights. Applied Digital may require additional capital
to fund growth of its current business as well as to make future acquisitions.
However, Applied Digital may not be able to obtain capital from outside sources.
Even if Applied Digital does obtain capital from outside sources, it may not be
on terms favorable to it. Applied Digital's current credit agreement with IBM
Credit Corporation may hinder Applied Digital's ability to raise additional debt
capital. If Applied Digital raises additional capital by issuing equity
securities, these securities may have rights, preferences or privileges senior
to those of its common shareholders.
Applied Digital depends on key individuals. The future success of Applied
Digital is highly dependent upon its ability to attract and retain qualified key
employees. Applied Digital is organized with a small senior management team,
with each of its separate operations under the day-to-day control of local
managers. If Applied Digital were to lose the services of any members of its
central management team, its overall
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operations could be adversely affected, and the operations of any of its
individual facilities could be adversely affected if the services of the local
managers should be unavailable. Applied Digital has entered into employment
contracts with its key officers and employees and certain subsidiaries. The
agreements are for periods of one to ten years through June 2009. Some of the
employment contracts also call for bonus arrangements based on earnings.
Applied Digital faces risks that the value of its inventory may
decline. Applied Digital purchases and warehouses inventory, much of which is
refurbished or excess inventory of personal computer equipment. As a result,
Applied Digital assumes 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. The success of Applied Digital will depend on its ability
to purchase inventory at attractive prices relative to its resale value and its
ability to turn its inventory rapidly through sales. If Applied Digital pays too
much or holds inventory too long, it may be forced to sell its inventory at a
discount or at a loss or write down its value, and its business could be
materially adversely affected.
Applied Digital does not pay dividends on its common stock. Applied
Digital does not have a history of paying dividends on its common stock and it
cannot assure you that any dividends will be paid in the foreseeable future. The
Amended and Restated Term and Revolving Credit Agreement dated as of July 30,
1999, with IBM Credit Corporation, as amended, places restrictions on the
declaration and payment of dividends. Applied Digital intends to use any
earnings which may be generated to finance the growth of its businesses.
Applied Digital may issue preferred stock. Applied Digital's Board of
Directors has the right to authorize the issuance of preferred stock, without
further shareholder approval, the holders of which may have preferences over the
holders of its common stock as to payments of dividends, liquidation and other
matters.
The stock price of Applied Digital may continue to be volatile. Applied
Digital common stock is listed on The Nasdaq National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of Applied
Digital common stock without regard to its operating performance. In addition,
Applied Digital believes that factors such as the significant changes to its
business resulting from continued acquisitions and expansions, quarterly
fluctuations in its financial results or cash flows, shortfalls in earnings or
sales below expectations, changes in the performance of other companies in its
same market sectors and the performance of the overall economy and the financial
markets could cause the price of Applied Digital's common stock to fluctuate
substantially. During the 12 month period prior to June 26, 2000, the price per
share of Applied Digital common stock has ranged from a high of $18.00 to a low
of $1.63.
Applied Digital is obligated to make termination payments upon a change of
control. The employment agreements of Applied Digital with Richard Sullivan,
Garret Sullivan and David Loppert include "change of control" provisions under
which the employees may terminate their employment within one year after a
change of control and are entitled to receive specified severance payments
and/or continued compensation payments for sixty months. The employment
agreements also provide that these executive officers are entitled to
supplemental compensation payments for sixty months upon termination of
employment, even if there is no change in control, unless their employment is
terminated due to a material breach of the terms of the employment agreement.
Also, the agreements for both Richard Sullivan and Garrett Sullivan provide for
certain "triggering events," which include a change in control, the termination
of Richard Sullivan's employment other than for cause, or if Richard Sullivan
ceases to hold his current positions with Applied Digital for any reason other
than a material breach of the terms of his employment agreement. In that case,
Applied Digital would be obligated to pay, in cash and/or in stock, $12.1
million and $3.5 million, respectively, to Richard Sullivan and to Garrett
Sullivan, in addition to certain other compensation. Finally, the employment
agreements provide for a gross up for excise taxes which are payable by these
executive officers if any payments upon a change of control are subject to such
taxes as excess parachute payments.
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The obligation of Applied Digital to make the payments described in this
section could adversely affect its financial condition or could discourage other
parties from entering into transactions with Applied Digital which might be
treated as a change in control or triggering event for purposes of these
agreements.
Digital Angel may not be able to develop products from its unproven
technology. In December 1999, Digital Angel acquired the patent rights to a
miniature digital receiver named "Digital Angel(TM)." This technology is still
in the development stage. Digital Angel's ability to develop and commercialize
products based on its proprietary technology will depend on its ability to
develop its products internally on a timely basis or to enter into arrangements
with third parties to provide these functions. If Digital Angel fails to develop
and commercialize products successfully and on a timely basis, it could have a
material adverse effect on Digital Angel's business, operating results and
financial condition.
Year 2000 compliance. Applied Digital has not experienced any significant
Year 2000 related problems. During 1998 and 1999, Applied Digital implemented a
company wide program to ensure that it would be compliant prior to the Year 2000
failure dates. Applied Digital has not experienced any Year 2000 compliance
problems. However, Applied Digital cannot make any assurances that unforeseen
problems may not arise in the future.
Software sold to consumers. During 1998 and 1999, Applied Digital
identified what it believes to be all potential Year 2000 problems with any of
the software products it develops and markets. However, Applied Digital
management believes that it is not possible to determine with complete certainty
that all Year 2000 problems affecting its software products have been identified
or corrected due to the complexity of these products. In addition, these
products interact with other third party vendor products and operate on computer
systems which are not under its control. For non-compliant products, Applied
Digital has provided and is continuing to provide recommendations as to how an
organization may address possible Year 2000 issues regarding that product.
Software updates are available for most, but not all, known issues. Such
information is the most currently available concerning the behavior of its
products and is provided "as is" without warranty of any kind. However,
variability of definitions of "compliance" with the Year 2000 and of different
combinations of software, firmware and hardware has led to, and could lead to
further lawsuits against Applied Digital. The outcome of any such lawsuits and
the impact on Applied Digital is not estimable at this time.
Applied Digital does not believe that the Year 2000 problem has had or will
continue to have a material adverse effect on its business, results of
operations or cash flows. The estimate of the potential impact on its financial
position, overall results of operations or cash flows for the Year 2000 problem
could change in the future. Applied Digital's ability to achieve Year 2000
compliance and the level of incremental costs associated therewith, could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, a vendor's ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
review. The discussion of Applied Digital's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
RISKS INHERENT IN THE BUSINESS OF DESTRON
Destron is dependent on proprietary protection. Destron's success depends
partly on its ability to maintain patent and trade secret protection, to obtain
future patents and licenses, and to operate without infringing on the
proprietary rights of third parties. There can be no assurance that the steps
Destron has taken to protect its intellectual property will prevent its
misappropriation or circumvention. In addition, there can be no assurance that
any patent application, when filed, will result in an issued patent, or that
Destron's existing patents, or any patents that may be issued in the future,
will provide Destron with significant protection against competitors. Moreover,
there can be no assurance that any patents issued to or licensed by Destron will
not be infringed upon or designed around by others. Litigation to establish the
validity of patents, to assert infringement claims against others, and to defend
against patent infringement claims can be expensive and time-consuming, even if
the outcome is in Destron's favor. Destron also relies to a lesser extent on
unpatented proprietary technology, and no assurance can be given that others
will not independently develop substantially equivalent proprietary information,
techniques or processes or that Destron can meaningfully protect its rights to
such unpatented proprietary technology.
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Destron is currently involved in litigation regarding its important
patents. Destron is involved in patent litigation in the United States District
Court of the District of Colorado and the United States District Court for the
District of Minnesota. Litigation involving the same subject matter as the
Minnesota litigation was recently dismissed in Colorado. While Destron's
management continues to believe that the final outcome of this litigation will
not have a significant adverse impact on Destron's future financial position,
cash flows or results of operations, it cannot assure the ultimate outcome of
the litigation. In addition, Destron will continue to incur additional legal
costs in connection with pursuing and defending such actions.
Many negative factors are affecting the animal identification market. To
date, the electronic animal identification market has been negatively affected
by such factors as food safety concerns, consumer perceptions regarding cost and
efficacy, international technology standards, national infrastructures, FDA
reviews, United States Federal Communications Commission approvals, and
slaughterhouse removal of microchips. In addition, certain foreign governmental
standards which require specific codes may limit Destron's ability to sell
microchips from its current inventory in such countries. With respect to sales
of electronic identification devices for fish, many of the principal customers
are government contractors that rely on funding from the United States
government, and thus this market could be adversely affected by any decline in
the availability of government funds. Destron cannot assure you it will not be
adversely affected by these and other factors described herein affecting the
animal identification market.
Destron is dependent on a single supplier for its electronic identification
products. Destron relies solely on a production arrangement with Raytheon
Corporation for the manufacture of its syringe-injectable microchips that are
used in all of Destron's electronic identification products. The termination, or
any significant reduction, by Raytheon Corporation of its production of these
microchips could have a material adverse effect on the financial condition and
results of operation of Destron. In addition, Raytheon may not be able to
produce sufficient quantities to meet any significant increased demand for
Destron's product or to meet any such demand on a timely basis. Any inability of
Raytheon to meet Destron's increased demand for its product could have a
material adverse effect on the financial condition and results of operations of
Destron.
Destron is dependent on principal customers. In the fiscal years ended
September 30, 1999, 1998 and 1997, Pacific States Marine, a customer that uses
Destron's products to identify fish, accounted for 11%, 18% and 10% of Destron's
sales, respectively. Also, during fiscal 1999, 1998 and 1997, Merial, a
distributor of Destron's products, accounted for 11%, 7% and 16% of Destron's
sales, respectively. The loss of, or a significant reduction in, orders from
these or Destron's other major customers has had and could have a material
adverse effect on the financial condition and results of operations of Destron.
Destron is reliant on export sales. Export sales by Destron to locations
outside of the United States (including those in Canada) constituted
approximately 28%, 22% and 30% for the years ended September 30, 1999, 1998, and
1997, respectively. Destron generally sells its products at prices quoted in
U.S. dollars to limit the risks associated with currency exchange rate
fluctuations. However, fluctuations in foreign exchange rates may adversely
affect Destron's ability to compete against local product offerings and
adversely affect Destron's results of operations. In addition, export sales
expose Destron to the risks inherent in international sales, including
unpredictable and inconsistent regulatory requirements, political and economic
changes and disruptions, tariffs or other restrictions on unencumbered trade,
transportation or shipping delays, and difficulties in staffing and managing
foreign operations.
Significant competition exists in the visual and electronic identification
markets. The market for visual and electronic identification for companion
animals and livestock is highly competitive. Specifically, Destron is aware of
four principal competitors who have developed permanent electronic
identification devices for the companion animal market. In addition, other
companies could enter the market. Certain of Destron's competitors have
substantially greater financial and other resources than Destron. Destron cannot
assure you it will compete successfully with its current and future competitors,
or that such competitors will not succeed in developing or marketing
technologies and products that are more widely accepted that those being
developed by Destron or that would render Destron's products obsolete or
noncompetitive.
Destron is subject to restrictions imposed by government
regulation. Destron is subject to federal, state and local regulation in the
United States and other countries, and it cannot predict the extent to which it
may
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be affected by future legislative and other regulatory developments concerning
its products and markets. Destron is required to obtain regulatory approval
before marketing most of its products. Destron's readers must and do comply with
the FCC Part 15 Regulations for Electromagnetic Emissions, and its insecticide
products have been approved by the U.S. Environmental Protection Agency and are
produced under EPA regulations. Sales of insecticide products are incidental to
Destron's primary business and do not represent a material part of its
operations. Destron's products also are subject to compliance with foreign
government agency requirements. Destron's contracts with its distributors
generally require the distributor to obtain all necessary regulatory approvals
from the governments of the countries into which they sell Destron's products.
However, any such approval may be subject to significant delays. Some regulators
also have the authority to revoke approval of previously approved products for
cause, to request recalls of products and to close manufacturing plants in
response to violations. Any actions by these regulators could materially
adversely affect Destron's business.
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APPLIED DIGITAL SPECIAL MEETING
General; date, time and place. This joint proxy statement/prospectus is
being furnished to holders of Applied Digital common stock and the holders of
the exchangeable shares of the Applied Digital Canadian subsidiary, ACT-GFX
Canada, Inc., in connection with the solicitation of proxies by the Applied
Digital board of directors for use at the Applied Digital special meeting to be
held on August 8, 2000, at the Chesterfield Hotel, 363 Cocoanut Row, Palm Beach,
Florida 33480, commencing at 2:00 p.m., local time, and at any adjournment or
postponement thereof. The holders of the exchangeable shares of ACT-GFX Canada,
Inc. are entitled, through a voting trust, to vote at the Applied Digital
special meeting.
Purposes of the Applied Digital special meeting. At the Applied Digital
special meeting, shareholders of Applied Digital will be asked to consider and
vote upon:
- a proposal to issue up to 20,469,570 shares of Applied Digital common
stock in exchange for all of the issued and outstanding shares of Destron
common stock and up to 2,795,346 shares of Applied Digital common stock
upon exercise of options and warrants to purchase Destron common stock
that Applied Digital is assuming pursuant to the merger agreement, as
amended; and
- a proposal to amend and restate the first paragraph of article three of
the Applied Digital second restated articles of incorporation, effective
at the effective time of the merger, as follows:
"The Corporation shall have the authority, to be exercised by the
board of directors, to issue a total of 250,000,000 shares consisting of
245,000,000 shares of common voting stock of the par value of $.0001 per
share (the "Common Stock") and 5,000,000 shares of preferred stock of the
par value of $10.00 per share (the "Preferred Stock")."
Shareholders entitled to vote. The Applied Digital board of directors has
fixed the close of business on June 26, 2000, as the record date for the
determination of the Applied Digital shareholders entitled to notice of and to
vote at the Applied Digital special meeting. Accordingly, only holders of record
of Applied Digital common stock and the holders of the exchangeable shares of
the Applied Digital Canadian subsidiary, ACT-GFX Canada, Inc., on the Applied
Digital record date will be entitled to notice of and to vote at the Applied
Digital special meeting. As of the Applied Digital record date, there were
outstanding and entitled to vote (i) 52,982,886 shares of Applied Digital common
stock, and (ii) one share of Applied Digital Class B Voting preferred stock,
which is entitled to 503 votes equal to the number of exchangeable shares
outstanding as of the record date.
The exchangeable shares entitle the holders thereof to dividends and other
rights economically equivalent to the Applied Digital common stock, including
the right, pursuant to a voting trust agreement, to vote at Applied Digital
shareholder meetings. The trustee of the exchangeable shares is The Montreal
Trust Company of Canada, a trust company incorporated under the laws of Canada.
The trustee holds one share of the Applied Digital Class B Voting preferred
stock, par value $10 per share. The holder of the Class B Voting preferred stock
is entitled to the number of votes at the Applied Digital shareholder meetings
equal to the number of exchangeable shares outstanding as of the record date for
such meeting held by persons other than Applied Digital, any of its subsidiaries
or any person directly or indirectly controlled by or under common control with
Applied Digital.
Pursuant to the voting trust agreement, each holder of exchangeable shares
is entitled to instruct the trustee as to the voting of the number of votes
attached to the Class B Voting preferred stock represented by such holder's
exchangeable shares. The trustee will exercise such vote only as directed by the
relevant holder, and in the absence of instructions from the holder as to voting
will not exercise such votes. A holder may instruct the trustee to give a proxy
to such holder entitling the holder to vote personally such relevant number of
votes or grant to Applied Digital's management a proxy to vote such votes. The
trustee has furnished or will cause Applied Digital to furnish this joint proxy
statement/prospectus to holders of exchangeable shares.
Each holder of record of shares of Applied Digital common stock on the
Applied Digital record date is entitled to one vote per share, which may be cast
either in person or by properly executed proxy at the Applied Digital special
meeting. The holder of the Class B Voting preferred stock is entitled to 503
votes. The common stock and Class B Voting preferred stock vote as a single
class The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Applied Digital capital stock entitled
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to vote at the Applied Digital special meeting is necessary to constitute a
quorum at the Applied Digital special meeting.
Vote required. The approval of the proposal to issue shares of Applied
Digital common stock pursuant to the merger agreement, as amended, will require
the affirmative vote of the majority of the shares of Applied Digital common
stock and preferred stock, voting as a single class, present in person or by
proxy at the Applied Digital special meeting. The approval of the proposal to
issue shares of Applied Digital capital stock pursuant to the merger agreement,
as amended, is required by the rules of The Nasdaq Stock Market governing
corporations with securities listed on The Nasdaq National Market and is a
condition to the consummation of the merger.
The approval of the proposal to amend the Applied Digital second restated
articles of incorporation with the effect of increasing the number of authorized
shares of Applied Digital capital stock to 250,000,000 authorized shares of
Applied Digital capital stock with 245,000,000 designated as Applied Digital
common stock requires the affirmative vote of the majority of the outstanding
shares of Applied Digital common stock and preferred stock, voting as a single
class.
Shares of Applied Digital capital stock represented in person or by
properly executed proxy will be counted for the purpose of determining whether a
quorum is present at the Applied Digital special meeting. Shares that abstain
from voting as to a particular matter will be treated as shares that are present
and entitled to vote at the Applied Digital special meeting for purposes of
determining whether a quorum exists, but will not be counted as votes cast in
favor of such matter. If a broker or nominee holding stock in "street name"
indicates on a proxy that it does not have discretionary authority to vote as to
a particular matter, referred to as "broker non-votes", those shares will be
treated as present and entitled to vote at the Applied Digital special meeting
for purposes of determining whether a quorum exists, but will not be counted as
present for purposes of determining the requisite majority vote necessary to
approve the proposal regarding the issuance of shares and will not be counted as
votes cast in favor of any of the proposals to amend the Applied Digital second
restated articles of incorporation.
Accordingly, in determining whether:
- the proposal to approve the issuance of shares of Applied Digital common
stock in connection with the merger agreement, as amended, has received
the requisite number of affirmative votes, the failure to vote and
abstentions by shares present will have the same effect as a vote against
this proposal, and broker non-votes will have no effect on the voting on
this proposal; and
- the proposal to amend the Applied Digital second restated articles of
incorporation has received the requisite number of affirmative votes, the
failure to vote, abstentions and broker non-votes will have the same
effect as a vote against such proposals.
As of June 26, 2000, current directors and executive officers of Applied
Digital and their affiliates may be deemed to be beneficial owners of
approximately 9,552,163 shares of Applied Digital common stock (including
presently exercisable options), or approximately 18.0% of the shares of Applied
Digital common stock entitled to vote at the Applied Digital special meeting.
Each of such directors and executive officers of Applied Digital has advised
Applied Digital that he or she intends to vote or direct the vote of all shares
of Applied Digital common stock over which he or she has voting control for
approval of the proposal to issue shares of Applied Digital common stock as well
as for approval of the proposal to amend the Applied Digital second restated
articles of incorporation.
Proxies. This joint proxy statement/prospectus is being furnished to
Applied Digital shareholders in connection with the solicitation of proxies by,
and on behalf of, the Applied Digital board of directors for use at the Applied
Digital special meeting, and is accompanied by a form of proxy.
All shares of Applied Digital common stock that are entitled to vote and
are represented at the Applied Digital special meeting by properly executed
proxies received prior to or at the Applied Digital special meeting, and are not
revoked, will be voted at the Applied Digital special meeting in accordance with
the instructions indicated on such proxies. If no instructions are indicated,
such proxies will be voted for approval
23
<PAGE> 33
of the proposal to issue shares of Applied Digital common stock pursuant to the
merger agreement, as amended, and for approval of the proposal to amend the
Applied Digital second restated articles of incorporation.
If any other matters are properly presented at the Applied Digital special
meeting for consideration, including, among other things, consideration of a
motion to adjourn such meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the merger), the persons
named in the enclosed form of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (1) filing
with the Secretary of Applied Digital, at or before the taking of the vote at
the Applied Digital special meeting, a written notice of revocation bearing a
later date than the proxy, (2) duly executing a later dated proxy relating to
the same shares and delivering it to the Secretary of Applied Digital before the
taking of the vote at the Applied Digital special meeting or (3) attending the
Applied Digital special meeting and voting in person (although attendance at the
Applied Digital special meeting will not in and of itself constitute a
revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent to Applied Digital at 400 Royal Palm Way, Palm Beach, Florida
33480, Attention: Secretary, or hand delivered to the Secretary of Applied
Digital at or before the taking of the vote at the Applied Digital special
meeting.
The telephone and Internet voting procedures are designed to authenticate
shareholders' identities, to allow Applied Digital shareholders to vote their
shares and to confirm their instructions have been properly recorded. Specific
instructions to be followed by Applied Digital shareholders interested in voting
via the telephone or the Internet are set forth on the proxy card.
All expenses of Applied Digital's solicitation of proxies will be borne by
Applied Digital, and the cost of preparing and mailing this joint proxy
statement/prospectus to Applied Digital shareholders and to Destron stockholders
will be paid one-half by Applied Digital and one-half by Destron. In addition to
solicitation by use of the mails, proxies may be solicited from Applied Digital
shareholders by directors, officers and employees of Applied Digital in person
or by telephone, telegram or other means of communication. Such directors,
officers and employees will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Applied Digital has retained Morrow & Co., Inc., a proxy
solicitation firm, for assistance in connection with the solicitation of proxies
for the Applied Digital special meeting at a cost of $12,500 plus other
solicitation fees and reimbursement of agreed upon out-of-pocket expenses and
other such solicitation expenses. Applied Digital will also make arrangements
with brokerage houses, custodians, nominees and fiduciaries for forwarding of
proxy solicitation materials to beneficial owners of shares held of record by
such brokerage houses, custodians, nominees and fiduciaries, and Applied Digital
will reimburse such brokerage houses, custodians, nominees and fiduciaries for
their reasonable expenses incurred in connection therewith.
If you plan to attend the meeting, please mark the appropriate box on your
proxy card to help us plan for the meeting. You will need an admission card to
attend the meeting, which you can obtain as follows:
- If your shares are registered in your name, you are a shareholder of
record. Your admission card is attached to your proxy card, and you
will need to bring it with you to the meeting.
- If your shares are in the name of your broker or bank, your shares
are held in street name. You will need to check the box on the proxy
card stating that you will be attending the meeting, or ask your
broker or bank for an admission card in the form of a legal proxy to
bring with you to the meeting. If you do not receive the legal proxy
in time, bring your most recent brokerage statement with you to the
meeting so that we can verify your ownership of our stock and admit
you to the meeting. However, you will not be able to vote your
shares at the meeting without a legal proxy.
24
<PAGE> 34
DESTRON SPECIAL MEETING
General; date, time and place. This joint proxy statement/prospectus is
being furnished to holders of Destron common stock in connection with the
solicitation of proxies by the Destron board of directors for use at the Destron
special meeting to be held on August 8, 2000, at the Sheraton Midway Hotel, 400
North Hamline Avenue, St. Paul, Minnesota 55104 commencing at 1:00 p.m., local
time, and at any adjournment or postponement thereof.
Purposes of the Destron special meeting. At the Destron special meeting,
stockholders of Destron will be asked to adopt and approve the merger agreement
proposal.
Stockholders entitled to vote. The Destron board of directors has fixed
the close of business on June 26, 2000 as the record date for the determination
of the Destron stockholders entitled to notice of and to vote at the Destron
special meeting. Accordingly, only holders of record of Destron common stock on
the Destron record date will be entitled to notice of and to vote at the Destron
special meeting. As of the Destron record date, there were outstanding and
entitled to vote 13,646,380 shares of Destron common stock (constituting all of
the voting stock of Destron), which shares were held by approximately 295
holders of record. Each holder of record of shares of Destron common stock on
the Destron record date is entitled to one vote per share, which may be cast
either in person or by properly executed proxy at the Destron special meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Destron common stock entitled to vote at
the Destron special meeting is necessary to constitute a quorum at the Destron
special meeting.
Vote required. The approval of the merger agreement, as amended, will
require the affirmative vote of the holders of a majority of the outstanding
shares of Destron common stock.
Shares of Destron common stock represented in person or by properly
executed proxy will be counted for the purpose of determining whether a quorum
is present at the Destron special meeting. Shares that abstain from voting will
be treated as shares that are present and entitled to vote at the Destron
special meeting for purposes of determining whether a quorum exists, but will
not be counted as votes cast in favor of such matter. If a broker or nominee
holding stock in "street name" indicates on a proxy that it does not have
discretionary authority to vote as to a particular matter, referred to as
"broker non-votes," those shares will be treated as present and entitled to vote
at the Destron special meeting for purposes of determining whether a quorum
exists, but will not be counted as votes cast in favor of such matter.
Accordingly, in determining whether the merger agreement proposal has
received the requisite number of affirmative votes, the failure to vote,
abstentions and broker non-votes will have the same effect as a vote against
this proposal.
As of June 26, 2000, current directors and executive officers of Destron
and their affiliates may be deemed to be beneficial owners of approximately
1,576,762 shares of Destron common stock, or approximately 11.5% of the shares
of Destron common stock entitled to vote at the Destron special meeting. Each of
such directors and executive officers of Destron has advised Destron that he
intends to vote or direct the vote of all shares of Destron common stock over
which he has voting control for approval of the merger agreement proposal.
Applied Digital required, as a condition to its entering into the merger
agreement, that all the executive officers and directors of Destron (the "Key
Shareholders") agree to vote their shares of Destron common stock in favor of
the merger agreement proposal. The Key Shareholders did not receive (nor did
Destron or Applied Digital surrender) any consideration (other than the
consideration provided under the merger agreement, as amended) in connection
with their agreement to vote their shares of Destron common stock in favor of
the merger agreement. The shares of the Key Shareholders constitute
approximately 6.3% of the shares entitled to vote at the Destron special
meeting. The Voting Agreement with the Key Shareholders is further described
under the caption "The Merger -- The Voting Agreement."
25
<PAGE> 35
Proxies. This joint proxy statement/prospectus is being furnished to
Destron stockholders in connection with the solicitation of proxies by, and on
behalf of, the Destron board of directors for use at the Destron special
meeting, and is accompanied by a form of proxy.
All shares of Destron common stock that are entitled to vote and are
represented at the Destron special meeting by properly executed proxies received
prior to or at the Destron special meeting, and are not revoked, will be voted
at the Destron special meeting in accordance with the instructions indicated on
such proxies. If no instructions are indicated, such proxies will be voted for
approval of the merger agreement proposal.
If any other matters are properly presented at the Destron special meeting
for consideration, including, among other things, consideration of a motion to
adjourn such meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the merger), the persons
named in the enclosed form of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (1) filing
with the Secretary of Destron, at or before the taking of the vote at the
Destron special meeting, a written notice of revocation bearing a later date
than the proxy, (2) duly executing a later dated proxy relating to the same
shares and delivering it to the Secretary of Destron before the taking of the
vote at the Destron special meeting or (3) attending the Destron special meeting
and voting in person (although attendance at the Destron special meeting will
not in and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent to Destron at 490 Villaume Avenue,
South St. Paul, Minnesota 55075 Attention: James P. Santelli, Secretary, or hand
delivered to the Secretary of Destron at or before the taking of the vote at the
Destron special meeting.
All expenses of Destron's solicitation of proxies will be borne by Destron,
and the cost of preparing and mailing this joint proxy statement/prospectus to
Destron stockholders and to Applied Digital shareholders will be paid one-half
by Destron and one-half by Applied Digital. In addition to solicitation by use
of the mails, proxies may be solicited from Destron stockholders by directors,
officers and employees of Destron in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Destron has retained Morrow &
Co., Inc., a proxy solicitation firm, for assistance in connection with the
solicitation of proxies for the Destron special meeting at a cost of $6,000 plus
other solicitation fees and reimbursement of reasonable out-of-pocket expenses.
Destron will also make arrangements with brokerage houses, custodians, nominees
and fiduciaries for forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such brokerage houses, custodians, nominees
and fiduciaries, and Destron will reimburse such brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in connection
therewith.
If you plan to attend the meeting, please mark the appropriate box on your
proxy card to help us plan for the meeting. You will need an admission card to
attend the meeting, which you can obtain as follows:
- If your shares are registered in your name, you are a stockholder of
record. Your admission card is attached to your proxy card, and you
will need to bring it with you to the meeting.
- If your shares are in the name of your broker or bank, your shares
are held in street name. You will need to check the box on the proxy
card stating that you will be attending the meeting, or ask your
broker or bank for an admission card in the form of a legal proxy to
bring with you to the meeting. If you do not receive the legal proxy
in time, bring your most recent brokerage statement with you to the
meeting so that we can verify your ownership of our stock and admit
you to the meeting. However, you will not be able to vote your
shares at the meeting without a legal proxy.
26
<PAGE> 36
THE COMPANIES
APPLIED DIGITAL SOLUTIONS, INC.
Applied Digital is an emerging leader in the implementation of e-business
solutions for the Internet through Computer Telephony Internet Integration
(CTII(TM)) (the integration of computer, telecom and the Internet). The goal of
Applied Digital is to be a single source e-business provider that mid-size
companies can turn to for intelligently connecting their business processes via
telephone or computer with their customers, suppliers and partners to deliver
the results expected from the emerging e-business market. Applied Digital's
services integrate Web front-end applications with back-end enterprise resources
either by telephone, computer/software or both. Applied Digital provides end to
end solutions that enable e-business optimization while powering e-business
initiatives through intelligent collaboration and customer interaction.
Applied Digital optimizes and integrates key e-business processes through
collaboration with its four technology groups, Telephony, Network, Internet and
Applications. Applied Digital's goal is to meet the challenge of the fundamental
way businesses view the use of technology. Instead of looking at each of its
four business groups as distinct and separate, Applied Digital regards them as
seamless and interrelated. The widely-used Internet Protocol is replacing the
Circuit Switched network, resulting in a shift from traditional use of
telephones, computers and the Internet into one dynamic network empowering the
enterprise and eliminating all limitations, physical, structural or geographic.
The majority of Applied Digital's current operations are the result of
acquisitions completed during the last five years. Applied Digital's net
operating revenue was approximately $85.2 million and $51.6 million for the
three months ended March 31, 2000 and 1999, respectively, and $336.7 million,
$207.1 million, $103.2 million, $19.9 million and $2.3 million respectively, in
1999, 1998, 1997, 1996 and 1995. Since 1995, Applied Digital has completed 42
acquisitions. Management analyzes each acquisition opportunity using criteria
including profitability over a two to three year period, the strength of the
acquiree's balance sheet, the strength of its customer base and the experience
of its management team. Since January 1, 2000, Applied Digital has completed one
acquisition. Applied Digital currently operates in the United States, Canada and
the United Kingdom.
RECENT DEVELOPMENTS
On September 14, 1999, Applied Digital's subsidiary, IntelleSale.com, Inc.,
filed a registration statement with the Securities and Exchange Commission in
connection with its proposed initial public offering. In addition to
IntelleSale.com selling primary shares, Applied Digital expected to sell shares
of IntelleSale's common stock as a selling shareholder. On January 31, 2000,
Applied Digital announced that it was postponing the proposed initial public
offering of IntelleSale's common stock due to market conditions. Deferred
initial public offering fees have been capitalized in anticipation of completing
the initial public offering within the next fiscal year. On May 4, 2000, Applied
Digital announced that it had retained Prudential Securities Incorporated to
assist in pursuing strategic alternatives regarding IntelleSale.com.
On March 22, 2000, Applied Digital filed a shelf registration statement to
sell, from time to time, up to 3 million shares of its common stock. Proceeds
from the sale were to be used for general corporate purposes, including the
funding of future acquisitions. On April 5, 2000, Applied Digital announced that
it was postponing this offering because of adverse market conditions.
Effective as of April 1, 2000, Applied Digital acquired 100% of the capital
stock of Independent Business Consultants, a network integration company based
in Valley Village, California, in a transaction accounted for under the purchase
method of accounting.
On May 26, 2000, Applied Digital filed a shelf registration statement to
register for resale, from time to time, up to 1,709,403 shares of its common
stock for certain shareholders. Applied Digital previously issued these shares
in connection with past acquisition transactions. Applied Digital has filed to
register such resales pursuant to agreements with these shareholders. Applied
Digital currently intends to file an amendment to the shelf registration
statement to change the number of shares registered for resale from 1,709,403 to
2,900,461.
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<PAGE> 37
Business Divisions. Beginning in the fourth quarter of 1998 and continuing
into 2000, Applied Digital reorganized into six operating segments to more
effectively and efficiently provide integrated communications products and
services to a broad base of customers. During the second quarter of 1999,
several adjustments were made to the composition of the Telephony, Internet and
Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. In October 1999, Applied Digital
disposed of the main business units comprising its Communication Infrastructure
division and dissolved this group.
In December 1999, its subsidiary, Digital Angel.net Inc., acquired the
patent rights to a miniature digital transceiver, which Applied Digital named
"Digital Angel(TM)." While still in the development stage, Applied Digital
believes that this technology may be available for a variety of purposes, such
as providing a tamper-proof means of identification for enhanced e-business
security, locating lost or missing individuals, tracking the location of
valuable property and pets and monitoring the medical conditions of at-risk
patients. It is anticipated that the implantable device will send and receive
data and would be able to use GPS (Global Positioning Satellite) technology for
continuous tracking.
CORE BUSINESS
Applied Digital's primary businesses, other than IntelleSale.com, the
Non-Core Business Group and Digital Angel, are now organized into four business
divisions:
- Telephony -- implements telecommunications and Computer Telephony
Integration (CTI) solutions for e-business. Applied Digital integrates a
wide range of voice and data solutions from communications systems to
voice over Internet Protocol and Virtual Private Networking (VPN).
Applied Digital provides complete design, project management, cable/fiber
infrastructure, installation and on-going support for the customers it
supports. On December 30, 1999, Applied Digital sold its interest in its
Canadian subsidiary, TigerTel, Inc. to concentrate its efforts on its
domestic CTI solutions.
- Network -- is a professional services organization dedicated to
delivering quality e-business services and support to Applied Digital's
client partners, providing e-business infrastructure design and
deployment, personal computer network infrastructure for the development
of local and wide area networks as well as site analysis, configuration
proposals, training and customer support services.
- Internet -- equips Applied Digital customers with the necessary tools and
support services to enable them to make a successful transition to
implementing e-business practices, Enterprise Resource Planning (ERP) and
Customer Relationship Management (CRM) solutions, website design, and
application and internet access services to customers of Applied
Digital's other divisions.
- Applications -- provides software applications for large retail
application environments, including point of sale, data acquisition,
asset management and decision support systems and develops programs for
portable data collection equipment, including wireless hand-held devices.
It is also involved in the design, manufacture and support of satellite
communication technology including satellite modems, data broadcast
receivers and wireless global positioning systems for commercial and
military applications.
As of March 31, 2000 and 1999 and as of December 31, 1999, 1998 and 1997,
revenues from these four divisions together accounted for 26.7%, 40.3%, 38.2%,
35.9% and 40.5%, respectively, of Applied Digital's total revenues.
IntelleSale.com. IntelleSale.com, Inc. sells refurbished and new computer
equipment and related components online, through its website at
www.IntelleSale.com, and through other Internet companies, as well as through
traditional channels, which includes sales made by IntelleSale.com's sales
force.
As of March 31, 2000 and 1999 and as of December 31, 1999, 1998 and 1997,
revenues from IntelleSale.com accounted for 59.7%, 33.2%, 42.5%, 29.4% and
38.2%, respectively, of the total revenues of Applied Digital.
On September 14, 1999, IntelleSale.com filed a registration statement with
the Securities and Exchange Commission in connection with its proposed initial
public offering. In addition to IntelleSale.com selling
28
<PAGE> 38
primary shares, Applied Digital expected to sell shares of IntelleSale.com stock
as a selling shareholder. On January 31, 2000, Applied Digital announced that
Applied Digital was postponing the proposed initial public offering of
IntelleSale.com stock due to market conditions. Deferred initial public offering
fees have been capitalized in anticipation of completing the initial public
offering within the next year. On May 4, 2000, Applied Digital announced that it
had retained Prudential Securities Incorporated to assist in pursuing strategic
alternatives regarding IntelleSale.com.
The Non-Core Business Group. This group is comprised of seven individually
managed companies whose businesses are as follows:
- Gavin-Graham Electrical Products is a custom manufacturer of electrical
products, specializing in digital and analog panelboards, switchboards,
motor controls and general control panels. The company also provides
custom manufacturing processes such as shearing, punching, forming,
welding, grinding, painting and assembly of various component structures.
- Ground Effects, Ltd., based in Windsor, Canada, is a certified
manufacturer and tier one supplier of standard and specialized vehicle
accessory products to the automotive industry. The company exports over
80% of the products it produces to the United States, Mexico, South
America, the Far East and the Middle East.
- Hopper Manufacturing Co., Inc. re-manufactures and distributes automotive
parts. This primarily includes alternators, starters, water pumps,
distributors and smog pumps.
- Innovative Vacuum Solutions, Inc. designs, installs and re-manufactures
vacuum systems used in industry.
- Americom, STC Netcom and ACT Leasing are all involved in the fabrication,
installation and maintenance of microwave, cellular and digital personal
communication services towers.
As of March 31, 2000 and 1999 and as of December 31, 1999, 1998 and 1997,
revenues from the Non-Core business group, as well as the four disposed entities
within Applied Digital's Communications Infrastructure group, accounted for
16.5%, 29.5%, 19.2%, 34.7% and 21.3%, respectively, of the total revenues of
Applied Digital.
Applied Digital has previously announced its intention to divest, in the
ordinary course of business, these non-core businesses at such time and on such
terms as the Applied Digital board of directors determines advisable. There can
be no assurance that Applied Digital will divest of any or all of these
businesses or as to the terms or timing of any divestiture transaction.
GROWTH STRATEGY
The growth strategy of Applied Digital is focused on internal expansion and
growth through acquisitions. The following are the key elements of Applied
Digital's strategy:
- Become a Single Source e-Business Solutions Provider. Applied Digital
believes that its expertise in all four areas of its core competency will
enable it to capitalize on the interest of businesses in fulfilling their
e-business solutions through one provider.
- Leverage of Existing Customer Relationships. Applied Digital believes
there are significant opportunities within and between each of its
operating divisions to cross market its services to its existing client
base.
- Profit Center Management. While Applied Digital's corporate management
team provides overall guidance, strategic direction and administrative
support, its division presidents have responsibility for the day-to-day
operations of their respective groups. Applied Digital operates each
business division as a largely autonomous profit center, which is held
accountable for achieving its financial goals. This approach to
management increases its responsiveness to changes in the marketplace and
to its customers' requirements and contributes to Applied Digital's
ability to grow profitably.
29
<PAGE> 39
- Acquisitions. Since 1995, Applied Digital has completed 42 acquisitions.
Management analyzes each acquisition opportunity using various criteria,
including profitability over a two to three year period, the strength of
the acquiree's balance sheet, the strength of its customer base and the
experience of its management team.
30
<PAGE> 40
SELECTED FINANCIAL DATA OF APPLIED DIGITAL
Applied Digital's selected statement of operations financial data for the
years ended December 31, 1997, 1998 and 1999 as set forth below have been
derived from the audited information included in the Applied Digital annual
report on Form 10-K filed for the year ended December 31, 1999 and included in
this joint proxy statement/prospectus. Applied Digital's selected balance sheet
financial data as of December 31, 1998 and 1999 as set forth below have been
derived from the audited information included in the Applied Digital annual
report on Form 10-K filed for the year ended December 31, 1999 and included in
this joint proxy statement/prospectus. The selected statement of operations
financial data for the years ended December 31, 1995 and 1996 have been derived
from audited financial statements which do not appear in this joint proxy
statement/prospectus. The selected balance sheet financial data as of December
31, 1995, 1996 and 1997 have been derived from audited financial statements
which do not appear in this joint proxy statement/prospectus. The selected
historical financial data for Applied Digital as of and for the three months
ended March 31, 1999 and 2000 are derived from unaudited financial statements
included in this joint proxy statement/prospectus which, in the opinion of
management, include all normal and recurring adjustments necessary to present
fairly the financial position and results of operations for those periods. The
operating results for the three months ended March 31, 2000 are not necessarily
indicative of the operating results to be expected for the full year. The
following historical financial information is only a summary and should be read
in conjunction with the information contained in the reports on Form 10-K and
Form 10-Q as filed by Applied Digital and also in conjunction with the other
information incorporated by reference in this document. See "Where You Can Find
More Information" on pages 93 through 94.
SUMMARY OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- ---------------------
1999 1998 1997 1996 1995 2000 1999
-------- -------- -------- ------- ------ -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenue........................... $336,741 $207,081 $103,159 $19,883 $2,336 $ 85,153 $51,573
Cost of goods sold.............................. 241,790 142,893 69,408 10,524 1,186 63,910 33,176
-------- -------- -------- ------- ------ -------- -------
Gross profit.................................... 94,951 64,188 33,751 9,359 1,150 21,243 18,397
-------- -------- -------- ------- ------ -------- -------
Selling, general and administrative expenses.... (90,416) (51,485) (26,431) (7,393) (970) (20,355) (16,091)
Depreciation and amortization................... (9,687) (4,501) (1,874) (712) (11) (2,090) (1,421)
Restructuring and unusual costs................. (2,550) -- (1,681) -- -- -- (2,550)
Gain on sale of subsidiary...................... 20,075 733 1,827 -- -- -- --
Interest income................................. 616 420 192 126 75 197 134
Interest expense................................ (3,842) (1,653) (978) (200) (15) (1,118) (445)
-------- -------- -------- ------- ------ -------- -------
Income (loss) from continuing operations before
provision (benefit) for income taxes, minority
interest and extraordinary loss............... 9,147 7,702 4,806 1,180 229 (2,123) (1,976)
Provision (benefit) for income taxes............ 3,160 2,588 1,769 362 -- (598) (575)
-------- -------- -------- ------- ------ -------- -------
Income (loss) before minority interest and
extraordinary loss............................ 5,987 5,114 3,037 818 229 (1,525) (1,401)
Minority interest............................... 395 424 697 132 49 (353) 244
-------- -------- -------- ------- ------ -------- -------
Income (loss) before extraordinary loss......... 5,592 4,690 2,340 686 180 (1,172) (1,645)
Extraordinary loss (net of taxes of $89)........ 160 -- -- -- -- -- --
-------- -------- -------- ------- ------ -------- -------
Net income (loss)............................... 5,432 4,690 2,340 686 180 (1,172) (1,645)
Preferred stock dividends....................... -- 44 72 60 -- -- --
-------- -------- -------- ------- ------ -------- -------
Net income (loss) available to common
stockholders.................................. $ 5,432 $ 4,646 $ 2,268 $ 626 $ 180 $ (1,172) $(1,645)
======== ======== ======== ======= ====== ======== =======
Average common shares outstanding............... 46,814 32,318 12,632 3,329 1,792 49,012 41,236
Average common shares outstanding assuming
dilution...................................... 50,086 34,800 15,245 4,641 1,967 49,012 41,236
Per common share data:
Basic......................................... $ 0.12 $ 0.14 $ 0.18 $ 0.19 $ 0.10 $ (0.02) $ (0.04)
Diluted....................................... $ 0.11 $ 0.13 $ 0.15 $ 0.15 $ 0.09 $ (0.02) $ (0.04)
</TABLE>
31
<PAGE> 41
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
1999 1998 1997 1996 1995 2000 1999
-------- -------- ------ ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $ 5,138 $ 4,555 $7,657 $ 810 $ 125 $ 5,863 $ 698
Due from buyers of divested
subsidiary.................. 31,302 -- -- -- -- -- --
Property and equipment........ 13,886 15,627 5,339 2,915 138 16,188 15,914
Goodwill...................... 62,000 33,430 12,787 14,528 907 65,696 41,708
Total assets.................. 228,976 124,116 61,282 33,208 4,131 209,081 132,064
Long-term debt................ 35,317 2,838 2,199 1,386 19 36,999 3,081
Total debt.................... 68,566 27,213 7,825 5,799 352 56,691 26,599
Minority interest............. 2,558 2,961 1,785 456 57 2,294 3,204
Redeemable preferred stock.... -- -- 900 10,900 -- -- --
Stockholders' equity.......... 92,936 67,560 36,285 8,252 3,052 97,326 70,007
</TABLE>
32
<PAGE> 42
APPLIED DIGITAL'S MANAGEMENT'S DISCUSSION
The following discussion and analysis of Applied Digital's financial
condition and results of operations should be read in conjunction with the
accompanying consolidated financial statements and related notes included in
this joint proxy statement/prospectus. Certain statements contained herein may
contain forward-looking statements.
OUTLOOK
Applied Digital's objective is to continue to grow each of its operating
divisions internally and through acquisitions, both domestically and abroad.
Applied Digital's strategy has been, and continues to be, to invest in and
acquire businesses that complement and add to its existing business base.
Applied Digital has expanded significantly through acquisitions in the past and
will continue to do so. Applied Digital's financial results and cash flows are
substantially dependent on not only its ability to sustain and grow existing
businesses, but to continue to grow through acquisition. Applied Digital expects
to continue to pursue its acquisition strategy in 2000 and future years, but
there can be no assurance that management will be able to continue to find,
acquire, finance and integrate high quality companies at attractive prices.
1999 AND RECENT DEVELOPMENTS
In April 1999, Applied Digital acquired:
- 100% of Port Consulting, Inc., an integrator of information technology
application systems and custom application development services based in
Jacksonville, Florida;
- 100% of Hornbuckle Engineering, Inc., an integrated voice and data
solutions provider based in Monterey, California;
- 100% of Lynch Marks & Associates, Inc., a network integration company
based in Berkeley, California; and
- 100% of STR, Inc., a software solutions company based in Cleveland, Ohio.
All of these acquisitions were accounted for using the purchase method of
accounting.
In May 1999, Applied Digital negotiated the early retirement of its line of
credit with State Street Bank and Trust Company ("State Street Debt") and its
simultaneous refinancing with IBM Credit Corporation. The IBM Agreement, as
amended and restated, provides for a revolving credit line of up to $33.9
million, and term loans of up to $61.1 million. Deferred financing fees
associated with the State Street Debt were written off during the second quarter
of 1999. The total amount of the write-off recorded as an extraordinary loss was
$160,000 net of income taxes.
In May 1999, Applied Digital entered into an agreement to merge its
wholly-owned subsidiary TigerTel Services Limited with Contour Telecom
Management, Inc., a Canadian company. Applied Digital received, in a reverse
merger transaction, 19,769 shares of Contour's common stock representing
approximately 75% of the total outstanding shares.
In June 1999, Applied Digital's subsidiary IntelleSale.com, Inc., purchased
all of the shares of Bostek, Inc. and affiliate (Bostek), in a transaction
accounted for using the purchase method of accounting. Bostek is engaged in the
business of acquiring open-box and off-specification computer equipment and
selling such equipment using the internet and other selling channels.
On September 14, 1999, Applied Digital's subsidiary, IntelleSale.com, Inc.,
filed a registration statement with the Securities and Exchange Commission in
connection with its proposed initial public offering. In addition to
IntelleSale.com selling primary shares, Applied Digital expected to sell shares
of IntelleSale's common stock as a selling shareholder. On January 31, 2000,
Applied Digital announced that it was postponing the proposed initial public
offering of IntelleSale's common stock due to market conditions. Deferred
initial public offering fees have been capitalized in anticipation of completing
the initial public
33
<PAGE> 43
offering within the next fiscal year. On May 4, 2000, Applied Digital announced
that it had retained Prudential Securities Incorporated to assist in pursuing
strategic alternatives regarding IntelleSale.com.
In October 1999, Applied Digital disposed of the main business units
comprising its Communications Infrastructure division and dissolved this group.
Applied Digital had concluded that the business units within this segment were
no longer core to its operations, and Applied Digital anticipates that it will
dispose of the remaining three business units that were within this segment
during 2000. As consideration for the sale, Applied Digital received
approximately 2.8 million shares of its common stock and a note for $2.5
million. The treasury shares were recorded at the book value of the divested
assets, which resulted in no gain being recognized. The transaction was
reflected at book value because the shareholders of the purchaser of the
divested assets were collectively deemed to be significant shareholders of
Applied Digital. The treasury stock was recorded at $2.54 per share.
In November 1999, TigerTel received an all cash bid for all of its
outstanding common shares from AT&T Canada, Inc. Applied Digital entered into a
lock-up agreement with AT&T to tender the approximately 65% of the outstanding
shares it owned and, on December 30, 1999, AT&T purchased all of the shares
tendered. Applied Digital recorded a pre-tax gain in the fourth quarter of 1999
of approximately $20.1 million, and received gross proceeds of approximately
$31.3 million in January 2000, which it applied against the outstanding balance
on Applied Digital's domestic revolving credit line.
In December 1999, Applied Digital's subsidiary, Digital Angel, acquired the
patent rights to a miniature digital transceiver, which it named "Digital
Angel(TM)". While still in the development stage, Applied Digital believes that
this technology may be available for a variety of purposes, such as providing a
tamper-proof means of identification for enhanced e-business security, locating
lost or missing individuals, tracking the location of valuable property and
monitoring the medical conditions of at-risk patients.
On March 3, 2000, Applied Digital announced a letter of intent, and on
April 24, 2000, Applied Digital signed a definitive merger agreement to acquire
Destron. On May 25, 2000, Applied Digital, Digital Angel and Destron signed an
amendment to the merger agreement to modify the exchange ratio, to eliminate
certain termination rights and to limit Applied Digital's ability to enter into
other acquisition agreements. Destron is a leading developer, manufacturer and
marketer of a broad line of electronic and visual identification devices for
companion animals, livestock, laboratory animals and wildlife. In this proposed
transaction, Applied Digital will issue shares of its common stock in exchange
for shares of common stock of Destron. The transaction, if consummated, is
expected to close in the third quarter of 2000, subject to a number of
conditions, including completion of due diligence, approval of both Applied
Digital's and Destron's shareholders, and approval of relevant government
agencies. Under the merger agreement, as amended, Destron would be merged into
Digital Angel.
On March 22, 2000, Applied Digital filed a shelf registration statement to
sell, from time to time, up to 3 million shares of Applied Digital common stock.
Proceeds from the sale were to be used for general corporate purposes, including
the funding of future acquisitions. On April 5, 2000, Applied Digital announced
that it was postponing this offering because of adverse market conditions.
Effective as of April 1, 2000, Applied Digital acquired 100% of Independent
Business Consultants, a network integration company based in Valley Village,
California, in a transaction accounted for under the purchase method of
accounting.
On May 26, 2000, Applied Digital filed a shelf registration statement to
register for resale, from time to time, up to 1,709,403 shares of its common
stock, for certain shareholders. Applied Digital had previously issued the stock
in connection with prior acquisition transactions. Applied Digital filed to
register such resales pursuant agreements with such shareholders. Applied
Digital currently intends to file an amendment to the shelf registration
statement to change the number of shares registered for resale from 1,709,403 to
2,900,461.
APPLIED DIGITAL'S BUSINESS
Beginning in the fourth quarter of 1998 and continuing into 2000, Applied
Digital reorganized into six operating segments to more effectively and
efficiently provide integrated communications products and
34
<PAGE> 44
services to a broad base of customers. During the second quarter of 1999,
several adjustments were made to the composition of the Telephony, Internet and
Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. In October 1999, Applied Digital
disposed of the main business units comprising its Communication Infrastructure
division and dissolved this group.
In December 1999, its subsidiary, Digital Angel.net Inc., acquired the
patent rights to a miniature digital transceiver, which Applied Digital named
"Digital Angel(TM)." While still in the development stage, Applied Digital
believes that this technology may be available for a variety of purposes, such
as providing a tamper-proof means of identification for enhanced e-business
security, locating lost or missing individuals, tracking the location of
valuable property and pets and monitoring the medical conditions of at-risk
patients. It is anticipated that the implantable device will send and receive
data and would be able to use GPS (Global Positioning Satellite) technology for
continuous tracking.
CORE BUSINESS
Applied Digital's primary businesses, other than IntelleSale.com, the
Non-Core Business Group and Digital Angel, are now organized into four business
divisions:
- Telephony -- implements telecommunications and Computer Telephony
Integration (CTI) solutions for e-business. Applied Digital integrates a
wide range of voice and data solutions from communications systems to
voice over Internet Protocol and Virtual Private Networking (VPN).
Applied Digital provides complete design, project management, cable/fiber
infrastructure, installation and on-going support for the customers it
supports. On December 30, 1999, Applied Digital sold its interest in its
Canadian subsidiary, TigerTel, Inc. to concentrate its efforts on its
domestic CTI solutions.
- Network -- is a professional services organization dedicated to
delivering quality e-business services and support to Applied Digital's
client partners, providing e-business infrastructure design and
deployment, personal computer network infrastructure for the development
of local and wide area networks as well as site analysis, configuration
proposals, training and customer support services.
- Internet -- equips Applied Digital customers with the necessary tools and
support services to enable them to make a successful transition to
implementing e-business practices, Enterprise Resource Planning (ERP) and
Customer Relationship Management (CRM) solutions, website design, and
application and internet access services to customers of Applied
Digital's other divisions.
- Applications -- provides software applications for large retail
application environments, including point of sale, data acquisition,
asset management and decision support systems and develops programs for
portable data collection equipment, including wireless hand-held devices.
It is also involved in the design, manufacture and support of satellite
communication technology including satellite modems, data broadcast
receivers and wireless global positioning systems for commercial and
military applications.
As of March 31, 2000 and 1999 and as of December 31, 1999, 1998 and 1997,
revenues from these four divisions together accounted for 26.7%, 40.3%, 38.2%,
35.9% and 40.5%, respectively, of Applied Digital's total revenues.
IntelleSale.com. IntelleSale.com, Inc. sells refurbished and new computer
equipment and related components online, through its website at
www.IntelleSale.com, and through other Internet companies, as well as through
traditional channels, which includes sales made by IntelleSale.com's sales
force.
As of March 31, 2000 and 1999 and as of December 31, 1999, 1998 and 1997,
revenues from IntelleSale.com accounted for 59.7%, 33.2%, 42.5%, 29.4% and
38.2%, respectively, of the total revenues of Applied Digital.
On September 14, 1999, IntelleSale.com filed a registration statement with
the Securities and Exchange Commission in connection with its proposed initial
public offering. In addition to IntelleSale.com selling primary shares, Applied
Digital expected to sell shares of IntelleSale.com stock as a selling
shareholder. On January 31, 2000, Applied Digital announced that Applied Digital
was postponing the proposed initial public
35
<PAGE> 45
offering of IntelleSale.com stock due to market conditions. Deferred initial
public offering fees have been capitalized in anticipation of completing the
initial public offering within the next year. On May 4, 2000, Applied Digital
announced that it had retained Prudential Securities Incorporated to assist in
pursuing strategic alternatives regarding IntelleSale.com.
The Non-Core Business Group. This group is comprised of seven individually
managed companies whose businesses are as follows:
- Gavin-Graham Electrical Products is a custom manufacturer of electrical
products, specializing in digital and analog panelboards, switchboards,
motor controls and general control panels. The company also provides
custom manufacturing processes such as shearing, punching, forming,
welding, grinding, painting and assembly of various component structures.
- Ground Effects, Ltd., based in Windsor, Canada, is a certified
manufacturer and tier one supplier of standard and specialized vehicle
accessory products to the automotive industry. The company exports over
80% of the products it produces to the United States, Mexico, South
America, the Far East and the Middle East.
- Hopper Manufacturing Co., Inc. re-manufactures and distributes automotive
parts. This primarily includes alternators, starters, water pumps,
distributors and smog pumps.
- Innovative Vacuum Solutions, Inc. designs, installs and re-manufactures
vacuum systems used in industry.
- Americom, STC Netcom and ACT Leasing are all involved in the fabrication,
installation and maintenance of microwave, cellular and digital personal
communication services towers.
As of March 31, 2000 and 1999 and as of December 31, 1999, 1998 and 1997,
revenues from the Non-Core business group, as well as the four disposed entities
within Applied Digital's Communications Infrastructure group, accounted for
16.5%, 29.5%, 19.2%, 34.7% and 21.3%, respectively, of the total revenues of
Applied Digital.
Applied Digital has previously announced its intention to divest, in the
ordinary course of business, these non-core businesses at such time and on such
terms as the Applied Digital Board of Directors determines advisable. There can
be no assurance that Applied Digital will divest of any or all of these
businesses or as to the terms or timing of any divestiture transaction.
GROWTH STRATEGY
The growth strategy of Applied Digital is focused on internal expansion and
growth through acquisitions. The following are the key elements of Applied
Digital's strategy:
- Become a Single Source e-Business Solutions Provider. Applied Digital
believes that its expertise in all four areas of its core competency will
enable it to capitalize on the interest of businesses in fulfilling their
e-business solutions through one provider.
- Leverage of Existing Customer Relationships. Applied Digital believes
there are significant opportunities within and between each of its
operating divisions to cross market its services to its existing client
base.
- Profit Center Management. While Applied Digital's corporate management
team provides overall guidance, strategic direction and administrative
support, its division presidents have responsibility for the day-to-day
operations of their respective groups. Applied Digital operates each
business division as a largely autonomous profit center, which is held
accountable for achieving its financial goals. This approach to
management increases its responsiveness to changes in the marketplace and
to its customers' requirements and contributes to Applied Digital's
ability to grow profitably.
- Acquisitions. Since 1995, Applied Digital has completed 42 acquisitions.
Management analyzes each acquisition opportunity using various criteria,
including profitability over a two to three year period, the
36
<PAGE> 46
strength of the acquiree's balance sheet, the strength of its customer
base and the experience of its management team.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 as compared with Three Months Ended March
31, 1999
The following table summarizes Applied Digital's results of operations as a
percentage of net operating revenue for the three month periods ended March 31,
2000 and 1999.
<TABLE>
<CAPTION>
RELATIONSHIP TO NET
OPERATING REVENUE
--------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
------- -------
% %
------- -------
<S> <C> <C>
Net operating revenue....................................... 100.0 100.0
Cost of goods sold.......................................... 75.1 64.3
----- -----
Gross profit................................................ 24.9 35.7
Selling, general and administrative expenses................ 23.9 31.2
Depreciation and amortization............................... 2.5 2.8
Restructuring and unusual charges........................... -- 4.9
Interest income............................................. 0.2 0.3
Interest expense............................................ (1.3) (0.9)
----- -----
Loss before benefit for income taxes and minority
interest.................................................. (2.5) (3.8)
Benefit for income taxes.................................... 0.7 1.1
----- -----
Loss before minority interest............................... (1.8) (2.7)
Minority interest........................................... 0.4 (0.5)
----- -----
Loss available to common stockholders....................... (1.4) (3.2)
===== =====
</TABLE>
Revenue
Revenue for the three months ended March 31, 2000 was $85.2 million, an
increase of $33.6 million, or 65.1%, from $51.6 million for the three months
ended March 31, 1999. These significant increases are attributable to the growth
of existing businesses as well as to growth through acquisitions.
Revenue for each of the operating segments was:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Telephony(1)................................................ $ 4,498 $ 9,012
Network..................................................... 7,245 4,006
Internet.................................................... 2,026 997
Applications................................................ 8,933 6,755
IntelleSale.com............................................. 50,837 17,107
Non-Core(2)................................................. 14,016 15,210
Corporate................................................... (2,402) (1,514)
------- -------
Consolidated................................................ $85,153 $51,573
======= =======
</TABLE>
--------------------
(1) Includes TigerTel's revenue of $5.0 million in the first quarter of
1999.
(2) Includes revenue from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Revenue for
these disposed entities included above amounted to $6.6 million in the
first quarter of 1999.
37
<PAGE> 47
Changes during the quarter were:
- Telephony revenue decreased 50.1% for the quarter primarily as a result
of the sale of TigerTel in December 1999. Revenue from the remaining
entities increased by $.5 million in the first quarter of 2000 compared
to the first quarter of 1999.
- Network revenue increased 80.9% for the quarter as a result of the
acquisitions, in the second quarter of 1999, of Hornbuckle Engineering,
Inc. and Lynch Marks & Associates. These entities contributed $2.5
million to revenue in the first quarter of 2000.
- Internet revenue increased by 103.2% in the quarter primarily as a result
of its acquisition of Port Consulting in the second quarter of 1999.
- Applications revenue increased by 32.2% in the quarter. This division
includes the revenue of STR, Inc., an acquisition completed during the
second quarter of 1999. Revenue contributed by STR during the first
quarter amounted to $3.2 million or 145.3% of the increased revenue of
this group. The decrease in revenue from existing businesses is the
result of its planned exit from certain lines of business within this
division.
- IntelleSale.com's revenue increased 197.2% for the quarter. Bostek, which
was acquired in June 1999, contributed $28.4 million in the first quarter
or 84.3% of the increase for the quarter, while existing businesses
contributed the difference.
- Non-Core revenue, which includes revenue from the former Communications
Infrastructure group, decreased $1.2 million or 7.9% in the first
quarter. Four entities in this segment were sold during 1999 and their
revenue is no longer included, and certain lines of business within this
segment continue to suffer from competition and lost market share,
partially offset by the increase in Ground Effect's revenue due to
increased business.
GROSS PROFIT AND GROSS MARGIN PERCENTAGE
Gross profit for the three months ended March 31, 2000 was $21.2 million,
an increase of $2.8 million, or 15.2%, from $18.4 million for the three months
ended March 31, 1999. As a percentage of revenue, the gross margin was 24.9% and
35.7% for the three months ended March 31, 2000 and 1999, respectively.
Gross profit for each of the operating segments was:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Telephony(1)................................................ $ 1,967 $ 5,135
Network..................................................... 2,295 820
Internet.................................................... 1,859 275
Applications................................................ 4,540 3,620
IntelleSale.com............................................. 7,037 5,123
Non-Core(2)................................................. 3,447 3,404
Corporate................................................... 98 20
------- -------
Consolidated................................................ $21,243 $18,397
======= =======
</TABLE>
--------------------
(1) Includes TigerTel's gross profit of $3.6 million in the first quarter
of 1999.
(2) Includes gross profit from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Gross profit
for these disposed entities included above amounted to $1.2 million in
the first quarter of 1999.
38
<PAGE> 48
Gross margin percentage for each of the operating segments was:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
% %
---- ----
<S> <C> <C>
Telephony(1)................................................ 43.7 57.0
Network..................................................... 31.7 20.5
Internet.................................................... 91.8 27.6
Applications................................................ 50.8 53.6
IntelleSale.com............................................. 13.8 29.9
Non-Core(2)................................................. 24.6 22.4
---- ----
Consolidated................................................ 24.9 35.7
==== ====
</TABLE>
--------------------
(1) Includes TigerTel's gross profit margin of 72.0% in the first quarter
of 1999.
(2) Includes gross profit margin from the Communications Infrastructure
group of companies, the majority of which were disposed of in 1999.
Gross profit margin for these disposed entities included above amounted
to 18.2% in the first quarter of 1999.
Changes during the quarters were:
- Telephony gross profit decreased by 61.7% for the quarter, and margin
declined to 43.7% from 57.0% for the quarter. The decrease in gross
profit and margin is as a result of the sale of TigerTel in December
1999.
- Network improvement is attributable to the acquisitions during the second
quarter of 1999 and a small improvement in existing business margin
resulting from the shift from product sales to services.
- Internet increase is due to the inclusion of Port Consulting, acquired in
the second quarter of 1999. Gross profit and margin are higher in this
division as it is service oriented and most of its operating costs are
recorded in selling, general and administrative expense.
- Applications gross profit increased $0.9 million or 25.4% primarily due
to the acquisition of STR but declined as a percentage of revenue as it
continues to implement its planned exit from a once highly profitable but
declining modem and communications market in the United Kingdom.
- IntelleSale.com dollar gross profit increased $1.9 million or 37.4% as a
result of internal growth and increased revenue from Bostek, but its
margin declined as it continued its expansion and focused its business on
Internet and business to business e-commerce.
- Non-core gross profit and margin increased slightly despite the sale of
four businesses during 1999 due to improvements in existing business
margin resulting from the increased revenue and improved business
conditions at Ground Effects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the three months ended
March 31, 2000 was $20.4 million, an increase of $4.3 million, or 26.7%, from
$16.1 million for the three months ended March 31, 1999. As a percentage of
revenue, selling, general and administrative expense was 23.9% and 31.2% for the
three months ended March 31, 2000 and 1999, respectively.
39
<PAGE> 49
Selling, general and administrative expense for each of the operating
segments was:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Telephony(1)................................................ $ 2,211 $ 4,306
Network..................................................... 1,998 585
Internet.................................................... 1,794 291
Applications................................................ 4,125 3,259
IntelleSale.com............................................. 5,432 2,662
Non-Core(2)................................................. 1,952 2,904
Corporate................................................... 2,843 2,084
------- -------
Consolidated................................................ $20,355 $16,091
======= =======
</TABLE>
--------------------
(1) Includes TigerTel's selling, general and administrative expense of $2.6
million in the first quarter of 1999.
(2) Includes selling, general and administrative expense from the
Communications Infrastructure group of companies, the majority of which
were disposed of in 1999. Selling, general and administrative expense
for these disposed entities included above amounted to $1.3 million in
the first quarter of 1999.
Selling, general and administrative expense as a percentage of revenue for
each of the operating segments was:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------
2000 1999
% %
---- ----
<S> <C> <C>
Telephony(1)................................................ 49.2 47.8
Network..................................................... 27.6 14.6
Internet.................................................... 88.5 29.2
Applications................................................ 46.2 48.2
IntelleSale.com............................................. 10.7 15.6
Non-Core(2)................................................. 13.9 19.1
---- ----
Consolidated................................................ 23.9 31.2
==== ====
</TABLE>
--------------------
(1) Includes TigerTel's selling, general and administrative expense of
52.0% in the first quarter of 1999.
(2) Includes selling, general and administrative expense from the
Communications Infrastructure group of companies, the majority of which
were disposed of in 1999. Selling, general and administrative expense
for these disposed entities included above amounted to 19.7% in the
first quarter of 1999.
Changes during the quarter were:
- Telephony decreased $2.1 million or 48.7% in the first quarter of 2000
due to the sale of TigerTel in December 1999. As a percentage of revenue,
selling, general and administrative expense in this division has not
increased significantly over the first quarter of 1999.
- Network increased significantly over the first quarter of 1999 as a
result of acquisitions made in the second quarter of 1999. These
companies are more service oriented and have higher selling, general and
administrative expense.
- Internet increased $1.5 million or 516.5% a significant increase over the
first quarter of 1999 as a result of the switch in entities comprising
this group from a hardware oriented company with higher cost of goods
sold and lower selling, general and administrative expense to a service
oriented company with lower cost of goods sold but higher selling,
general and administrative expense.
40
<PAGE> 50
- Applications increased $0.9 million or 26.6% over the first quarter of
1999 due to an acquisition in the second quarter of 1999. As a percentage
of revenue, selling, general and administrative expense in this division
has decreased slightly over the first quarter of 1999.
- IntelleSale.com's selling, general and administrative expense increased
in dollar terms as a result of the acquisition of Bostek in June 1999 and
the increase of Internet related business and the consolidation of
operations into one facility. As a percentage of sales, selling, general
and administrative expense in this division has declined slightly from
the first quarter of 1999.
- Non-core's selling, general and administrative expense decreased in
dollar terms and as a percentage of sales as a result of the sale of four
entities during 1999.
- Corporate selling, general and administrative expense increased $0.8
million or 36.5% over the first quarter of 1999 due to higher personnel
related expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended March 31,
2000 was $2.1 million, an increase of $0.7 million, or 50.0%, from $1.4 million
for the three months ended March 31, 1999.
Depreciation and amortization expense for each of the operating segments
was:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Telephony(1)................................................ $ 94 $ 262
Network..................................................... 38 5
Internet.................................................... 32 7
Applications................................................ 278 336
IntelleSale.com............................................. 169 89
Non-Core(2)................................................. 360 219
Corporate(3)................................................ 1,119 503
------ ------
Consolidated................................................ $2,090 $1,421
====== ======
</TABLE>
---------------
(1) Includes TigerTel's depreciation and amortization of $0.2 million in the
first quarter of 1999.
(2) Includes depreciation and amortization from the Communications
Infrastructure group of companies, the majority of which were disposed of in
1999. Depreciation and amortization for these disposed entities included
above amounted to $0.07 million in the first quarter of 1999.
(3) Includes consolidation adjustments of $0.8 million and $0.4 million in the
first quarters of March 31, 2000 and 1999, respectively.
Changes during the quarter were:
- Telephony decreased primarily as a result of the sale of TigerTel in
December 1999.
- Network increased due to the two acquisitions completed in the second
quarter of 1999.
- Internet increased due to the increase in depreciable assets in this
division during 1999 and the first quarter of 2000.
- Applications decreased due primarily to the sale of an entity in this
division during 1999.
- IntelleSale.com increased as a result of the increase in depreciable
assets during 1999 and the first quarter of 2000 associated with the
consolidation of the businesses into one facility.
- Non-core increased in the first quarter of 2000 due primarily to assets
purchased by Ground Effects during 1999 and the first quarter of 2000.
41
<PAGE> 51
On an annual basis, goodwill amortization will be approximately $3.5
million for goodwill recorded as of March 31, 2000.
RESTRUCTURING AND UNUSUAL CHARGES
As part of the reorganization of its core business in the first quarter of
1999, Applied Digital implemented a restructuring plan. The restructuring plan
included the exiting of selected lines of business within its Telephony and
Applications business groups, and the associated write-off of assets. The
restructuring charge of $2.2 million included asset impairments, primarily
software and other intangible assets, of $1.5 million, lease terminations of
$0.5 million and employee separations of $0.2 million. In addition, during the
first quarter of 1999, as part of its core businesses reorganization, Applied
Digital realigned certain operations within the Telephony division and
recognized impairment charges and other related costs of $0.3 million.
INTEREST INCOME AND EXPENSE
Interest income was $0.2 million and $0.1 million for the three months
ended March 31, 2000 and 1999, respectively. Interest income is earned primarily
from short-term investments and notes receivable.
Interest expense was $1.1 million and $0.4 million for the three months
ended March 31, 2000 and 1999, respectively. Interest expense is principally
associated with revolving credit lines, notes payable and term loans.
INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES AND MINORITY INTEREST
Loss before benefit for income taxes and minority interest for the three
months ended March 31, 2000 and 1999 was $2.1 million and $2.0 million,
respectively. Changes in loss before benefit for income taxes and minority
interest are a result of the factors discussed above. Excluding the $2.6 million
restructuring and unusual charges mentioned above, income before benefit for
income taxes and minority interest for the three months ended March 31, 1999 was
$0.6 million.
INCOME TAXES
Applied Digital had an effective tax benefit rate of 28.2% and 29.1% for
the three months ended March 31, 2000 and 1999, respectively. The income tax
benefits are the result of losses arising in the periods. The effective tax
benefit rates differed from the statutory federal income tax rate of (34%)
primarily as a result of non-deductible goodwill amortization associated with
acquisitions, state taxes net of federal benefits and, the reduction of
valuation allowances related to net operating loss carryforwards.
42
<PAGE> 52
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table summarizes Applied Digital's results of operations as a
percentage of net operating revenue for the last three years:
<TABLE>
<CAPTION>
1999 1998 1997
% % %
----- ----- -----
<S> <C> <C> <C>
Net operating revenue....................................... 100.0 100.0 100.0
Cost of goods sold.......................................... 71.8 69.0 67.3
----- ----- -----
Gross margin................................................ 28.2 31.0 32.7
Selling, general and administrative expenses................ (26.9) (24.9) (25.6)
Depreciation and amortization............................... (2.9) (2.2) (1.8)
Restructuring and unusual costs............................. (0.8) -- (1.6)
Gain on sale of subsidiary.................................. 6.0 0.4 1.8
Interest income............................................. 0.2 0.2 0.1
Interest expense............................................ (1.1) (0.8) (1.0)
----- ----- -----
Income before provision for income taxes, minority interest
and extraordinary loss.................................... 2.7 3.7 4.6
Provision for income taxes.................................. 0.9 1.2 1.7
----- ----- -----
Income before minority interest and extraordinary loss...... 1.8 2.5 2.9
Minority interest........................................... 0.1 0.2 0.6
----- ----- -----
Income before extraordinary loss............................ 1.7 2.3 2.3
Extraordinary loss.......................................... 0.1 -- --
----- ----- -----
Net income.................................................. 1.6 2.3 2.3
Preferred stock dividends................................... -- -- 0.1
----- ----- -----
Net income available to common stockholders................. 1.6 2.3 2.2
===== ===== =====
</TABLE>
REVENUE
Revenue for 1999 was $336.7 million, an increase of $129.6 million or 62.6%
from $207.1 million in 1998. Revenue for 1998 represents an increase of $103.9
million, or 100.7%, from $103.2 million in 1997. These significant increases are
attributable to the growth of existing businesses as well as to growth through
acquisitions.
Revenue for each of the operating segments was:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Telephony(1)........................................... $ 59,225 $ 33,270 $ 32,208
Network................................................ 27,190 21,282 --
Internet............................................... 6,607 -- --
Applications........................................... 35,780 19,859 9,574
IntelleSale.com........................................ 142,987 60,877 39,445
Non-Core(2)............................................ 64,689 71,793 21,932
Corporate.............................................. 263 -- --
-------- -------- --------
Consolidated........................................... $336,741 $207,081 $103,159
======== ======== ========
</TABLE>
--------------------
(1) Includes TigerTel's revenue of $39.2 million and $11.6 million in 1999
and 1998.
(2) Includes revenue from the Communications Infrastructure group of
companies, the majority of which were disposed of in the fourth quarter
of 1999. Revenues for these disposed entities included above amounted
to $21.0 million, $32.1 million and $4.3 million in 1999, 1998 and
1997.
43
<PAGE> 53
Changes during the years were:
- Telephony revenue increased $26.0 million or 78.3% from 1998 to 1999 as a
result of TigerTel's acquisition of Contour in May 1999. TigerTel's
revenue was $39.3 million or 66.4% of 1999 revenue and $11.6 million or
34.9% of 1998's revenue. Revenue did not increase significantly from 1997
to 1998.
- Network revenue increased $5.9 million or 27.8% from 1998 to 1999.
Hornbuckle Engineering, Inc. and Lynch Marks & Associates, both acquired
in the second quarter of 1999, contributed $9.2 million of revenue in
1999, representing 43.4% of 1999's revenue increase over 1998. The 15.5%
decline in existing business revenue reflects the transition from lower
margin product business to a higher margin service business in 1999
compared to 1998. This division was formed with the purchase of one
company in 1998 and had no operations prior to that.
- Internet revenue increased by 100.0% for the year as a result of its
acquisition of Port Consulting in the second quarter of 1999. Prior to
1999, Applied Digital had no significant Internet operations and those
operations reported as Internet in 1998 have been classified with
Telephony in 1999.
- Application revenue increased $15.9 million or 80.2% from 1998 to 1999.
In 1999, this division included the results of STR, an acquisition
completed during the second quarter of 1999, whose revenue of $9.9
million represents 49.9% of the increase, while existing businesses
contributed 30.3% of the increase, a small, but undetermined, portion of
which Applied Digital believes was due to Year 2000 remediation. Revenue
increased $10.3 million or 108.4% from 1997 to 1998, primarily from the
acquisition of Signature Industries in 1998, whose 1998 revenue was $9.6
million or 101.1% of the increase.
- IntelleSale.com's revenue increased $82.1 million or 134.9% from 1998 to
1999. Bostek, which was acquired in June 1999, contributed $74.6 million
or 122.5% of the increase for the year, while existing businesses
contributed 12.4% of the increase. Revenue increased $21.4 million or
54.3% from 1997 to 1998, primarily as a result of IntelleSale's 1998
acquisitions, which contributed $17.4 million or 44.2% of the increase.
- Non-core's revenue, which includes revenue from the former Communications
Infrastructure group, decreased $7.1 million or 9.9% from 1998 to 1999.
Four entities in this segment were sold at the beginning of the fourth
quarter of 1999 and their revenues are not included for the fourth
quarter of 1999. Certain lines of business within this segment continue
to suffer from competition and lost market share. Revenue increased $49.8
million or 227.4% from 1997 to 1998 primarily as a result of acquisitions
in 1998, which contributed $35.3 million or 89.6% of 1998's revenue.
44
<PAGE> 54
GROSS PROFIT AND GROSS MARGIN PERCENTAGE
Gross profit for 1999 was $94.9 million, an increase of $30.8 million, or
48.0%, from $64.1 million in 1998. Gross profit for 1998 represents a $30.4
million increase, or a 90.2% increase over 1997. As a percentage of revenue, the
gross margin was 28.2%, 31.0% and 32.7% for the years ended December 31, 1999,
1998 and 1997, respectively.
Gross profit for each of the operating segments was:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Telephony(1).............................................. $22,384 $19,071 $16,215
Network................................................... 8,635 3,863 --
Internet.................................................. 4,985 -- --
Applications.............................................. 18,641 11,613 5,846
IntelleSale.com........................................... 26,383 12,871 6,243
Non-Core(2)............................................... 13,660 16,770 5,447
Corporate................................................. 263 -- --
------- ------- -------
Consolidated.............................................. $94,951 $64,188 $33,751
======= ======= =======
</TABLE>
--------------------
(1) Includes TigerTel's gross profit of $14.9 million and $7.7 million in
1999 and 1998. Includes gross profit from the Communications
Infrastructure group of companies, the majority of which were disposed
of in the fourth quarter of 1999.
(2) Gross profit for these disposed entities included above amounted to
$4.3 million, $7.4 million and $1.0 million in 1999, 1998 and 1997.
Gross margin percentage for each of the operating segments was:
<TABLE>
<CAPTION>
1999 1998 1997
% % %
---- ---- ----
<S> <C> <C> <C>
Telephony(1)................................................ 37.8 57.3 50.3
Network..................................................... 31.8 18.2 --
Internet.................................................... 75.5 -- --
Applications................................................ 52.1 58.5 61.1
IntelleSale.com............................................. 18.5 21.1 15.8
Non-Core(2)................................................. 21.1 23.4 24.8
Corporate................................................... -- -- --
---- ---- ----
Consolidated................................................ 28.2 31.0 32.7
==== ==== ====
</TABLE>
--------------------
(1) Includes TigerTel's gross profit margin of 38.0% and 66.4% in 1999 and
1998. Includes gross profit margin from the Communications
Infrastructure group of companies, the majority of which were disposed
of in the fourth quarter of 1999.
(2) Gross profit margin for these disposed entities included above amounted
to of 20.5%, 23.1% and 23.3% in 1999, 1998 and 1997.
Changes during the years were:
- Telephony gross profits increased by $3.3 million or 17.4% for 1999, but
margins declined to 37.8% in 1999 from 57.3% in 1998. The increase in
absolute dollars was as a result of the acquisition of Contour, but this
acquisition also contributed significantly lower overall gross margin.
Contour's margins were historically lower than those of the other
entities within this division. Gross profits increased $2.8 million or
17.3% from 1997 to 1998 as a result of the acquisition of TigerTel in
1998.
- Network gross profit increased by $4.8 million or 123.5% for 1999. This
improvement is attributable to the acquisitions during the second quarter
of 1999, and a small improvement in existing business margin resulting
from the shift from product sales to services. The companies acquired are
service
45
<PAGE> 55
oriented companies with most expenses being classified as selling,
general and administrative. This division was established in 1998.
- Internet was established in 1999. Gross profits and margins are higher in
this division as it is service oriented and most of its operating costs
are recorded in selling, general and administrative expense.
- Applications gross profit increased $7.0 million or 60.3% for 1999,
primarily due to the acquisition of STR, but margins declined as Applied
Digital implemented its planned exit from a once highly profitable but
declining modem and communications market in the United Kingdom. Gross
profit increased $5.8 million or 98.6% from 1997 to 1998, primarily as a
result of the acquisition of Signature in 1998.
- IntelleSale.com's gross profit increased $13.5 million or 104.7% in 1999
as a result of increased revenue from Bostek and internal growth, but
Applied Digital's margins declined to 18.5% in 1999 from 21.1% in 1998 as
Applied Digital continued its expansion and focused its business on
Internet and business to business e-commerce. Gross profit increased $6.6
million or 106.5% from 1997 to 1998 as a result of 1998 acquisitions.
- Non-core's gross profit and margin declined due to the sale of one
business at the beginning of 1999 and the overall poor performance of the
units within this division. Gross profit declined by $3.1 million or
18.6% in 1999. Gross profit increased $11.3 million or 209.3% from 1997
to 1998, as a result of acquisitions in 1998 which contributed $8.9
million or 164.8% of the increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $90.4 million in 1999, an
increase of $38.9 million or 75.5% over 1998. The 1998 expense represents an
increase of $25.0 million or 94.7% over the $26.4 million reported in 1997. As a
percentage of revenue, selling, general and administrative expenses have
increased slightly to 26.9% in 1999 from 24.9% in 1998 and 25.6% in 1997.
Selling, general and administrative expense for each of the operating
segments was:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Telephony(1).............................................. $20,122 $17,572 $14,438
Network................................................... 6,953 2,261 --
Internet.................................................. 4,270 -- --
Applications.............................................. 16,901 8,975 3,244
IntelleSale.com........................................... 19,120 8,111 3,779
Non-Core(2)............................................... 12,546 11,167 4,350
Corporate(3).............................................. 10,504 3,399 620
------- ------- -------
Consolidated.............................................. $90,416 $51,485 $26,431
======= ======= =======
</TABLE>
--------------------
(1) Includes TigerTel's selling, general and administrative expense of
$11.4 million and $5.5 million in 1999 and 1998.
(2) Includes selling, general and administrative expense from the
Communications Infrastructure group of companies, the majority of which
were disposed of in the fourth quarter of 1999. Selling, general and
administrative expense for these disposed entities, included above
amounted to $4.8 million, $4.7 million and $0.7 million in 1999, 1998
and 1997.
(3) Corporate overhead includes an asset impairment reserve of $1.0 million
in 1999.
46
<PAGE> 56
Selling, general and administrative expense as a percentage of revenue for
each of the operating segments was:
<TABLE>
<CAPTION>
1999 1998 1997
% % %
----- ---- ----
<S> <C> <C> <C>
Telephony(1)................................................ 34.0 52.8 44.8
Network..................................................... 25.6 10.6 --
Internet.................................................... 64.6 31.2 --
Applications................................................ 47.2 45.2 33.9
IntelleSale.com............................................. 13.4 13.3 9.6
Non-Core(2)................................................. 19.4 15.6 19.8
Consolidated................................................ 26.9 24.9 25.6
===== ==== ====
</TABLE>
--------------------
(1) Includes, as a percentage of revenue, TigerTel's selling, general and
administrative expense of 29.3% and 47.4% in 1999 and 1998.
(2) Includes selling, general and administrative expense from the
Communications Infrastructure group of companies, the majority of which
were disposed of in the fourth quarter of 1999. Selling, general and
administrative expense as a percentage of revenue for these disposed
entities, included above, amounted to of 22.9%, 14.6% and 16.3% in
1999, 1998 and 1997.
Changes during the years were:
- Telephony selling, general and administrative expense increased $2.6
million or 14.9% in 1999, but as a percentage of revenue, declined 18.8
percentage points from 52.8% in 1998 to 34.0% in 1999. The decline
reflects economies in scale achieved through the merger of TigerTel and
Contour and the continued improvement of its domestic telecommunications
businesses. Selling, general and administrative expense increased $3.1
million or 21.5% in 1998, primarily as a result of the acquisition of one
of the TigerTel entities.
- Network selling, general and administrative expense increased $4.7
million or 204.3%, a significant increase over 1998 as a result of
acquisitions made in the second quarter of 1999. These companies are more
service oriented and have a higher selling, general and administrative
expenses. There were no Network operations in 1997.
- Internet commenced operations in 1999. As a service provider, this
division has a lower cost of goods sold but higher selling, general and
administrative expense.
- Application selling, general and administrative expense increased $7.9
million or 87.8% in 1999 due to an acquisition in the second quarter of
1999, and increased $5.7 million or 178.1% in 1998 as a result of the
acquisition of Signature. As a percentage of revenue, selling, general
and administrative expense in this division has not increased
significantly over prior periods.
- IntelleSale.com selling, general and administrative expense increased
$11.0 million or 135.8% in 1999, primarily as a result of the acquisition
of Bostek in June 1999 and the increase of Internet related business and
the consolidation of operations into one facility. Selling, general and
administrative expense increased $4.3 million or 113.2% in 1998 due to
acquisitions in 1998. As a percentage of sales, selling, general and
administrative expense in 1999 and 1998 are almost the level.
- Non-core selling, general and administrative expense did not increase
significantly in dollar terms in 1999 but increased as a percentage of
sales as sales continue to decline at certain units within this division.
In 1998, selling, general and administrative expense increased $6.8
million or 154.5% as a result of acquisitions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for 1999 was $9.7 million, an
increase of $5.2 million, or 115.6%, from $4.5 million in 1998. The 1998 expense
represents an increase of $2.6 million or 136.8% over the $1.9 million reported
in 1997. As a percentage of revenue, depreciation and amortization expense
increased to 2.9% in 1999 from 2.2% in 1998 and 1.8% in 1997. The increase,
despite substantially higher revenues, is due to
47
<PAGE> 57
significantly higher goodwill resulting from acquisitions, as well as increased
depreciation expense in 1999 resulting from higher capital expenditures in 1999
compared to 1998 and 1997.
Depreciation and amortization expense for each of the operating segments
was:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Telephony(1)................................................ $1,547 $ 677 $ 300
Network..................................................... 132 39 --
Internet.................................................... 69 -- --
Applications................................................ 2,366 1,241 459
IntelleSale.com............................................. 529 251 108
Non-Core(2)................................................. 1,153 935 277
Corporate(3)................................................ 3,891 1,358 730
------ ------ ------
Consolidated................................................ $9,687 $4,501 $1,874
====== ====== ======
</TABLE>
--------------------
(1) Includes TigerTel's depreciation and amortization of $1.2 million and
$0.5 million in 1999 and 1998.
(2) Includes depreciation and amortization from the Communications
Infrastructure group of companies, the majority of which were disposed
of in the fourth quarter of 1999. Depreciation and amortization for
these disposed entities, included above amounted to $4.8 million, $4.7
million and $0.7 million in 1999, 1998 and 1997.
(3) Includes consolidation adjustments of $2.9 million, $1.2 million and
$0.7 million, in 1999, 1998 and 1997, respectively.
Changes during the years were:
- Telephony depreciation and amortization increased in 1999 due to
TigerTel's acquisition of Contour in May 1999 as well as amortization of
goodwill of companies acquired by TigerTel at the beginning of 1999.
- Network infrastructure increased in 1999 due to the two acquisitions
completed in the second quarter of 1999.
- Application technology increased in 1999 by $1.1 million or 91.7% due to
the acquisition completed in the second quarter of 1999 and increases in
depreciable assets in 1999. 1998's increase was due to the acquisition of
Signature.
- IntelleSale.com increased in 1999 due to the acquisition of Bostek and
the increase in depreciable assets in 1999. 1998's increase over 1997 was
due to the increase in depreciable assets.
- Non-core both increased in 1999 due to the acquisition of depreciable
assets, primarily by Ground Effects, as part of its ongoing automotive
manufacturing programs.
On an annual basis, goodwill amortization will be approximately $3.5
million.
RESTRUCTURING AND UNUSUAL CHARGES
As part of the reorganization of Applied Digital's core business in the
first quarter of 1999, Applied Digital implemented a restructuring plan. The
restructuring plan includes the exiting of selected lines of business within
Applied Digital's Telephony and Applications business groups, and the associated
write-off of assets. The restructuring charge of $2.2 million includes asset
impairments, primarily software and other intangible assets, of $1.5 million,
lease terminations of $0.5 million, and employee separations of $0.2 million. In
addition, during the first quarter of 1999, as part of Applied Digital's core
businesses reorganization, Applied Digital realigned certain operations within
the Telephony division and recognized impairment charges and other related costs
of $0.3 million.
In 1997, as part of the disposition of certain assets within the Telephony
group, Applied Digital incurred asset impairment and lease termination and
employee separation costs of $1.7 million.
48
<PAGE> 58
GAIN ON SALE OF SUBSIDIARY
In November 1999, TigerTel received an all cash bid for all of its
outstanding common shares from AT&T Canada, Inc. Applied Digital entered into a
lock-up agreement with AT&T to tender the approximately 65% of the outstanding
shares Applied Digital owned, tendered Applied Digital shares and, on December
30, 1999, AT&T purchased all of the shares tendered. Applied Digital recorded a
pre-tax gain in the fourth quarter of 1999 of approximately $20.1 million and
received gross proceeds of approximately $31.3 million in January 2000.
INTEREST INCOME AND EXPENSE
Interest income was $0.6 million, $0.4 million and $0.2 million, for 1999,
1998 and 1997, respectively. Interest income is earned primarily from short-term
investments and notes receivable.
Interest expense was $3.8 million, $1.7 million and $1.0 million for 1999,
1998 and 1997, respectively. Interest expense is a function of the level of
outstanding debt and is principally associated with revolving credit lines,
notes payable and term loans.
INCOME TAXES
Applied Digital had effective income tax rates of 34.5%, 33.6% and 36.8% in
1999, 1998 and 1997, respectively. Differences in the effective income tax rate
from the statutory federal income tax rate arise from non-deductible goodwill
amortization associated with acquisitions, state taxes net of federal benefits
and the reduction of valuation allowances related to net operating loss
carryforwards.
EXTRAORDINARY LOSS
In 1999 Applied Digital retired its line of credit with State Street Bank
and Trust Company and refinanced it with IBM Credit Corporation. Deferred
financing fees associated with the State Street Bank and Trust agreement were
written off during the second quarter of 1999. The total amount of the write-off
recorded as an extraordinary loss was $0.2 million, net of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, cash and cash equivalents totaled $5.9 million, an
increase of $0.8 million, or 15.7% from $5.1 million at December 31, 1999.
Applied Digital utilizes a cash management system to apply excess cash on hand
against its revolving credit facility under which Applied Digital had
availability of $23.5 million at March 31, 2000, up from $11.8 million at
December 31, 1999. Cash used by operating activities totaled $13.0 million in
the first three months of 2000 as compared to cash provided by operating
activities of $0.4 million in the first three months of 1999. In the first
quarter of 2000, cash of $5.9 million was used to acquire inventory, $3.0
million was used to increase prepaid expenses and $9.5 million was used to
reduce accounts payable and accrued expenses. Partially offsetting these uses
was cash of $4.5 million received from the collection of accounts receivable. In
the first quarter of 1999, excluding assets and liabilities acquired or assumed
in connection with acquisitions, cash provided was due to increases in accounts
payable and accrued expenses, after adjusting for the net loss and for non-cash
expenses.
As of December 31, 1999, cash and cash equivalents totaled $5.1 million, an
increase of $0.6 million, or 13.3% from $4.5 million at December 31, 1998.
Applied Digital's revolving credit facility had availability of $11.8 million at
December 31, 1999, up from $3.8 million at December 31, 1998. Cash used in
operating activities totaled $14.3 million, $2.6 million and $3.3 million in
1999, 1998 and 1997, respectively. In all three years, excluding assets and
liabilities acquired or assumed in connection with acquisitions, cash used was
due to increases in accounts and unbilled receivables, inventories, prepaid
assets and accounts payable and accrued expenses, after adjusting for net income
and for non-cash expenses.
"Due from buyer of divested subsidiary" at December 31, 1999 represents the
net proceeds due from AT&T Canada, Inc. on the sale of TigerTel, Inc. This
amount was paid in January 2000, and Applied Digital applied the proceeds
against its domestic line of credit.
49
<PAGE> 59
Accounts and unbilled receivables, net of allowance for doubtful accounts,
decreased by $4.6 million or 8.8% to $47.6 million at March 31, 2000 from $52.2
million at December 31, 1999. This decrease was primarily attributable to
collection of additional sales generated in the fourth quarter of 1999.
Inventories increased by $5.9 million or 14.6% to $46.3 million at March
31, 2000 from $40.4 million at December 31, 1999. This increase was primarily
attributable to large inventory purchases at its IntelleSale.com unit at the end
of the quarter to take advantage or favorable pricing offered by vendors at the
end of the quarter.
Prepaid expenses and other current assets increased by 50.0% or $3.0
million to $9.0 million at March 31, 2000 from $6.0 million at December 31,
1999. This increase is attributable to increased prepayment of expenses,
primarily insurance, which is being expensed over the periods benefited.
"Due to shareholders of acquired subsidiary" decreased by $5.0 million or
33.3% to $10.0 million at March 31, 2000 from $15.0 million at December 31,
1999. This balance represents the deferred purchase price due to the Bostek
sellers. $5.0 million of this amount was paid in January 2000.
Accounts payable decreased by $2.9 million or 9.8% to $26.6 million at
March 31, 2000 from $29.5 million at December 31, 1999. This decrease was
primarily attributable to a reduction of higher payables incurred in the fourth
quarter of 1999 to support year end sales.
Accrued expenses decreased by $6.2 million or 35.0% to $11.5 million at
March 31, 2000 from $17.7 million at December 31, 1999 due to the payment of
expenses accrued in the fourth quarter of 1999 during the first quarter of 2000.
Other current liabilities represent accrued earnout payments of $4.7
million at March 31, 2000 and $2.7 million at March 31, 1999.
Investing activities provided cash of $20.8 million in the first three
months of 2000 and used cash of $3.3 million in the first three months of 1999.
In the first quarter of 2000, cash proceeds of $31.3 million were collected on
the sale of TigerTel, while cash of $6.6 million was used in connection with
acquired businesses, $3.0 million was spent to acquire property and equipment,
$0.3 million was advanced against notes receivable and $0.6 million was used to
increase other assets. In the first quarter of 1999, cash of $2.4 million was
used to acquire businesses, $0.8 million was spent to acquire property and
equipment, $0.3 million was used to increase other assets, while $0.1 million
was received from the collection of notes receivable.
Investing activities used cash of $27.2 million in 1999 and $6.8 million in
1998 and provided cash of $4.2 million in 1997. In 1999, cash of $17.9 million
was used to acquire businesses, $7 million was spent to acquire property and
equipment, $3 million was used principally to increase assets such as notes
receivable and other assets, while $0.7 million was received from the sale of
property and equipment. In 1998, $7.4 million was used principally to increase
assets such as notes receivable, property and equipment and other assets, while
$0.5 million was received from the sale of assets. In 1997, sources of cash
primarily included $4.0 million of cash acquired in acquisitions and $2.3
million in proceeds from the sale of assets. These amounts were partially offset
by payments of $2.2 million for property and equipment and other assets.
Cash of $7.1 million and $1.0 million was used by financing activities in
the first three months of 2000 and 1999, respectively. In the first quarter of
2000, $14.3 million was used to repay notes payable, $2.4 million was repaid and
$4.6 million was borrowed on long-term debt, while $5.0 million was obtained
through the issuance of common shares. In the first quarter of 1999, $2.3
million was borrowed and $0.3 million was repaid on long-term debt, while $2.9
million was used to repay borrowings under notes payable and $0.1 million was
used for other financing costs.
Cash of $42.2 million, $6.4 million and $6 million was provided by
financing activities in 1999, 1998 and 1997, respectively. In 1999, $54 million
was obtained through long-term debt and $5.2 million was obtained through the
issuance of common shares. Uses of cash in 1999 included net repayments of $10.9
million and $3.4 million against long-term debt and notes payable, respectively,
and $2.8 million for other financing costs. In 1998, $13.2 million was obtained
through borrowings under notes payable and long-term debt and $1.4 million was
obtained through the issuance of common shares. Uses of cash in 1998 included
repayments of
50
<PAGE> 60
$6.9 million on long-term debt, $0.9 million for the redemption of preferred
stock and $0.3 million for the repurchase of common stock. In 1997, $9.4 million
of cash was provided primarily through the issuance of common stock and from
long-term debt proceeds. In 1997, $3.3 million of cash was used to pay down
notes payable and long-term debt.
One of its stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength. However, due
to Applied Digital's significant growth rate, its investment needs have
increased. Consequently, Applied Digital will continue, in the future, to use
cash from operations and will continue to finance this use of cash through
financing activities such as the sale of common stock and/or bank borrowing, if
available.
In August 1998, Applied Digital entered into a $20 million line of credit
with State Street Bank and Trust Company secured by all of its domestic assets
at the prime lending rate or at the London Interbank Offered Rate, at Applied
Digital's discretion. In February 1999, the amount of the credit available under
the facility was increased to $23 million. On May 25, 1999, Applied Digital
entered into a Term and Revolving Credit Agreement with IBM Credit Corporation
(the "IBM Agreement") and, on May 26, 1999, Applied Digital repaid the amount
due to State Street Bank and Trust Company. The IBM Agreement, as amended and
restated on July 20, 1999 and January 27, 2000, provides for: (a) a revolving
credit line of up to $33.855 million, designated as follows: (i) a U.S.
revolving credit line of up to $30 million, and (ii) a Canadian revolving credit
line of up to $3.855 million, (b) a term loan A of up to $22 million, (c) a term
loan B of up to $36.405 million and (d) a Canadian term loan C of up to $2.740
million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and is
payable in full on May 25, 2002. The U.S. revolving credit line bears interest
at the 30-day LIBOR rate plus 1.75% to 1.90% depending on Applied Digital's
leverage ratio, and the Canadian revolving credit line bears interest at the
base rate as announced by the Toronto-Dominion Bank of Canada each month plus
0.1707% to 0.3207%, depending on Applied Digital's leverage ratio. As of March
31, 2000, the LIBOR rate was approximately 5.9% and approximately $10.3 million
was outstanding on the revolving credit line which is included in notes payable.
Term loan A, which was used to pay off State Street Bank and Trust Company,
bears interest at the 30-day LIBOR rate plus 1.75% to 1.90%, is amortized in
quarterly installments over six years and is repayable in full on May 25, 2002.
As of March 31, 2000, approximately $19.2 million was outstanding on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75% to 1.90%, is amortized in quarterly installments
over six years and is repayable in full on May 25, 2002. As of March 31, 2000,
approximately $23.3 million was outstanding on this loan.
Term loan C, which was used by Applied Digital's Canadian subsidiary to pay
off its bank debt, bears interest at the base rate as announced by the
Toronto-Dominion Bank of Canada each month plus 0.1707% to 0.3207%, is amortized
in quarterly installments over six years and is repayable in full on May 25,
2002. As of March 31, 2000, Toronto-Dominion's rate was approximately 6.75% and
approximately $2.4 million was outstanding on this loan.
The IBM Agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the declarations
and payment of dividends. As of March 31, 2000, Applied Digital was in
compliance with, or had received waivers for compliance with, all debt
covenants.
As of June 26, 2000, 52,982,886 shares of Applied Digital common stock were
outstanding. In addition, 503 shares of Applied Digital common stock were
reserved for issuance in exchange for certain exchangeable shares issued by its
Canadian subsidiary. Since January 1, 2000, Applied Digital has issued an
aggregate of 4,723,263 shares of Applied Digital common stock, of which
1,942,549 shares of Applied Digital common stock were issued to acquire put
options and as earnout payments in acquisitions, 45,925 shares were issued in
exchange for the exchangeable shares of its Canadian subsidiary and the
exchangeable shares of its former Canadian subsidiary, TigerTel Services,
Limited, 983,793 shares of common stock were issued for acquisitions, 1,291,090
shares were issued upon the exercise of options, 317,500 shares were issued upon
the exercise of warrants, and 142,406 shares were issued under Applied Digital's
employee stock purchase program.
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Applied Digital has entered into earnout arrangements with certain sellers
under which they are entitled to additional consideration for their interests in
the companies they sold to Applied Digital. Under these agreements, assuming
that all earnout profits are achieved, Applied Digital is contingently liable
for additional consideration of approximately $8.8 million in 2001, $3.0 million
in 2002 and $2.0 million in 2004, of which $1.0 million would be payable in cash
and $12.8 million would be payable in stock.
Applied Digital has entered into put options with the sellers of those
companies in which Applied Digital acquired less than a 100% interest. These
options require Applied Digital to purchase the remaining portion it does not
own after periods ranging from four to five years from the dates of acquisition
at amounts per share generally equal to 10% to 20% of the average annual
earnings per share of the subsidiary company before income taxes for a two-year
period ending on the effective date of the put multiplied by a multiple ranging
from four to five. The contingent amounts for earnouts and put options have not
been recorded as liabilities in the financial statements as it is uncertain
whether the contingencies will be met. In June 2000, Applied Digital entered
into agreements to issue, in the aggregate, 2,252,070 shares of its common
stock, 1,114,864 of which have been issued, to acquire $10.0 million in put
options and to settle earnout payments in certain companies owned by its
subsidiary IntelleSale.com. These agreements superseded agreements entered into
during the second quarter of 1999.
Applied Digital's sources of liquidity include, but are not limited to,
funds from operations and funds available under the IBM Agreement. Applied
Digital may be able to use additional bank borrowings, proceeds from the sale of
non-core businesses, proceeds from the sale of common and preferred shares,
proceeds from the exercise of stock options and warrants, and the raising of
other forms of debt or equity through private placements or public offerings.
Applied Digital cannot assure you, however, that these options will be
available, or if available, on favorable terms. Its capital requirements depend
on a variety of factors, including but not limited to, the rate of increase or
decrease in its existing business base; the success, timing, and amounts of
investment required to bring new products on-line; revenue growth or decline;
and potential acquisitions. Applied Digital believes that it has the financial
resources to meet its future business requirements for at least the next twelve
months.
OUTLOOK
Applied Digital's objective is to continue to grow each of its operating
segments internally and through acquisitions, both domestically and abroad.
Applied Digital's strategy has been, and continues to be, to invest in and
acquire businesses that complement and add to its existing business base.
Applied Digital has expanded significantly through acquisitions in the last
twelve months and continues to do so. Applied Digital's financial results and
cash flows are substantially dependent on not only its ability to sustain and
grow its existing businesses, but to continue to grow through acquisition.
Applied Digital expects to continue to pursue its acquisition strategy in 2000
and future years, but there can be no assurance that its management will be able
to continue to find, acquire, finance and integrate high quality companies at
attractive prices.
Applied Digital is constantly looking for ways to maximize shareholder
value. As such, Applied Digital is continually seeking operational efficiencies
and synergies within each of its operating segments as well as evaluating
acquisitions of businesses and customer bases which complement its operations.
These strategic initiatives may include acquisitions, raising additional funds
through debt or equity offerings, or the divestiture of non-core business units
that are not critical to Applied Digital's long term strategy or other
restructuring or rationalization of existing operations. Applied Digital will
continue to review all alternatives to ensure maximum appreciation of its
shareholders' investments. There can be no assurance, however, that any
initiatives will be found, or if found, that they will be on terms favorable to
Applied Digital.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The statement is effective for fiscal years
commencing after June 15, 2000 or January 1, 2001 for Applied Digital. Applied
Digital does not believe that
52
<PAGE> 62
FAS 133 will have a material impact on Applied Digital's results of operations,
cash flows and financial condition.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101). This Staff Accounting Bulletin
summarizes certain of the staff's views on applying generally accepted
accounting principles to revenue recognition in financial statements. Applied
Digital will be required to adopt this statement no later than the second
quarter of 2000. Applied Digital has completed analysis of its revenue
recognition policies and compliance with SAB 101 and has determined that it is
in compliance with SAB 101.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With Applied Digital's Canadian and United Kingdom subsidiaries, Applied
Digital has operations and sales in various regions of the world. Additionally,
Applied Digital may export and import to and from other countries. Applied
Digital's operations may therefore be subject to volatility because of currency
fluctuations, inflation and changes in political and economic conditions in
these countries. Sales and expenses may be denominated in local currencies and
may be affected as currency fluctuations affect Applied Digital's product prices
and operating costs or those of its competitors.
Applied Digital presently does not use fluctuations in interest rates,
foreign exchange rates, fluctuations in commodity prices or other market risks,
nor does Applied Digital invest in speculative financial instruments. Borrowings
under the IBM Agreement are at the London Interbank Offered Rate which is
adjusted monthly. Applied Digital's interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since the majority of
Applied Digital's investments are in short-term investments.
Due to the nature of Applied Digital's borrowings and its short-term
investments, Applied Digital has concluded that there is no material market risk
exposure and, therefore, no quantitative tabular disclosures are required.
53
<PAGE> 63
DESTRON FEARING CORPORATION
Destron Fearing Corporation develops, manufactures, and markets a broad
line of electronic and visual identification devices for the companion animal,
livestock, laboratory animal, fish and wildlife markets worldwide. Destron's
radio frequency identification products consist of miniature electronic
microchips, readers and injection systems. Destron holds patents on its
syringe-injectable microchip, which is encased in a glass or glass-like material
capsule and incorporates an antenna and a microchip with a unique permanent
identification code for the animal in which it is implanted. An associated
reader device uses radio frequency to interrogate the microchip and read the
code. The microchip is typically injected under the skin using a hypodermic
syringe, without requiring surgery. Destron's visual identification products,
such as numbered ear tags, are marketed under the Fearing brand name,
principally to livestock producers.
Destron's strategy has been to position itself as the leader in the growing
market for electronic animal identification. Governments and consumers have seen
the need to permanently identify animals in order to, among other things,
establish national rabies programs and return lost pets to their owners. Several
European countries now require some form of permanent identification for cats
and dogs.
In addition to developing its implantable electronic identification device
and scanner, Destron has established strategic marketing partnerships for the
companion animal market. In the United States, Destron's marketing partner is
Schering-Plough, which markets Destron's products in connection with its Home
Again(TM) pet identification system. In Europe, Destron's marketing partners are
Merial and AnimalCare Ltd., in Canada, Anitech, in Australia, AEID and, in
Japan, Dainippon Pharmaceutical.
In addition to pursuing the market for permanent identification of
companion animals, Destron leverages its traditional core business of visual
identification products to promote permanent electronic identification of
livestock. As the size of farms has increased, automated, permanent individual
identification has become a necessary tool for managing large livestock herds.
Destron believes that implantable electronic identification devices will be used
in an increasing number of programs to manage herds, to reduce the loss of
livestock, to implement feeding programs, and to track, control and eradicate
diseased livestock. The U.S. Department of Agriculture ("USDA") has given
clearance for implanting of microchips in food animals, enabling Destron to
market its electronic identification products to the United States livestock
market. Implantation of Destron's electronic microchips was previously cleared
by the U.S. Food and Drug Administration ("FDA"), subject to a determination by
the USDA as to anatomical implant sites in livestock animals. The USDA has now
identified four implantation sites, all in inedible tissue, where it has been
demonstrated there will be minimal or no migration of the implanted device.
Destron is now able to actively promote its implantable system in the United
States, and anticipates that the USDA clearance will result in increased use of
microchips in connection with disease control programs. Destron is currently
involved in a pilot livestock identification program in the private sector and
has begun working with large cattle and hog producers to develop appropriate
systems for their use. In connection with the recent incidence of "mad cow
disease" in Europe, permanent identification and tracking of food animals has
assumed new importance in Europe.
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SELECTED FINANCIAL DATA OF DESTRON
Destron's selected statement of operations financial data for the years
ended September 30, 1997, 1998 and 1999 as set forth below has been derived from
the audited information included in the Destron annual report on Form 10-K for
the year ended September 30, 1999. Destron's selected balance sheet financial
data as of September 30, 1998 and 1999 as set forth below has been derived from
the audited information included in the Destron annual report on Form 10-K filed
for the year ended September 30, 1999. The selected statement of operations
financial data for the years ended September 30, 1995 and 1996 has been derived
from audited financial statements which do not appear in this joint proxy
statement/prospectus. The selected balance sheet financial data as of September
30, 1995, 1996 and 1997 has been derived from financial statements which do not
appear in this joint proxy statement/prospectus. The selected historical
financial data as of and for the six months ended March 31, 1999 and 2000 are
derived from unaudited financial statements included in this joint proxy
statement/prospectus which, in the opinion of management, include all normal and
recurring adjustments necessary to present fairly the financial position and
results of operations for those periods. The operating results for the six
months ended March 31, 2000 are not necessarily indicative of the operating
results to be expected for the full year. The following historical financial
data is only a summary and should be read in conjunction with the information
contained in the reports on Form 10-K and Form 10-Q as filed by Destron and also
in conjunction with the other information incorporated by reference in this
document. See "Where You Can Find More Information" on pages 93 through 94.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- ----------------
1999 1998 1997 1996 1995 2000 1999
------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue............................ $18,548 $12,601 $12,889 $10,830 $16,234 $10,798 $9,511
Gross profit............................. 7,552 3,353 4,311 2,296 5,745 1,992 1,391
Income (loss) from operations............ 3,154 (1,980) (772) (3,855) 695 1,949 1,348
Extraordinary gain....................... 472 -- -- -- -- -- 472
Net income (loss)........................ 3,546 (1,980) (772) (3,855) 661 1,949 1,820
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------------------------------- ----------------
1999 1998 1997 1996 1995 2000 1999
------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................ $ 5,449 $ 1,407 $ 5,566 $ 1,264 $ 893 $ 7,757 $5.449
Total assets............................... 11,146 11,563 12,682 13,022 13,496 13,165 11,146
Current liabilities........................ 1,929 6,170 2,923 7,038 7,111 1,754 1,929
Long-term obligations, net of current
portion.................................. 796 677 3,121 1,688 281 651 796
Shareholders' equity....................... 8,421 4,716 6,638 4,296 6,104 10,760 8,421
</TABLE>
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<PAGE> 65
DESTRON'S MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Net income for the second quarter of fiscal year 2000 was $1,397,000
compared to $1,581,000 in the prior year's second quarter. Last year's amount
included an extraordinary gain of $472,000 related to a debt restructuring.
Year-to-date net income of $1,949,000 was 45% above same period last year,
excluding the $472,000 extraordinary gain. The increase in net income for the
quarter and year-to-date, excluding the extraordinary gain, was primarily the
result of increased sales of electronic products.
Net sales for the quarter ended March 31, 2000 of $6,615,000 was 21% higher
than the $5,449,000 reported for the comparable quarter of last year. In the
second quarter of fiscal 2000, electronic product sales grew 36% compared to the
same quarter last year primarily due to increased sales to the fishery markets.
Visual identification product revenue decreased 2% from the comparable quarter
of fiscal 1999. For the six month period, revenue was $10,798,000, or 14% above
comparable fiscal 1999 revenue. The increase was due to increased electronic
product sales, particularly in the fishery and European companion animal
markets.
Cost of sales was $3,814,000 for the second quarter and $6,339,000 for the
six month year-to-date period, compared to $3,098,000 and $7,730,000 for the
respective prior year periods. The gross profit margin for the second quarter
was 42% compared to 43% for the same quarter in fiscal 1999. The fiscal 2000
year-to-date gross margin was 41% compared to 40% for the same period last year.
Selling, general and administrative expenses for the second quarter of
fiscal 2000 were $1,110,000, compared to $856,000 in the second quarter of
fiscal 1999. For the six month period ended March 31, 2000, these expenses were
$1,977,000, or 15% above last year's comparable period. The increase was
primarily due to increased market development and investor relations expenses
compared to last year. Research and development expense for the second quarter
and year-to-date was $261,000 and $486,000, respectively, compared to $219,000
and $402,000 for the same periods last year. The higher research and development
expense was due to increased use of outside consultants to support new product
development activities.
Interest and other expenses of $3,000 in the second quarter of fiscal 2000
was $120,000 lower than the second quarter of fiscal 1999 due to lower interest
expense resulting from lower debt levels.
Destron derives a significant portion of its revenue from export sales. The
gross profit and cash requirements of these sales do not vary materially from
the requirements of its domestic sales.
Fiscal 1999 Compared to Fiscal 1998
Revenue in fiscal 1999 of $18,548,000 was 47% higher than fiscal 1998
revenues of $12,601,000. Sales of electronic products increased 85% to
$12,496,000. Sales to the international companion pet market grew more than
$2,000,000 as a result of broad acceptance of the microchip technology in the
United Kingdom and legislation requiring positive identification in other
countries. Sales in the fish and wildlife markets also increased more than
$2,500,000 as Destron successfully introduced its new high performance microchip
readers for specialized high speed data acquisition. Sales to the North American
companion pet market also grew by approximately $500,000. Revenue from visual
identification products was up 3% from fiscal 1998 primarily due to a favorable
product mix.
Gross profit as a percent of revenue was 41% in fiscal 1999 compared to 27%
in fiscal 1998. The higher margin in fiscal 1999 resulted from a significant
reduction in scrap and rework costs, relative to fiscal 1998, when significant
costs were incurred to improve the operating performance of electronic readers
through replacements and upgrades. In addition, the higher volumes and favorable
product sales mix also contributed to the increased margin.
Selling, general and administrative expenses decreased to $3,228,000 in
fiscal 1999 compared to $3,774,000 in fiscal 1998. The reduction was primarily
due to savings associated with personnel reductions and reduced legal expenses
related to patent litigation.
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<PAGE> 66
Research and development expenses were $802,000 in fiscal 1999 versus
$1,017,000 in fiscal 1998. The lower spending in fiscal 1999 resulted primarily
from reduced use of outside engineering and consulting resources.
Interest and other expense was $368,000 in fiscal 1999 compared to $542,000
in fiscal 1998. The lower expense in fiscal 1999 was primarily due to reduced
interest expense associated with the reductions in long term debt and line of
credit usage.
In the second quarter of fiscal 1999, Destron recorded an extraordinary
gain of $472,000 resulting from restructuring a vendor note. In a transaction
involving the sale of the note to a third party, the debt was reduced as of
March 1, 1999 to $1,529,000 at 9.25% interest from $2,352,000 at 11.25%
interest. In connection with this restructuring, Destron also issued five-year
warrants to the noteholder to purchase 275,000 shares of Destron common stock at
$1.00 per share. Net of costs directly associated with the restructuring, the
total gain on the transaction was $693,000, of which $221,000 will be recognized
in the form of lower interest expense over the life of the note. All amounts
outstanding under this note were paid in full in May 2000.
Fiscal 1998 Compared to Fiscal 1997
Revenue in fiscal 1998 of $12,601,000 was 2% lower than the $12,889,000
recorded in fiscal 1997. Overall, revenues from electronic products declined 6%
in fiscal 1998 although gains occurred in sales to the United States fisheries
industry and the United Kingdom companion animal market. These increases were
offset by lower shipments to the European continent and to Japan. Revenue from
visual identification products was up 3% from fiscal 1997 primarily because of
increased unit sales.
Gross profit as a percentage of revenue was 27% compared to 33% in the
prior year. The lower margins in fiscal 1998 resulted from rework costs incurred
to improve the operating performance of electronic readers through replacement
and upgrades of components. Additionally, costs increased because of a program
to exchange, without charge, electronic readers at certain animal shelters in
the United States. The margins reported from the sale of visual identification
products also declined in fiscal 1998 because of changes in the mix of products
sold and lower manufacturing efficiency.
Selling, general and administrative expenses increased to $3,774,000 in
fiscal 1998 from $3,651,000 in fiscal 1997. Selling expenses increased during
the year as a result of additions to the sales staff and increased domestic and
international travel expense. Such increases were offset by lower general and
administrative expenses resulting from reduced investor relations activities and
lower legal fees, primarily related to reduced patent litigation costs.
Research and development expenses were $1,017,000 in fiscal 1998 compared
to $870,000 in the previous year. The higher spending in fiscal 1998 primarily
resulted from the salaries of new personnel and increased use of outside
engineering resources that were retained to develop enhanced scanning products
for the United States fisheries industry.
Interest and other expenses of $542,000 remained relatively unchanged
between fiscal 1998 and 1997.
Destron derives a significant portion of its revenue from export sales. The
gross profit and cash requirements of these sales do not vary materially from
the requirements of its domestic sales.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Destron has utilized financing sources such as public and
private equity offerings and borrowings from financial institutions and
individual investors to fund its operating activities. Destron believes that its
cash on hand at March 31, 2000 and funds available under its existing credit
agreement combined with funds generated by operations will provide Destron with
adequate liquidity and capital resources for working capital and other cash
requirements for at least the next twelve months. Also see discussion below
regarding additional liquidity and cash flow considerations.
Destron's operating activities provided net cash of $178,000 during the six
months ended March 31, 2000, principally relating to net income of $1,949,000
offset by an increase in accounts receivable of $2,386,000.
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Destron's investing activities used $155,000 for the purchase of fixed
assets during the six month period ended March 31, 2000. Financing activities
provided net cash of $28,000 during the same period. The funds were provided by
the exercise of stock options and were used primarily to reduce long term debt
obligations.
As of March 31, 2000, Destron had net working capital of $7,757,000,
compared to $5,449,000 at September 30, 1999. Destron's balance sheet as of
March 31, 2000 reflected a current ratio of 5.4 to 1.
Destron has a $3,000,000 revolving credit facility with Coast Business
Credit, a division of Southern Pacific Thrift and Loan Association of Los
Angeles, California. The credit facility is secured by all of Destron's
receivables, inventories, investment property, equipment and general
intangibles, as defined in the credit agreement. Borrowings under the facility
are payable on demand and are limited to a portion of eligible accounts
receivable and inventories, as defined in a borrowing formula in the agreement.
The agreement has been renewed through June 30, 2001, with provisions for
extension of the maturity date. Interest on the credit facility is paid monthly
at a rate equal to the greater of 8% per annum or prime plus 1 3/4%. At March
31, 2000, Destron had no outstanding borrowings under the facility and had a
maximum availability under the borrowing formula of $3,000,000.
In June 1997, Destron completed an agreement with a vendor whereby
$4,290,000 of a trade payable was converted into a promissory note. In March
1999, the note was restructured, with a $472,000 extraordinary gain recorded in
the second quarter of fiscal 1999. In May 1999, Destron made a one-time payment
of $600,000 to further accelerate payment of the note. All amounts outstanding
under this note were paid in full in May 2000.
YEAR 2000
Destron evaluated the Year 2000 preparedness of its customers, suppliers
and service providers by soliciting representations and assurances from such
third parties. Through the date of this joint proxy statement/prospectus,
Destron has not experienced any significant difficulties with these third
parties. However, if these parties to experience future Year 2000 compliance
issues, Destron's business, financial condition and results of operations could
be adversely affected. With regard to its manufactured electronic products,
Destron continues to believe that its embedded technologies are Year 2000
compliant.
Destron has prepared contingency plans to address any remaining exposures
to Year 2000 matters. There can be no assurance that these plans will
successfully mitigate any residual Year 2000 risks.
DIGITAL ANGEL.NET INC.
In December 1999, Applied Digital announced that it had acquired the patent
rights to a miniature digital transceiver -- which it has named Digital
Angel -- implantable within the body. While still in the development stage,
Applied Digital believes this technology may be available for a variety of
purposes, such as providing a tamper-proof means of identification for enhanced
e-commerce security, locating lost or missing individuals, tracking the location
of valuable property and pets, and monitoring the medical conditions of at-risk
patients. It is anticipated that the implantable device will send and receive
data and would be able to use GPS (Global Positioning Satellite) technology for
continuous tracking.
The proposed merger of Digital Angel and Destron will result in Destron
becoming a subsidiary of Applied Digital operating under the "Digital Angel.Net
Inc." name.
The combined company will be engaged in the business of developing and
marketing electronic devices for the identification and tracking of animate and
inanimate objects and the associated collection, processing, storage and
retrieval of related information using wireline and wireless transmission
technologies.
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MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICES
Applied Digital common stock is listed on The Nasdaq National Market under
the symbol "ADSX." Destron common stock trades on The Nasdaq SmallCap Market
under the symbol "DFCO." The following table shows, for the periods indicated,
the high and low sales prices per share for Applied Digital and Destron common
stock based on published financial sources.
<TABLE>
<CAPTION>
APPLIED DIGITAL DESTRON
---------------- --------------
HIGH LOW HIGH LOW
------- ------ ------ -----
<S> <C> <C> <C> <C>
1998
First Quarter............................................. $ 5.50 $4.03 $ 1.94 $1.56
Second Quarter............................................ 4.88 3.13 2.00 1.31
Third Quarter............................................. 3.50 1.56 1.69 0.63
Fourth Quarter............................................ 5.50 1.53 1.25 0.56
1999
First Quarter............................................. 4.19 2.00 1.25 0.63
Second Quarter............................................ 3.50 2.00 1.75 0.75
Third Quarter............................................. 3.38 1.69 3.13 1.31
Fourth Quarter............................................ 16.00 1.63 2.97 1.88
2000
First Quarter............................................. 18.00 7.00 15.00 2.28
Second Quarter (through June 26, 2000).................... 10.25 2.97 6.88 3.06
</TABLE>
As of June 19, 2000, there were approximately 47,900 beneficial holders of
Applied Digital common stock, including 1,355 holders of record. As of June 19,
2000, there were approximately 4,100 beneficial holders of Destron common stock,
including 295 holders of record.
The following table presents trading information for Applied Digital and
Destron common stock on The Nasdaq National Market and The Nasdaq SmallCap
Market, respectively, on April 24, 2000 (the last full day of trading prior to
the announcement of the definitive agreement of the merger) and June 26, 2000
(the last practicable trading day for which information was available prior to
the date of this joint proxy statement/prospectus). Because the market price of
Applied Digital common stock that Destron stockholders will receive in the
merger may increase or decrease prior to and following the completion of the
merger, we urge you to obtain current market quotations.
<TABLE>
<CAPTION>
APRIL 24, 2000 JUNE 26, 2000
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
Applied Digital............................................. $ 6.28 $ 5.38 $ 3.84 $ 3.53
Destron..................................................... 4.69 4.06 5.47 5.13
</TABLE>
DIVIDENDS
Applied Digital has never paid cash dividends on Applied Digital common
stock. Destron has never paid cash dividends on Destron common stock. The
decision whether to apply legally available funds to the payment of dividends on
Applied Digital common stock will be made by the Applied Digital board of
directors from time to time in the exercise of its business judgment. The IBM
Agreement contains restrictions on the ability of Applied Digital to declare and
pay dividends.
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THE MERGER
The following discussion describes the more important aspects of the merger
and the material terms of the merger agreement, as amended. This description is
qualified in its entirety by reference to the merger agreement, as amended. We
encourage you to read carefully the merger agreement, as amended, in its
entirety, a copy of which is attached as Annex A.
BACKGROUND OF THE MERGER
As a regular part of its business plan, Applied Digital has looked to
acquisitions as an important element of its growth strategy. Applied Digital
regularly receives unsolicited acquisition opportunities. During the third week
of January 2000, Richard Sullivan, Chairman and Chief Executive Officer of
Applied Digital, received a call from a shareholder of Destron to determine
whether Applied Digital would be interested in combining Applied Digital's
subsidiary, Digital Angel, with Destron. Applied Digital began reviewing public
filings and other public information concerning Destron.
During the last week of January 2000, Mr. Sullivan called Randolph
Geissler, President and Chief Executive Officer of Destron. On January 26, 2000,
Applied Digital sent an offer to Destron. On January 28, 2000, Messrs. Sullivan
and Geissler discussed the offer. Mr. Geissler indicated that Destron was not
interested in the offer outlined in the January 26 letter but would like to
continue discussions regarding product commercialization.
During the second week of February 2000, Mr. Sullivan called Mr. Geissler
to reiterate Applied Digital's continued interest in Destron. On February 11,
2000, the board of directors of Destron met and Applied Digital's January 26
offer was discussed. On February 14, 2000, Mr. Geissler called Mr. Sullivan to
convey that the Destron board was not interested in Applied Digital's January 26
offer. On February 17, 2000, Mr. Sullivan called Dennis McCarthy of Roth Capital
Partners, Inc., a financial advisor to Destron, to state that Applied Digital
was willing to increase its offer for Destron. On February 24, 2000, Mr.
Geissler spoke with Mr. Sullivan about the terms of the new offer.
On March 1, 2000, Mr. Sullivan traveled to South St. Paul to meet with the
board of directors of Destron. On the evening of March 1, Mr. Sullivan met with
Mr. Geissler, Thomas Patin, a director of Destron, and Dennis McCarthy of Roth
Capital Partners, Inc. On March 2, 2000, Mr. Sullivan presented Applied
Digital's offer to the board of directors of Destron. A subcommittee of the
Destron board was appointed to negotiate the terms of the letter of intent. On
March 2 and 3, Richard Hoel of Winthrop & Weinstine, P.A., counsel to Destron,
and David Beckett, General Counsel of Applied Digital, negotiated the final
terms of the letter of intent. The letter of intent, together with a
confidentiality agreement, were signed on March 3, 2000.
Beginning March 14, 2000 and continuing until the signing of the merger
agreement, Applied Digital and Destron, together with their respective advisors,
began to review each other's businesses, strategies and documentation produced
in response to due diligence inquiries.
On March 24, 2000, a draft merger agreement and other draft transaction
documents were distributed by Akerman, Senterfitt & Eidson, P.A., counsel to
Applied Digital. Applied Digital and Destron, together with their respective
advisors, began to negotiate the terms of the definitive merger agreement and
other transaction documents. During this period until the signing of the merger
agreement, Applied Digital and Destron, together with their respective advisors,
held discussions regarding the various issues raised by the drafts of the merger
agreement and related documents.
On April 24, 2000, the Applied Digital board and the Destron board met
separately to consider the proposed business combination between the two
companies. At the Destron board meeting, Roth Capital Partners, Inc. and
AgriCapital Securities, Inc., the financial advisors to Destron, delivered their
written opinion to the board that, as of such date and based on and subject to
the assumptions, limitations and qualifications in such opinion, the
consideration to be received by the holders of Destron common stock was fair,
from a financial point of view, to such stockholders. Following a discussion of
the terms of the merger agreement and related documents, Applied Digital's and
Destron's board of directors separately approved the merger and all of the
related transactions and documents. Applied Digital then executed the merger
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documents in Palm Beach, Florida and Destron executed the merger documents in
South St. Paul, Minnesota, and the two companies issued a joint press release
announcing the signing.
Due to market volatility and a decrease in the market price of the common
stock of both companies, the managements of Applied Digital and Destron
discussed amending the merger agreement. In particular, management of both
companies wanted to renegotiate the exchange ratio since the stock prices of
both companies had declined below levels anticipated at the time of the entering
into the merger agreement. The companies' managements agreed upon a fixed
exchange ratio of 1.5 shares of Applied Digital common stock for each share of
Destron common stock. In addition, they agreed to remove the mutual right to
terminate the merger agreement for certain increases or decreases in the market
prices of Applied Digital common stock.
On May 24, 2000, the Destron board of directors met to consider proposed
amendments to the merger agreement. At the meeting, Roth Capital Partners, Inc.
and AgriCapital Securities, Inc. delivered a supplement to their prior written
opinion. The supplemented opinion considered the fixed 1.5 exchange ratio and
provided that, as of such date and based on and subject to the assumptions and
limitations set forth in the supplemented opinion, the consideration to be
received by the holders of Destron common stock was fair, from a financial point
of view, to such stockholders. Following a discussion of the terms of the
proposed amendments, the Destron board agreed to the amendments provided that
certain limitations be placed on Applied Digital's ability to enter into
agreements to acquire other public companies pending the earlier to occur of the
completion of the merger or the termination of the merger agreement. The Applied
Digital management then agreed to the proposed amendments, including the
limitations on Applied Digital's ability to enter certain acquisition agreements
with public companies.
On May 25, 2000, the Applied Digital board of directors met to consider the
proposed amendments. Following a discussion of the terms of the proposed
amendments to the merger agreement, the Applied Digital board approved the
amendments to the merger agreement. Applied Digital then signed the amendment to
the merger agreement in Palm Beach, Florida and Destron signed the amendment in
South St. Paul, Minnesota later on May 25, 2000. A joint press release was
issued the next day announcing the amendment.
RECOMMENDATION OF THE APPLIED DIGITAL BOARD OF DIRECTORS; REASONS OF APPLIED
DIGITAL FOR THE MERGER
THE APPLIED DIGITAL BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS
FAIR TO, AND IN THE BEST INTERESTS OF, APPLIED DIGITAL AND ITS SHAREHOLDERS AND
HAS APPROVED THE MERGER AGREEMENT, AS AMENDED, THE PROPOSAL TO ISSUE SHARES OF
APPLIED DIGITAL COMMON STOCK IN CONNECTION WITH THE MERGER, AND THE PROPOSAL TO
AMEND THE APPLIED DIGITAL SECOND RESTATED ARTICLES OF INCORPORATION.
ACCORDINGLY, THE APPLIED DIGITAL BOARD OF DIRECTORS RECOMMENDS THAT APPLIED
DIGITAL SHAREHOLDERS VOTE FOR THESE PROPOSALS.
The foregoing discussion of the factors considered by Applied Digital's
board of directors is not intended to be exhaustive, but is believed to include
all material factors considered by the Applied Digital board of directors. In
reaching its decision to approve the merger, Applied Digital's board of
directors did not quantify or assign any relative weights to the factors
considered, and individual directors may have given different weights to
different factors.
The board of directors of Applied Digital concluded that the merger and the
issuance of Applied Digital common stock in the merger are in the best interests
of Applied Digital and its shareholders, and determined to recommend that the
shareholders approve the issuance of Applied Digital common stock in the merger.
This decision was based upon several potential benefits of the merger that
Applied Digital's board believes will contribute to the success of the
combination of Digital Angel and Destron. These potential benefits include:
- the acceleration of the opportunities of the Digital Angel technology
through the combination with
Destron, with its current products it offers, establishing a company with
stronger capabilities;
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- the combination of Digital Angel and Destron, with its injectable
microchip technology and its current products in the animal
identification markets, will provide broader product offerings for the
combined company;
- the complementary nature of each company's product offerings as an
extension of the offerings of
the other company;
- increased distribution channels for Applied Digital's products and
services through Destron's
distribution partners;
- increased distribution channels for Destron's products and services
through Applied Digital's base
of customers;
- increased product diversification and penetration of each company's
customer base;
- Destron's position in its market;
- similarities in corporate culture;
- the opportunity for expanded research and development of the combined
product offerings, including
potential new product offerings; and
- an increase in the size of Applied Digital's market.
Applied Digital's board reviewed a number of factors in evaluating the
merger including, but not limited to, the following:
- information concerning Destron's business, financial performance and
condition, operations, technology, intellectual property and management;
- information concerning the financial condition, results of operations and
businesses of Applied Digital and Destron before and after giving effect
to the merger;
- current financial market conditions and historical market prices,
volatility and trading information with respect to Applied Digital common
stock and Destron common stock;
- the belief that the terms of the merger agreement, as amended, and
related agreements are reasonable;
- the impact of the merger on the customers and employees of Applied
Digital and the combined company;
- Applied Digital's management's view as to the integration of Destron; and
- results of the due diligence investigation conducted by Applied Digital's
management, accountants and legal counsel.
Applied Digital's board also considered the terms of the merger agreement
regarding Destron's rights and limits on its ability to consider and negotiate
other strategic transaction proposals, as well as the provision regarding
termination fees. In addition, it was noted to Applied Digital's board that the
merger is expected to be a tax-free transaction and accounted for under the
purchase method of accounting, meaning that significant goodwill and intangible
assets are expected to be created on the books of the combined company as a
result of the merger.
The Applied Digital board also identified and considered a number of
potentially negative factors in the deliberations concerning the merger,
including the following:
- the risk that the potential benefits of the merger may not be realized;
- the risk that the consideration to be paid by Applied Digital to acquire
Destron may exceed the amount of consideration justified based upon the
current earnings level of Destron or based upon the future performance of
Destron;
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- the risk that the market price of Applied Digital's common stock may be
adversely affected by the public announcement of the merger;
- the risk that the merger may not be consummated, notwithstanding the
voting agreement obtained from holders representing beneficial ownership
of approximately 6.3% of Destron's outstanding common stock;
- the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of Digital Angel, key
technical, sales and management personnel might not remain employed by
Digital Angel;
- the challenges of integrating Digital Angel's technology with Destron's
technology and the related challenges; and
- other applicable risks described in this joint proxy statement/prospectus
under "Risk Factors."
Applied Digital's board concluded, however, that, on balance, the merger's
potential benefits to Applied Digital and its shareholders outweighed the
associated risks.
RECOMMENDATION OF THE DESTRON BOARD OF DIRECTORS; REASONS OF DESTRON FOR THE
MERGER
THE DESTRON BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, DESTRON AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT, AS AMENDED. ACCORDINGLY, THE DESTRON BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT DESTRON STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE MERGER.
The Destron board of directors has determined that the merger is fair to,
and in the best interests of, Destron and its stockholders from a financial
point of view. The determination of the Destron board of directors is based upon
its consideration of a number of factors. The following list includes the
material factors the Destron board of directors considered in its evaluation of
the merger:
- Its conclusion that the merger would result in the creation of a combined
company with significantly greater resources, a more integrated and
cohesive product offering, greater geographic presence and capability,
and greater sales and marketing capability than those of Destron alone.
- The merger would result in a combined company that would be able to
compete more effectively in the marketplace with greater resources and a
broader product offerings than Destron alone.
- Its conclusion that Destron and Digital Angel principally have
complementary rather than competing product offerings in the injectable
microchip and animal identification markets and that the combined
companies will provide a broader product offering for Destron's
customers.
- Its conclusion that the combination of Digital Angel and Destron will
significantly improve the purchasing power of the combined company as
compared to either company standing alone, which the Destron board of
directors believes it would result in reduced costs.
- The board's conclusion that the management team of the combined company
will have greater depth of knowledge of the injectable microchip and
animal identification industries and more business experience than that
of either company standing alone.
- Its conclusion that the merger will provide Destron with the potential to
expand the market presence of its products globally through a larger
combined sales force and geographically more extensive sales and
distribution channels.
- Its conclusion that the Destron stockholders will have the opportunity to
participate in the potential growth of Applied Digital after the merger.
In arriving at its unanimous decision to approve the merger agreement, as
amended, the Destron board of directors considering a number of additional
factors, including (i) information concerning Destron's and
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Digital Angel's respective businesses, technologies, operations and products,
including possible future product releases, competitive positions and business
prospects, (ii) the complementary nature of Destron's and Digital Angel's
product lines and technologies, (iii) the complementary locations of Destron's
and Digital Angel's respective facilities, (iv) an analysis of the relative
contributions that Destron's and Digital Angel's respective products and
technologies could make to the future business prospects of the combined
company, (v) reports from management and legal and accounting advisors on the
specific terms of the relevant agreements, including the merger agreement, as
amended, and other matters, (vi) Destron's and Applied Digital's historical
financial information and the results of operations and estimated future
results, as well as current financial market conditions and historical market
prices, trading information for Destron common stock and Applied Digital common
stock, and the consideration to be received by Destron stockholders in the
merger, (vii) the technical marketing knowledge of management of Applied Digital
and Digital Angel, and (viii) the ability of Destron stockholders to
participate, through continued ownership of Applied Digital common stock, in the
enhanced prospects of the combined companies. The Destron board of directors
also considered the financial and other analyses presented by Roth Capital
Partners, Inc. and AgriCapital Securities, Inc., including the oral opinion of
Roth Capital Partners, Inc. and AgriCapital Securities, Inc., subsequently
confirmed in writing, that the consideration to be received by Destron's
stockholders in the merger was fair from a financial point of view as of the
date of such opinion.
The Destron board of directors over a period of time evaluated the
likelihood of realizing superior benefits through alternative business
strategies, which included evaluations of Destron's business and financial
prospects if it were to continue as an independent company. In this connection,
the Destron board of directors considered a number of factors, including market
growth, ongoing industry consolidation, the anticipated emergence of new
products and technologies, Destron's internal product development strategies,
the ability of Destron to access new customers and markets, and the fit of
Destron's technologies and product lines with those of Digital Angel. The
Destron board of directors believes that the technologies, product lines and the
fundamental business and operating strategies of Destron and Applied Digital are
complementary and consistent, that Destron and Applied Digital together can
provide a greater range of products and superior market coverage compared to
Destron standing alone, and that a combination of Destron and Digital Angel
provides a greater potential for enhanced stockholder value than does the
continuation of Destron's operations in their present form. Because the
consideration to be received in the merger consists of Applied Digital common
stock and not cash or other non-equity consideration, the merger will offer the
shareholders of Destron the opportunity to continue to participate in the growth
and appreciation of the business conducted by Destron and Applied Digital.
The Destron board of directors also considered the following:
- The risk that the benefits sought in the merger would not be obtained;
- The risk that the merger would not be consummated;
- The effect of the public announcement of the merger on Destron's sales,
customer relations, operating results and the ability to retain employees and on
the trading price of Destron common stock;
- The substantial management time and effort that will be required to
consummate the merger and integrate the operations of the two companies;
- The effect of the merger on Destron and Digital Angel personnel; and
- Other risks, including those described under "Risk Factors."
In the judgment of the Destron board of directors, the potential benefits
of the merger clearly outweighed the risks inherent in the transaction.
The foregoing discussion of the information and factors considered by the
Destron board of directors is not intended to be exhaustive but is believed to
include the material factors considered by the Destron board of directors. In
view of the wide variety of factors and the amount of information considered,
the Destron board of directors does not find it practical to and did not
quantify, rank or otherwise assign relative weights to the
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specific factors it considered in reaching its decision. The determination was
made after consideration of all of the factors and information taken as a whole.
OPINION OF ROTH CAPITAL PARTNERS, INC. AND AGRICAPITAL SECURITIES, INC.
Destron engaged Roth Capital Partners, Inc. and AgriCapital Securities,
Inc., its advisors, to render an opinion as to the fairness from a financial
point of view to Destron stockholders of the merger with Applied Digital. Roth
and AgriCapital were selected by the Destron board based on their qualifications
and expertise. Roth and AgriCapital rendered the opinion on May 24, 2000 to the
Destron board that based on the qualifications and limitations set forth in the
opinion, the merger is fair to the Destron stockholders from a financial point
of view. No limitations were placed on Roth and AgriCapital by the Destron board
with respect to the investigation made or the procedures followed in preparing
and rendering its opinion.
THE FULL TEXT OF THE OPINION OF ROTH AND AGRICAPITAL IS ATTACHED AS ANNEX B
TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS BY REFERENCE. DESTRON STOCKHOLDERS ARE URGED TO READ THE
OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER
MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY ROTH AND AGRICAPITAL. THE
DISCUSSION OF THE OPINION OF ROTH AND AGRICAPITAL SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO THE FULL TEXT
OF ROTH AND AGRICAPITAL'S OPINION. ROTH'S AND AGRICAPITAL'S OPINION WAS PREPARED
FOR THE DESTRON BOARD OF DIRECTORS AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, TO DESTRON STOCKHOLDERS OF THE MERGER UNDER THE MERGER
AGREEMENT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY DESTRON STOCKHOLDER AS
TO HOW TO VOTE AT THE DESTRON SPECIAL MEETING.
In its review of the merger, and in arriving at its opinion, Roth and
AgriCapital, among other things, reviewed and analyzed:
1. The specific terms of the merger, as embodied by the merger agreement,
as amended;
2. Publicly available information relating to Destron and Applied Digital;
3. Financial and operating information with respect to the business,
operations and prospects of Destron furnished to Roth and AgriCapital by
Destron;
4. Financial and operating information with respect to the business,
operations and prospects of Applied Digital furnished to Roth and AgriCapital by
Applied Digital;
5. Trading history of Destron common stock and Applied Digital common
stock;
6. A comparison of the historical financial results and the present
financial condition of Destron with other publicly-traded companies that Roth
and AgriCapital deemed relevant;
7. A comparison of the financial terms of the merger with the financial
terms of other merger and acquisition transactions that Roth and AgriCapital
deemed relevant; and
8. A comparison of the historical financial results and the present
financial condition of Applied Digital with other publicly-traded companies that
the advisors deemed relevant.
Roth and AgriCapital did not assume responsibility for independent
verification of any of the information concerning Destron or Applied Digital
considered in connection with their review of the merger and, for purposes of
its opinion, Roth and AgriCapital assumed and relied upon the accuracy and
completeness of all such information. Roth and AgriCapital assumed that there
has been no material change in Destron's or Applied Digital's assets, financial
condition, results of operations, business or prospects since the date of its
last financial statements. Roth and AgriCapital relied on advice of counsel and
independent accountants of Destron as to all legal and financial reporting
matters with respect to Destron, the merger and the merger agreement, as
amended. Roth and AgriCapital assumed that the merger will be consummated in a
manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, the Securities Exchange Act of 1934, and all other
applicable federal and state statutes, rules and regulations. In connection with
its opinion, Roth and AgriCapital did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of Destron or
Applied Digital, nor did they conduct a physical inspection of the
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properties and facilities of Destron or Applied Digital. With respect to the
financial forecasts and projections used in their analysis, Roth and AgriCapital
assumed that they reflected the best currently available estimates and judgments
of the expected future financial performance. For the purposes of its opinion,
Roth and AgriCapital also assumed that Destron and Applied Digital were not a
party to any pending transactions, including external financings,
recapitalizations or merger discussions, other than the merger and those in the
ordinary course of conducting their business. Roth's and AgriCapital's opinion
is necessarily based upon market, economic, financial and other conditions as
they existed and can be evaluated as of the date of the opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Roth and AgriCapital analyses set forth below does not purport to be a
complete description of the presentation by Roth and AgriCapital to the Destron
board. In arriving at its opinion, Roth and AgriCapital did not attribute any
particular weight to any analysis or factor considered by them but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Roth and AgriCapital believe that their analyses and the
summary set forth below must be considered as a whole, and that selecting
portions of their analyses without considering all factors and analyses could
create an incomplete view of the processes underlying the analyses set forth in
the Roth and AgriCapital presentation to the Destron board and Roth's and
AgriCapital's opinion. In performing the analyses, Roth and AgriCapital made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Destron and Applied Digital. The analyses performed by Roth and AgriCapital and
summarized below are not necessarily indicative of actual values or actual
future results that may be significantly more or less favorable than suggested
by those analyses. Additionally, analyses relating to the values of the
businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be acquired.
Roth and AgriCapital addressed two issues in its fairness analysis. The
first issue was whether the value offered in the merger is fair. The analysis
uses a range of potential values upon closing, given current market conditions
and expectations. Given that the value received by Destron stockholders was in
the form of Applied Digital common stock, the second issue was whether Applied
Digital common stock was trading at a reasonable price range.
The following is a brief summary of selected financial analyses performed
by Roth and AgriCapital in connection with providing their opinion to the
Destron board on April 24, 2000.
Discounted Cash Flow Analysis: Roth and AgriCapital performed a discounted
cash flow analysis for Destron and Applied Digital using projected financial
performance for fiscal 2000 through fiscal 2009 derived from projections
prepared by Destron and Applied Digital management, respectively. The analysis
aggregated
(1) The present value of the projected free cash flow through 2009; and
(2) The present value of a terminal value in the fiscal year 2010.
A terminal value is the hypothetical value of selling the enterprise in its
entirety at some future date. The terminal values for Destron and Applied
Digital were determined by applying multiples of 6 and 8 times Destron's and
Applied Digital's estimated after tax operating cash flow ("ATOCF") in fiscal
2009. The multiple used for determination of the terminal value is based on a
formula related to the final year's growth rate. Therefore, the multiple used
for Destron of 6 times is less than the multiple used for Applied Digital as
Destron's projected growth rate was lower than was that for Applied Digital.
Destron's ATOCF stream and terminal value were discounted to present values
using a range of discount rates from 17% to 25%. Applied Digital's ATOCF stream
and terminal value were discounted to present values using discount rates of
l7%. The discount rate is related to the estimated cost of capital to the
company which is influenced by several factors including the size of the
company. The discount rate range used for Destron is greater than the discount
rate of 17% used for Applied Digital primarily as a result of the difference in
size of the companies. The discounted cash flow value was calculated for the
enterprise value and then further adjusted for company cash and debt to reflect
the equity value. The discounted cash flow equity value for Destron ranged from
$4.03 per share to $6.14 per share and for Applied Digital was $6.63 per share.
The value range of Destron estimated
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by this method was within or below the per share range anticipated at closing
and supported the fairness of the merger. Similarly, the value of Applied
Digital estimated by this method was at or above the trading value of Applied
Digital and further supported the fairness of the merger.
Analysis of Publicly Traded Comparable Companies: Roth and AgriCapital
compared selected historical financial information of Destron to publicly-traded
companies Roth and AgriCapital deemed to be comparable to Destron. Roth and
AgriCapital examined eight companies. These companies consisted of:
1. Heska Corporation,
2. Identix Incorporated,
3. Idexx Laboratories, Inc.,
4. Neogen Corporation,
5. Printrak International Inc.,
6. Sensormatic Electronics Corporation,
7. Synbiotics Corporation, and
8. Viisage Technology Inc.
Each of these companies is a publicly-traded company in animal products or
electronic security/tracking devices. Comparing the range of potential values
with the share price of the eight companies as of May 23, 2000, using several
standard comparative measures, reveals that Destron's measures are at or above
the median of the eight companies. The ratios highlighted include (i) a net
income multiple using the companies' equity value which is the value of the
total shares outstanding times the recent share price and (ii) revenue and
operating income multiples using the companies' enterprise value which is the
equity value plus the companies' debt outstanding less cash on the balance
sheet. The multiples measured each company's equity value or enterprise value in
relation to each company's revenues, operating income and net income for the
twelve month period ended just prior to the date of the analysis. In the
enterprise value comparisons, Roth and AgriCapital noted the median multiple of
latest twelve months revenue for the publicly-traded companies was 1.3, compared
to Destron's multiple of 2.9 and 4.3 at a potential closing price of $4 and $6
per share, respectively. The median multiple of latest twelve months operating
income for the publicly-traded companies was 13.3, compared to Destron's
multiple of 14.7 and 22.1 at a potential closing price of $4 and $6 per share,
respectively. In the equity value comparison, Roth and AgriCapital noted the
median multiple of latest twelve months net income was 20.2, compared to
Destron's multiple of 23.3 and 35.0 on a fully taxed basis at a potential
closing price of $4 and $6 per share, respectively. As a whole, this analysis
suggests that the potential closing share prices are above, and in some cases
well above, the median multiples of the comparable companies and are, therefore,
relatively favorable to Destron.
Precedent Transaction Analysis: Roth and AgriCapital compared the merger
with selected merger and acquisition transactions in the electronic products and
healthcare services industries from 1998 to the date of the opinion with a
transaction value of $30 million or more and focused on 21 transactions. These
transactions involved the acquisition of:
1. Access Health, Inc.,
2. Altron Incorporated,
3. AMP Incorporated,
4. Benchmarq Microelectronics, Inc,
5. Berg Electronics Corp.,
6. Continental Circuits Corp.,
7. Corcom, Inc.
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8. International Manufacturing Services, Inc.,
9. LBMS,
10. Level One Communications, Incorporated,
11. Oak Industries Inc.,
12. Optek Technology, Inc.,
13. Physician Reliance Network, Inc.,
14. Sheridan Healthcare, Inc.,
15. Sigma Circuits, Inc.,
16. Smart Modular Technologies, Inc.,
17. Unitrode Corporation,
18. Varian Semiconductor Equipment Associates, Inc.,
19. Vitalink Pharmacy Services, Inc.,
20. VLSI Technology, Inc., and
21. Yurie Systems, Inc.
Comparing the value of Destron's potential closing prices of $4 and $6 per
share with the acquisition values realized in the transactions listed, using
several standard comparative measures, reveals that Destron's multiples are at
or above the median multiples of the 21 transactions. The ratios highlighted
include (i) a net income multiple using the companies' equity value which is the
value of the total shares outstanding times the recent share price and (ii)
revenue and operating income multiples using each company's enterprise value
which is the equity value plus the company's debt outstanding less cash on the
balance sheet. The multiples measured the equity value or enterprise value in
relation to each company's revenues, operating income and net income for the
twelve month period ended just prior to the date of the transaction. In the
enterprise value comparisons, Roth and AgriCapital noted the median multiple of
latest twelve months revenue for the publicly-traded companies was 2.0, compared
to Destron's multiple of 2.9 and 4.3 at the potential closing prices of $4 and
$6 per share, respectively. The median multiple of latest twelve months
operating income for the publicly-traded companies was 14.5, compared to
Destron's multiple of 14.7 and 22.1 at the potential closing prices of $4 and $6
per share, respectively. In the equity value comparison, Roth and AgriCapital
noted the median multiple of latest twelve months net income was 23.1, compared
to Destron's multiple of 23.3 and 35.0 on a fully taxed basis at the potential
closing prices of $4 and $6 per share, respectively. As a whole, this analysis
suggests that the potential closing prices of $4 and $6 per share are above, and
in some cases well above, the median multiples of the comparable companies and
are, therefore, relatively favorable to Destron.
Valuation of Components: Roth and AgriCapital estimated a value of Applied
Digital based on the valuation of several major components of its business. The
components were (i) computer, telephony and Internet integration business, (ii)
the Intellesale business, and (iii) the non-core assets. The value of the non-
core assets was estimated to be the net asset value. The value of the other two
components was estimated based on the median multiples of revenue of
publicly-traded companies which were deemed comparable to the two businesses.
Roth and AgriCapital examined 21 companies. These companies were as follows:
1. Braun Consulting, Inc.,
2. Breakaway Solutions, Inc.,
3. Cambridge Technology Partners (Massachusetts), Inc.,
4. Complete Business Solutions, Inc.,
5. Convergent Communications, Inc.,
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6. Diamond Technology Partners Incorporated,
7. Egghead.com, Inc.,
8. Elcom International, Inc.,
9. ELoyalty Corporation,
10. En Pointe Technologies, Inc.,
11. iGATE Capital Corporation,
12. IXL Enterprises, Inc.,
13. marchFIRST, Inc.,
14. Net2Phone, Inc.,
15. Predictive Systems, Inc.,
16. QRS Corporation,
17. Razorfish, Inc.,
18. Renaissance Worldwide, Inc.,
19. Sapient Corporation,
20. Syntel, Inc., and
21. Viant Corporation.
No company or transaction used in the above analyses is identical to the
businesses of Applied Digital or this transaction. Accordingly, the calculation
of an enterprise value and equity value was an approximation based on the
process employed and the valuation of the comparable companies as of May 23,
2000. The median revenue multiple for the comparable companies in the computer,
telephony and Internet integration business was 3.8 times the latest twelve
months revenue for Applied Digital's business unit of $130 million. The median
revenue multiple for the comparable companies in the computer products business
was 0.2 times the latest twelve months revenue for Applied Digital's business
unit of $176.7 million. The net asset value of the non-core assets was $28
million. The resulting enterprise value was approximately $549 million or an
equity value per share of $9.70. This suggests that the value of Applied
Digital's common stock at a level as high as $9.70 is supported by the median
range of comparable companies. The trading price of Applied Digital was below
this level.
The foregoing discussion of Roth's and AgriCapital's opinion is qualified
in its entirety by reference to the full text of such opinion which is attached
as Annex B to this joint proxy statement/prospectus.
Roth and AgriCapital, as part of their investment banking services, are
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, strategic transactions, negotiated
underwritings, private placements and valuations for corporate and other
purposes.
Destron has agreed to pay Roth and AgriCapital a total fee of $1,000,000
upon the completion of the merger and a fairness opinion fee of $100,000 in
connection with the delivery of their fairness opinion. Destron also has agreed
to reimburse Roth and Agricapital for their reasonable out-of-pocket expenses
and to indemnify Roth and AgriCapital, including against liabilities under the
federal securities laws or relating to or arising out of Roth and AgriCapital's
engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the boards of directors of Applied
Digital and Destron regarding approval of the proposals to issue the shares of
Applied Digital common stock pursuant to the merger agreement, as amended, to
increase the number of authorized shares of Applied Digital common stock and to
approve and adopt the merger agreement, as amended, Applied Digital shareholders
and Destron stockholders
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should be aware of interests that some of the officers and directors of Applied
Digital and Destron have in the merger that may be different from your and their
interests as Applied Digital shareholders and Destron stockholders generally.
The boards of directors have recognized such interests and have determined that
such interests neither supported nor detracted from the fairness of the merger
to Applied Digital shareholders and Destron stockholders. No members of the
Destron board of directors are expected to become members of the Applied Digital
board of directors.
Interests in Common Stock. As of June 26, 2000 the executive officers and
directors of Destron beneficially owned an aggregate of 1,576,762 shares of
Destron common stock, which will be treated in the same manner as shares of
Destron common stock held by other stockholders.
Stock Options. As of the record date, approximately 840,500 shares of
Destron common stock were subject to options granted to executive officers and
directors under Destron's equity based compensation plans and an additional
105,000 shares of Destron common stock were subject to options granted to
directors outside Destron's plans. As of such date, approximately 65% of all
Destron stock options were held by directors and executive officers of Destron.
Under the terms of the Destron option plans, all such stock options are subject
to accelerated vesting upon a change of control of Destron and will therefore
become immediately exercisable at the effective time of the merger. All
outstanding options to purchase Destron common stock under such plans will be
assumed by Applied Digital and will become options to purchase Applied Digital
common stock, with appropriate adjustments to be made to the number of shares
and the per share exercise price under such options based on the exchange ratio.
Indemnification. Pursuant to the merger agreement, as amended, Applied
Digital has agreed to maintain for directors and officers of Destron the
indemnification provisions contained in Destron's certificate of incorporation
and bylaws. For further details regarding these arrangements, see "The Merger
Agreement -- Indemnification of Directors and Officers" on page 81.
Employment Agreements. At the effective time of the merger, Digital Angel
will enter into an employment agreement with Randolph K. Geissler, the current
president and chief executive officer of Destron, and James P. Santelli, the
current chief financial officer of Destron.
Randolph K. Geissler. The term of the Mr. Geissler's employment agreement
is two years subject to automatic term renewal. The employment agreement
provides for Mr. Geissler's appointment as the Chief Executive Officer of
Digital Angel. The employment agreement provides for an annual base salary of
$225,000.
Mr. Geissler's employment agreement may be terminated at any time by
Digital Angel for "cause." Upon such termination, Mr. Geissler will receive only
base salary that was earned but unpaid as of the date of termination. "Cause" is
defined to include acting in bad faith or with dishonesty; a willful failure by
Mr. Geissler to perform his duties under his employment agreement; or a material
breach by Mr. Geissler of the employment agreement. With respect to failure to
perform duties or a material breach that is curable, not involving dishonesty,
Mr. Geissler must be provided with written notice and an opportunity to cure the
alleged failure or breach for a period of one month.
If Mr. Geissler's employment is terminated due to death or "disability" (as
defined in the employment agreement), he will not be entitled to severance
benefits.
If Mr. Geissler's employment is terminated by Digital Angel without
"cause," he will be entitled to the following severance benefits:
- continuation of his base salary (at the rate in effect at the time of
such termination) for a period commencing on the date of termination and
ending on the second anniversary of the date of termination; and
- payment of health insurance premiums to continue health insurance
coverage under the Consolidated Omnibus Budget Reduction Act (COBRA).
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If Mr. Geissler resigns for "good reason" (as such term is defined in the
employment agreement, generally consisting of a material breach by Applied
Digital of the employment agreement; a diminution of Mr. Geissler's
responsibilities or title; a reduction in Mr. Geissler's base salary; a
relocation of Mr. Geissler's workplace; or a notice of non-renewal of the
employment), or upon a "Change in Control," he will receive the same severance
benefits as if his employment had been terminated by Digital Angel without
"cause." "Change in Control" is defined to include the following events:
- when any person becomes the beneficial owner of Digital Angel's
securities representing more than 33 1/3% of the combined voting power of
Digital Angel's then outstanding securities other than Applied Digital,
any affiliate of Applied Digital or a trustee or other fiduciary holding
securities under a benefit plan of Digital Angel;
- when during any period of 36 consecutive months during the term of the
employment agreement, the individuals who, at the beginning of such
period, constitute the board of directors of Applied Digital, cease for
any reason other than death to constitute at least a majority of such
board;
- when the shareholders of Digital Angel approve a merger or consolidation
or sale of substantially all of Digital Angel's assets with any other
corporation (excluding Applied Digital and its affiliates), other than a
merger or consolidation which would result in the voting securities of
Digital Angel outstanding immediately prior to such merger or
consolidation continuing to represent 80% or more of the combined voting
power of the securities of Digital Angel or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation; or
- when there is a sale or disposition of all or substantially all of
Digital Angel's assets to a person other than Applied Digital or any of
its affiliates, or Digital Angel adopts a plan of complete liquidation.
The employment agreement contains confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the later of the first anniversary of the date employment has ceased and the
fifth anniversary of the effective time of the merger. The employment agreement
also contains provisions giving Digital Angel exclusive ownership of any
inventions, discoveries, improvements and the like which were developed or
conceived by Mr. Geissler as a result of his employment with Digital Angel.
James P. Santelli. At the effective time of the merger, Digital Angel will
enter into an employment agreement with James P. Santelli, the current chief
financial officer of Destron. The term of the agreement is one year subject to
automatic term renewal if notice of termination is not delivered more than 60
days prior to the end of the term. The employment agreement provides for Mr.
Santelli's appointment as the Chief Financial Officer of Digital Angel. The
employment agreement provides for an annual base salary of $150,000.
Mr. Santelli's employment agreement may be terminated at any time by
Digital Angel for "cause." Upon such termination, Mr. Santelli will receive only
the base salary that was earned but unpaid as of the date of termination.
"Cause" is defined as willful and material misconduct, including fraud or
embezzlement, or conviction of a felony or a gross misdemeanor, or gross neglect
of his duties as an officer of Digital Angel or the material breach by Mr.
Santelli of the employment agreement. With respect to a material breach of the
employment agreement that is curable, Mr. Santelli must be provided with written
notice and an opportunity to cure the alleged failure or breach for a period of
15 days after the receipt of notice of such breach.
If Mr. Santelli's employment is terminated due to death or disability, he
will be entitled to receive his current base salary and employee benefits for a
period of 12 months from the date of termination. Additionally, if Mr.
Santelli's employment is terminated by Digital Angel without "cause" or Mr.
Santelli resigns for "good reason," he will be entitled to receive his current
base salary and employee benefits for a period of 12 months from the date of
termination. "Good reason" means a material breach by Applied Digital of the
employment agreement, including a diminution of Mr. Santelli's responsibilities
or title and a reduction in Mr. Santelli's base salary which breach has not been
cured within 15 days after notice of the breach.
The employment agreement contains confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the first anniversary of the date employment has
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ceased. The employment agreement also contains provisions giving Digital Angel
exclusive ownership of any inventions, discoveries, improvements and the like
which were developed or conceived by Mr. Santelli as a result of his employment
with Digital Angel.
Digital Angel Options. On December 30, 1999, pursuant to the Digital
Angel.net Inc. 2000 Flexible Stock Plan, certain officers and directors of
Applied Digital were granted options to purchase, at an exercise price of $0.05
per share, an aggregate of 2,425,000 shares of common stock of Digital Angel, as
adjusted for as subsequent stock split, and on January 10, 2000, Applied Digital
agreed to cause Digital Angel to make an additional grant of options to
purchase, at the same exercise price, 75,000 shares of Digital Angel common
stock to a new officer of Applied Digital, which grant was confirmed by the
board of directors of Digital Angel on February 15, 2000. These officers and
directors may be deemed to beneficially own approximately 11.75% of Digital
Angel common stock or securities convertible into common stock. Pursuant to the
merger agreement, as amended, certain officers of Destron Fearing will receive
options to purchase up to 10% in the aggregate of the shares of common stock in
Digital Angel in such amounts and on such terms as may be agreed to by the
parties.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE STOCK OPTIONS
The stock options for shares of Applied Digital common stock to be issued
in the merger to replace the Destron stock options will be nonqualified stock
options under the Code. The grant of a nonqualified stock option does not result
in the recognition of taxable income by the optionholders or in a deduction to
Applied Digital. Upon exercise, the option holder will recognize ordinary income
in an amount equal to the excess of the fair market value of the Applied Digital
common stock on the date of exercise over the exercise price. Applied Digital is
required to withhold tax on the amount of income so recognized, and a tax
deduction is, subject to the provisions of Section 162(m) of the Code, allowable
equal to the amount of such income. Gain or loss upon a subsequent sale of any
Applied Digital common stock received upon the exercise of a nonqualified stock
option generally would be taxed as capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold). Certain
additional rules apply if the exercise price for an option is paid in shares
previously owned by the optionholder.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material anticipated U.S. federal income
tax consequences of the merger to holders of Destron common stock who hold such
stock as a capital asset. The term "capital asset" is defined in Section 1221 of
the Code. This summary and the opinions referred to below are based on the Code,
Treasury regulations, administrative rulings and court decisions, all as in
effect as of the date hereof and all of which are subject to change at any time
(possibly with retroactive effect). This summary is not a complete description
of all the consequences of the merger and, in particular, may not address U.S.
federal income tax considerations applicable to stockholders subject to special
treatment under U.S. federal income tax law (including, for example,
stockholders who are financial institutions, dealers in securities, insurance
companies, tax-exempt entities, holders who acquired Destron common stock
pursuant to the exercise of an employee stock option or right or otherwise as
compensation, holders who hold Destron common stock as part of a hedge, straddle
or conversion transaction and stockholders who are not U.S. persons). For these
purposes, a U.S. person is (1) a citizen of the United States for U.S. or a
resident of the United States federal income tax purposes, (2) a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof, (3) an estate, the income of which is subject
to U.S. federal income tax regardless of the source or (4) a trust with respect
to which a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons have the
authority to control all its substantial decisions. In addition, no information
is provided herein with respect to the tax consequences of the merger under
applicable foreign, state or local laws. HOLDERS OF DESTRON COMMON STOCK ARE
URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME AND
OTHER TAX CONSEQUENCES OF THE MERGER TO THEM BASED UPON THEIR OWN PARTICULAR
CIRCUMSTANCES, INCLUDING THE EFFECTS OF STATE, LOCAL AND FOREIGN TAX LAWS.
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The obligations of the parties to consummate the merger are conditioned
upon the receipt by Applied Digital of an opinion from Akerman, Senterfitt &
Eidson, P.A., and the receipt by Destron of an opinion from Winthrop &
Weinstine, P.A., in each case conditioned upon and in reliance upon receipt of
representations contained in certificates of officers of Applied Digital and
Destron and subject to the qualifications discussed below, to the effect that
the merger will be treated for federal income tax purposes as a "reorganization"
within the meaning of Section 368(a) of the Code, and Applied Digital, Digital
Angel and Destron will each be a party to such reorganization within the meaning
of Section 368(b) of the Code. As a reorganization, the merger will have the
following principal U.S. federal income tax consequences:
- no gain or loss will be recognized by Applied Digital, Digital Angel or
Destron as a result of the merger;
- no gain or loss will be recognized by the holders of Destron common stock
who exchange their Destron common stock for Applied Digital common stock
pursuant to the merger, except with respect to any cash received in lieu
of a fractional share of Applied Digital common stock or in connection
with the exercise of statutory appraisal rights;
- the aggregate tax basis of the Applied Digital common stock received in
the merger by each holder of Destron common stock will be the same as the
aggregate tax basis of the Destron common stock surrendered in exchange
therefor, reduced by any amount of tax basis allocable to a fractional
share interest in Applied Digital common stock for which cash is
received; and
- the holding period of Applied Digital common stock received in the
merger, including any fractional share interest, will include the holding
period for the Destron common stock surrendered in exchange therefor.
Cash received by a holder of Destron common stock in lieu of a fractional
share of Applied Digital common stock will be treated as received in disposition
of such fractional share. A Destron stockholder will generally recognize capital
gain or loss measured by the difference between the amount of cash received and
the portion of the tax basis of his Destron common stock allocable to the
fractional share interest. In the case of individuals, the maximum federal
income tax rate applicable to capital gains is generally as follows:
- the same as ordinary income rates for capital assets held for one year or
less; and
- 20% for capital assets held for more than one year.
Winthrop & Weinstine, P.A. and Akerman, Senterfitt & Eidson, P.A. will
render their tax opinions as to the tax-free treatment of the merger on the
basis of facts, representations and assumptions set forth or referred to in the
opinions. Stockholders should be aware that an opinion of counsel is not binding
on the Internal Revenue Service or the courts. Stockholders should also be aware
that the opinions of Winthrop & Weinstine, P.A. and Akerman, Senterfitt &
Eidson, P.A. will be based on current law and on various representations
regarding factual matters and various covenants as to future actions made by
Applied Digital and Destron. If these representations are incorrect in one or
more material respects or the covenants are not complied with, the conclusions
reached by counsel in its opinion might be jeopardized.
Under the U.S. backup withholding rules, a holder of Destron common stock
may be subject to backup withholding at the rate of 31%, unless the stockholder
(1) is a corporation or comes within various other exempt categories and, when
required, demonstrates this fact or (2) provides a correct taxpayer
identification number, certifies that such stockholder is not subject to backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Any amount withheld under these rules will be credited
against the stockholder's federal income tax liability. Applied Digital may
require holders of Destron common stock to establish an exemption from backup
withholding or to make arrangements that are satisfactory to Applied Digital to
provide for the payment of backup withholding. A stockholder that does not
provide Applied Digital with its current taxpayer identification number may be
subject to penalties imposed by the IRS.
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THE VOTING AGREEMENT
All of the directors and executive officers of Destron entered into a
voting agreement concurrent with the execution of the merger agreement. The
voting agreement was subsequently amended and restated on May 25, 2000 in
connection with the amendment to the merger agreement. These directors and
executive officers owned in the aggregate approximately 6.3% of the Destron
common stock outstanding on June 26, 2000. The voting agreement provides that
the Destron stockholders who are parties to the voting agreement will vote their
shares of Destron common stock in favor of the adoption of the merger agreement,
as amended, and against any proposal that interferes with or otherwise inhibits
the consummation of the merger, including any Alternative Proposal. An
"Alternative Proposal" is defined as any proposal or offer by an entity other
than Applied Digital with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities of, Destron or its subsidiaries.
ACCOUNTING TREATMENT
The merger will be accounted for as the acquisition of Destron by Applied
Digital under the "purchase" method of accounting, in accordance with generally
accepted accounting principles. Under this method of accounting, the purchase
price will be allocated to assets acquired and liabilities assumed based on
their estimated fair values at the time of the merger. Income of Applied Digital
will not include income (or loss) of Destron prior to the consummation of the
merger, except as provided for in the pro forma financial information included
in this joint proxy statement/prospectus.
REGULATORY APPROVALS
Hart-Scott-Rodino. The Federal Trade Commission and the Antitrust Division
of the Department of Justice frequently scrutinize the legality under the
antitrust laws of transactions such as the merger. At any time before or after
the merger, the Department of Justice ("DOJ") or the Federal Trade Commission
("FTC") could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the merger or
seeking divestiture of substantial assets of Applied Digital or Destron or their
subsidiaries. Private parties and state attorneys general may also bring an
action under the antitrust laws under particular circumstances. There can be no
assurance that a challenge to the merger on antitrust grounds will not be made
or, if such a challenge is made, of the result.
The HSR Act, and the rules and regulations of the FTC, provide that some
merger transactions, including the merger, may not be consummated until required
information and materials have been furnished to the DOJ and the FTC and the
applicable waiting periods have expired or been terminated. On May 19, 2000,
Applied Digital and Destron filed Pre-Merger Notification and Report Forms with
the FTC and the DOJ under the HSR Act. On June 1, 2000 Applied Digital and
Destron received notification that FTC terminated the waiting period for the
pre-merger notification effective June 1, 2000.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Applied Digital common stock received by Destron stockholders
in the merger have been registered under the Securities Act and will be freely
transferable. However, shares of Applied Digital common stock received by
persons who are deemed to be affiliates of Destron prior to the merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act, or Rule 144 promulgated under the
Securities Act in the case of such persons who become affiliates of Applied
Digital, or otherwise in compliance with, or pursuant to an exemption from, the
registration requirements of the Securities Act. Persons deemed to be affiliates
of Destron or Applied Digital are those individuals or entities that control,
are controlled by, or are under common control with, such party and generally
include executive officers and directors of such party as well as principal
stockholders of such party. The merger agreement requires Destron to use its
reasonable best efforts to cause each of its affiliates to execute a written
agreement to the effect that such person will not offer or sell or otherwise
dispose of any of the shares of Applied Digital common stock issued to such
person in or pursuant to the merger except in compliance with the Securities Act
and the rules and regulations promulgated by the Commission thereunder.
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LISTING OF APPLIED DIGITAL COMMON STOCK
The shares of Applied Digital common stock to be issued pursuant to the
merger agreement, as amended, will be filed for listing on The Nasdaq National
Market, subject to shareholder approval and official notice of issuance.
DELISTING OF DESTRON COMMON STOCK
If the merger is completed, the Destron common stock will be delisted from
The Nasdaq SmallCap Market and will be deregistered under the Exchange Act.
APPRAISAL RIGHTS
Destron Stockholders. In accordance with the DGCL, Destron stockholders
will have appraisal rights in connection with the merger. Under the DGCL, record
holders of shares of Destron common stock who follow the procedures set forth in
Section 262 and who have not voted in favor of the merger agreement, as amended,
will be entitled to have their shares of Destron common stock appraised by the
Delaware Court of Chancery and to receive payment of the "fair value" of such
shares, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, as
determined by such court. The following is a summary of certain of the
provisions of Section 262 of the DGCL and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached hereto as
Annex E.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the Destron special
meeting, not less than 20 calendar days prior to the meeting, Destron must
notify each of the holders of Destron common stock at the close of business on
the record date that such appraisal rights are available and include in each
such notice a copy of Section 262. This joint proxy statement/prospectus
constitutes such notice. Any Destron stockholder wishing to exercise appraisal
rights should review the following discussion and Annex D carefully because
failure to timely and properly comply with the procedures specified in Section
262 will result in the loss of appraisal rights under the DGCL.
A holder of shares of Destron common stock wishing to exercise appraisal
rights must deliver to Destron, before the vote on the approval and adoption of
the merger agreement, as amended, at the Destron special meeting, a written
demand for appraisal of such holder's shares of Destron common stock. Such
demand will be sufficient if it reasonably informs Destron of the identity of
the stockholder and that the stockholder intends thereby to demand the appraisal
of that person's shares. A proxy or vote against the merger agreement, as
amended, will not constitute such a demand. In addition, a holder of shares of
Destron common stock wishing to exercise appraisal rights must hold of record
such shares on the date the written demand for appraisal is made and must
continue to hold such shares through the effective time of the merger.
Only a holder of record of shares of Destron common stock is entitled to
assert appraisal rights for the shares of common stock registered in that
holder's name. A demand for appraisal should be executed by or on behalf of the
holder of record fully and correctly, exactly as the holder's name appears on
the stock certificates. Holders of Destron common stock who hold their shares in
brokerage accounts or other nominee forms and wish to exercise appraisal rights
are urged to consult with their brokers to determine the appropriate procedures
for the making of a demand for appraisal by such nominee. All written demands
for appraisal of shares of Destron common stock should be sent or delivered to
James P. Santelli, Secretary, Destron Fearing Corporation, 490 Villaume Avenue,
South St. Paul, Minnesota 55075-2445, so as to be received before the vote on
the approval and adoption of the merger agreement, as amended, at the Destron
special meeting.
If the shares of Destron common stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the shares of Destron common stock are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or on behalf of all joint owners. An
authorized agent, including one or more joint owners, may execute a demand for
appraisal on behalf of a holder of record; however, the agent must
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identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is agent for such owner or owners. A record
holder such as a broker holding shares of Destron common stock as nominee for
several beneficial owners may exercise appraisal rights with respect to the
shares of Destron common stock held for one or more beneficial owners while not
exercising such rights with respect to the Destron common stock held for other
beneficial owners; in such case, the written demand should set forth the number
of shares as to which appraisal is sought and where no number of shares is
expressly mentioned the demand will be presumed to cover all shares of Destron
common stock held in the name of the record owner.
Within 10 calendar days after the effective time of the merger, Applied
Digital must send a notice as to the effectiveness of the merger to each person
who has satisfied the appropriate provisions of Section 262 and who has not
voted in favor of the merger agreement, as amended. Within 120 calendar days
after the effective time, Applied Digital, or any Destron stockholder entitled
to appraisal rights under Section 262 and who has complied with the foregoing
procedures, may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of all such stockholders. Destron
is not under any obligation, and has no present intention, to file a petition
with respect to the appraisal of the fair value of the shares of Destron common
stock. Accordingly, it is the obligation of the Destron stockholders to initiate
all necessary action to perfect their appraisal rights within the time
prescribed in Section 262. A stockholder who fails to file a petition for
appraisal within 120 calendar days after the effective time of the merger will
lose the right to appraisal.
Within 120 calendar days after the effective time of the merger, any
Destron stockholder of record who has complied with the requirements for
exercise of appraisal rights will be entitled, upon written request, to receive
from Applied Digital a statement setting forth the aggregate number of shares of
Destron common stock with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such statement must
be mailed within 10 calendar days after a written request therefor has been
received by Applied Digital.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the stockholders
entitled to appraisal rights and will appraise the "fair value" of the shares of
Destron common stock, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
Holders considering seeking appraisal should be aware that the fair value of
their shares of Destron common stock as determined under Section 262 could be
more than, the same as or less than the amount per share that they would
otherwise receive if they did not seek appraisal of their shares of common
stock. The Delaware Supreme Court has stated that "proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court" should be considered in the
appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenter's exclusive remedy. The court will also determine the amount of
interest, if any, to be paid upon the amounts to be received by persons whose
shares of Destron common stock have been appraised. The costs of the action may
be determined by the court and taxed upon the parties as the court deems
equitable. The court may also order that all or a portion of the expenses
incurred by any holder of shares of Destron common stock in connection with an
appraisal, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts utilized in the appraisal proceeding, be charged
pro rata against the value of all the shares of Destron common stock entitled to
appraisal.
The court may require Destron stockholders who have demanded an appraisal
and who hold common stock represented by certificates to submit their
certificates of common stock to the court for notation thereon of the pendency
of the appraisal proceedings. If any Destron stockholder fails to comply with
such direction, the court may dismiss the proceedings as to such Destron
stockholder.
Any Destron stockholder who has duly demanded an appraisal in compliance
with Section 262 will not, after the effective time of the merger, be entitled
to vote the shares of Destron common stock subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares
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(except dividends or other distributions payable to holders of record of shares
of Destron common stock as of a date prior to the effective time of the merger).
If any Destron stockholder who demands appraisal of shares under Section
262 fails to perfect, or effectively withdraws or loses, the right to appraisal,
as provided in the DGCL, the shares of Destron common stock of such holder will
be converted into the right to receive the merger consideration in accordance
with the merger agreement, as amended, without interest. A Destron stockholder
will fail to perfect, or effectively lose, the right to appraisal if no petition
for appraisal is filed within 120 calendar days after the effective time of the
merger. A Destron stockholder may withdraw a demand for appraisal by delivering
to Applied Digital a written withdrawal of the demand for appraisal and
acceptance of the merger, except that any such attempt to withdraw made more
than 60 calendar days after the effective time of the merger will require the
written approval of Applied Digital. Once a petition for appraisal has been
filed, such appraisal proceeding may not be dismissed as to any Destron
stockholder without the approval of the court.
Applied Digital Shareholders. There will be no appraisal rights available
to holders of Applied Digital common stock in connection with the merger.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, as amended, that are not summarized elsewhere in this joint proxy
statement/prospectus. Such summary is qualified in its entirety by reference to
the merger agreement, as amended, a copy of which is attached as Annex A to this
joint proxy statement/prospectus. Shareholders of Applied Digital and Destron
are urged to read the merger agreement, as amended, in its entirety for a more
complete description of the terms and conditions of the merger.
STRUCTURE OF THE MERGER
At the effective time of the merger, Digital Angel, a subsidiary of Applied
Digital, will be merged with and into Destron, with Destron as the surviving
corporation and as a subsidiary of Applied Digital immediately after the merger.
At the effective time of the merger, Destron will change its name to "Digital
Angel.net Inc."
CONVERSION OF SECURITIES
At the effective time of the merger, each issued and outstanding share of
Destron common stock, other than shares owned by Destron as treasury stock and
other than shares owned by Applied Digital or any wholly owned subsidiary of
Applied Digital or Destron, all of which will be canceled, will be converted
into the right to receive 1.5 shares of Applied Digital common stock. Assuming
all Destron stock options and warrants are exercised as a result of the merger,
based upon the number of outstanding shares of Applied Digital common stock and
Destron common stock as of June 26, 2000, Applied Digital would issue
approximately 23,264,916 shares of Applied Digital common stock in connection
with the merger. Assuming all Destron stock options and warrants are exercised,
as a result of the merger, Applied Digital estimates that the stockholders of
Destron immediately following the consummation of the merger will own
approximately 31% of the outstanding shares of Applied Digital common stock and
the shareholders of Applied Digital will own approximately 69% of the
outstanding shares of Applied Digital common stock immediately following
consummation of the merger.
No fractional shares of Applied Digital common stock will be issued to any
Destron stockholder upon surrender of certificates previously representing
Destron common stock. No dividend or distribution with respect to Applied
Digital common stock will be payable with respect to any fractional share and
such fractional share interests will not entitle their owners to any rights of a
stockholder of Applied Digital. Promptly after the effective time of the merger,
a bank or trust company to be designated by Applied Digital as the exchange
agent will make available to each former holder of Destron common stock the
amount, if any, determined by multiplying the fractional share interest to which
such holder would otherwise be entitled by the average closing price, as
determined under the merger agreement, as amended.
Promptly after the effective time of the merger, Applied Digital will cause
the exchange agent to mail letters of transmittal and exchange instructions to
each holder of record of Destron common stock to be used to surrender and
exchange certificates formerly evidencing shares of Destron common stock for
certificates evidencing the shares of Applied Digital common stock to which such
holder has become entitled. Upon surrender to the exchange agent of certificates
formerly representing Destron common stock together with a completed letter of
transmittal, each holder of a certificate will receive in exchange therefor
certificates evidencing the number of whole shares of Applied Digital common
stock to which that holder is entitled, any cash that may be payable in lieu of
a fractional share of Applied Digital common stock and any dividends or other
distributions with respect to Applied Digital common stock with a record date
after the effective time declared or made after the effective time. DESTRON
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM. APPLIED DIGITAL SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES.
After the effective time of the merger, each certificate formerly
representing Destron common stock, until so surrendered and exchanged, shall be
deemed, for all purposes, to evidence only the right to receive the number of
whole shares of Applied Digital common stock that the holder of such certificate
is entitled to receive in the merger, any cash payment in lieu of a fractional
share of Applied Digital common stock and any dividend or other distribution
with respect to Applied Digital common stock as described above. The holder of
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such unexchanged certificate will not be entitled to receive any dividends or
other distributions payable by Applied Digital until the certificate has been
exchanged. Subject to applicable laws, following surrender of such certificates,
such dividends and distributions, together with any cash payment in lieu of a
fractional share of Applied Digital common stock, will be paid without interest.
Each share of common stock of Digital Angel issued and outstanding
immediately prior to the effective time of the merger will be converted into one
share of common stock of the surviving corporation in the merger.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of the certificate of
merger with the Secretary of State of the State of Delaware, or a later time
agreed upon by the parties and specified in the certificate of merger. The
merger agreement, as amended, provides that the parties will file the
certificate of merger as soon as practicable following the satisfaction or
waiver of the conditions to the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement, as amended, contains various customary
representations and warranties of (1) Destron and (2) Applied Digital and
Digital Angel. These representations relate to, among other things:
- organization and qualification;
- certificate of incorporation, articles of incorporation and bylaws;
- capitalization;
- corporate authority to enter into the merger and enforceability of the
merger agreement, as amended;
- conflicts under corporate governance documents, required consents or
approvals and violations of any instruments or law caused by the merger;
- possession of governmental permits and compliance with laws;
- required reports and financial statements and disclosure of liabilities;
- the absence of certain changes, events or litigation;
- employee benefit plans and labor matters;
- contracts and commitments;
- accounting and tax matters and past tax compliance;
- intellectual property matters;
- Year 2000 compliance;
- opinion of the financial advisors;
- takeover statutes and Section 203 of the DGCL;
- vote required by the stockholders of Destron and the shareholders of
Applied Digital;
- transactions with affiliates;
- insurance matters; and
- environmental matters.
CERTAIN COVENANTS
Each of Applied Digital and Destron has agreed that, during the period from
the date of the merger agreement until the effective time of the merger, except
as otherwise consented to in writing by the other party
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or as contemplated by the merger agreement, it and each of its respective
subsidiaries will carry on its business in the usual, regular and ordinary
course in all material respects consistent with past practice and use all
reasonable best efforts to preserve current business relationships with
employees, customers and suppliers.
The merger agreement, as amended, contains other covenants with respect to
Destron and Applied Digital and their respective subsidiaries, that, during the
period from the date of the merger agreement until the effective time of the
merger, limit certain actions, including the declaration and payment of
dividends, with respect to Destron, the amendment of corporate governance
documents, the acquisition of assets, the disposition of assets, increases in
the salaries of certain officers and employees, the incurrence of indebtedness,
changes in accounting methods, tax elections and certain capital expenditures.
NO SOLICITATION
The merger agreement, as amended, provides that Destron and its
subsidiaries will not, directly or indirectly, and that Destron will direct and
use its reasonable best efforts to cause its officers, directors, employees,
agents and other representatives not to, initiate, solicit or knowingly
encourage (including by way of furnishing non-public information or assistance),
or take any other action to facilitate knowingly, any inquiries or the making or
implementation of any proposal or offer with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, Destron or its
subsidiaries. In addition, Destron has agreed to keep Applied Digital informed,
on a current basis, of the status of any such proposals or offers and the status
of any such discussions or negotiations.
The merger agreement, as amended, would not prevent Destron or the Destron
board of directors from complying with Rule 14d-9 and Rule 14e-2 promulgated
under the Exchange Act, to the extent applicable. In addition, if the Destron
board of directors concludes in good faith (after consultation with independent
legal counsel) that a third-party competing transaction proposal would, if
consummated, result in a transaction more favorable to its stockholders than the
merger with Digital Angel and that such action could reasonably be deemed to be
necessary for it to act in a manner consistent with its fiduciary duties under
applicable law, Destron would be permitted to engage in discussions or
negotiations with, or provide any information to, any person or entity in
response to an unsolicited third-party competing transaction proposal to the
holders of Destron common stock. Prior to providing such information to any
third party or entering into discussions or negotiations with any third party,
the third party must enter into a confidentiality/standstill agreement, and
Destron must provide reasonable notice to Applied Digital in reasonable detail
of the terms and conditions of such competing transaction proposal. If the
merger agreement, as amended, is terminated by Applied Digital because the board
of directors of Destron has recommended a third-party competing transaction
proposal, Destron must pay the fees and expenses more fully described below
under "-- Termination Expenses and Alternative Transaction Fees."
STOCKHOLDERS' MEETINGS
Destron and Applied Digital will call a meeting of their stockholders or
shareholders, as the case may be, to be held promptly as practicable to vote on
the merger. Destron and Applied Digital have agreed to:
- recommend to their stockholders and shareholders, respectively, the
adoption and approval of the merger; and
- use all reasonable efforts to solicit from its stockholders and
shareholders, respectively, proxies in favor of the merger, subject to
the fiduciary duties of their respective boards of directors.
ACCESS
Destron has agreed to give Applied Digital and its authorized
representatives access to its facilities, books and records before the merger is
completed. Destron and Applied Digital will furnish the other party with all
financial and operating data and other information as the other party may
reasonably request.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
For six years after the effective time of the merger, and unless otherwise
required by law, Applied Digital has agreed to indemnify the directors and
officers of Destron to the maximum extent permitted by the Destron certificate
of incorporation, the Destron bylaws and applicable law.
STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS
Stock Options and Warrants. All options and warrants outstanding, at the
effective time of the merger, under Destron's stock option plans (which include
the 1992 Stock Option Plan for Employees and the 1992 Non-Employee Directors'
Option Plan) or otherwise will be assumed by Applied Digital and will be
exercisable upon the same terms and conditions as under the applicable Destron
stock option plan or applicable agreement, except that each such substitute
option or warrant will be exercisable for, and represent the right to acquire,
that whole number of shares of Applied Digital common stock, rounded to the
nearest whole share, equal to the number of shares of Destron common stock
subject to such Destron stock option multiplied by the exchange ratio (rounded
down to the nearest whole share). All options under the above plans will
immediately vest and become exercisable at the effective time of merger. Applied
Digital intends to register for resale the shares of Applied Digital common
stock issuable upon exercise of such stock options and warrants.
Employee Benefit Plans. To the extent the existing employee benefit plans
of Destron are terminated, Applied Digital has agreed to provide the Destron
employees benefit plans and arrangements that are available, and subsequently
become available, to Applied Digital's employees on the same basis as Applied
Digital's employees in similar positions are eligible to participate.
OPTIONS TO PURCHASE COMMON STOCK OF DIGITAL ANGEL
On December 30, 1999, pursuant to the Digital Angel.net Inc. 2000 Flexible
Stock Plan, certain officers, directors and employees of Applied Digital were
granted options to purchase, at an exercise price of $0.05 per share, an
aggregate of 2,425,000 shares of Digital Angel common stock, as adjusted for a
subsequent stock split, and on January 10, 2000, Applied Digital agreed to cause
Digital Angel to make an additional grant of options to purchase, at the same
exercise price, 75,000 shares of Digital Angel common stock to a new officer of
Applied Digital, which grant was confirmed by the board of directors of Digital
Angel on February 15, 2000. These officers, directors and employees may be
deemed to beneficially own approximately 11.75% of Digital Angel common stock or
securities convertible into common stock. Pursuant to the merger agreement, as
amended, certain officers of Destron Fearing will receive options to purchase up
to 10% in the aggregate of the shares of common stock in Digital Angel in such
amounts and on such terms as may be agreed to by the parties.
CERTAIN OTHER COVENANTS
The merger agreement, as amended, also contains other agreements relating
to the conduct of the parties before the effective time, including those
requiring the parties to use commercially reasonable efforts to:
- take all applicable actions to consummate these transactions;
- prepare and file any filings required by federal or state securities
laws;
- supply information for this joint proxy statement/prospectus that is true
and correct in all material respects;
- consult with each other before issuing any press releases or making any
public statements about the merger, except for filings required by
governmental entities;
- comply with all legal requirements of the merger and obtain all necessary
consents and approvals;
- use their best efforts to cause the merger to qualify as a "tax-free
reorganization" within the meaning of Section 368(a) of the Code; and
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- take actions necessary to consummate the transactions contemplated by the
merger agreement, as amended, if any takeover statute shall apply.
CONDITIONS TO THE MERGER
Conditions to Each Party's Obligations to Consummate the Merger. The
respective obligations of Applied Digital, Destron and Digital Angel to effect
the merger are subject to the satisfaction or waiver of the following conditions
on or prior to the closing date of the merger:
- Destron Stockholder Approval. The merger agreement, as amended, having
been duly approved and adopted by the stockholders of Destron;
- Applied Digital Shareholder Approval. The issuance of capital stock of
Applied Digital pursuant to the merger agreement, as amended, and the
increase in the authorized capital stock of Applied Digital having been
duly approved by the shareholders of Applied Digital;
- HSR Act. The waiting period (and any extension thereof) applicable to
the merger under the HSR Act having expired or been terminated (on June
1, 2000 Applied Digital and Destron received notification that the FTC
terminated the waiting period for the pre-merger notification effective
June 1, 2000);
- No Proceedings. No governmental order, writ, injunction or decree being
in effect that would make the (1) merger illegal, (2) otherwise prohibit
the consummation of the merger, or (3) change the terms and conditions of
the merger agreement, as amended;
- Consents and Authorizations Received. Destron, Applied Digital and
Digital Angel shall have obtained all material consents, authorizations,
orders and approvals of any governmental commission, board or other
regulatory bodies required in connection with the execution, delivery and
performance of the merger agreement, as amended;
- Effective Registration Statement. The Applied Digital Registration
Statement on Form S-4 having become effective and not being the subject
of a stop order or proceedings seeking a stop order; and
- Listing on The Nasdaq National Market. The shares of Applied Digital
common stock to be issued in the merger having been authorized for
listing on The Nasdaq National Market.
Additional Conditions to the Obligations of Applied Digital and Digital
Angel. The obligations of Applied Digital and Digital Angel to effect the
merger are subject to the satisfaction or waiver of the following additional
conditions:
- Representations and Warranties True. Each of the representations and
warranties of Destron set forth in the merger agreement, as amended,
being true and correct when made and on and as of the effective time of
the merger as if made on and as of such time, except where the failure to
be so true and correct would not have, individually or in the aggregate,
a material adverse effect on Destron, and Applied Digital having received
a certificate signed by an officer of Destron to such effect;
- Compliance with Obligations. Destron having performed in all material
respects all of the obligations required to be performed by it at or
prior to the effective time of the merger, and Applied Digital having
received a certificate signed by an officer of Destron to such effect;
- Receipt of Tax Opinion. Applied Digital having received the opinion of
Akerman, Senterfitt & Eidson, P.A. to the effect that the merger will be
treated for federal income tax purposes as a tax-free reorganization
qualifying under the provisions of Section 368(a) of the Code, and that
Applied Digital, Digital Angel and Destron are each a party to the
reorganization within the meaning of Section 368(b) of the Code;
- Employment Agreements. The employment agreements with each of Randolph
K. Geissler and James P. Santelli becoming effective at the effective
time of the merger; and
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- Destron Material Adverse Effect. There not having occurred any events or
circumstances since April 24, 2000 that would have a material adverse
effect on Destron.
Additional Conditions to the Obligations of Destron. The obligations of
Destron to effect the merger are subject to the satisfaction or waiver of the
following additional conditions:
- Representations and Warranties True. Each of the representations and
warranties of Applied Digital and Digital Angel set forth in the merger
agreement, as amended, being true and correct when made and on and as of
the effective time of the merger as if made on and as of such time,
except where the failure to be so true and correct would not have,
individually or in the aggregate, a material adverse effect on Applied
Digital, and Destron having received a certificate signed by the
President of Applied Digital and Digital Angel to such effect;
- Compliance with Obligations. Applied Digital having performed in all
material respects all of the obligations required to be performed by it
at or prior to the effective time of the merger, and Destron having
received a certificate signed by an officer of Applied Digital and
Digital Angel to such effect;
- Receipt of Tax Opinion. Destron having received the opinion of Winthrop
& Weinstine, P.A. to the effect that the merger will be treated for
federal income tax purposes as a tax-free reorganization qualifying under
the provisions of Section 368(a) of the Code, and that Applied Digital,
Digital Angel and Destron are each a party to the reorganization within
the meaning of Section 368(b) of the Code;
- Fairness Opinion. The fairness opinion of Roth Capital Partners, Inc.
and AgriCapital Securities, Inc. as to the fairness of the consideration
to be received by the Destron stockholders in the merger, has not been
withdrawn and such withdrawal is not a result of a material adverse
change in the business of Applied Digital; and
- Applied Digital Material Adverse Effect. There not having occurred any
events or circumstances since April 24, 2000 that would have a material
adverse effect on Applied Digital.
TERMINATION OF THE MERGER AGREEMENT
Termination
The merger agreement, as amended, may be terminated at any time before the
closing of the merger. This termination may occur before or after approval of
the merger by the Applied Digital shareholders or the Destron stockholders in
the following manner:
- Mutual written consent of both Destron and Applied Digital;
- By either Destron or Applied Digital if:
(1) the merger has not been consummated on or before September 30, 2000
(although the right to terminate under this clause is not available to
a party whose failure to fulfill an obligation under the merger
agreement, as amended, is the cause of the failure of the merger to
occur on or before such date);
(2) a court or a governmental entity has issued a nonappealable final
order or taken any other nonappealable final action (i) permanently
restraining or prohibiting any transaction contemplated by the merger
agreement, as amended, or (ii) compelling Applied Digital, Digital
Angel or Destron to dispose of or hold separate all or a material
portion of the respective businesses or assets of Applied Digital or
Destron, or sell or license any material product of Applied Digital or
Destron;
(3) the other party has breached, or failed to comply with, in any
material respect any of its obligations under the merger agreement, as
amended, or any representation or warranty made by the other party
shall have been incorrect in any material respect when made or shall
have since ceased to be true and correct in any material respect, and
such breach, failure or misrepresentation is not cured within 30 days
after notice of it has been given and these breaches, failures or
misrepresentations, individually or in the aggregate, result or would
reasonably be expected to result in a material adverse effect;
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(4) the Destron stockholders and Applied Digital shareholders have not
approved the merger as required;
(5) the Applied Digital shareholders have not approved the necessary
increase in the authorized capital stock of Applied Digital; or
(6) 5% or more of the issued and outstanding shares Destron common stock
demand and perfect dissenters' rights of appraisal under Section 262
of the DGCL.
- By Applied Digital, if the Destron board has withdrawn or modified in any
adverse manner its recommendation of the merger.
TERMINATION EXPENSES AND ALTERNATIVE TRANSACTION FEES
Destron will pay expenses of up to a maximum of $2,000,000 to Applied
Digital if the merger agreement, as amended, is terminated by Applied Digital
because the board of directors of Destron recommends a third-party competing
transaction proposal.
EXPENSES; FINDER'S FEES
Except as described above under "-- Termination Expenses and Alternative
Transaction Fees", all reasonable out-of-pocket expenses, including all fees and
expenses of counsel, accountants, investment bankers, experts and consultants,
incurred in connection with the merger agreement, as amended, and the merger
will be paid by the party incurring such expenses, whether or not the merger is
consummated, except that Applied Digital and Destron each will pay one-half of
all expenses related to (i) the printing, and mailing the Applied Digital
Registration Statement on Form S-4 and the joint proxy statement/prospectus and
(ii) HSR Act filing fees.
In addition, Applied Digital has agreed to pay a finder's fee of 320,000
unregistered shares of Applied Digital common stock to Bradley Holt, who
introduced Applied Digital to Destron. On January 20, 2000, Mr. Holt entered
into a letter of agreement with Applied Digital. Under this agreement, Mr. Holt
agreed to assist Applied Digital in identifying acquisition targets as well as
potential investors in Applied Digital. Mr. Holt is also part of a 13D group of
Destron. Based upon a Schedule 13D, as amended, filed by such group, Bradley
Holt beneficially owns 243,500 shares (1.8%) of Destron common stock and the 13D
group of which he is a part beneficially owns 1,144,950 shares (8.49%) of
Destron common stock. In September 1998, Destron agreed with the 13D Group to
add John R. Beattie, a member of the 13D Group, and Gary S. Kohler to its board
of directors and both individuals currently serve on its board of directors.
AMENDMENT AND WAIVER
The merger agreement, as amended, may be amended at any time prior to the
effective time of the merger, upon action taken by the respective boards of
directors of Applied Digital or Destron; provided, however, that after approval
of the merger agreement by either the shareholders of Applied Digital or
stockholders of Destron, no amendment may be made that by law requires further
approval by the shareholders of Applied Digital or stockholders of Destron
without the further approval of such shareholders or stockholders, as the case
may be. The merger agreement may be amended only by an instrument in writing
signed by the parties.
At any time prior to the effective time of the merger, Applied Digital or
Destron may extend the time for performance of the obligations or other acts of
the other parties to the merger agreement, as amended, may waive inaccuracies in
the representations or warranties contained in the merger agreement, as amended,
or in any document delivered pursuant to the merger agreement, as amended, or
waive compliance with any agreement or condition contained in the merger
agreement, as amended. Any such extension or waiver shall be valid if set forth
in an instrument in writing signed by the party or parties to be bound thereby.
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DIVIDENDS AND DISTRIBUTIONS
Applied Digital will not pay any dividends it has declared or any cash
payable in lieu of fractional shares until the shareholder to which the dividend
or cash payable is due has exchanged the Destron shares for shares of Applied
Digital. Following surrender of any Destron certificate, Applied Digital will
pay to the stockholder, without interest, the amount of any dividends declared
by Applied Digital to which the stockholder is entitled and any cash payable in
lieu of fractional shares of Applied Digital common stock.
LOST CERTIFICATES
If your stock certificates of Destron are lost, stolen or destroyed prior
to the closing of the merger, you must make an affidavit of that fact. Also, if
required by Destron, you must post a bond in a reasonable amount as determined
by Destron as indemnity against any potential claim regarding the lost
certificates. In exchange for lost, stolen or destroyed stock certificates,
after you have made the affidavit and posted the bond, the exchange agent will
issue you shares of Applied Digital common stock and any cash in lieu of
fractional shares due. The exchange agent will also pay any unpaid dividends and
distributions on shares of Applied Digital common stock that are deliverable on
the Applied Digital common stock.
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DESCRIPTION OF APPLIED DIGITAL'S CAPITAL STOCK
The following description of the capital stock of Applied Digital is
subject to the MGBCL and to provisions contained in Applied Digital's Articles
of Incorporation and Bylaws, copies of which are exhibits to Applied Digital's
Registration Statements on Form S-3, filed on June 23, 1999 and April 27, 1998,
respectively, which are incorporated by reference into this joint proxy
statement/prospectus. Reference is made to such exhibits for a detailed
description of the provisions thereof summarized below.
AUTHORIZED CAPITAL
The authorized capital stock of Applied Digital consists of 80,000,000
shares of common stock, $.001 par value, and 5,000,000 shares of preferred
stock, $10.00 par value. Holders of Applied Digital common stock have no
preemptive or other subscription rights.
COMMON STOCK
As of June 26, 2000, there were 52,982,886 shares of Applied Digital common
stock outstanding. In addition, 503 shares of Applied Digital common stock are
reserved for issuance in exchange for the exchangeable shares of Applied
Digital's Canadian subsidiary. As of June 19, 2000, there were 1,355 holders of
record of Applied Digital common stock.
The holders of Applied Digital common stock are entitled to one vote per
share on all matters submitted to a vote of the stockholders. Holders of Applied
Digital common stock do not have cumulative voting rights. Therefore, holders of
more than 50% of the shares of Applied Digital common stock are able to elect
all directors eligible for election each year. The holders of common stock are
entitled to dividends and other distributions out of assets legally available if
and when declared by the Applied Digital board of directors. Upon Applied
Digital's liquidation, dissolution or winding up, the holders of Applied Digital
common stock are entitled to share pro rata in the distribution of all of
Applied Digital's assets remaining available for distribution after satisfaction
of all liabilities, including any prior rights of any preferred stock which may
be outstanding. There are no redemption or sinking fund provisions applicable to
the Applied Digital common stock.
The transfer agent and registrar for the common stock is Florida Atlantic
Stock Transfer, Inc.
PREFERRED STOCK
As of June 26, 2000, there was one share of Applied Digital Class B Voting
preferred stock outstanding and issued in the name of a trustee under a voting
trust agreement. The Class B Voting preferred stock is entitled to a number of
votes equal to the number of outstanding shares of ACT-GFX, Canada, Inc. that
can be exchanged for Applied Digital's common shares (the "exchangeable
shares"). As of June 26, 2000, there were 503 exchangeable shares outstanding
and entitled to vote through the exercise by the trustee of voting rights under
the voting trust agreement. The holders of Applied Digital common stock and
Class B Voting preferred stock vote together as a single class. The holder of
the Class B Voting preferred stock is entitled to dividends and other rights
economically equivalent to those of holders of Applied Digital common stock.
Pursuant to the voting trust agreement, each holder of exchangeable shares
is entitled to instruct the trustee as to the voting of the number of votes
attached to the Class B Voting preferred stock represented by such holder's
exchangeable shares. The trustee will exercise each vote attached to the Class B
Voting preferred stock only as directed by the relevant holder, and in the
absence of instructions from such holder as to voting will not exercise such
votes.
Additional series of the preferred stock may be created and issued from
time to time by the Applied Digital board of directors, with such rights and
preferences as it may determine. Because of its broad discretion with respect to
the creation and issuance of any series of preferred stock without shareholder
approval, the Applied Digital board of directors could adversely affect the
voting power of Applied Digital common stock. The issuance of preferred stock
may also have the effect of delaying, deferring or preventing a change in
control of Applied Digital.
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OPTIONS AND WARRANTS
As of June 26, 2000 there were 918,200 issued and outstanding warrants to
purchase shares of Applied Digital common stock at a weighted average exercise
price of $4.69 per share and options held by Applied Digital employees to
purchase 11,142,800 shares of Applied Digital common stock at a weighted average
exercise price of $2.23 per share. All of the warrants are currently
exercisable. Of the outstanding options, 9,270,690 are now exercisable at a
weighted average exercise price of $3.04 per share, and the rest become
exercisable at various times over the next three years.
INDEMNIFICATION
Applied Digital's bylaws require it to indemnify each of its directors and
officers to the fullest extent permitted by law. Applied Digital's bylaws
provides that no director shall have any personal liability to the company or
its stockholders for any monetary damages for breach of fiduciary duty as a
director, provided that such provision does not limit or eliminate the liability
of any director (i) for breach of such director's duty of loyalty to the Applied
Digital or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 345 of the MGCBL (involving certain unlawful dividends or stock
repurchase) or (iv) for any transaction from which such director derived an
improper personal benefit. An amendment to such article does not affect the
liability of any director for any act or omission occurring prior to the
effective time of such amendment.
COMPARISON OF CAPITAL STOCK
The MGBCL, the Applied Digital articles of incorporation and the Applied
Digital bylaws govern the rights of Applied Digital shareholders. Delaware law,
the Destron certificate of incorporation and Destron bylaws govern the rights of
Destron stockholders. After completion of the merger between Applied Digital and
Destron, the holders of Destron common stock who receive Applied Digital common
stock will become stockholders of Applied Digital and Missouri law, the Applied
Digital articles of incorporation and Applied Digital bylaws will govern their
shareholder rights. The following discussion summarizes the material differences
between the rights of holders of Destron common stock and holders of Applied
Digital common stock. This summary does not purport to be complete and is
qualified in its entirety by reference to the Destron certificate of
incorporation, the Destron bylaws, the relevant provisions of Delaware law, the
Applied Digital articles of incorporation, the Applied Digital bylaws and the
relevant provisions of Missouri law including the MGBCL.
AUTHORIZED CAPITAL STOCK
Applied Digital. The authorized capital stock of Applied Digital currently
consists of 85,000,000 shares of capital stock, consisting of (i) 80,000,000
shares of Applied Digital common stock, par value, $.001 per share and (ii)
5,000,000 preferred shares, par value $10.00, of which 1 share of Applied
Digital Class B Voting preferred stock is outstanding.
Destron. The authorized capital stock of Destron currently consists of
20,000,000 shares of common stock, $0.01 par value.
SPECIAL MEETINGS OF SHAREHOLDERS
Applied Digital. Under MGBCL Section 225, a special meeting of
shareholders may be called by the board of directors or by such persons as may
be authorized by the corporation's bylaws. The Applied Digital bylaws provide
that special meetings of the shareholders may be called by the Applied Digital
board of directors or by a designated committee of the Applied Digital board of
directors. The Applied Digital articles of incorporation also provide that
special meetings may be called by the holders of record of 10% of the
outstanding shares of stock entitled to vote at such meetings.
Destron. The DGCL provides that a special meeting of stockholders may be
called by the board of directors or by such persons as may be authorized by the
certificate of incorporation or bylaws. The Destron
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bylaws provide that the Destron board of directors, the Chairman of the Board,
the Chief Executive Officer or the President may call a special meeting of
stockholders. The Destron certificate of incorporation also provides that
special meetings may be called by the holders of record of 10% of the
outstanding shares of stock entitled to vote at such meetings.
NUMBER OF DIRECTORS
Applied Digital. Section 315 of the MGBCL provides that a corporation
shall have three or more directors, except that a corporation may have one or
two directors if stated in the articles of incorporation. The Applied Digital
bylaws provide for Applied Digital to consist of 5 directors, and in no event
less than 3, but the number of directors may be amended by vote of a majority of
the Applied Digital board of directors. Applied Digital currently has 7
directors.
Destron. The DGCL permits the certificate of incorporation or the bylaws
of a corporation to contain provisions governing the number and terms of
directors. However, if the certificate of incorporation contains provisions
fixing the number of directors, such number may not be changed without amending
the certificate of incorporation. The Destron certificate of incorporation and
bylaws provide for the number of directors to be one or more with the number of
directors to be fixed by a resolution of the board of directors. Destron
currently has nine directors.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Applied Digital. The Applied Digital bylaws provides for three classes of
directors nearly as equal in number as possible to serve terms expiring at the
third succeeding annual meeting of Applied Digital shareholders after the
election of the members of that class.
Destron. The Destron certificate of incorporation and bylaws do not
provide for separate classes of directors.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Applied Digital. Under MGBCL Section 317, any director of a Missouri
corporation may be removed for cause by a majority of the board if that director
fails to meet the qualifications for director or is in breach of any agreement
with the corporation relating to the director's service to the corporation as a
director or employee. The Applied Digital articles of incorporation and bylaws
are silent on the issue of removal of directors. Under MGBCL Section 320, unless
otherwise provided in the certificate of incorporation or the bylaws, vacancies
on the board of directors and newly created directorships resulting from an
increase in the authorized number of directors may be filled by a majority of
the directors then in office, although less than a quorum, or by the sole
remaining director, until the next election by the shareholders of the
corporation. The Applied Digital bylaws provide that any vacancy on the Applied
Digital board of directors as well as any vacancy resulting from an increase in
the number of directors which occurs between annual meetings of shareholders at
which directors are elected, will be filled by a majority of the directors
remaining in office. Directors chosen to fill vacancies hold office for a term
expiring at the end of the next annual meeting of shareholders at which the
terms of the class to which they have been elected expires.
Destron. The DGCL provides that a director or directors may be removed
with or without cause by the holders of a majority of the shares then entitled
to vote at an election of directors, except that (i) members of a classified
board may be removed only for cause, unless the certificate of incorporation
provides otherwise and (ii) in the case of a corporation having cumulative
voting, if less than the entire board is to be removed, no director may be
removed without cause if the votes cast against such director's removal would be
sufficient to elect such director if then cumulatively voted at an election of
the entire board of directors or of the class of directors of which such
director is a part. Destron does not have a classified board, and it does not
allow cumulative voting for directors. The Destron certificate of incorporation
and bylaws are silent on the issue of removal of directors. Under the DGCL,
unless otherwise provided in the certificate of incorporation or the bylaws,
vacancies on the board of directors and newly created directorships resulting
from an increase in the authorized number of directors may be filled by a
majority of the directors then in office, although less than a
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quorum, or by the sole remaining director, provided that, in the case of a
classified board, such vacancies and newly created directorships may be filed by
a majority of the directors elected by such class, or by the sole remaining
director so elected. In the case of a classified board, directors elected to
fill vacancies or newly created directorships shall hold office until the next
election of the class for which such directors have been chosen, and until their
successors have been duly elected and qualified. In addition, if, at the time of
the filling of any such vacancy or newly created directorship, the directors in
office constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Delaware Court of Chancery may,
upon application of any stockholder or stockholders holding at least 10% of the
total number of outstanding shares entitled to vote for such directors,
summarily order an election to fill any such vacancy or newly created
directorship, or replace the directors chosen by the directors then in office.
The Destron bylaws provides that any vacancy on the Destron board of directors
as well as any vacancy resulting from an increase in the number of directors
which occurs between annual meetings of stockholders at which directors are
elected, will be filled by a majority of the directors remaining in office.
Directors chosen to fill vacancies hold office for a term expiring at the end of
the next annual meeting of stockholders at which the terms of the class to which
they have been elected expires.
CUMULATIVE VOTING
Cumulative voting entitles each shareholder to cast an aggregate number of
votes equal to the number of voting shares held, multiplied by the number of
directors to be elected. Each shareholder may cast all of their votes for one
nominee or distribute them among one or more nominees, thus permitting holders
of less than a majority of the outstanding shares of voting stock to achieve
board representation. Where cumulative voting is not permitted, holders of all
outstanding shares of voting stock of a corporation elect the entire board of
directors of the corporation, thereby precluding the minority shareholders from
having board representation.
Applied Digital. Under MGBCL Section 245, cumulative voting is permitted,
unless a corporation's articles of incorporation or bylaws provide otherwise.
The Applied Digital bylaws do not permit cumulative voting.
Destron. Under the DGCL, the certificate of incorporation may provide that
at all elections of directors, or at elections held under specified
circumstances, each stockholder is entitled to cumulate such stockholder's votes
for the election of directors. The Destron bylaws do not permit cumulative
voting.
ANTI-TAKEOVER STATUTES
Applied Digital. Sections 459 and 407 of the MGBCL contains certain
provisions applicable to Missouri corporations such as Applied Digital which may
be deemed to have an anti-takeover effect. Such provisions include Missouri's
business combination statute and the control share acquisition statute.
Section 459 of the MGBCL protects domestic corporations from hostile
takeovers by prohibiting certain transactions once an acquiror has gained
control. The statute restricts certain "Business Combinations" between a
corporation and an "Interested Shareholder" or affiliates of the Interested
Shareholder for a period of five years unless certain conditions are met. A
"Business Combination" includes a merger or consolidation, certain sales, leases
exchanges, pledges and similar dispositions of corporate assets or stock and
certain reclassifications and recapitalizations. An "Interested Shareholder"
includes any person or entity which beneficially owns or controls 20% or more of
the outstanding voting shares of the corporation.
During the initial five-year restricted period, no Business Combination may
occur unless such Business Combination or the transaction in which an Interested
Shareholder becomes "interested" is approved by the board of directors of the
corporation. Business Combinations may occur during such five-year period if:
(i) prior to the stock acquisition by the Interested Shareholder, the board of
directors approves the transaction in which the Interested Shareholder became
such or approves the Business Combination in question; (ii) the holders of a
majority of the outstanding voting stock, other than stock owned by the
Interested Shareholder, approve the Business Combination; or (iii) the Business
Combination satisfies certain detailed fairness and procedural requirements.
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The MGBCL exempts from its provisions: (i) corporations not having a class
of voting stock registered under Section 12 of the Exchange Act; (ii)
corporations which adopt provisions in their articles of incorporation or bylaws
expressly electing not to be covered by the statute; and (iii) certain
circumstances in which a shareholder inadvertently becomes an Interested
Shareholder. Applied Digital's restated articles of incorporation and bylaws do
not "opt out" of the Missouri Business Combination Statute.
The MGBCL also contains a "Control Share Acquisition Statute" which
provides that an "Acquiring Person" who after any acquisition of shares of a
publicly traded corporation has the voting power, when added to all shares of
the same corporation previously owned or controlled by the Acquiring Person to
exercise or direct the exercise of: (i) 20% but less than 33 1/3%, (ii) 33 1/3%
or more but less than a majority or (iii) a majority, of the voting power of
outstanding stock of such corporation must obtain shareholder approval for the
purchase of the "Control Shares." If approval is not given, the Acquiring
Person's shares lose the right to vote. The statute prohibits an Acquiring
Person from voting its shares unless certain disclosure requirements are met and
the retention or restoration of voting rights is approved by both: (i) a
majority of the outstanding voting stock, and (ii) a majority of the outstanding
voting stock after exclusion of "Interested Shares." Interested Shares are
defined as shares owned by the Acquiring Person, by directors who are also
employees, and by officers of the corporation. Shareholders are given
dissenters' rights with respect to the vote on Control Share Acquisitions and
may demand payment of the fair value of their shares.
A number of acquisitions of shares are deemed not to constitute Control
Share Acquisitions, including good faith gifts, transfers pursuant to wills,
purchases pursuant to an issuance by the corporation, mergers involving the
corporation which satisfy the other requirements of the MGBCL, transactions with
a person who owned a majority of the voting power of the corporation within the
prior year, or purchases from a person who has previously satisfied the
provisions of the Control Share Acquisition Statute so long as the transaction
does not result in the purchasing party having voting power after the purchase
in a percentage range (such ranges are as set forth in the immediately preceding
paragraph) beyond the range for which the selling party previously satisfied the
provisions of the statute. Additionally, a corporation may exempt itself from
application of the statute by inserting a provision in its articles of
incorporation or bylaws expressly electing not to be covered by the statute.
Applied Digital's Restated articles of incorporation and bylaws do not "opt out"
of the Control Share Acquisition Statute.
Destron. The DGCL applicable to Destron contains a business combination
statute similar to that contained in the MGBCL. Like the Missouri business
combination statute, the Delaware business combination statute (Section 203 of
the DGCL) generally prohibits a domestic corporation from engaging in mergers or
other business combinations with an "interested stockholder" (as defined in the
DGCL) for three years. The prohibition can be avoided if the business
combination is approved by the board of directors prior to the date on which the
interested stockholder acquires the requisite percentage of stock that caused it
to become an interested stockholder. The MGBCL imposes a longer prohibition
period on transactions with Interested Persons (five years) than the DGCL (three
years), thereby potentially increasing the period during which a hostile
takeover may be frustrated. In addition, the DGCL, unlike its Missouri
counterpart, does not apply if the interested stockholder obtains at least 85%
of the corporation's voting stock upon consummation of the transactions which
resulted in the stockholder becoming an interested stockholder. Thus, a person
acquiring at least 85% of the corporation's voting stock could circumvent the
defensive provisions of the DGCL while being unable to do so under the MGBCL.
The prohibition against business combinations also can be avoided under the DGCL
if, at or subsequent to the time the business combination is approved by the
target company's board of directors, and authorized at an annual or special
meeting of stockholders, and not by written consent, it is approved by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. The DGCL does not contain a control
share acquisition statute similar to that contained in the MGBCL.
PREEMPTIVE RIGHTS
Applied Digital. MGBCL Section 305 allows preemptive rights to be limited
or denied to the extent provided in a corporation's articles of incorporation.
No shareholder of Applied Digital has preemptive rights with regard to shares of
common or preferred stock.
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Destron. Under the DGCL, a stockholder does not possess preemptive rights
unless such rights are specifically granted in the certificate of incorporation.
No stockholder of Destron has preemptive rights with regard to shares of common
or preferred stock.
DISSENTERS' RIGHTS
Applied Digital. Under MGBCL Section 455, a shareholder of any corporation
which is a party to a merger or consolidation, or which sells all or
substantially all of its assets, has the right to dissent from such corporate
action and to demand payment of the fair value of such shares.
Destron. Under Section 262 of the DGCL, except as otherwise provided by
the DGCL, stockholders have the right to demand and receive payment of the fair
value of their stock in the event of a merger or consolidation. However, except
as otherwise provided by the DGCL, stockholders do not have appraisal rights if,
among other things, the consideration they receive for their shares consists of
(i) shares of stock of the corporation surviving or resulting from such merger
or consolidation, (ii) shares of stock of any other corporation which at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an inter-dealer quotation system by the National Association of Securities
Dealers, Inc. ("NASD") or held of record by more than 2,000 stockholders, (iii)
cash in lieu of fractional shares of the corporations described in clause (i) or
(ii) of this sentence, or (iv) any combination of shares of stock and cash in
lieu of fractional shares described in the foregoing clauses (i), (ii) and
(iii).
STOCKHOLDERS' RIGHT TO INSPECT
Under the DGCL, any stockholder may inspect the corporation's stock ledger,
stockholder list and other books and records for any proper purpose. A "proper
purpose" is defined in Section 220 of the DGCL as a purpose reasonably related
to such person's interest as a stockholder. The DGCL specifically provides that
a stockholder may appoint an agent for the purpose of examining the stock
ledger, list of stockholders or other books and records of the corporation. A
stockholder may apply to the Delaware Court of Chancery to compel inspection if
the stockholder's request to examine the books and records is refused. In
general, the stockholder has the burden of proving a proper purpose when seeking
to inspect books and records other than the stock ledger and stockholder list,
and the corporation has the burden of proving an improper purpose where a
stockholder requests to examine the stockholder ledger or stockholder list. The
right of stockholders to inspect under the MGBCL is generally similar to that of
stockholders under the DGCL. Neither the MGBCL nor Missouri case law, however,
provides any specific guidance as to whether a shareholder may appoint an agent
for the purpose of examining books and records or the extent to which a
shareholder must have a "proper purpose." Accordingly, in comparison with the
DGCL, in a given situation a Missouri shareholder may be provided with less
guidance as to the scope of his or her ability to inspect the books and records
of the corporation.
AMENDMENT OF ARTICLES OR CERTIFICATE OF INCORPORATION AND BYLAWS
Applied Digital. Under the MGBCL, shareholders must approve a proposed
amendment to the articles of incorporation of a Missouri corporation by a
majority vote of the outstanding shares entitled to vote. The Applied Digital
articles of incorporation provides that, in general, it may be amended by the
affirmative vote of a majority of the Applied Digital board of directors and the
holders of a majority of Applied Digital's common stock. In general, the bylaws
may be amended by the affirmative vote of a majority of the Applied Digital
board of directors or the holders of a majority of Applied Digital's common
stock.
Destron. Under the DGCL, unless otherwise provided in the certificate of
incorporation, a proposed amendment to the certificate of incorporation requires
an affirmative vote of a majority of all votes entitled to be cast on a matter.
If any such amendment would adversely affect the rights of any holders of shares
of a class or series of stock, the vote of the holders of a majority of all
outstanding shares of the class or series, voting as a class, is also necessary
to authorize such amendment. In general, the Destron certificate of
incorporation may be amended by an affirmative vote of the Destron board of
directors and the holders of a majority of
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Destron's shares. Any amendment to the Destron certificate of incorporation
which relates to the Destron board of directors, however, requires the
affirmative vote of 66 2/3% of the outstanding shares of Destron unless it has
been approved by a majority vote of the full Destron board of directors. If the
full Destron board of directors approves such amendments, only the affirmative
vote of a majority of shares is needed. The Destron bylaws may be amended by the
affirmative vote of a majority of the Destron board of directors or the holders
of a majority of Destron's shares.
SHAREHOLDER PROPOSALS
The Applied Digital board of directors will consider proposals of
shareholders intended to be presented for action at Applied Digital's 2001
annual meeting of shareholders. A shareholder proposal intended to be included
in Applied Digital's 2001 proxy statement must be submitted in writing and be
received at Applied Digital's principal executive offices, 400 Royal Palm Way,
Suite 410, Palm Beach, Florida 33480, Attn: Secretary no later than January 3,
2001. Proposals by shareholders to be presented at Applied Digital's 2001 annual
meeting of shareholders (but not intended to be included in Applied Digital's
2001 proxy statement) must be submitted in writing to Applied Digital no earlier
than March 17, 2001, no later than April 17, 2001, in accordance with Applied
Digital's bylaws. Any proxy received by Applied Digital may confer discretionary
authority to vote on any shareholder proposal not received by Applied Digital by
April 17, 2001.
If the merger is not consummated, Destron will hold an annual meeting of
stockholders for the fiscal year ending September 30, 2000 in calendar year
2001. If such meeting is held, stockholder proposals intended to be presented at
such meeting must be received by Destron a reasonable time before the
solicitation of proxies for such meeting is made for inclusion in Destron's
proxy materials for such meeting.
EXPERTS
The consolidated financial statements of Applied Digital Solutions, Inc.
and its subsidiaries (formerly Applied Cellular Technology) as of December 31,
1998 and 1999 and for each of the years then ended, included in this joint proxy
statement/prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accounts, given on the authority of said
firm as experts in auditing and accounting. The financial statements as of, and
for the year ended December 31, 1997 have been so included 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 consolidated financial statements of Bostek, Inc. and affiliate as of
and for the year ended December 31, 1998 incorporated into this joint proxy
statement/prospectus by reference to the Current Report on Form 8-K/A of Applied
Digital Solutions, Inc. (formerly, Applied Cellular Technology, Inc.) dated
August 12, 1999, have been so incorporated in reliance on the report of Di Pesa
& Company, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements and schedules as of September 30,
1999 and 1998 and for the three years in the period ended September 30, 1999
included in this joint proxy statement/prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
LEGAL MATTERS
The validity of the shares of Applied Digital common stock offered by this
joint proxy statement/prospectus and the federal income tax consequences in
connection with the merger will be passed upon for Applied Digital by Bryan Cave
LLP, St. Louis, Missouri, and by Akerman, Senterfitt & Eidson, P.A., Miami,
Florida, respectively. Certain legal matters with respect to federal income tax
consequences in connection with the merger will be passed upon for Destron by
Winthrop & Weinstine, P.A., Minneapolis, Minnesota.
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PRIOR SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders of Applied Digital was held on June 17,
2000 to:
(a) Elect three directors, each to hold office until the 2003 annual
meeting of shareholders, or in each case until their respective successors
have been elected or appointed. The results of the vote to elect the three
directors were as follows:
<TABLE>
<CAPTION>
VOTES RECEIVED
----------------------------------
NAME FOR AGAINST ABSTENTIONS
---- ---------- ------- -----------
<S> <C> <C> <C>
Arthur F. Noterman.................... 44,398,560 -- 661,302
Constance K. Weaver................... 44,321,989 -- 737,873
Richard S. Friedland.................. 44,464,323 -- 595,539
</TABLE>
(b) Ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors of Applied Digital for the 2000 calendar year. The
proposal received 44,506,092 votes for, 438,408 votes against, and 115,362
abstentions.
(c) Ratify options granted under Applied Digital's 1999 Flexible Stock
Plan. The proposal received 8,587,703 votes for, 2,540,566 votes against,
and 271,071 abstentions.
(d) Ratify options granted under Applied Digital's 1999 Employees
Stock Purchase Plan. The proposal received 8,669,090 votes for, 2,447,709
votes against, and 282,541 abstentions.
(e) Ratify options granted under Applied Digital's 1996 Non Qualified
Stock Option Plan. The proposal received 8,542,409 votes for, 2,529,024
votes against, and 327,907 abstentions.
WHERE YOU CAN FIND MORE INFORMATION
Applied Digital and Destron are each subject to the informational
requirements of the Exchange Act and, in accordance therewith, file reports,
proxy statements and other information with the Commission. The reports, proxy
statements and other information filed by Applied Digital and Destron with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, 13th floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, Washington, D.C. 20549, or by calling the Commission at
1-800-SEC-0330. In addition, Applied Digital and Destron are each required to
file electronic versions of such material with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Applied
Digital common stock and Destron common stock are listed on the Nasdaq. Reports
and other information concerning Applied Digital and Destron can also be
inspected at the offices of Nasdaq, Department of NASDR, 1390 Piccard Drive,
Rockville, Maryland 20850, (800-289-9999).
Applied Digital has filed with the Commission a registration statement on
Form S-4 under the Exchange Act with respect to the shares of Applied Digital
common stock to be issued pursuant to the merger agreement. This joint proxy
statement/prospectus does not contain all the information set forth in the
registration statement. For further information with respect to Applied Digital,
Destron and the Applied Digital common stock, reference is hereby made to the
Applied Digital registration statement on Form S-4 (including the exhibits and
schedules thereto).
The Commission allows Applied Digital to "incorporate by reference"
information into this joint proxy statement/prospectus, which means that Applied
Digital can disclose important information to you by referring you to another
document filed separately with the Commission. Statements regarding Applied
Digital contained in this joint proxy statement/prospectus or in any document
incorporated by reference in
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this joint proxy statement/prospectus as to the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document (if any) filed as an exhibit to the Applied Digital registration
statement on Form S-4 or such other document, each such statement being
qualified in all respects by such reference. The information incorporated by
reference is deemed to be part of this joint proxy statement/prospectus. This
joint proxy statement/prospectus incorporates by reference the documents set
forth below that Applied Digital has previously filed with the SEC. These
documents contain important information about Applied Digital and its finances.
<TABLE>
<CAPTION>
APPLIED DIGITAL, INC. COMMISSION FILINGS
(FILE NO. 000-26020) PERIOD
---------------------------------------- ------
<S> <C>
Annual Report on Form 10-K, as amended....... Fiscal Year ended December 31, 1999
Quarterly Report on Form 10-Q................ Filed May 15, 2000
Definitive Proxy Statement................... Filed May 8, 2000
Current Report on Form 8-K................... Filed May 1, 2000
Current Report on Form 8-K................... Filed April 13, 2000
Current Report on Form 8-K/A................. Filed August 12, 1999
Current Report on Form 8-K................... Filed June 4, 1999
The description of Applied Digital common Filed May 5, 1995
stock set forth on Applied Digital
Registration Statement on Form 8-A.........
</TABLE>
All documents and reports subsequently filed by Applied Digital pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
joint proxy statement/prospectus and prior to the date of the Applied Digital
special meeting shall be deemed to be incorporated by reference in this joint
proxy statement/prospectus and to be part hereof from the date of filing of such
documents or reports. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this joint proxy statement/prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
joint proxy statement/prospectus.
Documents incorporated by reference which are not presented herein or
delivered herewith (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference) are available to any person,
including any beneficial owner, to whom this joint proxy statement/prospectus is
delivered, on written or oral request, without charge, in the case of documents
relating to Applied Digital, directed to Applied Digital, Inc., 400 Royal Palm
Way, Suite 410, Palm Beach, Florida 33480, (561-366-4800), Attention: Kay
Langsford, Vice President, Administration. In order to ensure timely delivery of
any of such documents, any request should be made by July 31, 2000.
APPLIED DIGITAL SHAREHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED
IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE ISSUANCE OF APPLIED
DIGITAL COMMON STOCK AS CONTEMPLATED BY THE MERGER AGREEMENT, AS AMENDED.
DESTRON STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER AGREEMENT. NEITHER APPLIED
DIGITAL NOR DESTRON HAS AUTHORIZED ANYONE TO PROVIDE INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DATED JUNE 27, 2000. STOCKHOLDERS SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS ACCURATE AS OF ANY OTHER DATE, AND NEITHER THE MAILING OF THIS JOINT PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF APPLIED DIGITAL COMMON
STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
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INDEX TO FINANCIAL STATEMENTS
APPLIED DIGITAL SOLUTIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Years Ended December 31, 1999, 1998 and 1997
Reports of Independent Accountants for the Three Years Ended
December 31, 1999......................................... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-4
Consolidated Statements of Operations for the Three Years
Ended December 31, 1999................................... F-5
Consolidated Statements of Stockholders' Equity for the
Three Years Ended December 31, 1999....................... F-6
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1999................................... F-7
Notes to Consolidated Financial Statements.................. F-8
Three Months Ended March 31, 2000 (unaudited)
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000............................................ F-30
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999............................. F-31
Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 2000............................... F-32
Consolidated Statements of Cash Flows for Three Months Ended
March 31, 2000 and 1999................................... F-33
Notes to Consolidated Financial Statements.................. F-34
DESTRON FEARING CORPORATION CONSOLIDATED FINANCIAL
STATEMENTS
Years Ended September 30, 1999, 1998 and 1997
Report of Independent Public Accountants.................... F-40
Consolidated Balance Sheets at September 30, 1999 and
1998...................................................... F-41
Consolidated Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997......................... F-42
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997............. F-43
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997......................... F-44
Notes to Consolidated Financial Statements.................. F-45
Six Months Ended March 31, 2000 (unaudited)
Consolidated Balance Sheets as of March 31, 2000 and
September 30, 1999........................................ F-55
Consolidated Statements of Operations for the Three Months
and Six Months Ended March 31, 2000 and 1999.............. F-56
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2000 and 1999............................. F-57
Notes to Consolidated Financial Statements.................. F-58
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... P-1
Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 2000............................................ P-2
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended December 31, 1999........... P-4
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Three Months Ended March 31, 2000...... P-6
</TABLE>
F-1
<PAGE> 105
REPORT OF INDEPENDENT ACCOUNTANTS
To: The Board of Directors and
Shareholders of Applied Digital Solutions, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Applied
Digital Solutions, Inc. and its subsidiaries (formerly Applied Cellular
Technology, Inc.) at December 31, 1999 and December 31, 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States. 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 audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 3, 2000
F-2
<PAGE> 106
REPORT OF INDEPENDENT ACCOUNTANTS
To: The Board of Directors and Shareholders
Applied Digital Solutions, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Applied Digital Solutions, Inc. and
subsidiaries (formerly Applied Cellular Technology, Inc.) for the year 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Applied Digital Solutions, Inc. and subsidiaries for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
F-3
<PAGE> 107
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PAR VALUE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,138 $ 4,555
Due from buyer of divested subsidiary..................... 31,302 --
Accounts receivable and unbilled receivables (net of
allowance for doubtful accounts of $1,698 in 1999 and
$990 in 1998).......................................... 52,170 34,390
Inventories............................................... 40,448 20,657
Notes receivable.......................................... 3,822 3,600
Prepaid expenses and other current assets................. 6,001 2,042
-------- --------
Total current assets.............................. 138,881 65,244
Property and equipment, Net................................. 13,886 15,627
Notes receivable............................................ 3,297 1,445
Goodwill, net............................................... 62,000 33,430
Other assets................................................ 10,912 8,370
-------- --------
$228,976 $124,116
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable............................................. $ 25,211 $ 23,217
Current maturities of long-term debt...................... 8,038 1,158
Due to shareholders of acquired subsidiary................ 15,000 --
Accounts payable.......................................... 29,499 13,819
Accrued expenses.......................................... 17,672 9,251
Other current liabilities................................. 2,745 3,312
-------- --------
Total current liabilities......................... 98,165 50,757
Long-term debt.............................................. 35,317 2,838
-------- --------
Total liabilities................................. 133,482 53,595
-------- --------
Commitments and contingencies (see notes 2, 15 and 19)
Minority interest........................................... 2,558 2,961
-------- --------
Stockholders' equity
Preferred shares:
Authorized 5,000 shares in 1999 and 1998 of $10 par
value; special voting, issued and outstanding 1
share in 1999 and 1998, Class B voting, issued and
outstanding 1 share in 1999 and 1998................ -- --
Common shares:
Authorized 80,000 shares in 1999 and 1998, of $.001 par
value; 51,116 shares issued and 48,260 shares
outstanding in 1999 and 35,683 shares issued and
35,577 shares outstanding in 1998..................... 48 36
Common and preferred additional paid-in capital........... 87,470 60,517
Retained earnings......................................... 12,664 7,232
Treasury stock (carried at cost, 2,856 shares in 1999, 106
shares in 1998)........................................ (7,310) (337)
Accumulated other comprehensive income.................... 64 112
-------- --------
Total stockholders' equity........................ 92,936 67,560
-------- --------
$228,976 $124,116
======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-4
<PAGE> 108
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net operating revenue....................................... $336,741 $207,081 $103,159
Costs of goods sold......................................... 241,790 142,893 69,408
-------- -------- --------
Gross profit................................................ 94,951 64,188 33,751
Selling, general and administrative expenses.............. (90,416) (51,485) (26,431)
Depreciation and amortization............................. (9,687) (4,501) (1,874)
Restructuring and unusual costs........................... (2,550) -- (1,681)
Gain on sale of subsidiary................................ 20,075 733 1,827
Interest income........................................... 616 420 192
Interest expense.......................................... (3,842) (1,653) (978)
-------- -------- --------
Income before provision for income taxes, minority interest
and extraordinary loss.................................... 9,147 7,702 4,806
Provision for income taxes................................ 3,160 2,588 1,769
-------- -------- --------
Income before minority interest and extraordinary loss...... 5,987 5,114 3,037
Minority interest......................................... 395 424 697
-------- -------- --------
Income before extraordinary loss............................ 5,592 4,690 2,340
Extraordinary loss (net of taxes of $89).................. 160 -- --
-------- -------- --------
Net income.................................................. 5,432 4,690 2,340
Preferred stock options................................... -- 44 72
-------- -------- --------
Net income per common share -- basic........................ $ .12 $ .14 $ .18
======== ======== ========
Earning per share -- diluted
Income before extraordinary loss.......................... $ .11 $ .13 $ .15
Extraordinary loss........................................ -- -- --
-------- -------- --------
Net income per common share -- diluted...................... $ .11 $ .13 $ .15
======== ======== ========
Weighted average number of common shares
outstanding -- basic...................................... 46,814 32,318 12,632
======== ======== ========
Weighted average number of common shares
outstanding -- diluted.................................... 50,086 34,800 15,245
======== ======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-5
<PAGE> 109
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED OTHER TOTAL
--------------- --------------- PAID-IN EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL (DEFICIT) STOCK INCOME EQUITY
------ ------ ------ ------ ---------- --------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31,
1996.................... -- $-- 5,799 $ 6 $ 7,928 $ 318 $ -- $ -- $ 8,252
Net income.............. -- -- -- -- 2,340 -- -- --
Comprehensive income --
foreign currency
translation......... -- -- -- -- -- -- -- (2)
Total
comprehensive
income.......... -- -- -- -- -- 2,340 -- (2) 2,388
Issuance of common
shares................ -- -- 1,572 2 5,534 -- -- -- 5,536
Issuance of common
shares to redeem
preferred stock....... -- -- 1,354 1 2,499 -- -- -- 2,500
Issuance of common
shares for
acquisitions.......... -- -- 9,624 10 10,263 -- -- -- 10,273
Warrants redeemed for
common shares......... -- -- 2,323 2 7,456 -- -- -- 7,458
Preferred stock
dividends paid........ -- -- -- -- -- (72) -- -- (72)
-- --- ------ --- ------- ------- ------- ---- -------
Balance -- December 31,
1997.................... -- -- 20,672 21 33,680 2,586 -- (2) 36,285
Net income.............. -- -- -- -- -- 4,690 -- --
Comprehensive income --
foreign currency
translation......... -- -- -- -- -- -- 114 --
Total
comprehensive
income.......... -- -- -- -- -- 4,690 -- 114 4,804
Issuance of common
shares................ -- -- 50 -- 100 -- -- -- 100
Issuance of common
shares for
acquisitions.......... -- -- 12,511 12 18,770 -- -- -- 18,782
Issuance of preferred
shares................ -- -- -- -- 6,020 -- -- -- 6,020
Conversion of preferred
shares to common
shares................ -- -- 1,600 2 (2) -- -- -- --
Warrants redeemed for
common shares......... -- -- 850 1 1,949 -- -- -- 1,950
Preferred dividends
paid.................. -- -- -- -- -- (44) -- -- (44)
Common shares
repurchased........... -- -- (106) -- -- -- (337) -- (337)
-- --- ------ --- ------- ------- ------- ---- -------
Balance -- December 31,
1998.................... -- -- 35,577 36 60,517 7,232 (337) 112 67,560
Net income.............. -- -- -- -- -- 5,432 -- --
Comprehensive income --
foreign currency
translation......... -- -- -- -- -- -- (36) --
unrealized gain on
securities -- -- -- -- -- -- (12) --
Total
comprehensive
income.......... -- -- -- -- -- 5,432 -- (48) 5,384
Issuance of common
shares................ -- -- 2,808 3 5,508 -- -- -- 5,511
Issuance of common
shares for
acquisitions.......... -- -- 11,701 11 19,016 -- -- -- 19,027
Warrants redeemed for
common shares......... -- -- 924 1 2,429 -- -- -- 2,430
Common shares
repurchased........... -- -- (2,750) (3) -- -- (6,973) -- (6,976)
-- --- ------ --- ------- ------- ------- ---- -------
Balance -- December 31,
1999.................... -- $-- 48,260 $48 $87,470 $12,664 $(7,310) $ 64 $92,936
== === ====== === ======= ======= ======= ==== =======
</TABLE>
See the accompanying notes to consolidated financial statements.
F-6
<PAGE> 110
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 5,432 $ 4,690 $ 2,340
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 9,687 4,501 1,874
Minority interest...................................... 395 424 697
Gain on sale of subsidiary............................. (20,075) (733) (1,827)
Loss (gain) on sale of assets.......................... 143 (140) 148
Reserve on investments................................. 1,000 -- --
Non-cash portion of restructuring cost................. 1,522 -- --
Net change in operating assets and liabilities......... (12,483) (11,353) (6,549)
-------- -------- -------
Net cash used in operating activities....................... (14,379) (2,610) (3,317)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in notes receivable................... (413) (2,338) 122
Proceeds from sale of assets.............................. 758 507 2,296
Payments for property and equipment....................... (7,024) (1,950) (916)
(Payments for) proceeds from asset and business
acquisitions (net of cash balances acquired)........... (17,903) 57 3,983
Increase in other assets.................................. (2,675) (3,118) (1,327)
-------- -------- -------
Net cash (used in) provided by investing activities......... (27,257) (6,842) 4,158
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net amounts (paid) borrowed on notes payable.............. (3,358) 12,202 (2,847)
Proceeds on long-term debt................................ 54,114 1,011 335
Payments for long-term debt............................... (10,911) (6,936) (494)
Other financing costs..................................... (2,863) -- --
Issuance of common shares................................. 5,237 1,354 9,084
Repurchase of common stock................................ -- (337) --
Redemption of preferred shares............................ -- (900) --
Preferred stock dividends paid............................ -- (44) (72)
-------- -------- -------
Net cash provided by financing activities................... 42,219 6,350 6,006
-------- -------- -------
Net increase (decrease) in cash............................. 583 (3,102) 6,847
Cash and cash equivalents -- beginning of year.............. 4,555 7,657 810
-------- -------- -------
Cash and cash equivalents -- end of year.................... $ 5,138 $ 4,555 $ 7,657
======== ======== =======
Supplemental disclosure of cash flow information
Income taxes paid......................................... $ 1,334 $ 2,430 $ 964
Interest paid............................................. $ 3,541 $ 1,534 $ 1,012
</TABLE>
See the accompanying notes to consolidated financial statements.
F-7
<PAGE> 111
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Applied Digital Solutions, Inc. and subsidiaries (the Company) is an
emerging leader in the implementation of e-business solutions for the Internet
through Computer Telephony Internet Integration (the integration of computer,
telecom and the Internet). The Company's goal is to be a single source
e-business provider that midsize companies can turn to for intelligently
connecting their business processes via telephone or computer, with their
customers, suppliers and partners to deliver the results expected from the
emerging e-business market. The Company currently operates in six segments as
follows:
Telephony -- This segment is an implementer of telecommunications and
Computer Telephony Integration (CTI) solutions for e-business.
Network -- This segment provides e-business infrastructure design and
deployment, personal computer network infrastructure for the development of
local and wide area networks as well as site analysis, configuration,
training and customer support services.
Internet -- This segment equips customers with the necessary tools and
support services to enable them to make a successful transition to becoming
or implementing e-business practices, ERP and CRM solutions, website design
and application and internet access services.
Applications -- This segment provides software applications primarily
for large retail environments, including point of sale, data acquisition,
asset management and decision support systems; and develops programs for
portable data collection equipment, including wireless hand-held devices.
IntelleSale.com -- This segment sells refurbished and new computer
equipment and related components online, through its website at
www.IntelleSale.com, and through other Internet companies, as well as
through traditional channels, which includes sales made by
IntelleSale.com's sales force.
Non-Core -- This segment is comprised of seven individually managed
companies engaged in various business enterprises including the
manufacturing of electronic and automotive components, and the fabrication,
installation and maintenance of microwave, cellular and digital personal
communication service towers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Applied
Digital Solutions, Inc. and its wholly owned and majority owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated upon
consolidation.
As further discussed in Note 2, the Company acquired businesses during 1999
and 1998 all of which have been accounted for under the purchase method of
accounting.
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.
FOREIGN CURRENCIES
The Company's foreign subsidiaries use their local currency as their
functional currency. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at end of period exchange rates. Translation adjustments resulting
from this process are included
F-8
<PAGE> 112
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in accumulated other comprehensive income in stockholders' equity. Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency, are included in
the results of operations as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
UNBILLED RECEIVABLES
Unbilled receivables consist of certain direct costs and profits recorded
in excess of amounts billable pursuant to contract provisions in connection with
system installation projects and software licensing. Unbilled receivables
included in accounts receivable was $0.5 million in 1999 and $1.6 million in
1998.
INVENTORIES
Inventories consist of raw materials, work in process 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. Inventory items designated as
obsolete or slow-moving are reduced to net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation
and amortization computed using straight-line and accelerated methods. Building
and leasehold improvements are depreciated and amortized over periods ranging
from 10 to 40 years and equipment is depreciated over periods ranging from 3 to
10 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated on the cost basis and are
amortized, principally on a straight-line basis, over the estimated future
periods to be benefitted (not exceeding 20 years). Goodwill and other intangible
assets are periodically reviewed for impairment based on expected future
undiscounted cash flows to ensure that they are appropriately valued.
PROPRIETARY SOFTWARE IN DEVELOPMENT
In accordance with Statement of Financial Accounting Standards (FAS) 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, the Company has capitalized certain computer software development
costs upon the establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of a detailed program
design which has been confirmed by documenting and tracing the detail program
design to product specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization is provided based on the
greater of the ratios that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product, or the
straight-line method over the estimated useful life of the product. The
straight-line life is determined to be 2 to 5 years.
F-9
<PAGE> 113
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Company generally expenses production costs of print advertisements the
first date the advertisements take place. Advertising expense, included in
selling, general and administrative expenses, was $2.9 million in 1999, $0.7
million in 1998 and $0.9 million in 1997.
REVENUE RECOGNITION
For programming, consulting and software licensing services and
construction contracts, the Company recognizes revenue based on the percent
complete for fixed fee contracts, with the percent complete being calculated as
either the number of direct labor hours in the project to date divided by the
estimated total direct labor hours or based upon the completion of specific task
orders. It is the Company's policy to record contract losses in their entirety
in the period in which such losses are foreseeable. For non fixed fee jobs,
revenue is recognized based on the actual direct labor hours in the job times
the standard billing rate and adjusted to realizable value, if necessary. For
product sales, the Company recognizes revenue upon shipment. Revenue from
royalties is recognized when licensed products are shipped. There are no
significant post contract support obligations at the time of revenue
recognition. The Company's 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. The Company does not experience
significant product returns, and therefore, management is of the opinion that no
allowance for sales returns is necessary. The Company has no obligation for
warranties on new hardware sales, because the warranty is provided by the
manufacturer. However, the Company provides a minimum six month warranty and
offers the opportunity to purchase an extended warranty for most refurbished
hardware sales not covered by manufacturer warranties. The Company has recorded
a warranty reserve of $0.3 million at December 31, 1999 based upon prior
history. The Company does not offer a warranty policy for services to customers.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (FAS) 109, Accounting for Income Taxes, which
requires the asset and liability approach for the financial accounting and
reporting for income taxes. Income taxes include U.S. and international taxes.
The Company and its U.S. subsidiaries file a consolidated federal income tax
return.
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, conversion of preferred stock outstanding and contingently issuable
shares.
COMPREHENSIVE INCOME
The Company's comprehensive income consists of foreign currency translation
adjustments and unrealized gains on securities, and is reported in the
consolidated statements of stockholders' equity.
F-10
<PAGE> 114
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS AND DISPOSITIONS
The following represents acquisitions which occurred in 1999 and 1998:
<TABLE>
<CAPTION>
COMMON/
PREFERRED
DATE OF PERCENT ACQUISITION SHARES
ACQUISITION ACQUIRED PRICE ISSUED BUSINESS DESCRIPTION
----------- -------- ----------- --------- ------------------------
<S> <C> <C> <C> <C> <C>
1999 ACQUISITIONS
Port Consulting, Inc.......... 04/01/99 100% $ 1,292 -- Integrator of
information technology
application systems
Hornbuckle Engineering,
Inc......................... 04/01/99 100 3,680 555 Integrated voice and
data solutions provider
Lynch Marks & Associates,
Inc......................... 04/01/99 100 2,526 773 Network integration
company
STR, Inc...................... 04/01/99 100 3,050 932 Software solutions
provider for retailers
TigerTel Services Limited
(formerly Contour Telecom
Management, Inc.) (Divested
effective 12/31/99)......... 05/01/99 75 5,627 -- Provider of outsourced
telecommunications
management services
Bostek, Inc. & affiliate...... 06/01/99 100 26,966 -- Seller of computer
systems and peripherals
1998 ACQUISITIONS
Information Products Center,
Inc......................... 01/01/98 100 2,797 1,766 Network Infrastructure
services provider
Winward Electric (Divested
effective 10/1/99).......... 01/01/98 100 4,556 2,307 Full service electrical
and communications
systems contractor
The Americom Group, Inc....... 04/01/98 80 956 227 Provider of
communications
infrastructure
construction,
maintenance,
installation and
training services
Aurora Electric, Inc.
(Divested effective
10/1/99).................... 04/01/98 100 1,897 1,098 Full service electrical
and communications
system contractor
Blue Star Electronics, Inc.... 04/01/98 80 431 203 Cable assembly
manufacturer
Consolidated Micro Components,
Inc......................... 04/01/98 100 1,948 1,042 Reseller of memory,
processors and mass
storage devices
Data Path Technologies,
Inc......................... 04/01/98 100 3,421 1,778 Seller of computer
systems, peripherals,
components and software
GDB Software Services......... 04/01/98 100 1,932 1,013 Provider of data
processing consulting
services
Ground Effects, Ltd........... 04/01/98 85 2,049 1,106 Manufacturer of aluminum
and steel tubes
</TABLE>
F-11
<PAGE> 115
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON/
PREFERRED
DATE OF PERCENT ACQUISITION SHARES
ACQUISITION ACQUIRED PRICE ISSUED BUSINESS DESCRIPTION
----------- -------- ----------- --------- ------------------------
<S> <C> <C> <C> <C> <C>
Innovative Vacuum Solutions,
Inc......................... 04/01/98 80 1,361 729 Re-manufacturer of high-
end vacuum pumps
Service Transport Company..... 04/01/98 80 89 35 Transporter of computer
systems and electronics
Teledata Concepts, Inc........ 04/01/98 100 308 138 Internet and
telecommunications
services provider
TigerTel Services, Ltd
(Divested effective
12/31/99)................... 05/01/98 100 6,500 3,418 Call centers, voice
messaging and one number
dialing services
provider
Signature Industries, Ltd..... 06/01/98 85 4,974 3,571 Manufacturer of
high-grade
communications and
safety devices
Fiscal Advantage, Inc......... 10/1/98 Assets 200 -- Computer leasing
services
</TABLE>
EARNOUT AND PUT AGREEMENTS
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements reflect the
results of operations of each company from the date of acquisition. The costs of
acquisitions include all payments according to the acquisition agreements plus
costs for investment banking services, legal services and accounting services,
that were direct costs of acquiring these assets. Goodwill resulting from these
acquisitions is being amortized on a straight-line basis, over twenty years.
Certain acquisition agreements include additional consideration contingent on
profits of the acquired subsidiary. Upon earning these additional shares, the
value will be recorded as additional goodwill. The acquisitions above include
contingent shares earned upon attainment of certain profits by subsidiaries
through December 31, 1999. Under these agreements, assuming all earnout profits
are achieved, the Company is contingently liable for additional consideration of
approximately $12.7 million in 2000, $7.1 million in 2001, $1.8 million in 2002
and $2 million in 2004, of which 6.2 million would be payable in cash and 17.4
million would be payable in stock. See Note 23 for unaudited pro forma
information for the above acquisitions that occurred in 1999 and 1998. The
Company has entered into put options with the selling shareholders of various
companies in which the Company acquired less than a 100% interest. These options
require the Company to purchase the remaining portion it does not own after
periods ranging from four to five years from the dates of acquisition at amounts
per share generally equal to 10% to 20% of the average annual earnings per share
of the company before income taxes for the two year period ending the effective
date of the put multiplied by a multiple ranging from four to five. In the
second quarter of 1999, the Company entered into agreements to pay $3.9 million
to acquire put options in certain companies owned by the Company's subsidiary,
IntelleSale.com. In addition, based on current earnings, assuming all other put
options are exercised, the Company is contingently liable for an additional $6.9
million in the next two years. The contingent amounts for earnouts and put
options have not been recorded as liabilities in the financial statements as it
is uncertain whether the contingencies will be met.
There were 9,441 shares of common stock issued during 1999 related to
agreements with the Company's subsidiaries, primarily for earnouts and to
purchase minority interests.
F-12
<PAGE> 116
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAJOR ACQUISITION
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 $27 million, of which $10.2 million was paid in cash at closing,
$5 million was paid in cash in January 2000, and $1.8 million for the 1999
earnout was paid in cash in February 2000. The earnout accrual is included in
other current liabilities at December 31, 1999. Upon a successful initial public
offering of IntelleSale.com, $10 million will be payable in stock of
IntelleSale.com to the former owners of Bostek. In the event that the initial
public offering does not occur, the $10 million will be payable in cash. An
additional $3.2 million is contingent upon achievement of certain earnings
targets. The operating results of the Company include Bostek from its
acquisition date. The total purchase price of Bostek, including the liabilities
assumed, was allocated to the identifiable assets with the remainder of $24.4
million recorded as goodwill which is being amortized over 20 years.
DISPOSITIONS
Effective October 1, 1999, the Company entered into a Stock Purchase
Agreement for the sale of all outstanding shares of common stock of four
non-core subsidiaries. In consideration, the Company received a note for $2.5
million, and 2.8 million shares of the Company's stock, recorded as treasury
stock in the amount of $7 million. No gain was recorded on this transaction,
because the shareholders of the purchaser of the divested assets were deemed to
be significant shareholders of the Company. The operating results of these
companies are properly included in the Company's financial statements through
the date of disposition.
Effective December 30, 1999, the Company sold its approximately 4.9 million
shares in TigerTel, Inc., its Toronto-based telecommunications subsidiary. The
total proceeds were $31.3 million in cash, resulting in a pre-tax gain of $20.1
million. Payment of the proceeds was received on January 10, 2000. The operating
results of TigerTel are properly included in the Company's financial statements
through the date of disposition.
On December 31, 1998, the Company entered into a Purchase and Sale
Agreement for the sale of certain of its cellular assets. In consideration, the
Company received one thousand shares of 6% first series preferred stock of the
purchaser of the cellular assets in the face amount and having a liquidation
value of $1 million. The first series preferred stock may be redeemed at any
time through December 31, 2004. This sale resulted in a gain of $647.
On December 31, 1998, the Company entered into an Agreement for Sale of
Stock for the sale of its investment in a subsidiary company. In consideration,
the Company received two thousand shares of 6% preferred stock of the purchaser
of the subsidiary in the face amount and having a liquidation value of $2
million, due December 31, 2003. This sale resulted in a gain of $86.
3. RESTRUCTURING AND UNUSUAL CHARGES
In the first quarter of 1999, a pre-tax charge of $2,550 was recorded to
cover restructuring costs of $2,236 and unusual charges of $314.
RESTRUCTURING CHARGE
As part of the Company's reorganization of its core business into five
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telephony and Applications business groups, and the associated
write-off of assets. The restructuring charge of $2,236 includes asset
impairments, primarily software and other intangible assets, of $1,522, lease
terminations of $541, and employee separations of $173. The total charge reduced
net income by $1,588.
F-13
<PAGE> 117
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through December 31, 1999:
<TABLE>
<CAPTION>
BALANCE BALANCE
JANUARY 1, DECEMBER 31,
TYPE OF COST 1999 ADDITIONS DEDUCTIONS 1999
------------ ---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Asset impairment.................. $-- $1,522 $1,522 $ --
Lease terminations................ -- 541 342 199
Employee separations.............. -- 173 123 50
--- ------ ------ ----
Total................... $-- $2,236 $1,987 $249
=== ====== ====== ====
</TABLE>
Towards the end of the third quarter of 1997, the Company made a decision
to exit its retail cellular operations. During the fourth quarter of 1997, the
Company completed its exit strategy and incurred costs related to the
restructuring of these operations, including provisions for terminations of
leases and employees and write down of the carrying values of inventory and
other assets. Costs totaling $1,681 were charged to expense in 1997 and no
material costs were incurred in future periods. All amounts were paid in 1997.
UNUSUAL ITEMS
During the first quarter of 1999, as part of the Company's core business
reorganization, the Company realigned certain operations within its Telephony
division and has recognized impairment charges and other related costs of $314.
The total charge reduced net income by $223.
4. EXTRAORDINARY LOSS
In connection with the early retirement of the Company's line of credit
with State Street Bank and Trust Company and its simultaneous refinancing with
IBM Credit Corporation, deferred financing fees associated with the State Street
Bank and Trust agreement were written off during the second quarter of 1999. The
total amount of the write-off recorded as an extraordinary loss was $160, net of
income taxes of $89.
5. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................... $ 4,648 $ 4,437
Work in process............................................. 1,195 2,349
Finished goods.............................................. 35,602 15,246
------- -------
41,445 22,032
Less: Allowance for excess and obsolescence................. 997 1,375
------- -------
$40,448 $20,657
======= =======
</TABLE>
6. NOTES RECEIVABLE
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Due from purchaser of four non-core subsidiaries, bears
interest at 5%, interest payable quarterly, principal due
October 2004.............................................. $2,531 $ --
Due from purchaser of cellular assets, personally guaranteed
by company owners, bears interest at 6.5%, $350 due
January 1999, remaining payable in monthly installments of
$25 including interest starting July 1999. In 1999, the
Company made demand for full payment due to default on
certain terms by the maker of the note.................... 950 1,300
Due from purchaser of interconnect service business,
forgiven in 1999 in connection with the repurchase of the
business.................................................. -- 1,350
</TABLE>
F-14
<PAGE> 118
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Due from officers of subsidiaries, unsecured, bear interest
at varying interest rates, due on demand.................. 1,914 1,594
Due from customer, unsecured, bears interest at the prime
rate, due on demand; paid in 1999......................... -- 226
Due from individuals and corporations, bear interest at
varying rates above prime, secured by business assets,
personal guarantees, and securities, due various dates
through July 2001......................................... 1,205 --
Due from purchaser of business assets, secured by maker's
assets, bears interest at 8.7% and provides for monthly
payments of principal and interest equal to 10% of the
maker's net cash revenue for each preceding month, balance
due October 2001.......................................... 519 575
------ ------
7,119 5,045
Less: Current portion....................................... 3,822 3,600
------ ------
$3,297 $1,445
====== ======
</TABLE>
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land........................................................ $ 755 $ 755
Building and leasehold improvements......................... 4,662 4,097
Equipment................................................... 19,418 18,021
------- -------
24,835 22,873
Less: Accumulated depreciation and amortization............. 10,949 7,246
------- -------
$13,886 $15,627
======= =======
</TABLE>
Included above are vehicles and equipment acquired under capital lease
obligations in the amount of $1,917 and $1,577 at December 31, 1999 and 1998,
respectively. Related accumulated depreciation amounted to $723 and $602 at
December 31, 1999 and 1998, respectively.
Depreciation and amortization charged against income amounted to $3,703,
$2,260 and $846 for the years ended December 31, 1999, 1998 and 1997,
respectively.
8. GOODWILL
Goodwill consists of the excess of cost over fair value of tangible and
identifiable intangible assets of companies purchased. The Company applies the
principles of Accounting Principles Board Opinion No. 16, Business Combinations,
and uses the purchase method of accounting for acquisitions of wholly owned and
majority owned subsidiaries.
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Original balance............................................ $67,761 $35,920
Accumulated amortization.................................... (5,761) (2,490)
------- -------
Carrying value.............................................. $62,000 $33,430
======= =======
</TABLE>
Amortization expense amounted to $3,258, $1,487 and $670 for the years
ended December 31, 1999, 1998, and 1997, respectively. The Company has entered
into various earnout arrangements with the selling shareholders 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
added to goodwill as earned.
F-15
<PAGE> 119
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- ------
<S> <C> <C>
Proprietary software........................................ $ 7,611 $5,979
Loan acquisition costs...................................... 2,890 308
Other assets................................................ 413 109
-------- ------
10,914 6,396
Less: Accumulated amortization.............................. (4,456) (1,730)
-------- ------
6,458 4,666
Investment in preferred stock (net of reserve of $1,000 in
1999 and $0 in 1998)...................................... 2,000 3,000
Deferred tax asset.......................................... 1,424 --
Other....................................................... 1,030 704
-------- ------
$ 10,912 $8,370
======== ======
</TABLE>
The Company has provided a valuation allowance on certain of its
investments in preferred stock to reflect current fair market values.
Amortization of other assets charged against income amounted to $2,726,
$754 and $358 for the years ended December 31, 1999, 1998 and 1997,
respectively.
10. NOTES PAYABLE
On May 25, 1999, the Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation (the "IBM Agreement"). On May 26, 1999,
the Company repaid the amount due on the previous revolving line of credit. The
IBM Agreement, as amended on July 30, 1999 provides for the following: (1) a
revolving credit line of up to $36,150, designated as follows: (i) a USA
revolving credit line of up to $27,000, (ii) a Canadian revolving credit line of
up to $6,150, and (iii) a United Kingdom revolving credit line of up to $3,000;
(2) Term Loan A of up to $22,000; (3) Term Loan B of up to $25,000; (4) Term
Loan C of up to $6,850 and (5) Term Loan D of up to $5,000.
The IBM Agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the declarations
and payment of dividends. As of December 31, 1999, the outstanding balance was
$66,629 and the availability was $28,371. See Note 11 for long-term debt of the
Company under the IBM Agreement.
The weighted average interest rate was 6.9% and 8.8% for the years ended
December 31, 1999 and 1998, respectively. The London Interbank Offered Rate and
Toronto-Dominion Bank of Canada interest rates at December 31, 1999 were 5.58%
and 6.5%, respectively.
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revolving credit line -- IBM Credit Corporation,
collateralized by all domestic assets of the Company,
bearing interest at the 30 day London Interbank Offered
Rate plus 1.75% to 1.9%, due in May 2002.................. $21,400 $ --
Revolving credit line -- IBM Credit Corporation,
collateralized by all Canadian assets of the Company,
bearing interest at the base rate as announced by the
Toronto-Dominion Bank of Canada plus .17% to .32%, due May
2002...................................................... 2,993 --
Notes payable -- bank, collateralized by business assets of
certain subsidiaries. Interest is payable monthly at rates
varying from the London Interbank Offered Rate plus 1.5%
to 3.5% in 1999, and prime plus 0.5% to 2.25% in 1998. The
credit lines are due through December 2000................ 723 5,974
</TABLE>
F-16
<PAGE> 120
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revolving credit line -- bank, collateralized by all assets
of the Company, bearing interest at the prime lending rate
or the London Interbank Offered Rate, as elected by the
Company, refinanced with IBM Credit in May 1999........... -- 17,193
Notes payable -- other, unsecured, due on demand............ 95 50
------- -------
$25,211 $23,217
======= =======
</TABLE>
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Term Loan -- IBM Credit Corporation, collateralized by all
domestic assets of the Company bearing interest at the 30
day London Interbank Offered Rate plus 1.75% to 1.9%,
payable in quarterly principal installments of $1,770 plus
interest, due in May 2002................................. $39,747 $ --
Term Loan -- IBM Credit Corporation, collateralized by all
Canadian assets of the Company, bearing interest at the
base rate as announced by the Toronto-Dominion Bank of
Canada plus 0.17% to 0.32%, payable in quarterly principal
installments of $113 plus interest, due May 2002.......... 2,489 --
Notes payable -- bank, collateralized by land, building and
assets, payable in monthly installments of principal and
interest totaling $25, bearing interest at rates between
8.15% and prime plus 1.5%, refinanced with IBM Credit
Corporation in May 1999................................... -- 805
Note payable -- bank, collateralized by subsidiary's
business assets, payable in monthly principal payments of
$62 plus interest at the prime rate plus 0.5%, refinanced
with IBM Credit Corporation in May 1999................... -- 1,402
Mortgage notes payable -- bank, collateralized by buildings,
payable in monthly installments of principal and interest
totaling $2, bearing interest at prime plus 2.0% in 1999,
due through April 2028.................................... 343 802
Notes payable -- finance companies and banks, collateralized
by vehicles, payable in monthly principal installments of
$1, bearing interest at rates ranging from 9.75% to 10.9%
in 1999, due through December 2002........................ 24 132
Notes payable -- bank, collateralized by business assets,
payable in monthly installments of principal and interest
totaling $2, bearing interest at rates ranging from 5.61%
to prime plus 2% in 1999, due through June 2003........... 54 118
Capital lease obligations................................... 698 737
------- ------
43,355 3,996
Less: Current maturities.................................... 8,038 1,158
------- ------
$35,317 $2,838
======= ======
</TABLE>
The scheduled maturities of long-term debt at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
2000........................................................ $ 8,038
2001........................................................ 7,756
2002........................................................ 26,117
2003........................................................ 494
2004........................................................ 472
Thereafter.................................................. 478
-------
$43,355
=======
</TABLE>
F-17
<PAGE> 121
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on the long and short-term notes payable (including notes
payable in Note 10) amounted to $3,842, $1,653 and $978 for the years ended
December 31, 1999, 1998 and 1997, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those instruments.
NOTES RECEIVABLE
The carrying value of the notes approximate fair value because either the
interest rates of the notes approximate the current rate that the Company could
receive on a similar note, or because of the short-term nature of the notes.
NOTES PAYABLE
The carrying amount approximates fair value because of the short-term
nature of the notes and the current rates approximate market rates.
LONG-TERM DEBT
The carrying amount approximates fair value because either the stated
interest rates fluctuate with current market rates or the interest rates
approximate the current rates at which the Company could borrow funds on a
similar note.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value.
13. INCOME TAXES
The provision for income taxes, excluding the $89 of tax benefit related to
the extraordinary loss in 1999, consists of:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Current:
United States at statutory rates.......................... $ 5,033 $1,747 $1,570
International............................................. (198) 930 533
Current taxes covered by net operating loss............... -- -- (88)
------- ------ ------
Current income tax provision.............................. 4,835 2,677 2,015
Deferred:
United States............................................. (1,553) 94 (246)
International............................................. (122) (183) --
------- ------ ------
Deferred income taxes (credit) provision.................. (1,675) (89) (246)
------- ------ ------
$ 3,160 $2,588 $1,769
======= ====== ======
</TABLE>
F-18
<PAGE> 122
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred Tax Assets:
Liabilities and reserves.................................. $1,203 $ 557
Net operating loss carryforwards.......................... 1,975 3,892
------ ------
Gross deferred tax assets................................. 3,178 4,449
Valuation allowance....................................... (15) (2,994)
------ ------
3,163 1,455
------ ------
Deferred Tax Liabilities:
Accounts receivable....................................... 118 719
Notes receivable.......................................... 361 361
Prepaid expenses.......................................... 418 --
Property and equipment.................................... 462 10
Intangible assets......................................... 380 365
------ ------
1,739 1,455
------ ------
Net Deferred Tax Asset...................................... $1,424 $ --
====== ======
</TABLE>
The valuation allowance for deferred tax asset decreased by $2,979 in 1999
and $520 in 1998 due to management determining it was more likely than not the
net operating loss carryforwards will be utilized in future periods.
Approximate domestic and international income before provision for income
taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Domestic.................................................... $9,599 $5,082 $3,132
International............................................... (452) 2,620 1,674
------ ------ ------
$9,147 $7,702 $4,806
====== ====== ======
</TABLE>
At December 31, 1999, the Company had aggregate net operating loss
carryforwards of approximately $6,300 for income tax purposes which expire in
various amounts through 2011. The net operating loss carryforwards were acquired
in connection with various 1997 acquisitions and are limited as to use in any
particular year based on Internal Revenue Code sections related to separate
return year and change of ownership restrictions. Utilization of the Company's
net operating loss carryforwards are estimated to be limited to approximately
$371 per year. When realized, the tax benefit of the acquired net operating loss
carryforwards will be recorded to income as there is no remaining goodwill or
other long term assets associated with these acquisitions.
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
% % %
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 34 34 34
Non-deductible goodwill amortization........................ 10 5 5
State income taxes, net of federal benefits................. 7 5 7
International tax rates different from the then statutory US
federal rate.............................................. (1) -- (3)
Reduction of deferred tax asset valuation allowance......... (20) (6) (5)
Other....................................................... 5 (4) (1)
--- -- --
35 34 37
=== == ==
</TABLE>
F-19
<PAGE> 123
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NUMERATOR:
Net income................................................ $ 5,432 $ 4,690 $ 2,340
Preferred stock dividends................................. -- (44) (72)
------- ------- -------
Numerator for basic earnings per share -- net income
available to common stockholders.......................... 5,432 4,646 2,268
Effect of dilutive securities:
Preferred stock dividends................................. -- 44 72
------- ------- -------
Numerator for diluted earnings per share -- net income
available to common stockholders.......................... $ 5,432 $ 4,690 $ 2,340
======= ======= =======
DENOMINATOR:
Denominator for basic earnings per
share -- weighted-average shares outstanding........... 46,814 32,318 12,632
------- ------- -------
Effect of dilutive securities:
Redeemable preferred stock................................ -- 85 998
Warrants.................................................. 280 477 779
Employee stock options.................................... 2,992 266 451
Contingent stock -- acquisitions.......................... -- 1,654 385
------- ------- -------
Dilutive potential common shares.......................... 3,272 2,482 2,613
------- ------- -------
Denominator For Diluted Earnings Per Share -- adjusted
weighted-average shares and assumed conversions........... 50,086 34,800 15,245
======= ======= =======
BASIC EARNINGS PER SHARE.................................... $ .12 $ .14 $ .18
======= ======= =======
DILUTED EARNINGS PER SHARE.................................. $ .11 $ .13 $ .15
======= ======= =======
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $5.2 million, $3.9 million and $2.7 million for the
years ended December 31, 1999, 1998 and 1997, 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 2009. Some of the employment contracts also call for bonus
arrangements based on earnings of a particular subsidiary.
F-20
<PAGE> 124
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 are:
<TABLE>
<CAPTION>
MINIMUM
RENTAL EMPLOYMENT
YEAR PAYMENTS CONTRACTS
---- -------- ----------
<S> <C> <C>
2000........................................................ $ 4,085 $ 7,500
2001........................................................ 3,467 6,500
2002........................................................ 3,032 5,200
2003........................................................ 2,063 3,100
2004........................................................ 1,493 1,000
Thereafter.................................................. 1,659 600
------- -------
$15,799 $23,900
======= =======
</TABLE>
The employment agreements with three of the executive officers include
"change of control" provisions, under which the employees may terminate their
employment within one year after a change of control, and be entitled to receive
specified severance payments and/or continued compensation payments for sixty
months. The employment agreements also provide that these executive officers are
entitled to supplemental compensation payments for sixty months upon termination
of employment, even if there is no change in control, unless their employment is
terminated due to a material breach of the terms of the employment agreement.
Also, the agreements for two officers provide for certain "triggering events"
which include a change in control. Upon the occurrence of a triggering event,
the Company will pay, in cash and/or in stock, $12.1 million and $3.5 million,
respectively, to two of these officers, in addition to certain other
compensation. Finally, the employment agreements provide for a gross up for
excise taxes which are payable by these executive officers if any payments upon
a change of control are subject to such taxes as excess parachute payments.
16. PROFIT SHARING PLAN
The Company has a 401(k) Plan for the benefit of eligible United States
employees. The Company has made no contributions to the 401(k) Plan.
The Company's International subsidiaries operate certain defined
contribution pension plans. The Company's expense relating to the plans
approximated $286 and $304 for the years ended December 31, 1999 and 1998.
17. REDEEMABLE PREFERRED SHARES
In March 1996, the Company issued nine thousand 8% convertible preferred
shares at $100 per share, in exchange for 80% of Burling Instruments, Inc. If,
and to the extent, the preferred shares had not been converted to common stock
by the second anniversary of the initial issuance of the shares, the Company was
required to redeem the preferred shares by paying $100 per share. Each holder of
the preferred shares had the ability to convert their preferred shares into
common shares by dividing the redemption price ($100) by $5.75 per common share.
The shares were redeemed in 1998. In October 1996, the Company issued one
hundred thousand 8% redeemable preferred shares at $100 per share as partial
consideration for the 100% purchase of ATI Communications. For purposes of
redemption of the preferred shares, each share of ACT Communications, Inc.'s
common stock was valued at $10,000. During 1997, the one hundred thousand shares
of preferred stock were redeemed for 1.4 million shares of the Company's common
stock.
F-21
<PAGE> 125
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. STOCKHOLDERS' EQUITY
PREFERRED SHARES
The Company has authorized 5 million shares of preferred stock, $10.00 par
value, to be issued from time to time on such terms as is specified by the board
of directors.
In May 1998, in connection with the Company's acquisition of Commstar
Limited, an Ontario corporation ("Commstar"), the board of directors authorized
the issuance of one share of the Company's Preferred Stock ($10.00 par value)
designated as the Company's Special Voting Preferred Stock (the "Special
Preferred Share"). The Special Preferred Share is entitled to a number of votes
equal to the number of outstanding shares of Commstar not owned by the Company
that can be exchanged for the Company's common shares. The holder of the Special
Preferred Share is not entitled to receive any dividends or participate in any
distribution of assets to the stockholders of the Company. When all of
Commstar's exchangeable shares have been exchanged or redeemed for shares of the
Company's Common Stock, the Special Preferred Share will be canceled. The
Company has the right to call the outstanding exchangeable shares with the
occurrence of various events including liquidation of Commstar and at the
five-year anniversary date of the acquisition. The Company initially reserved
3.4 million shares of its Common Stock to be exchanged for exchangeable shares
held by the Commstar selling shareholders, 1.4 million of which have been
exchanged into shares of Common Stock and 2.0 million are reserved at December
31, 1998. On July 30, 1998, Commstar acquired certain assets from Western
Inbound Network, Inc., an Ontario corporation, in consideration for 0.4 million
exchangeable shares. The Special Preferred Share was returned to the Company due
to the divestiture of TigerTel in 1999.
In June 1998, in connection with the Company's acquisition of Ground
Effects Limited, an Ontario corporation ("Ground Effects"), the board of
directors authorized the issuance of one share of the Company's Preferred Stock
($10.00 par value) designated as the Company's Class B Voting Preferred Stock
(the "Class B Special Preferred Share"). The Class B Special Preferred Share is
entitled to a number of votes equal to the number of outstanding shares of
Ground Effects not owned by the Company that can be exchanged for the Company's
common shares. The holder of the Class B Special Preferred Share is not entitled
to receive any dividends or participate in any distribution of assets to the
stockholders of the Company. When all exchangeable shares of Ground Effects have
been exchanged or redeemed for shares of the Company's Common Stock, the Special
Preferred Share will be canceled. The Company has the right to call the
outstanding exchangeable shares with the occurrence of various events including
liquidation of Ground Effects and at the five-year anniversary date of the
acquisition. The Company has reserved 1.1 million shares of its Common Stock to
be exchanged for exchangeable shares held by Ground Effects selling
shareholders, 1.0 million and 0.2 million of which have been exchanged into
shares of common stock and 0.1 million and 0.9 million are reserved as of
December 31, 1999 and 1998, respectively.
Since the Preferred Shares provide votes for the equivalent number of
common shares that may be exchanged and the common shares may be exchanged at
any time at the holders' option, for purposes of computing basic and diluted
earnings per share (Note 14), the reserved common shares are considered to be
outstanding for all periods that the Preferred Shares are issued.
F-22
<PAGE> 126
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
The Company has issued warrants convertible into shares of common stock for
consideration, as follows (in thousands, except exercise price):
<TABLE>
<CAPTION>
EXERCISABLE
CLASS OF WARRANTS AUTHORIZED ISSUED EXERCISED EXERCISE PRICE DATE OF ISSUE PERIOD
----------------- ---------- ------ --------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class K....................... 250 250 -- 5.31 September 1996 5 years
Class L....................... 125 125 123 3.00 October 1996 5 years
Class N....................... 800 800 750 3.00 August 1997 5 years
Class P....................... 520 520 275 3.00 September 1997 5 years
Class R....................... 125 125 63 3.00 October 1997 5 years
Class S....................... 600 600 223 2.00 April 1998 5 years
Class U....................... 250 250 -- 8.38 November 1998 5 years
----- ----- -----
2,670 2,670 1,434
===== ===== =====
</TABLE>
STOCK OPTION PLAN
During 1996, the Company adopted a non-qualified stock option plan (the
Option Plan). During 1999, the Company adopted a non-qualified Flexible Stock
Plan (the Flexible Plan). The Company applies APB Opinion No. 25 and related
Interpretations in accounting for the Option Plan and the Flexible Plan. Under
both Plans, options are granted at an exercise price equal to fair value on the
date of grant. Accordingly, no compensation cost has been recognized under
either Plan. Had compensation cost for either Plan been determined based on the
fair value at the grant dates for awards under either Plan, consistent with the
alternative method set forth under FAS 123, Accounting for Stock-Based
Compensation, the Company's net income applicable to common stockholders and
earnings per common and common equivalent share would have been reduced. The pro
forma amounts are indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
As reported............................................... $5,432 $4,646 $2,268
Pro forma................................................. $2,538 $2,408 $1,614
EARNINGS PER COMMON SHARE -- BASIC
As reported............................................... $ .12 $ .14 $ .18
Pro forma................................................. $ .05 $ .07 $ .13
EARNINGS PER COMMON SHARE -- DILUTED
As reported............................................... $ .11 $ .13 $ .15
Pro forma................................................. $ .05 $ .07 $ .11
</TABLE>
Under the Option Plan, options for ten million common shares were
authorized for issuance to certain officers and employees of the Company at
December 31, 1999, 1998, and 1997 respectively, of which 9.4 million had been
issued through December 31, 1999. The options may not be exercised until one to
three years after the options have been granted, and are exercisable for a
period of five years.
Under the Flexible Plan, the number of shares which may be issued or sold,
or for which options, Stock Appreciation Rights (SAR's) or Performance Shares
may be granted to certain officers and employees of the Company is five million
at December 31, 1999, of which 4.6 million options have been issued through
December 31, 1999. The options may not be exercised until one to three years
after the options have been granted, and are exercisable over a period of five
years.
F-23
<PAGE> 127
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1999, 1998, and 1997: dividend yield of 0% for
the three years; expected volatility of 43.41%, 43.69%, and 44.03%; risk-free
interest rate of 6.36%, 8.5%, and 8.5%; and expected lives of five years for the
three years. The weighted-average fair value of options granted was $1.17,
$1.27, and $1.58 for the years ended December 31, 1999, 1998, and 1997,
respectively. A summary of stock option activity for 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding on January 1.................... 9,105 $3.55 3,835 $4.39 2,180 $4.40
Granted..................................... 4,968 2.07 5,367 2.80 2,487 4.62
Exercised................................... (1,000) 2.53 -- -- (650) 4.25
Forfeited................................... (901) 3.26 (97) 4.79 (182) 4.23
------ ----- ----- ----- ----- -----
Outstanding on December 31.................. 12,172 $3.01 9,105 $3.55 3,835 $4.39
====== ===== ===== ===== ===== =====
Exercisable on December 31.................. 6,663 $3.56 2,885 $4.48 705 $4.44
====== ===== ===== ===== ===== =====
Shares available on December 31 for options
that may be granted....................... 1,178 450 1,145
------ ----- -----
</TABLE>
The following table summarizes information about stock options at December
31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
-------------------------------------------- --------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ ------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$0.01 to $1.00.................. 25 5.00 $0.61 -- $ --
$2.00 to $3.00.................. 6,671 5.37 2.17 1,811 2.17
$3.01 to $4.00.................. 3,200 4.31 3.53 2,727 3.50
$4.01 to $5.00.................. 1,471 3.40 4.40 1,336 4.39
$5.01 to $6.00.................. 805 3.99 5.52 789 5.53
------ ----- ----- -----
$0.01 to $6.00.................. 12,172 $3.01 6,663 $3.56
====== ===== ===== =====
</TABLE>
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
During 1999, the Company adopted a qualified Employee Stock Purchase Plan
(the Stock Purchase Plan). Under the Stock Purchase Plan, options are granted at
an exercise price of the lesser of 85% of the fair market value on the date of
grant or 85% of the fair market value on the exercise date. Under the Stock
Purchase Plan, options for 1.5 million common shares were authorized for
issuance to substantially all full-time employees of the Company, of which none
have been issued and exercised through December 31, 1999. Each participant's
options to purchase shares will be automatically exercised for the participant
on the exercise dates determined by the Board of directors.
19. LEGAL PROCEEDINGS
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material adverse affect
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-24
<PAGE> 128
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUPPLEMENTAL CASH FLOW INFORMATION
The changes in operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Increase in accounts receivable and unbilled
receivables........................................... $(19,835) $ (1,922) $(3,992)
Increase in inventories................................. (15,624) (4,148) (657)
Increase in prepaid expenses............................ (3,452) (442) (676)
Increase in deferred tax asset.......................... (1,344) (89) (121)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 27,772 (4,771) (1,103)
-------- -------- -------
$(12,483) $(11,352) $(6,549)
======== ======== =======
</TABLE>
In the years ended December 31, 1999, 1998 and 1997, the Company had the
following noncash investing and financing activities:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Assets acquired for common stock.......................... $19,027 $25,408 $13,485
Due from buyer of divested subsidiary (Note 2)............ 31,302 -- --
Due to shareholders of acquired subsidiary (Note 2)....... 15,000 -- --
Tax benefit from stock options............................ 1,825 -- 454
Assets acquired for long-term debt and capital leases..... 662 2,635 614
Sale of assets for preferred stock........................ -- 3,000 --
Payment of debt in exchange for common stock.............. -- -- 521
Other..................................................... -- 132 --
</TABLE>
21. SEGMENT INFORMATION
In 1998, the Company adopted FAS No. 131. Prior years information has been
restated to present the Company's reportable segments. The Company is organized
into six operating segments, whose principal products and services are as
follows:
<TABLE>
<CAPTION>
OPERATING SEGMENT PRINCIPAL PRODUCTS AND SERVICES
----------------- -------------------------------
<S> <C> <C>
Telephony................................... - Telephone services and systems
- Computer telephony integration
- Interactive voice response
- Call centers
- Voice messaging
Network..................................... - Computer systems
- e-Business infrastructure design and
deployment
- Local and wide area networks
- Application servers
Internet.................................... - Electronic Commerce
- ERP solutions
- Intranet
- Extranet
- Wide area networks
</TABLE>
F-25
<PAGE> 129
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPERATING SEGMENT PRINCIPAL PRODUCTS AND SERVICES
----------------- -------------------------------
<S> <C> <C>
Applications................................ - Global positioning systems
- Field automation
- Asset management
- Satellite communication technology
- Corporate enterprise access
- Decision support
- Voice/data technology
IntelleSale.com............................. - Sales of new and refurbished computer
equipment
- Peripherals
- Components
- Business continuity services
- Consulting
- Systems integration
- Transportation
Non-Core.................................... - Electrical components
- Design engineering
- Manufacturing engineering
- Automation systems
- Vacuum pumps
- Communications towers
</TABLE>
The "Eliminations" category includes all amounts recognized upon
consolidation of the Company's subsidiaries such as the elimination of
intersegment revenues, expenses, assets and liabilities and goodwill
amortization expense. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies,
except that intersegment sales and transfers are generally accounted for as if
the sales or transfers were to third parties at current market prices; segment
data includes an allocated charge for the corporate headquarters costs. It is on
this basis that management utilizes the financial information to assist in
making internal operating decisions. The Company evaluates performance based on
stand alone segment operating income.
F-26
<PAGE> 130
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------------------------------
APPLI- INTELLE- CORPORATE ELIMI- CONSOLI-
TELEPHONY NETWORK INTERNET CATIONS SALE.COM NON-CORE OVERHEAD NATIONS DATED
--------- ------- -------- ------- -------- -------- --------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers..................... $59,225 $27,190 $6,607 $35,780 $142,987 $64,689 $ 263 $ -- $336,741
Intersegment net revenue........ -- -- -- -- 8,000 -- -- (8,000) --
------- ------- ------ ------- -------- ------- ------- ------- --------
Total Revenue........... 59,225 27,190 6,607 35,780 150,987 64,689 263 (8,000) 336,741
======= ======= ====== ======= ======== ======= ======= ======= ========
Depreciation and amortization... 1,547 132 69 2,366 529 1,153 980 2,911 9,687
Interest income................. 144 31 -- 11 154 40 2,957 (2,721) 616
Interest expense................ 622 126 43 461 1,684 438 3,189 (2,721) 3,842
Income before provision for
income taxes, minority
interest and extraordinary
loss.......................... 436 1,456 603 (1,475) 5,191 (438) 5,833 (2,459) 9,147
Segment assets.................. 10,237 6,686 2,900 22,475 61,508 24,054 47,863 53,253 228,976
Expenditures for property and
equipment..................... 2,177 179 371 533 1,459 1,789 516 -- 7,024
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------------------------
APPLI- INTELLE- CORPORATE ELIMI- CONSOLI-
TELEPHONY NETWORK INTERNET CATIONS SALE.COM NON-CORE OVERHEAD NATIONS DATED
--------- ------- -------- ------- -------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers................... $33,270 $21,282 $ -- $19,859 $60,877 $71,793 $ -- $ -- $207,081
Intersegment net revenue...... -- -- -- -- 1,949 -- -- (1,949) --
------- ------- ------ ------- ------- ------- -------- --------- --------
Total Revenue................. 33,270 21,282 -- 19,859 62,826 71,793 -- (1,949) 207,081
======= ======= ====== ======= ======= ======= ======== ========= ========
Depreciation and
amortization................ 677 39 -- 1,241 251 935 137 1,221 4,501
Interest income............... 129 14 -- 47 45 83 686 (584) 420
Interest expense.............. 531 144 -- 192 340 559 471 (584) 1,653
Income before provision for
income taxes, minority
interest and extraordinary
loss........................ 723 1,433 -- 1,279 4,214 4,343 (3,161) (1,220) 7,702
Segment assets................ 21,989 5,528 -- 22,849 13,595 29,274 147,518 (116,637) 124,116
Expenditures for property and
equipment................... 231 46 -- 73 138 788 674 -- 1,950
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------------------------------
APPLI- INTELLE- CORPORATE ELIMI- CONSOLI-
TELEPHONY NETWORK INTERNET CATIONS SALE.COM NON-CORE OVERHEAD NATIONS DATED
--------- ------- -------- ------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers.................... $32,208 $ -- $ -- $ 9,574 $39,445 $21,932 $ -- $ -- $103,159
Intersegment net revenue....... -- -- -- -- 2,127 -- -- (2,127) --
------- ------ ------ ------- ------- ------- ------ -------- --------
Total Revenue.................. 32,208 -- -- 9,574 41,572 21,932 -- (2,127) 103,159
======= ====== ====== ======= ======= ======= ====== ======== ========
Depreciation and
amortization................. 300 -- -- 459 108 277 17 713 1,874
Interest income................ 62 -- -- 26 1 7 130 (34) 192
Interest expense............... 491 -- -- 103 152 256 9 (33) 978
Income before provision for
income taxes, minority
interest and extraordinary
loss......................... 1,048 -- -- 2,082 2,205 725 (544) (710) 4,806
Segment assets................. 12,559 -- -- 77,886 8,736 12,667 3,523 (54,089) 61,282
Expenditures for property and
equipment.................... 118 -- -- 141 364 278 15 -- 916
</TABLE>
F-27
<PAGE> 131
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. Information concerning principal geographic areas
as of and for the years ended December 31, was as follows (in thousands):
<TABLE>
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM CONSOLIDATED
-------- ------- ------- ------------
<S> <C> <C> <C> <C>
1999
Net revenue................................. $263,074 $55,296 $18,371 $336,741
Total assets................................ 205,883 11,825 11,268 228,976
1998
Net revenue................................. $172,369 $22,017 $12,695 $207,081
Total assets................................ 91,458 18,137 14,521 124,116
1997
Net revenue................................. $ 96,796 $ 1,381 $ 4,982 $103,159
Total assets................................ 56,177 1,254 3,851 61,282
</TABLE>
22. RELATED PARTY TRANSACTIONS
In connection with the acquisitions which took place in 1998 and 1997, the
Company paid a related party, $0.6 million and $0.5 million, respectively, for
investment banking services. These payments were included in the total cost of
assets purchased and are being amortized over the life of the related assets.
In 1998, the Company sold its investment in a subsidiary company to a
related party for two thousand shares of preferred stock.
23. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma consolidated information of the Company for the
years ended December 31, 1999 and 1998 gives effect to the acquisitions,
disclosed in Note 2, as if they were effective at January 1, 1998. The statement
gives effect to the acquisitions under the purchase method of accounting.
The pro forma information may not be indicative of the results that would
have actually occurred if the acquisitions had been effective on the dates
indicated or of the results that may be obtained in the future. The pro forma
information should be read in conjunction with the consolidated financial
statements and notes thereto of the Company.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating revenue....................................... $390,418 $323,891
Net income.................................................. 5,989 6,677
Net income available to common stockholders................. 5,989 6,615
Earnings per common share -- basic.......................... .13 .19
Earnings per common share -- diluted........................ .12 .18
</TABLE>
F-28
<PAGE> 132
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. SUMMARIZED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1999
Net operating revenue......................... $51,573 $72,955 $107,262 $104,951 $336,741
Gross profit.................................. 18,397 26,283 28,666 21,605 94,951
Net (loss) income available to common
stockholders(1)............................. (1,645) 341 447 6,289 5,432
Basic (loss) net income per share(2).......... (0.04) 0.01 0.01 0.13 0.12
Diluted (loss) net income per share(2)........ (0.04) 0.01 0.01 0.12 0.11
1998
Net operating revenue......................... $38,784 $53,680 $ 59,044 $ 55,573 $207,081
Gross profit.................................. 10,486 17,608 18,949 17,145 64,188
Net income available to common stockholders... 597 2,351 1,654 44 4,646
Basic net income per share(2)................. 0.03 0.07 0.05 -- 0.14
Diluted net income per share(2)............... 0.02 0.07 0.05 -- 0.13
1997
Net operating revenue......................... $18,127 $24,743 $ 29,195 $ 31,094 $103,159
Gross profit.................................. 6,048 8,309 10,369 9,025 33,751
Net income available to common stockholders... 279 519 1,174 296 2,268
Basic net income per share(2)................. 0.05 0.07 0.09 0.02 0.18
Diluted net income per share(2)............... 0.04 0.06 0.08 0.01 0.15
</TABLE>
---------------
(1) First quarter net loss includes one time restructuring and unusual costs of
$2,550.
(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net earnings per share will
not necessarily equal the total for the year.
F-29
<PAGE> 133
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
(IN THOUSANDS,
EXCEPT PAR VALUE)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 5,863 $ 5,138
Due from buyer of divested subsidiary..................... -- 31,302
Accounts receivable and unbilled receivables (net of
allowance for doubtful accounts of $1,568 in 2000 and
$1,698 in 1999)........................................ 47,647 52,170
Inventories............................................... 46,311 40,448
Notes receivable.......................................... 3,988 3,822
Prepaid expenses and other current assets................. 8,976 6,001
-------- --------
Total Current Assets.............................. 112,785 138,881
Property and Equipment, Net................................. 16,188 13,886
Notes Receivable............................................ 3,396 3,297
Goodwill, Net............................................... 65,696 62,000
Other Assets................................................ 11,016 10,912
-------- --------
$209,081 $228,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable............................................. $ 10,952 $ 25,211
Current maturities of long-term debt...................... 8,740 8,038
Due to shareholders of acquired subsidiary................ 10,000 15,000
Accounts payable.......................................... 26,586 29,499
Accrued expenses.......................................... 11,489 17,672
Other current liabilities................................. 4,695 2,745
-------- --------
Total Current Liabilities......................... 72,462 98,165
Long-Term Debt.............................................. 36,999 35,317
-------- --------
Total Liabilities................................. 109,461 133,482
-------- --------
Commitments and Contingencies
Minority Interest........................................... 2,294 2,558
-------- --------
Stockholders' Equity
Preferred shares:
Authorized 5,000 shares in 2000 and 1999 of $10 par
value; special voting, issued and outstanding 1 share
in 2000 and 1999, Class B voting, issued and
outstanding 1 share in 2000 and 1999.................. -- --
Common shares:
Authorized 80,000 shares in 2000 and 1999, of $.001 par
value; 53,173 shares issued and 50,317 shares
outstanding in 2000 and 51,116 shares issued and
48,260 shares outstanding in 1999..................... 50 48
Common and preferred additional paid-in capital........ 93,404 87,470
Retained earnings...................................... 11,492 12,664
Treasury stock (carried at cost, 2,856 shares)......... (7,310) (7,310)
Accumulated other comprehensive income (loss).......... (310) 64
-------- --------
Total Stockholders' Equity........................ 97,326 92,936
-------- --------
$209,081 $228,976
======== ========
</TABLE>
F-30
<PAGE> 134
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net operating revenue....................................... $ 85,153 $ 51,573
Cost of goods sold.......................................... 63,910 33,176
-------- --------
Gross profit................................................ 21,243 18,397
Selling, general and administrative expenses................ (20,355) (16,091)
Depreciation and amortization............................... (2,090) (1,421)
Restructuring and unusual costs............................. -- (2,550)
Interest income............................................. 197 134
Interest expense............................................ (1,118) (445)
-------- --------
Loss before benefit for income taxes and minority
interest.................................................. (2,123) (1,976)
Benefit for income taxes.................................... (598) (575)
-------- --------
Loss before minority interest............................... (1,525) (1,401)
Minority interest........................................... (353) 244
-------- --------
Net loss available to common stockholders................... $ (1,172) $ (1,645)
======== ========
Net loss per common share -- basic.......................... $ (.02) $ (.04)
Net loss per common share -- diluted........................ $ (.02) $ (.04)
Weighted average number of common shares
outstanding -- basic...................................... 49,012 41,236
Weighted average number of common shares
outstanding -- diluted.................................... 49,012 41,236
</TABLE>
F-31
<PAGE> 135
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PREFERRED STOCK COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
--------------- --------------- PAID-IN RETAINED TREASURY INCOME STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL EARNINGS STOCK (LOSS) EQUITY
------ ------ ------ ------ ---------- -------- -------- ------------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31,
1999...................... -- $ -- 48,260 $48 $87,470 $12,664 $(7,310) $ 64 $92,936
Net loss.................. -- -- -- -- -- (1,172) -- --
Comprehensive
loss -- foreign currency
translation............. -- -- -- -- -- -- -- (374)
Total comprehensive
loss.................... -- -- -- -- -- (1,172) -- (374) (1,546)
Issuance of common
shares.................... -- -- 1,316 2 3,944 -- -- -- 3,946
Issuance of common shares
for acquisition........... -- -- 423 -- 1,038 -- -- -- 1,038
Warrants redeemed for
common shares............. -- -- 318 -- 952 -- -- -- 952
--- ---- ------ --- ------- ------- ------- ----- -------
BALANCE -- MARCH 31,
2000...................... -- $ -- 50,317 $50 $93,404 $11,492 $(7,310) $(310) $97,326
=== ==== ====== === ======= ======= ======= ===== =======
</TABLE>
F-32
<PAGE> 136
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................. $(1,172) $(1,645)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 2,090 1,486
Minority interest...................................... (353) 244
Gain on sale of equipment.............................. (10) --
Non-cash loss on restructuring......................... -- 205
Change in assets and liabilities:
Decrease (increase) in accounts receivable........... 4,523 (2,032)
Increase in inventories.............................. (5,863) (1,190)
Increase in prepaid expenses......................... (2,975) (267)
Decrease in deferred tax asset....................... 206 --
(Decrease) increase in accounts payable and accrued
expenses............................................ (9,471) 3,617
------- -------
Net cash provided by operating activities................... (13,025) 418
------- -------
Cash flows from investing activities
Decrease in due from buyer of divested subsidiary......... 31,302 --
(Increase) decrease in notes receivable................... (265) 130
Increase in other assets.................................. (585) (257)
Proceeds from sale of property and equipment.............. 32 20
Payments for property and equipment....................... (3,046) (757)
Payments for costs of asset and business acquisitions (net
of cash balances acquired)............................. (6,636) (2,411)
------- -------
Net cash provided by (used in) investing activities......... 20,802 (3,275)
------- -------
Cash flows from financing activities
Net amounts paid on notes payable......................... (14,259) (2,935)
Proceeds from long-term debt.............................. 4,566 2,331
Payments on long-term debt................................ (2,367) (289)
Other financing costs..................................... -- (107)
Issuance of common shares................................. 5,008 --
------- -------
Net cash used in financing activities....................... (7,052) (1,000)
------- -------
Net increase (decrease) in cash and cash equivalents........ 725 (3,857)
Cash and cash equivalents -- beginning of period............ 5,138 4,555
------- -------
Cash and cash equivalents -- end of period.................. $ 5,863 $ 698
======= =======
</TABLE>
F-33
<PAGE> 137
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Applied
Digital Solutions, Inc. (the "Company") as of March 31, 2000 and for the three
months ended March 31, 2000 and 1999 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 of 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 three months ended March
31, 2000 is not necessarily indicative of the results that may be expected for
the entire year. These statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 1999.
2. PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its wholly
owned and majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
3. INVENTORY
Inventory at March 31, 2000 and December 31, 1999 consists of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials............................................... $ 4,081 $ 4,648
Work in process............................................. 1,479 1,195
Finished goods.............................................. 41,382 35,602
------- -------
46,942 41,445
Allowance for excess and obsolescence....................... (631) (997)
------- -------
$46,311 $40,448
======= =======
</TABLE>
4. FINANCING AGREEMENTS
In August 1998, the Company entered into a $20 million line of credit with
State Street Bank and Trust Company secured by all of our domestic assets at the
prime lending rate or at the London Interbank Offered Rate, at our discretion.
In February 1999, the amount of the credit available under the facility was
increased to $23 million. On May 25, 1999, the Company entered into a Term and
Revolving Credit Agreement with IBM Credit Corporation (the "IBM Agreement"). On
May 26, 1999, the Company repaid the amount due to State Street Bank and Trust
Company. On July 30, 1999 and January 27, 2000, the IBM Agreement was amended
and restated. The IBM Agreement, as amended, provides for:
(a) a revolving credit line of up to $33.855 million, designated as
follows: (i) a USA revolving credit line of up to $30 million, and (ii) a
Canadian revolving credit line of up to $3.855 million,
(b) a term loan A of up $22 million,
(c) a term loan B of up to $36.405 million,
F-34
<PAGE> 138
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) a term loan C of up to $2.740 million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and is
repayable in full on May 25, 2002. The USA revolving credit line bears interest
at the 30-day LIBOR rate plus 1.75% to 1.90% depending on the Company's leverage
ratio; the Canadian revolving credit line bears interest at the base rate as
announced by the Toronto-Dominion Bank of Canada each month plus 0.1707% to
.3207%, depending on the Company's leverage ratio. As of March 31, 2000, the
LIBOR rate was approximately 5.9% and approximately $10.3 million was
outstanding on the revolving credit line, which is included in notes payable.
Term loan A, which was used to pay off State Street Bank and Trust Company,
bears interest at the 30-day LIBOR rate plus 1.75% to 1.90%, is amortized in
quarterly installments over six years and is repayable in full on May 25, 2002.
As of March 31, 2000, approximately $19.2 million was outstanding on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75% to 1.90%, is amortized in quarterly installments
over six years and is repayable in full on May 25, 2002. As of March 31, 2000,
approximately $23.3 million was outstanding on this loan.
Term loan C, which was used by our Canadian subsidiary to pay off their
bank debt, bears interest at the base rate as announced by the Toronto-Dominion
Bank of Canada each month plus 0.1707%, to 0.3207%, is amortized in quarterly
installments over six years and is repayable in full on May 25, 2002. As of
March 31, 2000, Toronto-Dominion's rate was approximately 6.75% and
approximately $2.4 million was outstanding on this loan.
The agreement contains standard debt covenants relating to the financial
position and performance as well as restrictions on the declarations and payment
of dividends. As of March 31, 2000, the Company was in compliance with, or had
received waivers for compliance with, all debt covenants.
5. RESTRUCTURING AND UNUSUAL CHARGES
In the first quarter of 1999, a pre-tax charge of $2,550 was recorded to
cover restructuring costs of $2,236 and unusual charges of $314.
Restructuring Charge
As part of the Company's reorganization of its core business into four
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telephony and Applications business groups, and the associated
write-off of assets. The restructuring charge of $2,236 included asset
impairments, primarily software and other intangible assets, of $1,522, lease
terminations of $541, and employee separations of $173. The total charge reduced
net income by $1,588.
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through March 31, 2000:
<TABLE>
<CAPTION>
BALANCE, BALANCE BALANCE
JANUARY 1, DECEMBER 31, MARCH 31,
TYPE OF COST 1999 ADDITIONS DEDUCTIONS 1999 DEDUCTIONS 2000
------------ ---------- --------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Asset impairment.................. $ -- $1,522 $1,522 $ -- $ -- $--
Lease terminations................ -- 541 342 199 199 --
Employee separations.............. -- 173 123 50 -- 50
------ ------ ------ ---- ---- ---
Total................... $ -- $2,236 $1,987 $249 $199 $50
====== ====== ====== ==== ==== ===
</TABLE>
F-35
<PAGE> 139
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unusual Items
During the first quarter of 1999, as part of the Company's core business
reorganization, the Company realigned certain operations within its telephony
division and has recognized impairment charges and other related costs of $314.
The total charge reduced net income by $223.
6. LOSS PER SHARE
The following is a reconciliation of the numerator and denominator of basic
and diluted loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Numerator:
Net loss available to common stockholders................. $(1,172) $(1,645)
======= =======
Denominator:
Denominator for basic loss per share --
Weighted-average shares(1)................................ 49,012 41,236
======= =======
Denominator for diluted loss per share(2)................. 49,012 41,236
======= =======
Basic loss per share...................................... $ (0.02) $ (0.04)
======= =======
Diluted loss per share.................................... $ (0.02) $ (0.04)
======= =======
</TABLE>
---------------
(1) Includes, for the three month periods ended March 31, 2000 and 1999, 0.5 and
136 shares of common stock, respectively, reserved for issuance to the
holders of ACT-GFX, Inc.'s exchangeable shares and for the three month
period ended March 31, 1999, 1,257 shares of common stock reserved for
issuance to the holders of TigerTel Services Limited's (formerly Commstar
Ltd.) exchangeable shares.
(2) The weighted average shares listed below were not included in the
computation of diluted loss per share because to do so would have been
anti-dilutive for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Employee stock options...................................... 5,004 380
Warrants.................................................... 534 293
Contingent stock -- acquisitions............................ 117 --
------- -------
5,655 673
======= =======
</TABLE>
7. SEGMENT INFORMATION
The Company is organized into six operating segments. The "eliminations"
category includes all amounts recognized upon consolidation of the Company's
subsidiaries such as the elimination of intersegment revenues, expenses, assets
and liabilities and goodwill amortization expense. The accounting policies of
the operating segments are the same as those described in the summary of
significant accounting policies in the Company's Annual Report on Form 10-K
filed for the year ended December 31, 1999, except that intersegment sales and
transfers are generally accounted for as if the sales or transfers were to third
parties at current market prices and segment data includes an allocated charge
for the corporate headquarters costs. It is on this basis that management
utilizes the financial information to assist in making internal operating
decisions. The Company evaluates performance based on stand-alone segment
operating income. Certain prior period information has been reclassified for
comparative purposes.
F-36
<PAGE> 140
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is the selected segment data as of and for the three months ended
March 31, 2000:
<TABLE>
<CAPTION>
CORPORATE
TELEPHONY NETWORK INTERNET APPLICATIONS INTELLESALE.COM NON-CORE OVERHEAD ELIMINATIONS
--------- ------- -------- ------------ --------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue...... $ 4,498 $7,245 $2,026 $ 8,933 $48,337 $14,016 $ 98 $ --
Intersegment
revenue............. -- -- -- -- 2,500 -- -- (2,500)
------- ------ ------ ------- ------- ------- -------- ---------
Total
revenue..... 4,498 7,245 2,026 8,933 50,837 14,016 98 (2,500)
======= ====== ====== ======= ======= ======= ======== =========
Income (loss) before
benefit for income
taxes and minority
interest............ (462) 252 6 (28) 511 1,001 (2,603) (800)
Total
assets...... 10,482 6,786 2,944 21,661 65,639 27,545 196,109 (122,085)
<CAPTION>
CONSOLIDATED
------------
<S> <C>
External revenue...... $ 85,153
Intersegment
revenue............. --
--------
Total
revenue..... 85,153
========
Income (loss) before
benefit for income
taxes and minority
interest............ (2,123)
Total
assets...... 209,081
</TABLE>
Following is the selected segment data as of and for the three months ended
March 31, 1999:
<TABLE>
<CAPTION>
CORPORATE
TELEPHONY NETWORK INTERNET APPLICATIONS INTELLESALE.COM NON-CORE OVERHEAD ELIMINATIONS
--------- ------- -------- ------------ --------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue...... $ 9,012 $4,006 $ 997 $ 6,755 $15,574 $15,210 $ 19 $ --
Intersegment
revenue............. -- -- -- -- 1,533 -- -- (1,533)
------- ------ ------ ------- ------- ------- -------- ---------
Total
revenue..... 9,012 4,006 997 6,755 17,107 15,210 19 (1,533)
======= ====== ====== ======= ======= ======= ======== =========
Income (loss) before
benefit for income
taxes and minority
interest............ 510 203 (49) (380) 2,289 197 (4,359) (387)
Total
assets...... 23,400 3,516 1,205 21,501 16,938 29,407 156,361 (120,264)
<CAPTION>
CONSOLIDATED
------------
<S> <C>
External revenue...... $ 51,573
Intersegment
revenue............. --
--------
Total
revenue..... 51,573
========
Income (loss) before
benefit for income
taxes and minority
interest............ (1,976)
Total
assets...... 132,064
</TABLE>
8. MERGERS AND ACQUISITIONS
The following represents acquisitions which occurred in the first quarter
of 2000 and in 1999:
<TABLE>
<CAPTION>
COMMON/
PREFERRED
DATE OF PERCENT ACQUISITION SHARES
ACQUISITION ACQUIRED PRICE ISSUED BUSINESS DESCRIPTION
----------- -------- ----------- --------- --------------------
<S> <C> <C> <C> <C> <C>
First Quarter 2000
Acquisitions
None
1999 Acquisitions
Port Consulting, Inc....... 04/01/99 100% $1,292 -- Integrator of information
technology application
systems
Hornbuckle Engineering,
Inc..................... 04/01/99 100 4,626 555 Integrated voice and data
solutions provider
Lynch Marks & Associates,
Inc..................... 04/01/99 100 2,526 773 Network integration company
STR, Inc................... 04/01/99 100 6,800 932 Software solutions provider
for retailers
TigerTel Services Limited
(formerly Contour
Telecom Management,
Inc.) (Divested
effective 12/31/99)..... 05/01/99 75 5,627 -- Provider of outsourced
telecommunications
management services
Bostek, Inc. & affiliate... 06/01/99 100 26,966 -- Seller of computer systems
and peripherals
</TABLE>
F-37
<PAGE> 141
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnout and Put Agreements
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements reflect the
results of operations of each company from the date of acquisition. The costs of
acquisitions include all payments according to the acquisition agreements plus
costs for investment banking services, legal services and accounting services,
that were direct costs of acquiring these assets. Goodwill resulting from these
acquisitions is being amortized on a straight-line basis, over twenty years.
Certain acquisition agreements include additional consideration contingent on
profits of the acquired subsidiary. Upon earning this additional consideration,
the value will be recorded as additional goodwill. The acquisitions above
include contingent shares earned upon attainment of certain profits by
subsidiaries through March 31, 2000. Under these agreements, assuming all
earnout profits are achieved, the Company is contingently liable for additional
consideration of approximately $7.6 million in 2001, $1.8 million in 2002 and
$2.0 million in 2004, of which $1.0 million would be payable in cash and $10.4
million would be payable in stock.
The Company has entered into put options with the sellers of those
companies in which it acquired less than a 100% interest. These options require
the Company to purchase the remaining portion it does not own after periods
ranging from four to five years from the date of acquisition at amounts per
share generally equal to 10% to 20% of the average annual earnings per share of
the subsidiary company before income taxes for the two year period ending the
effective date of the put multiplied by a multiple ranging from four to five. In
the second quarter of 1999, the Company entered into agreements to pay $3.9
million to acquire put options in certain companies owned by the Company's
subsidiary, Intellesale.com. In addition, based on current earnings, assuming
all other put options are exercised, the Company is contingently liable for an
additional $6.3 million in the next two years. The contingent amounts for
earnouts and put options have not been recorded as liabilities in the financial
statements as it is uncertain whether the contingencies will be met.
There were 377 and 9,441 shares of common stock issued during the first
three months of 2000 and 1999, respectively, related to agreements with the
company's subsidiaries primarily for earnouts and to purchase minority
interests.
Major Acquisition
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 $27 million, of which $10.2 million was paid in cash at closing,
$5 million was paid in cash in January 2000 and $1.8 million for the 1999
earnout was paid in cash in February 2000. The earnout accrual was included in
the other current liabilities at December 31, 1999. Upon a successful initial
public offering of IntelleSale.com, $10 million will be payable in stock of
IntelleSale.com to the former owners of Bostek. In the event that the initial
public offering does not occur, the $10 million will be payable in cash on June
30, 2000. An additional $3.2 million is contingent upon achievement of certain
earnings targets. The operating results of the Company include Bostek from its
acquisition date. The total purchase price of Bostek, including the liabilities,
was allocated to the identifiable assets with the remainder of $24.4 million
recorded as goodwill which is being amortized over 20 years.
Dispositions
Effective October 1, 1999, the Company entered into a Stock Purchase
Agreement for the sale of all outstanding shares of common stock of four
non-core subsidiaries. In consideration, the Company received a note for $2.5
million, and 2.8 million shares of the Company's common stock, recorded as
treasury stock in the amount of $7 million. No gain was recorded on this
transaction, because the shareholders of the purchaser of the divested assets
were deemed to be significant shareholders of the Company. The operating results
of these companies are properly included in the Company's financial statements
through the date of disposition.
F-38
<PAGE> 142
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 30, 1999, the Company sold its approximately 4.9 million
shares in TigerTel, Inc., its Toronto-based telecommunications subsidiary. The
total proceeds were $31.3 million in cash, resulting in a pre-tax gain of $20.1
million. Payment of the proceeds was received on January 10, 2000. The operating
results of TigerTel are properly included in the Company's financial statements
through the date of disposition.
9. RECENT DEVELOPMENTS
On September 14, 1999, our subsidiary, IntelleSale.com, Inc., filed a
registration statement with the Securities and Exchange Commission in connection
with its proposed initial public offering (initial public offering). In addition
to IntelleSale.com selling primary shares, the Company expected to sell shares
of IntelleSale.com's common stock as a selling shareholder. On January 31, 2000,
the Company announced a postponement of the initial public offering of
IntelleSale.com's common stock due to market conditions. Deferred initial public
offering fees have been capitalized in anticipation of completing the initial
public offering within the next fiscal year.
On March 3, 2000, the Company announced, and on April 24, 2000, the Company
signed a definitive merger agreement to acquire Destron Fearing Corporation, a
Nasdaq listed company trading under the stock symbol "DFCO". Destron Fearing is
a leading developer, manufacturer and marketer of a broad line of electronic and
visual identification devices for companion animals, livestock, laboratory
animals and wildlife. In this proposed transaction, the Company will issue
shares of its common stock in exchange for shares of common stock of Destron
Fearing. The approximately $80 million transaction is expected to close by the
end of July 2000, subject to a number of conditions including the completion of
due diligence, approval of both the Company's and Destron Fearing's
shareholders, and approval of relevant government agencies. Under the agreement,
Destron Fearing would be merged into Digital Angel.net Inc., the Company's
wholly owned subsidiary.
On March 22, 2000, the Company filed a shelf registration statement to
sell, from time to time, up to 3 million shares of its common stock. Proceeds
from the sale will be used for general corporate purposes, including the funding
of future acquisitions. On April 5, 2000 the Company announced that it was
postponing the offering because of adverse market conditions.
10. SUBSEQUENT EVENTS
On May 5, 2000, the Company signed a letter of intent to acquired 100% of
ATEC Group Inc. (ATEC), a Nasdaq listed company, in an all-stock transaction
valued at approximately $55.9 million. On May 23, 2000, Applied Digital
announced that the letter of intent to acquire ATEC had been terminated due to
market conditions.
F-39
<PAGE> 143
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Destron Fearing Corporation:
We have audited the accompanying consolidated balance sheets of Destron
Fearing Corporation (a Delaware corporation) and Subsidiaries as of September
30, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended September 30, 1999. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Destron Fearing Corporation
and Subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 5, 1999
F-40
<PAGE> 144
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,027,000 $ 104,000
Accounts receivable, net of allowance for doubtful
accounts of $147,000 and $134,000...................... 1,757,000 2,212,000
Inventories............................................... 3,827,000 4,753,000
Vendor deposits........................................... 665,000 475,000
Prepaid expenses and other current assets................. 102,000 33,000
------------ ------------
Total current assets.............................. 7,378,000 7,577,000
PROPERTY AND EQUIPMENT, net................................. 1,808,000 1,922,000
GOODWILL, net............................................... 1,833,000 1,917,000
OTHER ASSETS, net........................................... 127,000 147,000
------------ ------------
$ 11,146,000 $ 11,563,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $ -- $ 1,278,000
Accounts payable.......................................... 695,000 988,000
Customer deposits......................................... -- 865,000
Accrued liabilities....................................... 571,000 495,000
Current portion of long-term obligations.................. 663,000 2,544,000
------------ ------------
Total current liabilities......................... 1,929,000 6,170,000
LONG-TERM OBLIGATIONS, net of current portion............... 796,000 677,000
------------ ------------
Total liabilities................................. 2,725,000 6,847,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized,
13,443,000 and 13,354,000 shares issued and outstanding... 135,000 134,000
Common stock warrants....................................... 100,000 --
Additional paid-in capital.................................. 19,904,000 19,846,000
Accumulated deficit......................................... (11,718,000) (15,264,000)
------------ ------------
8,421,000 4,716,000
------------ ------------
Total shareholders' equity........................ $ 11,146,000 $ 11,563,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-41
<PAGE> 145
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................... $18,548,000 $12,601,000 $12,889,000
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales......................................... 10,996,000 9,248,000 8,578,000
Selling, general and administrative................... 3,228,000 3,774,000 3,651,000
Research and development.............................. 802,000 1,017,000 870,000
Interest expense and other............................ 368,000 542,000 562,000
----------- ----------- -----------
Total costs and expenses...................... 15,394,000 14,581,000 13,661,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....................... 3,154,000 (1,980,000) (772,000)
PROVISION FOR INCOME TAXES.............................. 80,000 -- --
----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY GAIN............. 3,074,000 (1,980,000) (772,000)
EXTRAORDINARY GAIN ON DEBT RESTRUCTURING (Note 3)....... 472,000 -- --
----------- ----------- -----------
NET INCOME (LOSS)....................................... $ 3,546,000 $(1,980,000) $ (772,000)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic --
Net income (loss) before extraordinary gain........... $ 0.23 $ (0.15) $ (0.06)
Extraordinary gain.................................... 0.04 -- --
----------- ----------- -----------
$ 0.27 $ (0.15) $ (0.06)
=========== =========== ===========
Diluted --
Net income (loss) before extraordinary gain........... $ 0.23 $ (0.15) $ (0.06)
Extraordinary gain.................................... 0.03 -- --
----------- ----------- -----------
$ 0.26 $ (0.15) $ (0.06)
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic................................................. 13,377,000 13,315,000 12,886,000
=========== =========== ===========
Diluted............................................... 13,483,000 13,315,000 12,886,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 146
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK COMMON ADDITIONAL TOTAL
--------------------- STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL DEFICIT EQUITY
---------- -------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996......... 11,641,000 $116,000 $ -- $16,692,000 $(12,512,000) $ 4,296,000
Issuance of common stock in
private placements.............. 1,650,000 17,000 -- 3,092,000 -- 3,109,000
Issuance of common stock upon
exercise of stock options....... 3,000 -- -- 5,000 -- 5,000
Net loss.......................... -- -- -- -- (772,000) (772,000)
---------- -------- -------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1997......... 13,294,000 133,000 -- 19,789,000 (13,284,000) 6,638,000
Issuance of common stock upon
exercise of stock options and
warrants........................ 60,000 1,000 -- 57,000 -- 58,000
Net loss.......................... -- -- -- -- (1,980,000) (1,980,000)
---------- -------- -------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1998......... 13,354,000 134,000 -- 19,846,000 (15,264,000) 4,716,000
Issuance of common stock upon
exercise of stock options....... 89,000 1,000 -- 58,000 -- 59,000
Issuance of common stock
warrants........................ -- -- 100,000 -- -- 100,000
Net income........................ -- -- -- -- 3,546,000 3,546,000
---------- -------- -------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1999......... 13,443,000 $135,000 $100,000 $19,904,000 $(11,718,000) $ 8,421,000
========== ======== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE> 147
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $3,546,000 $(1,980,000) $ (772,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization.......................... 497,000 475,000 494,000
Extraordinary gain on debt restructuring............... (472,000) -- --
Equity in income of joint venture and other............ -- -- 225,000
Change in operating items:
Accounts receivable................................. 455,000 (301,000) (895,000)
Inventories......................................... 926,000 539,000 1,927,000
Vendor deposits..................................... (190,000) (313,000) (162,000)
Prepaid expenses and other current assets........... (69,000) 16,000 (21,000)
Accounts payable and accrued liabilities............ (217,000) 487,000 (839,000)
Customer deposits................................... (865,000) 865,000 --
---------- ----------- -----------
Net cash provided by (used in) operating
activities................................... 3,611,000 (212,000) (43,000)
INVESTING ACTIVITIES:
Purchase of fixed assets............................... (279,000) (268,000) (192,000)
---------- ----------- -----------
Net cash used in investing activities.......... (279,000) (268,000) (192,000)
FINANCING ACTIVITIES:
Issuance of common stock, net.......................... 59,000 58,000 3,114,000
Repayments of long-term obligations.................... (1,190,000) (1,454,000) (1,350,000)
Net borrowings (repayments) on bank lines of credit.... (1,278,000) 905,000 (493,000)
---------- ----------- -----------
Net cash provided by (used in) financing
activities................................... (2,409,000) (491,000) 1,271,000
---------- ----------- -----------
NET CHANGE IN CASH....................................... 923,000 (971,000) 1,036,000
CASH, beginning of year.................................. 104,000 1,075,000 39,000
---------- ----------- -----------
CASH, end of year........................................ $1,027,000 $ 104,000 $ 1,075,000
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 385,000 $ 549,000 $ 512,000
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Conversion of trade payable to term loan............... $ -- $ -- $ 4,290,000
========== =========== ===========
Issuance of common stock warrants in connection with
debt restructuring.................................. $ 100,000 $ -- $ --
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE> 148
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND RISK FACTORS:
Destron Fearing Corporation (Destron or the Company) manufactures a broad
line of electronic and visual identification devices for the companion animal,
livestock, laboratory animal, fish and wildlife markets worldwide. The Company's
products are marketed primarily through a wide network of domestic and
international distributors. In November 1993, the Company acquired Fearing
Manufacturing Co., Inc. (Fearing), a 50-year-old company engaged in the
manufacture of visual identification products for the livestock market.
During fiscal year 1999, the Company resolved several matters which had
raised going-concern uncertainties in fiscal year 1998. These included the
renewal of the Company's line of credit agreement through June 30, 2001 and the
restructuring of a significant vendor note (Note 3), as well as an overall
improvement in operating results and cash flows.
The Company's future operations are dependent on the attainment of certain
objectives, including the successful development, marketing and sale of new and
existing products and technology. There can be no assurance that these
objectives will be achieved, that the Company would be able to obtain any
required additional financing if or when needed, or that such financing, if
obtained, would be on terms favorable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes product revenue, net of estimated returns, at the
time the products are shipped.
INVENTORIES
Inventories consist of materials, labor and overhead and are valued at the
lower of first-in, first-out cost, or market. Inventories consisted of the
following at September 30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials............................................... $2,607,000 $2,481,000
Finished goods.............................................. 1,220,000 2,272,000
---------- ----------
Total............................................. $3,827,000 $4,753,000
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of cost or net realizable
value. Depreciation and amortization are recorded on a straight-line basis over
the following useful lives:
<TABLE>
<S> <C>
Building.................................................... 30 years
Improvements................................................ 10-20 years
Equipment................................................... 7-10 years
Furniture and fixtures...................................... 7 years
</TABLE>
F-45
<PAGE> 149
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fixed assets consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land, building and improvements............................. $ 1,354,000 $ 1,351,000
Equipment................................................... 1,742,000 1,541,000
Furniture and fixtures...................................... 375,000 357,000
----------- -----------
3,471,000 3,249,000
Accumulated depreciation and amortization................... (1,663,000) (1,327,000)
----------- -----------
$ 1,808,000 $ 1,922,000
=========== ===========
</TABLE>
The Company periodically evaluates whether events or circumstances indicate
that the carrying values of net property and equipment may not be recoverable,
or whether the remaining estimated useful lives should be revised. The Company's
evaluation at September 30, 1999 indicated that no impairment write-down was
necessary.
GOODWILL
Goodwill represents the excess of the purchase price of Fearing (see Note
1) over the fair value of its net assets, and is being amortized on a
straight-line basis over 30 years. Other assets consist primarily of patents and
licenses related to the Company's technologies, which are being amortized over
their estimated useful lives of 17 to 20 years. Total accumulated amortization
of these other assets was $998,000 and $892,000 as of September 30, 1999 and
1998.
The Company periodically evaluates whether events or circumstances indicate
that the carrying values of goodwill and other assets may not be recoverable, or
whether the remaining estimated useful lives should be revised. The Company's
evaluation at September 30, 1999 indicated that no impairment write-down was
necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term obligations approximated carrying value at
September 30, 1999 and 1998. The fair values of all other financial instruments
also approximated carrying value at September 30, 1999 and 1998, due to the
short maturities of those instruments.
WARRANTIES
The Company provides various warranties on certain of its products.
Estimated warranty costs are accrued in the same period in which the related
revenue is recognized, based on anticipated parts and labor costs and utilizing
historical experience.
RESEARCH AND DEVELOPMENT
Research and development costs consist primarily of salaries, supplies and
other direct costs and are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires recognition of deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets and
liabilities as well as the expected future effects of loss carryforwards and tax
credit carryforwards. Resulting net deferred tax assets are reduced by a
valuation allowance for the amount of any tax benefits which may not be
realized.
F-46
<PAGE> 150
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common and common equivalent share is based on the
weighted average number of common and common equivalent shares outstanding for
the period. Common equivalent shares consist primarily of stock options granted
to employees and directors and outstanding warrants.
The Company calculates earnings (loss) per share (EPS) in accordance with
the requirements of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." Basic EPS is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period,
excluding potentially dilutive securities. Diluted EPS is calculated using the
treasury stock method and reflects the dilutive effect of outstanding stock
options and warrants.
A reconciliation of EPS calculations under SFAS No. 128 is as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net income (loss).............................. $ 3,546,000 $ (1,980,000) $ (772,000)
=========== ============ ===========
Weighted average number of common shares
outstanding.................................. 13,377,000 13,315,000 12,886,000
Dilutive effect of stock options and
warrants..................................... 106,000 -- --
----------- ------------ -----------
13,483,000 13,315,000 12,886,000
=========== ============ ===========
Net income (loss) per common share:
Basic........................................ $ 0.27 $ (0.15) $ (0.06)
Diluted...................................... $ 0.26 $ (0.15) $ (0.06)
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the periods presented. Estimates are used for such items as allowances
for doubtful accounts, inventory reserves, amortization periods for goodwill and
other assets, useful lives of property and equipment, warranty reserves and
others. Ultimate results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that changes in the fair value of derivative instruments be recognized
currently in earnings, unless specific hedge accounting criteria are met. SFAS
No. 133, as amended, will be effective for the Company on October 1, 2000. The
Company is currently evaluating the impact of SFAS No. 133, but does not believe
it will have a significant effect on its financial position or results of
operations.
3. LINE OF CREDIT AND LONG-TERM OBLIGATIONS:
LINE OF CREDIT
The Company has a $3,000,000 revolving credit facility with a lending
institution. This credit facility bears interest at the greater of 8% or prime
plus 1.75%, payable monthly, and carries a commitment fee equal to 0.75% of the
unused portion of the commitment under the facility. Borrowings under this
facility are payable on demand and are limited to certain eligible accounts
receivable and inventories ($2,021,000
F-47
<PAGE> 151
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum availability at September 30, 1999). The line-of-credit agreement is
effective through June 30, 2001.
The following information relates to this credit facility for the years
ended September 30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance outstanding at end of year.......................... $ -- $1,278,000
Maximum amount outstanding during the year.................. 1,729,000 2,083,000
Average borrowings during the year.......................... 380,000 1,234,000
Weighted average interest rate during the year.............. 9.50% 10.25%
Interest rate at end of year................................ 10.25% 10.25%
</TABLE>
The line-of-credit agreement contains various restrictive covenants which
require the Company to maintain minimum levels of tangible net worth and remain
current on all other outstanding debt obligations, among other matters. The
credit facility also limits additional indebtedness, capital expenditures and
dividends. The Company was in compliance with all such covenants at September
30, 1999.
LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note payable to third party (see below)..................... $ 767,000 $2,488,000
Note payable, interest at 8.98%, payable in monthly
installments of
principal and interest through March 2001 with a balloon
payment of approximately $533,000 due April 2001;
collateralized by real estate.......................... 571,000 598,000
Noncompete obligation, interest at 9%....................... 121,000 135,000
---------- ----------
Total long-term obligations....................... 1,459,000 3,221,000
Less -- Current portion of long-term obligations............ 663,000 2,544,000
---------- ----------
Long-term obligations, net of current portion..... $ 796,000 $ 677,000
========== ==========
</TABLE>
Future maturities of long-term obligations are as follows as of September
30, 1999:
<TABLE>
<S> <C>
2000........................................................ $ 663,000
2001........................................................ 738,000
2002........................................................ 36,000
2003........................................................ 22,000
----------
$1,459,000
==========
</TABLE>
DEBT RESTRUCTURING
In June 1997, the Company completed an agreement with a vendor whereby
$2,290,000 of a trade payable was converted into an unsecured term note. At
September 30, 1998, the Company was in default on certain payment terms of this
note.
In March 1999, the Company completed a restructuring of this note whereby
the vendor assigned the note to a third party. Effective March 1, 1999, the new
noteholder agreed to a reduction of the principal to $1,529,000 to reflect a 35%
discount, with interest at 9.25% and monthly payments of $50,000 through January
2002. In connection with this restructuring, the Company granted warrants to the
new noteholder to purchase 275,000 shares of the Company's common stock at $1.00
per share. The warrants are exercisable at any time
F-48
<PAGE> 152
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through March 15, 2004. The warrants were recorded at their estimated fair value
of $100,000 as of the date of issuance.
In accordance with the requirements of SFAS No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings," the Company recorded a net
extraordinary gain on restructuring of $472,000.
In May 1999, the Company made an additional $600,000 cash payment against
the principal of the note.
4. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has established an Employee Stock Option Plan (the Employee
Plan), a Nonemployee Director Stock Option Plan (the Nonemployee Director Plan)
and a Consultant Stock Option Plan (the Consultant Plan).
The Employee Plan authorizes the grant of options to purchase an aggregate
of up to 2,300,000 shares of common stock. All persons who are employees of the
Company, including directors who are also employees, are eligible to
participate. The plan provides for the grant of incentive stock options (ISOs),
as defined in the Internal Revenue Code (the Code), and nonincentive stock
options (NSOs). Options under this plan are granted at the discretion of a
committee of the Company's board of directors.
The Nonemployee Director Plan authorizes the grant of NSOs to purchase an
aggregate of 300,000 shares of common stock to nonemployee directors of the
Company. Each nonemployee director is granted an option to purchase 15,000
shares of common stock when elected or appointed to the board of directors and
receives an option to purchase an additional 2,500 shares of common stock upon
each reelection to the Company's board of directors. Options are granted at
exercise prices equal to the fair market value of the common stock at the date
of grant, and vesting terms are determined by the board of directors or its
designee.
The Consultant Plan authorizes the grant of options to purchase an
aggregate of 500,000 shares of common stock to consultants of the Company who
may be directors, but not employees of the Company. Stock options granted under
the Consultant Plan are administered by a committee of the board of directors,
which determines the grants, exercise prices, number of shares and vesting
terms.
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
in the accompanying consolidated statements of operations. Had compensation cost
related to these options been determined based on the fair value at the grant
date for awards granted in fiscal years 1999, 1998 and 1997 consistent with the
provisions of SFAS No. 123, the Company's pro forma net income (loss) and net
income (loss) per share would be as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported............................................ $3,546,000 $(1,980,000) $ (772,000)
Pro forma.............................................. 3,156,000 (2,258,000) (1,082,000)
Net income (loss) per common share:
As reported --
Basic............................................... $ 0.27 $ (0.15) $ (0.06)
Diluted............................................. 0.26 (0.15) (0.06)
Pro forma --
Basic............................................... 0.24 (0.17) (0.08)
Diluted............................................. 0.23 (0.17) (0.08)
</TABLE>
F-49
<PAGE> 153
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted in fiscal years 1999,
1998 and 1997 were $0.87, $0.93 and $1.73. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in fiscal years
1999, 1998 and 1997, respectively: risk-free interest rates of 5.5%, 5.6% and
6.4%; expected volatility of 60%, 74% and 78%; and expected lives of four years.
Dividend yields were not used in the fair value computations as the Company has
never declared or paid dividends on its common stock and currently intends to
retain any earnings for use in operations.
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED NON- WEIGHTED
INCENTIVE AVERAGE QUALIFIED AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTION PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance, September 30, 1996............................. 466,750 $3.04 167,500 $2.21
Granted............................................... 210,000 3.00 50,000 2.12
Exercised............................................. (2,500) 2.13 -- --
Forfeited or canceled................................. (2,000) 2.13 (20,000) 2.45
-------- ----- -------- -----
Balance, September 30, 1997............................. 672,250 3.04 197,500 2.17
Granted............................................... 215,000 1.69 57,500 0.99
Exercised............................................. -- -- (5,000) 0.69
Forfeited or canceled................................. (28,750) 3.49 -- --
-------- ----- -------- -----
Balance, September 30, 1998............................. 858,500 2.68 250,000 1.93
Granted............................................... 357,500 1.73 17,500 1.18
Exercised............................................. (53,750) 0.90 -- --
Forfeited or canceled................................. (187,750) 2.90 (100,000) 2.13
-------- ----- -------- -----
Balance, September 30, 1999............................. 974,500 $2.31 167,500 $1.73
======== ===== ======== =====
Options exercisable at:
September 30, 1999.................................... 612,625 $2.63 167,500 $1.73
======== ===== ======== =====
September 30, 1998.................................... 541,000 $2.76 250,000 $1.93
======== ===== ======== =====
September 30, 1997.................................... 384,000 $2.69 197,500 $2.17
======== ===== ======== =====
</TABLE>
F-50
<PAGE> 154
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding stock options outstanding and exercisable
at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -------------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
OPTION TYPE PRICES OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE
----------- ------------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Incentive $0.88 - $2.44 734,500 $1.79 7.8 388,875 $1.84
3.00 - 4.56 240,000 3.92 6.6 223,750 3.99
------------------------------------------------------------------------------
$0.88 - $4.56 974,500 $2.31 7.5 612,625 $2.63
------------------------------------------------------------------------------
Nonqualified $0.81 - $1.94 107,500 $1.28 8.0 107,500 $1.28
2.13 - 4.63 60,000 2.53 6.5 60,000 2.53
------------------------------------------------------------------------------
$0.81 - $4.63 167,500 $1.73 7.5 167,500 $1.73
------------------------------------------------------------------------------
</TABLE>
WARRANTS
Warrants to purchase 803,000 and 528,000 shares of the Company's common
stock at prices ranging from $1.00 to $4.81 were outstanding at September 30,
1999 and 1998, respectively. The warrants are exercisable at various times
through January 2002.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Destron has been a party to litigation in which it asserted infringement by
a competitor of one of the Company's patents related to certain of its
technologies. The defendants asserted that the patent was not infringed, was
invalid and was unenforceable. The defendants also asserted antitrust and unfair
competition claims against the Company and Hughes Aircraft Company (now a
division of Raytheon Company).
On January 29, 1996, the jury in the trial returned a verdict in favor of
the Company and found that the defendants had willfully infringed on the
Company's patent, awarding damages of approximately $444,000. The defendants
appealed the verdict, and on July 24, 1997, the appellate court affirmed the
trial court's judgment. Additionally, on November 7, 1997, the trial court ruled
that there had been no inequitable conduct on the part of Destron in connection
with the issuance of the patent and, as such, upheld the validity and
enforceability of the patent. On February 9, 1998, the court entered a judgment
confirming the previous finding of no inequitable conduct. An appeals court
hearing was held on December 8, 1998 in these matters, and on January 26, 1999,
the appellate court again affirmed the original decision. Because the defendants
did not pursue a timely appeal, the January 26, 1999 decision is final and not
appealable.
On April 21, 1997, the defendants in the above litigation filed suit
against the Company, alleging patent infringement and unfair competition on the
part of the Company, among other matters. As a result of the favorable ruling in
the above-described lawsuit on February 9, 1998, this litigation has been stayed
pending further action by the plaintiffs or the court. Although management is
unable, at this time, to estimate the potential impact of this litigation, the
Company and its legal counsel believe that the ultimate resolution of the
litigation will not have a significant adverse impact on the Company's future
financial position, cash flows or results of operations; however, there can be
no assurance of the ultimate outcome.
EMPLOYEE BENEFIT PLAN
The Company has a tax-deferred employee savings plan which was established
in accordance with Section 401(k) of the Code. The plan covers all employees of
the Company. Participants may contribute up to
F-51
<PAGE> 155
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15% of their annual compensation on a before-tax basis, subject to certain
limits. The Company may elect to make matching and/or discretionary
contributions to the Plan. Contributions totaled $43,000 in 1999. There were no
Company contributions in 1998.
6. INCOME TAXES:
As of September 30, 1999 and 1998, the Company had approximately $6,100,000
and $9,500,000 of net operating loss (NOL) carryforwards. Further, the Company
has approximately $130,000 of research and development tax credits available to
offset future federal taxes, subject to limitations for alternative minimum tax.
The NOL and credit carryovers expire from 2004 through 2018 and are subject to
examination by the tax authorities. Approximately $1,500,000 of the $6,100,000
of NOL carryforwards at September 30, 1999 relate to the exercise and subsequent
sale of stock options. The tax benefit of approximately $555,000 associated with
this stock option deduction will be recorded as additional paid-in capital when
realized.
The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss and credit carryovers available to be used in any given year upon
the occurrence of certain events, including significant changes in ownership
interests. The Company does not believe that a change in ownership has occurred
since the NOL carryforwards were generated.
The components of deferred income taxes at September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 2,277,000 $ 3,392,000
Other, net.................................................. (1,000) 160,000
Less -- Valuation allowance................................. (2,276,000) (3,552,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has determined that certain deferred tax benefits may not be
realizable because such realization requires future taxable income, the
attainment of which is uncertain. Accordingly, a valuation allowance has been
established to eliminate the net deferred tax asset related to these items.
The reconciliation between income taxes using the statutory federal income
tax rate and the recorded tax provision is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Federal taxes at statutory rate.............. $ 1,233,000 $(673,000) $(262,000)
Effect of nonutilization (utilization) of net
operating losses and permanent
differences................................ (1,153,000) 673,000 262,000
----------- --------- ---------
Tax provision................................ $ 80,000 $ -- $ --
=========== ========= =========
Effective rate............................... 2% --% --%
=========== ========= =========
</TABLE>
F-52
<PAGE> 156
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EXPORT SALES AND SIGNIFICANT CUSTOMERS:
The Company generally sells its products at prices quoted in U.S. dollars
to limit the risks associated with currency exchange rate fluctuations. Sales to
locations outside of the United States are summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Europe............................................. $3,670,000 $1,690,000 $2,575,000
Canada............................................. 628,000 694,000 570,000
Asia and other..................................... 848,000 372,000 713,000
---------- ---------- ----------
Total.................................... $5,146,000 $2,756,000 $3,858,000
========== ========== ==========
</TABLE>
For the year ended September 30, 1999, sales to two customers represented
11% each of net sales. During the year ended September 30, 1998, sales to one
customer represented 18% of net sales, and during the year ended September 30,
1997, sales to two customers represented 16% and 10% of net sales.
8. SEGMENT DISCLOSURES AND RELATED INFORMATION:
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires the
disclosure of certain information about operating segments in financial
statements. The Company's reportable segments are based on the Company's method
of internal reporting, which generally segregates the strategic business units
into two segments: radio frequency identification (RFID), consisting primarily
of the Company's electronic microchip identification technology sales, and
visual identification, whereby the Company manufactures and sells animal
identification tags. Segment information included in the accompanying
consolidated balance sheets as of September 30, 1999 and 1998 and in the
consolidated statements of operations for the years ended September 30, 1999,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
RADIO FREQUENCY VISUAL
IDENTIFICATION IDENTIFICATION CORPORATE (A) TOTAL
--------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
1999
Net sales........................ $12,496,000 $6,052,000 $ -- $18,548,000
Income (loss) before income
taxes......................... 2,816,000 830,000 (492,000) 3,154,000
Depreciation and amortization.... 229,000 145,000 123,000 497,000
Interest expense, net............ -- -- 368,000 368,000
Extraordinary gain............... 472,000 -- -- 472,000
Provision for income taxes....... -- -- 80,000 80,000
Identifiable assets.............. 5,220,000 3,714,000 2,212,000 11,146,000
Capital expenditures............. 113,000 113,000 53,000 279,000
1998
Net sales........................ $ 6,750,000 $5,851,000 $ -- $12,601,000
Income (loss) before income
taxes......................... (1,539,000) 221,000 (662,000) (1,980,000)
Depreciation and amortization.... 230,000 125,000 120,000 475,000
Interest expense, net............ -- -- 542,000 542,000
Identifiable assets.............. 6,294,000 3,927,000 1,342,000 11,563,000
Capital expenditures............. 80,000 83,000 105,000 268,000
</TABLE>
F-53
<PAGE> 157
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RADIO FREQUENCY VISUAL
IDENTIFICATION IDENTIFICATION CORPORATE (A) TOTAL
--------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
1997
Net sales........................ $ 7,202,000 $5,687,000 $ -- $12,889,000
Income (loss) before income
taxes......................... (786,000) 685,000 (671,000) (772,000)
Depreciation and amortization.... 256,000 130,000 108,000 494,000
Interest expense, net............ -- -- 562,000 562,000
Identifiable assets.............. 6,680,000 3,612,000 2,390,000 12,682,000
Capital expenditures............. 14,000 46,000 132,000 192,000
</TABLE>
---------------
(a) Corporate amounts consist of amounts not directly assignable to a business
segment.
9. SUBSEQUENT EVENT (UNAUDITED):
On April 24, 2000 the Company announced that a definitive merger agreement
had been signed pursuant to which Applied Digital Solutions, Inc. (NASDAQ:ADSX)
will acquire the Company in a tax-free exchange of common stock. The Company
will merge with Digital Angel.net Inc., a wholly owned subsidiary of Applied
Digital Solutions, Inc. and the combined companies will do business under the
Digital Angel.net Inc. name.
The terms of the agreement require Applied Digital Solutions to acquire all
of the outstanding capital stock of the Company with newly-issued shares of
Applied Digital Solutions' common stock in a transaction that is expected to be
tax-free to shareholders. Company shareholders will receive 1.5 shares of
Applied Digital Solutions stock for every share of the Company common stock. All
outstanding options and warrants will be assumed by Applied Digital Solutions
based on the exchange ratio. Based on 13,640,772 shares of the Company common
stock outstanding as of May 30, 2000, an assumed exchange ratio of 1.5 and
without taking into account the exercise of options and warrants assumed by
Applied Digital Solutions, Company shareholders will own an estimated 28% of
Applied Digital Solutions common stock upon the closing of the merger.
The agreement, which has already been approved by Boards of Directors of
the Company and Applied Digital Solutions, is subject to approval by both
companies' shareholders, as well as regulatory review, including Hart-Scott
Rodino. Pending these approvals, the completion of the merger is expected in
July 2000. No assurance can be given that the merger agreement will result in a
transaction.
F-54
<PAGE> 158
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2000 AND SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
--------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,078 $ 1,027
Accounts receivable, net.................................. 4,143 1,757
Inventories, net.......................................... 3,875 3,827
Vendor deposits........................................... 321 665
Prepaid expenses and other current assets................. 94 102
------- -------
Total current assets.............................. 9,511 7,378
PROPERTY AND EQUIPMENT, net................................. 1,748 1,808
GOODWILL, net............................................... 1,791 1,833
OTHER ASSETS, net........................................... 115 127
------- -------
$13,165 $11,146
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 855 $ 695
Accrued liabilities....................................... 453 571
Current portion of long-term obligations.................. 446 663
------- -------
Total current liabilities......................... 1,754 1,929
LONG TERM OBLIGATIONS, net of current portion............... 651 796
------- -------
Total liabilities................................. 2,405 2,725
------- -------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares
authorized; 13,640,772 and 13,443,000 shares issued and
outstanding, respectively.............................. 136 135
Common stock warrants..................................... 100 100
Additional paid-in capital................................ 20,293 19,904
Accumulated deficit....................................... (9,769) (11,718)
------- -------
Total shareholders' equity........................ 10,760 8,421
------- -------
$13,165 $11,146
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE> 159
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED MARCH 31, MARCH 31,
---------------- ----------------
2000 1999 2000 1999
------- ------ ------- ------
<S> <C> <C> <C> <C>
NET SALES................................................... $ 6,615 $5,449 $10,798 $9,511
COSTS AND EXPENSES:
Cost of sales............................................. 3,814 3,099 6,339 5,730
Selling, general and administrative....................... 1,110 856 1,977 1,723
Research and development.................................. 261 219 486 402
Interest expense and other................................ 3 123 4 265
------- ------ ------- ------
Total costs and expenses.......................... 5,188 4,297 8,806 8,120
INCOME BEFORE INCOME TAXES.................................. 1,427 1,152 1,992 1,391
PROVISION FOR INCOME TAXES.................................. 30 43 43 43
------- ------ ------- ------
INCOME BEFORE EXTRAORDINARY GAIN............................ 1,397 1,109 1,949 1,348
EXTRAORDINARY GAIN ON DEBT RESTRUCTURING.................... -- 472 -- 472
------- ------ ------- ------
NET INCOME.................................................. $ 1,397 $1,581 $ 1,949 $1,820
======= ====== ======= ======
BASIC AND DILUTED NET INCOME PER COMMON SHARE:
Before extraordinary gain................................. $ 0.10 $ 0.08 $ 0.14 $ 0.10
Extraordinary gain........................................ -- $ 0.04 -- $ 0.04
------- ------ ------- ------
$ 0.10 $ 0.12 $ 0.14 $ 0.14
======= ====== ======= ======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic..................................................... 13,523 13,354 13,495 13,354
======= ====== ======= ======
Diluted................................................... 14,368 13,370 14,113 13,362
======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE> 160
DESTRON FEARING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
---------------
2000 1999
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $1,949 $1,820
Adjustments to reconcile net income to net cash used in
operating activities:
Extraordinary gain on debt restructuring............... -- (472)
Depreciation and amortization.......................... 269 237
Changes in operating items:
Accounts receivable.................................. (2,386) (1,531)
Inventories.......................................... (48) 176
Vendor deposits...................................... 344 (70)
Prepaid expenses and other current assets............ 8 (41)
Accounts payable and accrued liabilities............. 42 259
Customer deposits.................................... -- (12)
------ ------
Net cash provided by operating activities......... 178 366
INVESTING ACTIVITIES:
Purchases of fixed assets................................. (155) (241)
------ ------
Net cash used in investing activities............. (155) (241)
FINANCING ACTIVITIES:
Repayments of long-term obligations....................... (362) (243)
Net borrowings on bank line of credit..................... -- 550
Issuance of common stock.................................. 390 --
------ ------
Net cash provided by financing activities......... 28 307
------ ------
NET CHANGE IN CASH.......................................... 51 432
CASH, beginning of period................................... 1,027 104
------ ------
CASH, end of period......................................... $1,078 $ 536
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 52 $ 259
====== ======
Income taxes paid......................................... $ 43 $ 43
====== ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of common stock warrants in connection with debt
restructuring.......................................... $ -- $ 100
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
<PAGE> 161
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(UNAUDITED)
1. GENERAL
The information included in the accompanying consolidated interim financial
statements is unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the most recent
Annual Report on Form 10-K filed for Destron Fearing Corporation and its
subsidiaries (collectively, the "Company"). In the opinion of management, all
adjustments, consisting of normal recurring items, necessary for a fair
presentation of the financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the entire fiscal year.
2. INVENTORIES
Inventories are valued at the lower of first in, first out, cost or market,
and consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 SEPT. 30, 1999
-------------- --------------
<S> <C> <C>
Raw materials.............................................. $2,814 $2,607
Finished goods............................................. 1,061 1,220
------ ------
Total inventories................................ $3,875 $3,827
====== ======
</TABLE>
3. NET INCOME PER COMMON SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding for the
period. Common equivalent shares consist primarily of stock options granted to
employees, directors and others, and outstanding warrants. The Company
calculates earnings per share ("EPS") in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." Basic EPS is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period, excluding
potentially dilutive securities. Diluted EPS is calculated using the treasury
stock method and reflects the dilutive effect of outstanding options, warrants
and other securities.
A reconciliation of EPS calculations under SFAS No. 128 is as follows for
the three months and six months ended March 31 (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income........................................ $ 1,397 $ 1,581 $ 1,949 $ 1,820
======= ======= ======= =======
Weighted average number of common shares
outstanding..................................... 13,523 13,354 13,495 13,354
Dilutive effect of stock options and warrants
after application of the treasury stock
method.......................................... 845 16 618 8
------- ------- ------- -------
14,368 13,370 14,113 13,362
======= ======= ======= =======
Basic and diluted net income per common share..... $ 0.10 $ 0.12 $ 0.14 $ 0.14
======= ======= ======= =======
</TABLE>
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that changes in the fair value of
F-58
<PAGE> 162
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
derivative instruments be recognized currently in earnings, unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, will be effective
for the Company on October 1, 2000. The Company is currently evaluating the
impact of SFAS No. 133, but does not believe it will have a significant effect
on its financial position or results of operations.
5. DEBT RESTRUCTURING
In June 1997, the Company completed an agreement with a vendor whereby
$2,290,000 of a trade payable was converted into an unsecured term note. At
September 30, 1998, the Company was in default on certain payment terms of this
note.
In March 1999, the Company completed a restructuring of this note whereby
the vendor assigned the note to a third party. Effective March 1, 1999, the new
noteholder agreed to a reduction of the principal to $1,529,000 to reflect a 35%
discount, with interest at 9.25% and monthly payments of $50,000 through January
2002. In connection with this restructuring, the Company granted warrants to the
new noteholder to purchase 275,000 shares of the Company's common stock at $1.00
per share. The warrants are exercisable at any time through March 15, 2004. The
warrants were recorded at their estimated fair value of $100,000 as of the date
of issuance.
In accordance with the requirements of SFAS No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings", the Company recorded a net
extraordinary gain on restructuring of $472,000.
In May 1999, the Company made an additional $600,000 cash payment against
the principal of the note.
F-59
<PAGE> 163
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT DISCLOSURES
In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires the
disclosure of certain information about operating segments in financial
statements. The Company's reportable segments are based on the Company's method
of internal reporting, which generally segregates the strategic business units
into two segments: radio frequency identification (RFID), consisting primarily
of the Company's electronic transponder identification technology sales, and
visual identification, whereby the Company manufactures and sells animal
identification tags. Segment information included in the accompanying
consolidated balance sheets as of March 31 and September 30, 1999 and in the
consolidated statements of operations for the three and six month periods ended
March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
RADIO
FREQUENCY VISUAL
IDENTIFICATION IDENTIFICATION CORPORATE(A) TOTAL
-------------- -------------- ------------ -------
<S> <C> <C> <C> <C>
3 MONTHS ENDED MARCH 31, 2000
Net sales................................. $4,512 $2,103 $ -- $ 6,615
Income (loss) before income taxes......... 1,459 576 (608) 1,427
Identifiable assets....................... 7,442 4,184 1,539 13,165
3 MONTHS ENDED MARCH 31, 1999
Net sales................................. $3,309 $2,140 $ -- $ 5,449
Income (loss) before income taxes......... 1,072 629 (77) 1,624
Identifiable assets....................... 7,920 4,482 1,063 13,465
6 MONTHS ENDED MARCH 31, 2000
Net sales................................. $7,340 $3,458 $ -- $10,798
Income (loss) before income taxes......... 2,216 866 (1,090) 1,992
Identifiable assets....................... 7,442 4,184 1,539 13,165
6 MONTHS ENDED MARCH 31, 1999
Net sales................................. $5,851 $3,660 $ -- $ 9,511
Income (loss) before income taxes......... 1,666 899 (702) 1,863
Identifiable assets....................... 7,920 4,482 1,063 13,465
</TABLE>
---------------
(a) Corporate amounts consist of amounts not directly assignable to a business
segment.
7. LEGAL PROCEEDINGS
COLORADO PATENT ACTIONS
On January 29, 1996, the Company prevailed in a patent infringement trial
against four competitors in the United States District Court of Colorado. (The
patent involved was No. 5,211,129, which relates to the Company's injectable
transponder technology.) The judgment included an award of damages and a
permanent injunction against the four competitors. The judgment is now final.
On February 9, 1998, the District Court Judge issued an Order finding two
of the defendants in contempt of the permanent injunction and awarded the
Company damages due to the contempt.
On January 23, 1998, the Company filed a second Motion for Contempt against
certain of these defendants. On April 23, 1998, the Magistrate Judge entered a
recommendation that the defendants be held in contempt a second time, based upon
their manufacture, use and sale of the ID-100 Zip Quill transponder product and
based upon their offer to sell transponders to the Denver Metro Microchip
Committee. On March 18, 1999, the District Court adopted the recommendation of
the Magistrate Judge as to the Denver Metro Microchip Committee solicitation,
but also concluded that the defendants' manufacture, use and sale of
F-60
<PAGE> 164
DESTRON FEARING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the ID-100 Zip Quill transponder product was not a contemptuous act and that the
Company would need to initiate a new infringement action against the defendants
regarding this product. On April 15, 1999, the Company appealed the District
Court's decision as to the Zip Quill product. The Company's appeal from the
refusal of the District Court to find the defendant in contempt with respect to
the ID-100 Zip Quill transponder product was denied by the Court of Appeals. As
to the finding of contempt regarding the Denver Metro Microchip Committee, on
December 10, 1999, the District Court awarded double damages to the Company in
the amount of $31,471.54 and ordered the defendants to pay this amount within
ninety days. The defendants did not make the awarded payment within ninety days,
therefore the Company filed a Motion for Contempt on May 11, 2000.
MINNESOTA PATENT ACTIONS
On April 21, 1997, four plaintiffs (including three competitors found to be
willful infringers in the Colorado patent infringement trial) filed a lawsuit
against the Company and Schering-Plough and another of the Company's competitors
in the United States District Court for the District of Minnesota. The
plaintiffs allege that the defendants participated in unfair competition,
breached an oral agreement and infringed on three of the plaintiffs' United
States patents and requested that the Court award compensatory and treble
damages of an unspecified amount.
On May 16, 1997, the plaintiffs amended the lawsuit and, in their complaint
as amended, allege patent infringement, false advertising, unfair competition
and attempted monopolization on the part of the Company, among other matters,
stemming from the ISO standards. This lawsuit has been stayed by agreement of
all parties pending the outcome of the appeal of the Colorado action.
Although the appeal in the Colorado action has been completed and the
judgment in the Colorado action is final, the plaintiffs in the Minnesota
litigation have not elected to vacate the stay, and hence the Minnesota action
remains inactive.
8. PENDING TRANSACTION WITH APPLIED DIGITAL SOLUTIONS, INC.
On April 24, 2000 the Company announced that a definitive merger agreement
had been signed pursuant to which Applied Digital Solutions, Inc. (NASDAQ:ADSX)
will acquire the Company in a tax-free exchange of common stock. The Company
will merge with Digital Angel.net Inc., a wholly owned subsidiary of Applied
Digital Solutions, Inc. and the combined companies will do business under the
Digital Angel.net Inc. name.
The terms of the agreement require Applied Digital Solutions to acquire all
of the outstanding capital stock of the Company with newly-issued shares of
Applied Digital Solutions' common stock in a transaction that is expected to be
tax-free to shareholders. Company shareholders will receive 1.5 shares of
Applied Digital Solutions stock for every share of the Company common stock. All
outstanding options and warrants will be assumed by Applied Digital Solutions
based on the exchange ratio. Based on 13,640,772 shares of the Company's common
stock outstanding as of May 30, 2000, an assumed exchange ratio of 1.5 and
without taking into account the exercise of options and warrants assumed by
Applied Digital Solutions, Company shareholders will own an estimated 28% of
Applied Digital Solutions common stock upon the closing of the merger.
The agreement, which has already been approved by Boards of Directors of
the Company and Applied Digital Solutions, is subject to approval by both
companies' shareholders, as well as regulatory review, including Hart-Scott
Rodino. Pending these approvals, the completion of the merger is expected in
July 2000. No assurance can be given that the merger agreement will result in a
transaction.
F-61
<PAGE> 165
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma balance sheet set forth below gives effect to the
merger as if it had been consummated on March 31, 2000. The unaudited pro forma
statement of operations set forth below gives effect to the merger as if it
occurred at the beginning of each company's complete fiscal year. Applied
Digital's fiscal year ended on December 31, 1999 while Destron's fiscal year
ended on September 30, 1999.
The pro forma adjustments reflecting the consummation of the merger are
based upon the purchase method of accounting and upon the assumptions set forth
in the notes hereto. Each share of Destron common stock issued and outstanding
immediately prior to the effectiveness of the merger will be canceled and
automatically converted into the right to receive 1.5 shares of Applied
Digital's common stock, $.001 par value per share, subject to adjustments as set
forth in the Merger Agreement. Additionally, all Destron warrants and stock
options outstanding prior to the merger will be assumed by Applied Digital. In
conjunction with and upon the completion of the merger, Destron will be merged
into Digital Angel.net Inc., a wholly-owned subsidiary of Applied Digital and
will operate with Digital Angel.net Inc. This pro forma information should be
read in conjunction with the audited and unaudited financial statements and
notes thereto of Applied Digital and Destron that are included in this document
and the financial data appearing under "Selected Financial Data" and
"Management's Discussion" appearing elsewhere in this document.
The pro forma adjustments do not reflect any operating efficiencies and
cost savings which may be achievable with respect to the combined companies. The
pro forma adjustments do not include any adjustments to historical sales for any
future price changes nor any adjustments to selling and marketing expenses for
any future operating changes.
The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the merger been
consummated on the dates, or at the beginning of the periods for which the
consummation of the merger is being given effect. For purposes of preparing
Applied Digital's consolidated financial statements, Applied Digital will
establish a new basis for Destron's assets and liabilities based upon the fair
values thereof, the value of the Applied Digital shares, warrants and stock
options issued to consummate the merger and the costs of the merger. A final
determination of the required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values, has not yet been made. Accordingly, the
purchase accounting adjustments made in connection with the development of the
pro forma combined financial information are preliminary and have been made
solely for purposes of developing such pro forma combined financial information.
Applied Digital will undertake a study to determine the fair value of certain of
Destron's assets and liabilities and will make appropriate purchase accounting
adjustments upon completion of that study. Assuming completion of the merger,
the actual financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein because of a variety
of factors, including access to additional information and changes in value and
operating results between the dates of the pro forma financial information data
and the date on which the merger is consummated.
P-1
<PAGE> 166
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
APPLIED DESTRON
DIGITAL FEARING
SOLUTIONS, INC. CORPORATION PRO FORMA
HISTORICAL HISTORICAL MERGER COMBINED
MARCH 31, 2000 DECEMBER 31, 1999 ADJUSTMENT MARCH 31, 2000
--------------- ----------------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............. $ 5,863 $ 1,549 $ $ 7,412
Accounts receivable and unbilled
receivables......................... 47,647 1,643 49,290
Inventories............................ 46,311 4,169 50,480
Notes receivable....................... 3,988 -- 3,988
Prepaid expenses and other current
assets.............................. 8,976 724 9,700
-------- ------- --------
Total Current Assets........... 112,785 8,085 120,870
Property and equipment, Net.............. 16,188 1,752 17,940
Notes receivable......................... 3,396 -- 3,396
Goodwill, Net............................ 65,696 1,812 79,476(A) 146,984
Other assets............................. 11,016 122 11,138
-------- ------- --------- --------
$209,081 $11,771 $ 79,476 $300,328
======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable.......................... $ 10,952 $ -- $ $ 10,952
Current maturities of long-term debt... 8,740 595 9,335
Due to shareholders of acquired
subsidiary.......................... 10,000 -- 10,000
Accounts payable....................... 26,586 903 27,489
Accrued expenses....................... 11,489 592 2,494(B) 14,575
Other current liabilities.............. 4,695 -- 4,695
-------- ------- --------- --------
Total Current Liabilities...... 72,462 2,090 2,494 77,046
Long-term debt........................... 36,999 680 37,679
-------- ------- --------- --------
Total Liabilities.............. 109,461 2,770 2,494 114,725
-------- ------- --------- --------
Commitments and contingencies............ -- -- -- --
-------- ------- --------- --------
Minority Interest........................ 2,294 -- -- 2,294
-------- ------- --------- --------
Stockholders' Equity
Preferred shares....................... -- -- --
Common shares.......................... 50 135 (115)(C) 70
Common stock warrants.................. -- 100 (100)(C) --
Common and preferred addition paid-in
capital............................. 93,404 19,933 66,030(C) 179,367
Retained earnings (deficit)............ 11,492 (11,167) 11,167(C) 11,492
Treasury stock......................... (7,310) -- (7,310)
Accumulated other comprehensive loss... (310) -- (310)
-------- ------- --------- --------
Total Stockholders' Equity..... 97,326 9,001 76,982 183,309
-------- ------- --------- --------
$209,081 $11,771 $ 79,476 $300,328
======== ======= ========= ========
</TABLE>
The unaudited pro forma condensed combined balance sheet at March 31, 2000
gives effect to the financial position as if the merger occurred on March 31,
2000.
P-2
<PAGE> 167
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AT MARCH 31, 2000 ARE AS FOLLOWS:
(A) The adjustment to goodwill represents the amount required to reflect the
goodwill associated with the excess of the purchase price paid by Applied
Digital over the sum of the amounts assigned to the identifiable assets
acquired and liabilities assumed. It is assumed that the new book basis of
the acquired net tangible assets and liabilities approximates the
historical valuation of Destron's tangible assets and liabilities, using
the purchase method of accounting. For purposes of this presentation, the
fair value of the Applied Digital shares issuable in exchange for Destron's
stock has been calculated using the share price of $3.85. This price
represents the average closing stock price of Applied Digital's stock as of
May 25, 2000 and for the two trading days prior to and subsequent to May
25, 2000. On May 25, 2000, the exchange ratio was fixed at 1.5 shares of
Applied Digital common stock. For purposes of this presentation, the fair
value of Destron's 1,873,564 stock options and warrants assumed by Applied
Digital has been calculated utilizing the Black-Scholes option pricing
model, Destron's outstanding options and warrants and their weighted
average exercise price as of May 25, 2000, a 1.5 exchange ratio and the May
25, 2000 Applied Digital closing stock price of $4.00. Under these
assumptions, the merger consideration and related goodwill is as follows:
<TABLE>
<S> <C>
Fair Value of Stock Issued -- (Including Shares Issued for
Transaction Fee).......................................... $79,817
Fair Value of Options and Warrants Assumed.................. 6,166
Estimated Transaction Costs -- (Excluding Shares Issued for
Transaction Fee).......................................... 2,494
-------
Merger Consideration........................................ 88,477
Net Tangible Assets Acquired (Excluding Goodwill)........... 7,189
-------
Goodwill.................................................... 81,288
Destron Historical Goodwill................................. (1,812)
-------
Merger Adjustment........................................... $79,476
=======
</TABLE>
(B) The accrued expenses adjustment represents the accrued estimated
transaction costs to be incurred as the Merger is completed. The costs are
primarily Applied Digital's financial advisory, legal, accounting,
printing and similar expenses.
(C) The shareholders' equity adjustment represents the fair value of the
Applied Digital stock to be issued in the Merger and the elimination of
Destron's historical equity accounts as follows:
<TABLE>
<S> <C>
Fair Value of Stock Issued and Options and Warrants
Assumed................................................... $85,983
Destron's Historical Stockholders' Equity................... (9,001)
-------
$76,982
=======
</TABLE>
P-3
<PAGE> 168
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
BOSTEK, INC. APPLIED
APPLIED AND AFFILIATE DIGITAL
DIGITAL HISTORICAL SOLUTIONS, INC.
SOLUTIONS, INC. (JANUARY 1, 1999 - PRO FORMA
HISTORICAL MAY 31, 1999) PRO FORMA DECEMBER 31, 1999
DECEMBER 31, 1999 (A) ADJUSTMENTS (B)
----------------- ------------------ ----------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net operating
revenue............ $336,741 $33,400 $ $370,141
Cost of goods sold... 241,790 29,596 271,386
-------- ------- --------
Gross profit......... 94,951 3,804 98,755
Selling, general and
administrative
expenses........... (90,416) (3,424) (93,840)
Depreciation and
amortization....... (9,687) (10) (447)(C) (10,144)
Restructuring and
unusual costs...... (2,550) -- (2,550)
Gain on sale of
subsidiary......... 20,075 -- 20,075
Interest income...... 616 -- 616
Interest expense..... (3,842) (151) (352)(D) (4,345)
-------- ------- ----- --------
Income (loss) before
provision for
income taxes,
minority interest
and extraordinary
loss............... 9,147 219 (799) 8,567
Provision for income
taxes.............. 3,160 74 (298)(E) 2,936
-------- ------- ----- --------
Income (loss) before
minority interest
and extraordinary
loss............... 5,987 145 (501) 5,631
Minority interest.... 395 -- -- 395
-------- ------- ----- --------
Income (loss) before
extraordinary
loss............... $ 5,592 $ 145 $(501) $ 5,236
======== ======= ===== ========
Earnings per common
share -- basic
Income before
extraordinary
loss............. $ 0.12 N/A N/A $ 0.11
Earnings per share --
diluted
Income before
extraordinary
loss............. $ 0.11 N/A N/A $ 0.10
Weighted average
number of common
shares
outstanding --
basic.............. 46,814 N/A N/A 46,814
Weighted average
number of common
shares
outstanding --
diluted............ 50,086 N/A N/A 50,086
<CAPTION>
DESTRON
FEARING
CORPORATION PRO FORMA
HISTORICAL MERGER COMBINED
SEPTEMBER 30, 1999 ADJUSTMENTS DECEMBER 31, 1999
------------------ ----------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net operating
revenue............ $18,548 $ $388,689
Cost of goods sold... 10,996 282,382
------- --------
Gross profit......... 7,552 106,307
Selling, general and
administrative
expenses........... (3,929) (97,769)
Depreciation and
amortization....... (214) (3,980)(F) (14,338)
Restructuring and
unusual costs...... (2,550)
Gain on sale of
subsidiary......... 20,075
Interest income...... 18 634
Interest expense..... (273) (4,618)
------- --------
Income (loss) before
provision for
income taxes,
minority interest
and extraordinary
loss............... 3,154 (3,980) 7,741
Provision for income
taxes.............. 80 --(G) 3,016
------- ------- --------
Income (loss) before
minority interest
and extraordinary
loss............... 3,074 (3,980) 4,725
Minority interest.... 395
------- ------- --------
Income (loss) before
extraordinary
loss............... $ 3,074 $(3,980) $ 4,330
======= ======= ========
Earnings per common
share -- basic
Income before
extraordinary
loss............. $ 0.06
Earnings per share --
diluted
Income before
extraordinary
loss............. $ 0.06
Weighted average
number of common
shares
outstanding --
basic.............. 67,579(H)
Weighted average
number of common
shares
outstanding --
diluted............ 71,057(I)
</TABLE>
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1999 gives effect to the combined results of operations
for the year ended December 31, 1999 as if the acquisition of Bostek, Inc. and
affiliate and the merger of Destron occurred at the beginning of each company's
fiscal year.
P-4
<PAGE> 169
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 ARE AS FOLLOWS:
(A) Represents the historical unaudited condensed combined results of
Bostek, Inc. and affiliate for the five months ended May 31, 1999.
Bostek, Inc. and affiliate was acquired by Applied Digital effective
June 1, 1999.
(B) Represents the historical unaudited condensed combined pro forma results
of Applied Digital for the year ended December 31, 1999 as if the
acquisition of Bostek, Inc. and Affiliate had occurred on January 1,
1999.
(C) The $447 increase in depreciation and amortization expense represents
the estimated amount of goodwill amortization expense to be recorded for
the five month period from January 1, 1999 to May 31, 1999, assuming
straight line amortization of the $21,458 of goodwill related to the
Bostek, Inc. and Affiliate acquisition over a twenty year period.
(D) The $352 increase in interest expense represents the increase to
interest expense for the five month period from January 1, 1999 to May
31, 1999 associated with debt issued in connection with the purchase of
Bostek, Inc. and Affiliate, based upon borrowing the $10,055 paid to the
sellers at closing, at an 8.41% interest rate.
(E) The adjustment to the provision for income taxes results from providing
for taxes at a 40% rate (net federal and state) against the pre-tax pro
forma adjustments.
(F) The $3,980 increase in depreciation and amortization expense represents
the estimated amount of goodwill amortization expense to be recorded,
assuming straight line amortization of the $81,288 of goodwill over a 20
year period and taking into consideration the $84 of goodwill
amortization expense included in Destron's historical statement of
operations.
(G) The amortization of goodwill is not deductible and therefore receives no
tax benefit.
(H) The number of shares of Applied Digital common stock to be issued were
determined under the assumption that all of the 13,640,722 shares of
Destron common stock outstanding on June 26, 2000 are exchanged for
common stock of Applied Digital at an assumed exchange ratio of 1.5,
that approximately 303,750 shares of Applied Digital common stock will
be issued for payment of a finder's fee and without taking into account
the exercise of options and warrants of Destron assumed by Applied
Digital. For purposes of this pro forma presentation, such shares of
Applied Digital common stock were deemed to be outstanding for the
entire pro forma period.
(I) The diluted potential common shares outstanding were determined
utilizing the treasury stock method under the assumption that all
potentially dilutive potential common shares were outstanding for the
entire pro forma period. The dilutive potential common shares consist
of the estimated number of Destron options and warrants of 1,873,564
outstanding as of June 26, 2000. The Destron options and warrants
outstanding as of June 26, 2000, adjusted for an assumed exchange ratio
of 1.5, are those that are assumed to be acquired by Applied Digital.
P-5
<PAGE> 170
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
APPLIED DESTRON
DIGITAL FEARING
SOLUTIONS, INC. CORPORATION PRO FORMA
HISTORICAL HISTORICAL MERGER COMBINED
MARCH 31, 2000 DECEMBER 31, 1999 ADJUSTMENT MARCH 31, 2000
--------------- ----------------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net operating revenue....................... $ 85,153 $ 4,183 $ $ 89,336
Cost of goods sold.......................... 63,910 2,525 66,435
-------- ------- --------
Gross profit................................ 21,243 1,658 22,901
Selling, general and administrative
expenses.................................. (20,355) (1,024) (21,379)
Depreciation and amortization............... (2,090) (56) (995)(A) (3,141)
Interest income............................. 197 13 210
Interest expense............................ (1,118) (27) (1,145)
-------- ------- ------- --------
Income (loss) before (benefit) provision for
income taxes, minority interest and
extraordinary loss........................ (2,123) 564 (995) (2,554)
(Benefit) provision for income taxes........ (598) 13 --(B) (585)
-------- ------- ------- --------
Income (loss) before minority interest and
extraordinary loss........................ (1,525) 551 (995) (1,969)
Minority interest........................... 353 -- 353
-------- ------- ------- --------
Income (loss) before extraordinary loss..... $ (1,172) $ 551 $ (995) $ (1,616)
======== ======= ======= ========
Earnings (loss) per common share -- basic
Income before extraordinary loss.......... $ (0.02) $ (0.02)
Earnings (loss) per common share -- diluted
Income before extraordinary loss.......... $ (0.02) $ (0.02)
Weighted average number of common shares
outstanding -- basic...................... 49,012 69,777(C)
Weighted average number of common shares
outstanding -- diluted.................... 49,012 69,777(D)
</TABLE>
The unaudited pro forma condensed combined statement of operations for the
three month period ended March 31, 2000 gives effect to the consolidated results
of operations for the three month period as if the merger of Destron occurred at
the beginning of each company's prior fiscal year.
P-6
<PAGE> 171
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 ARE AS
FOLLOWS:
(A) The $995 increase in depreciation and amortization expense represents
the estimated amount of goodwill amortization expense to be recorded,
assuming straight line amortization of the $81,228 of goodwill over a 20
year period and taking into consideration the $21 of goodwill
amortization expense included in Destron's historical statement of
operations.
(B) The amortization of goodwill is not deductible, and, therefore receives
no tax benefit.
(C) The number of shares of Applied Digital common stock to be issued were
determined under the assumption that all of the 13,640,722 shares of
Destron common stock outstanding on June 26, 2000 are exchanged for
common stock of Applied Digital at an assumed exchange ratio of 1.5 that
approximately 303,750 shares of Applied Digital common stock will be
issued for payment of a finder's fee and without taking into account the
exercise of options and warrants of Destron Fearing assumed by Applied
Digital. For purposes of this pro forma presentation, such shares of
Applied Digital commons stock were deemed to be outstanding for the
entire pro forma period.
(D) The diluted potential common shares were not included in the computation
of diluted loss per share because to do so would have been anti-dilutive
for the three-month period ended March 31, 2000. The dilutive potential
common shares consist of the estimated number of Destron options and
warrants outstanding of 1,873,564 as of June 26, 2000.
P-7
<PAGE> 172
ANNEX A-1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
APPLIED DIGITAL SOLUTIONS, INC.
DIGITAL ANGEL.NET INC.
AND
DESTRON FEARING CORPORATION
APRIL 24, 2000
<PAGE> 173
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
ARTICLE I THE MERGER........................................ A-1-1
1.1 The Merger....................................... A-1-1
1.2 Closing.......................................... A-1-1
1.3 Effective Time................................... A-1-1
1.4 Conversion of Shares............................. A-1-1
1.5 Exchange of Certificates Representing Company
Common Stock..................................... A-1-3
1.6 Adjustment of Exchange Ratio..................... A-1-4
1.7 Stock Options and Warrants....................... A-1-4
1.8 Tax Consequences................................. A-1-5
1.9 Dissenters' Rights............................... A-1-5
1.10 Taking of Necessary Action; Further Action....... A-1-5
ARTICLE II CERTAIN MATTERS RELATING TO THE SURVIVING
CORPORATION............................................... A-1-6
2.1 Certificate of Incorporation of the Surviving
Corporation...................................... A-1-6
2.2 By-Laws of the Surviving Corporation............. A-1-6
2.3 Officers and Directors of the Surviving
Corporation...................................... A-1-6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ADS AND MERGER
SUB....................................................... A-1-6
3.1 Organization, Standing and Qualification......... A-1-6
3.2 Authorization of Agreement and Other Documents... A-1-6
3.3 No Violation..................................... A-1-7
3.4 SEC Documents.................................... A-1-7
3.5 No Undisclosed Liabilities....................... A-1-8
3.6 No Brokers....................................... A-1-8
3.7 ADS Common Stock................................. A-1-8
3.8 Capitalization................................... A-1-9
3.9 Material Adverse Change.......................... A-1-9
3.10 Disclosure Documents............................. A-1-9
3.11 Tax Reorganization............................... A-1-9
3.12 Compliance with Laws............................. A-1-10
3.13 Litigation....................................... A-1-10
3.14 Taxes............................................ A-1-10
3.15 Affiliated Transactions.......................... A-1-12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.... A-1-12
4.1 Organization, Standing and Qualification......... A-1-12
4.2 Capitalization................................... A-1-12
4.3 Subsidiaries..................................... A-1-13
4.4 Ownership Interests.............................. A-1-13
4.5 Stock Records.................................... A-1-13
4.6 Authorization of Agreement and Other Documents... A-1-13
4.7 No Violation..................................... A-1-14
4.8 Compliance with Laws............................. A-1-14
4.9 Books and Records................................ A-1-15
4.10 SEC Documents.................................... A-1-15
4.11 Adequacy of Properties........................... A-1-16
4.12 Real Estate...................................... A-1-17
4.13 Contracts........................................ A-1-17
4.14 Intellectual Property............................ A-1-19
4.15 Year 2000 Compliance and Security................ A-1-20
</TABLE>
A-1-i
<PAGE> 174
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
4.16 Distributors and Customers....................... A-1-21
4.17 Insurance........................................ A-1-21
4.18 Litigation....................................... A-1-21
4.19 Warranties....................................... A-1-21
4.20 Products Liability............................... A-1-21
4.21 Taxes............................................ A-1-22
4.22 ERISA............................................ A-1-23
4.23 Labor Matters.................................... A-1-24
4.24 Environmental Matters............................ A-1-25
4.25 Interim Conduct of Business...................... A-1-26
4.26 Affiliated Transactions.......................... A-1-27
4.27 Material Adverse Change.......................... A-1-27
4.28 Inappropriate Payments........................... A-1-28
4.29 Absence of Indemnifiable Claims, etc............. A-1-28
4.30 No Undisclosed Liabilities....................... A-1-28
4.31 No Brokers....................................... A-1-28
4.32 Tax Reorganization............................... A-1-28
4.33 Opinion of Financial Advisor..................... A-1-28
4.34 Information Supplied............................. A-1-28
4.35 No Existing Discussions.......................... A-1-29
4.36 Takeover Statutes................................ A-1-29
ARTICLE V COVENANTS......................................... A-1-29
5.1 Alternative Proposals............................ A-1-29
5.2 Interim Operations............................... A-1-30
5.3 Meetings of Stockholders......................... A-1-31
5.4 Filings; Other Action............................ A-1-32
5.5 Inspection of Records............................ A-1-32
5.6 Publicity........................................ A-1-32
5.7 Registration Statement; Proxy Statement.......... A-1-32
5.8 Further Action................................... A-1-33
5.9 Affiliate Letters................................ A-1-34
5.10 Expenses......................................... A-1-34
5.11 Tax Treatment of Merger.......................... A-1-34
5.12 Indemnification of Directors and Officers........ A-1-34
5.13 Voting Agreement - Company....................... A-1-35
5.14 Confidentiality.................................. A-1-35
5.15 Defense of Litigation............................ A-1-35
5.16 Actions by Merger Sub............................ A-1-35
5.17 Takeover Statutes................................ A-1-35
5.18 NASDAQ Listing................................... A-1-35
5.19 Termination of Confidentiality and Secrecy
Agreements....................................... A-1-35
5.20 Employee Benefit Plans........................... A-1-36
5.21 Issuance of Options in the Surviving
Corporation...................................... A-1-36
5.22 Section 16 Matters............................... A-1-36
</TABLE>
A-1-ii
<PAGE> 175
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
ARTICLE VI CONDITIONS....................................... A-1-36
6.1 Conditions to Each Party's Obligation to Effect
the Merger....................................... A-1-36
6.2 Conditions to Obligation of the Company to Effect
the Merger....................................... A-1-37
6.3 Conditions to Obligation of ADS and Merger Sub to
Effect the Merger................................ A-1-38
ARTICLE VII TERMINATION..................................... A-1-38
7.1 Termination by Mutual Consent.................... A-1-38
7.2 Termination by Either ADS or the Company......... A-1-38
7.3 Termination by the Company....................... A-1-39
7.4 Termination by ADS............................... A-1-39
7.5 Effect of Termination and Abandonment............ A-1-39
7.6 Extension; Waiver................................ A-1-40
ARTICLE VIII GENERAL PROVISIONS............................. A-1-40
8.1 Nonsurvival of Representations, Warranties and
Agreements....................................... A-1-40
8.2 Notices.......................................... A-1-40
8.3 Assignment, Binding Effect....................... A-1-40
8.4 Entire Agreement................................. A-1-41
8.5 Amendment........................................ A-1-41
8.6 Governing Law.................................... A-1-41
8.7 Counterparts..................................... A-1-41
8.8 Headings......................................... A-1-41
8.9 Interpretation................................... A-1-41
8.10 Waivers.......................................... A-1-41
8.11 Incorporation of Exhibits........................ A-1-41
8.12 Severability..................................... A-1-41
8.13 Enforcement of Agreement......................... A-1-41
EXHIBITS
Exhibit A -- Form of Affiliate Letter
Exhibit B -- Form of Voting Agreement
Exhibit C -- Form of Employment Agreement (Geissler)
Exhibit D -- Form of Employment Agreement (Santelli)
</TABLE>
A-1-iii
<PAGE> 176
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of April 24, 2000 (the
"Agreement") by and among Applied Digital Solutions, Inc., a Missouri
corporation ("ADS"), Digital Angel.Net Inc., a Delaware corporation and a
wholly-owned subsidiary of ADS ("Merger Sub"), and Destron Fearing Corporation,
a Delaware corporation (the "Company").
WHEREAS, the Board of Directors of each of ADS and the Company have
determined that a business combination between ADS and the Company merging their
respective businesses is in the best interests of their respective companies and
their stockholders and accordingly have agreed to effect the merger provided for
herein upon the terms and subject to the conditions set forth herein; and
WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"); and
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.3 of this Agreement),
Merger Sub shall be merged with and into the Company in accordance with the laws
of the State of Delaware and the terms of this Agreement (the "Merger"),
whereupon the separate corporate existence of Merger Sub shall cease, and the
Company shall be the surviving corporation of the Merger (the Company, as the
surviving corporation after the Merger, is sometimes referred to herein as the
"Surviving Corporation").
1.2 CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place (a) at the offices of
Akerman, Senterfitt & Eidson, P.A., SunTrust International Center, One S.E.
Third Avenue, Suite 2800, Miami, Florida 33131 on the date of the fulfillment of
the last of the conditions set forth in Article VI of this Agreement (other than
(i) those that are waived by the party or parties for whose benefit such
conditions exist, and (ii) any such conditions which, by their terms, are not
capable of being satisfied until the Closing Date) are satisfied; or (b) at such
other place, time, and/or date as the parties hereto may otherwise agree. The
date upon which the Closing shall occur is referred to herein as the "Closing
Date."
1.3 EFFECTIVE TIME. If all the conditions to the Merger set forth in
Article VI of this Agreement have been fulfilled or waived and this Agreement
shall not have been terminated as provided in Article VII hereof, the parties
hereto shall cause a certificate of merger (the "Certificate of Merger") to be
properly executed and filed in accordance with the laws of the State of Delaware
and the terms of this Agreement on the Closing Date. The Merger shall become
effective at such time as the Certificate of Merger is duly filed with the
Secretary of State of Delaware or at such later time as is specified by the
parties hereto as the Effective Time in the Certificate of Merger (the
"Effective Time"). The Merger shall have the effects set forth in the relevant
provisions of the General Corporation Law of the State of Delaware (the "DGCL"),
including Section 259 thereof. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of the Company and Merger Sub.
1.4 CONVERSION OF SHARES.
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of ADS, Merger Sub, the Company or the holders of common stock, par
value $.00005 per share, of Merger Sub ("Merger Sub Common Stock"), each share
of Merger Sub Common Stock outstanding immediately prior to the Effective
A-1-1
<PAGE> 177
Time shall be converted into one share of common stock, par value $0.01 per
share, of the Surviving Corporation;
(b) Subject to Section 1.5(f), at the Effective Time, by virtue of the
Merger and without any action on the part of ADS, Merger Sub, the Company or the
holders of Company common stock, par value $.01 per share (the "Company Common
Stock"), each share of Company Common Stock outstanding immediately prior to the
Effective Time shall be converted into the right to receive a fraction (herein
called the "Exchange Ratio") of one share of common stock, $.001 par value, of
ADS ("ADS Common Stock"). The shares of ADS Common Stock to be received as
consideration pursuant hereto (together with cash in lieu of fractional shares
of ADS Common Stock as specified in Section 1.5(f) below) are referred to herein
as the "Merger Consideration."
(c) (i) The Exchange Ratio shall be 0.75 in the event the Average Closing
Price (as defined in Section 1.4(f)) of the ADS Common Stock is not less than
$8.00 per share and not more than $16.00 per share.
(ii) If the Average Closing Price is more than $16.00 per share, then
the Exchange Ratio shall be the quotient derived by dividing $12.00 by the
Average Closing Price.
(iii) If the Average Closing Price is less than $8.00 per share, then
the Exchange Ratio shall be the quotient derived by dividing $6.00 by the
Average Closing Price.
(iv) If any adjustment is made to the Exchange Ratio pursuant to this
Section 1.4(c), then the adjusted Exchange Ratio shall be rounded to four
decimal places, rounding downward from 0.00005.
(d) Immediately following the Effective Time, all shares of Company Common
Stock shall cease to be outstanding and shall be canceled and retired and shall
cease to exist, and each holder of shares of Company Common Stock shall
thereafter cease to have any rights with respect to such shares of Company
Common Stock, except for the right to receive, without interest, the
consideration set forth in this Section 1.4 (and any dividends or other
distributions payable with respect thereto pursuant to Section 1.5(d)) and cash
in lieu of fractional shares of ADS Common Stock in accordance with Section 1.5
of this Agreement upon the surrender of a certificate representing such shares
of Company Common Stock in accordance with the provisions of this Article I.
(e) Each share of Company Common Stock held by the Company as treasury
stock or owned by ADS or any Subsidiary (as defined in Section 1.4(f) of this
Agreement) of ADS immediately prior to the Effective Time shall be canceled, and
no payment shall be made with respect thereto.
(f) For purposes of this Agreement, (i) the term "Average Closing Price"
shall mean the average of the per share last daily closing price of ADS Common
Stock as quoted on The Nasdaq National Market ("NASDAQ") (and as reported by The
Wall Street Journal or, if not reported thereby, by another authoritative
source) during the twenty (20) consecutive Trading Days which precede the fifth
trading day immediately preceding the Closing Date; (ii) the term "Trading Day"
shall mean any day on which the NASDAQ is open for trading; (iii) the word
"Subsidiary," when used with respect to any Person, means any corporation or
other organization, whether incorporated or unincorporated, of which (A) at
least fifty percent (50%) of the securities or other interests having by their
terms ordinary voting power to elect a majority of the board of directors or
others performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such Person or by
any one or more of its Subsidiaries; or (B) such Person or any other Subsidiary
of such Person is a general partner (excluding partnerships the general
partnership interests of which held by such Person or any Subsidiary of such
Person do not have a majority of the voting interests in such partnership), it
being understood that representations and warranties of a Person concerning any
former Subsidiary of such Person shall be deemed to relate only to the periods
during which such former Subsidiary was a Subsidiary of such Person; and (iv)
the word "Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or any agency or
instrumentality thereof, or any affiliate (as that term is defined in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act")) of any of the foregoing.
A-1-2
<PAGE> 178
1.5 EXCHANGE OF CERTIFICATES REPRESENTING COMPANY COMMON STOCK.
(a) Florida Atlantic Stock Transfer, Inc. (or such other exchange agent
selected by ADS and reasonably acceptable to the Company) shall act as exchange
agent (the "Exchange Agent") in the Merger.
(b) As of the Effective Time and, in any event, no later than five (5)
Trading Days after the Effective Time, ADS shall deposit or cause to be
deposited with the Exchange Agent for exchange in accordance with this Article
I, certificates representing the shares of ADS Common Stock issuable pursuant to
Section 1.4 in exchange for certificates formerly representing shares of Company
Common Stock outstanding immediately prior to the Effective Time and a
sufficient amount of cash to satisfy the cash payments to be made by ADS to
certain holders of Company Common Stock pursuant to Section 1.5(f) hereof.
(c) Promptly after the Effective Time, ADS shall cause the Exchange Agent
to mail to each holder of a certificate or certificates which immediately prior
to the Effective Time represented outstanding shares of Company Common Stock
("Certificates") whose shares were converted into the right to receive ADS
Common Stock Common Stock pursuant to Section 1.4 (i) a notice of effectiveness
of the Merger; (ii) a letter of transmittal which shall specify that delivery
shall be effected, and risk of loss and title to such Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in a
form and shall have such other provisions as ADS and the Company may reasonably
specify; and (iii) instructions for use in effecting the surrender of such
Certificates in exchange for the consideration to be received by such holder
pursuant to Sections 1.4 and 1.5 hereof. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed and completed in accordance with the instructions thereto, ADS
shall cause to be delivered to the person in whose name such Certificate shall
have been issued, or to such person as such person shall direct in writing in
the letter of transmittal, (A) a certificate representing that number of whole
shares of ADS Common Stock into which the shares previously represented by the
surrender of Certificates shall have been converted into the right to receive at
the Effective Time pursuant to Section 1.4; and (B) a check representing the
amount of cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, which such holder has the right to receive in respect of
the Certificate surrendered pursuant to the provisions of this Section 1.5, in
each case, after giving effect to any required withholding tax, and the shares
of Company Common Stock represented by the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the cash paid in
lieu of fractional shares and unpaid dividends and distributions, if any, to
holders of shares of Company Common Stock who receive shares of ADS Common Stock
pursuant to Section 1.4 hereof. In the event of a transfer of ownership of
Company Common Stock which is not registered in the transfer records of the
Company, the consideration to be paid to such holder of Company Common Stock
pursuant to Sections 1.4 and 1.5 hereof may be issued to such a transferee if
the Certificate representing such Company Common Stock is presented to ADS,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid or,
alternatively, payments of such transfer tax to the Exchange Agent. Until so
surrendered, each Certificate that, at the Effective Time, represented shares of
Company Common Stock will be deemed from and after the Effective Time, for all
corporate purposes (except to the extent provided in Section 1.5(d) below), to
evidence the consideration to be received by the holders of Company Common Stock
pursuant to Sections 1.4 and 1.5 hereof.
(d) Notwithstanding anything to the contrary contained herein, no dividends
or other distributions declared after the Effective Time on ADS Common Stock
shall be paid with respect to any shares of Company Common Stock entitled to be
converted into shares of ADS Common Stock represented by a Certificate until
such Certificate is surrendered for exchange as provided herein. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificates representing whole shares of ADS
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such whole
shares of ADS Common Stock and not paid, less the amount of any withholding
taxes which may be required thereon; and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of ADS Common Stock, less the amount
of any withholding taxes which may be required thereon.
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(e) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to ADS or the Surviving Corporation, they shall
be canceled and exchanged for the consideration set forth in this Article I
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Section 1.5. Certificates surrendered for exchange
by any person constituting an "affiliate" of the Company for purposes of Rule
145(c) under the Securities Act of 1933, as amended (the "Securities Act"),
shall not be exchanged until ADS has received an Affiliate Letter (as defined
herein) from such person as provided in Section 5.9.
(f) No fractional shares of ADS Common Stock shall be issued upon surrender
for exchange of Certificates for Company Common Stock. In lieu of the issuance
of any fractional share of ADS Common Stock pursuant to Section 1.4, cash
adjustments will be paid to holders in respect of any fractional share of ADS
Common Stock that would otherwise be issuable, and the amount of such cash
adjustment shall be equal to such fractional proportion of the Average Closing
Price of a share of ADS Common Stock.
(g) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving Corporation, the
posting by such person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, ADS will issue in exchange for such lost,
stolen or destroyed Certificate, the consideration to be received by the holder
of such Certificate pursuant to Sections 1.4 and 1.5 hereof.
(h) Any portion of the property delivered to the Exchange Agent in
accordance with Section 1.5(b) that remains unclaimed two years after the
Effective Time shall be delivered to ADS. Any holder of a Certificate who has
not theretofore surrendered such Certificate for exchange pursuant to this
Section 1.5 shall thereafter look only to ADS for payment of the consideration
deliverable in respect of such Certificate determined pursuant to this
Agreement, without any interest thereon. Payment or delivery of any shares of
ADS Common Stock, any cash in lieu of fractional shares of ADS Common Stock and
any dividends, or distributions with respect to ADS Common Stock shall be
subject to applicable abandoned property, escheat and similar laws, and none of
ADS, Merger Sub, the Company, the Surviving Corporation or any other person
shall be liable to any former holder of shares of Company Common Stock for any
amount properly delivered to a public official pursuant to any applicable
abandoned property, escheat or similar laws.
1.6 ADJUSTMENT OF EXCHANGE RATIO. Excluding the increase in the number of
authorized shares of ADS Common Stock contemplated by Section 6.1(g) hereof, if
subsequent to the date of this Agreement but prior to the Effective Time, the
ADS Common Stock is recapitalized or reclassified or ADS shall effect any stock
split, reverse stock split or stock dividend of ADS Common Stock, then the
Exchange Ratio and the Average Closing Price shall be appropriately and
equitably adjusted to the kind and amount of shares of stock and other
securities and property which the holders of such shares of ADS Common Stock
would have been entitled to receive had such shares been issued and outstanding
as of the record date for determining stockholders entitled to participate in
such corporate event.
1.7 STOCK OPTIONS AND WARRANTS. All options and warrants to acquire
Company Common Stock (individually, a "Company Option" and collectively, the
"Company Options") outstanding at the Effective Time under the Company's 1992
Incentive Stock Option Plan, the Company's 1992 Non-Employee Directors Stock
Option Plan, the Company's 1992 Consultant Stock Option Plan or otherwise (the
"Company Stock Option Plans") shall remain outstanding following the Effective
Time. At the Effective Time, such Company Options, by virtue of the Merger and
without any further action on the part of the Company or the holder of such
Company Options, shall be assumed by ADS in such manner that ADS (a) is a
corporation (or a parent or a subsidiary corporation of such corporation)
"assuming a stock option in a transaction to which Section 424(a) applied"
within the meaning of Section 424 of the Code; or (b) to the extent that Section
424 of the Code does not apply to any such Company Options, would be such a
corporation (or a parent or a subsidiary corporation of such corporation) were
Section 424 applicable to such option. Each Company Option assumed by ADS shall
be exercisable upon the same terms and conditions as under the applicable
Company Stock Option Plan and the applicable option agreement issued thereunder,
except that (x) the
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unexercised portion of each such Company Option shall be exercisable for that
whole number of shares of ADS Common Stock (rounded down to the nearest whole
share) equal to the number of shares of Company Common Stock subject to the
unexercised portion of such Company Option multiplied by the Exchange Ratio; and
(y) the option exercise price per share of ADS Common Stock shall be an amount
equal to the option exercise price per share of Company Common Stock subject to
such Company Option in effect at the Effective Time divided by the Exchange
Ratio (the option price per share, as so determined, being rounded up to the
nearest full cent). No payment shall be made for fractional interests. The term,
exercisability, vesting schedule, status as an "incentive stock option" under
Section 422 of the Code, if applicable, and all of the other terms of the
Company Options shall otherwise remain unchanged unless modified by or as a
result of the transaction contemplated by this Agreement (including, without
limitation, to the extent that all outstanding Company Options shall become
vested and exercisable at the Effective Time). As soon as practicable after the
Effective Time, ADS shall deliver to the holders of Company Options appropriate
notices setting forth such holders' rights pursuant to such Company Options, as
amended by this Section 1.7 as well as notice of ADS's assumption of the
Company's obligations with respect thereto (which occurs by virtue of this
Agreement). ADS shall take all corporate actions necessary to reserve for
issuance such number of shares of ADS Common Stock as will be necessary to
satisfy exercises in full of all Company Options after the Effective Time.
1.8 TAX CONSEQUENCES. It is intended by the parties hereto that the Merger
shall constitute a reorganization within the meaning of Section 368 of the Code.
The parties hereto hereby adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Treasury Regulations promulgated under the Code.
1.9 DISSENTERS' RIGHTS. Notwithstanding any provisions of this Agreement
to the contrary, shares of Company Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by a Company
stockholder who has not approved of the Merger by written consent or by vote at
the Company Stockholder Meeting (as defined in Section 3.10) and, with respect
to which, appraisal rights shall have been duly demanded and perfected in
accordance with Section 262 of the DGCL ("Dissenting Shares") shall not be
converted into a right to receive ADS Common Stock in accordance with Section
1.4 hereof , or any cash in lieu of fractional shares of ADS Common Stock and
any dividends or distributions with respect to ADS Common Stock in accordance
with Sections 1.5(d) and 1.5(f) hereof. The holders of Dissenting Shares shall
be entitled only to such rights as are granted by Section 262 of the DGCL. Each
holder of Dissenting Shares who becomes entitled to payment for such Dissenting
Shares pursuant to Section 262 of the DGCL shall receive payment therefor from
ADS in accordance with the DGCL; provided, however, that (i) if any such holder
of Dissenting Shares shall have failed to establish its entitlement to appraisal
rights as provided in Section 262 of the DGCL, (ii) if any such holder of
Dissenting Shares shall have effectively withdrawn its demand for appraisal of
such Dissenting Shares or lost its right to appraisal and payment for its
Dissenting Shares under Section 262 of the DGCL, or (iii) if neither any holder
of Dissenting Shares nor ADS shall have filed a petition demanding a
determination of the value of all Dissenting Shares within the time provided in
Section 262 of the DGCL, such holder shall forfeit the right to appraisal of
such Dissenting Shares, and each such Dissenting Share shall be treated as if
such Share had been converted, as of the Effective Time, into a right to
receive, subject to the provisions of Sections 1.4 and 1.5 hereof, the Merger
Consideration with respect thereto, without interest thereon.
1.10 TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of the Company, ADS
and Merger Sub will take all such reasonable and lawful action as may be
necessary or appropriate in order to effectuate the Merger as promptly as
possible in accordance with this Agreement. If, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purposes of
this Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
the Company and Merger Sub, the officers and directors of the Company and Merger
Sub are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action, so long
as such action is lawful and consistent with this Agreement.
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ARTICLE II
CERTAIN MATTERS RELATING TO
THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION. The
certificate of incorporation of Merger Sub in effect at the Effective Time shall
be the certificate of incorporation of the Surviving Corporation until amended
in accordance with its terms and pursuant to applicable law.
2.2 BY-LAWS OF THE SURVIVING CORPORATION. The By-Laws of Merger Sub in
effect at the Effective Time shall be the By-Laws of the Surviving Corporation
until amended in accordance with the terms of such By-Laws and pursuant to
applicable law and the Certificate of Incorporation of the Surviving
Corporation.
2.3 OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION. The officers and
directors of Merger Sub immediately prior to the Effective Time shall be the
officers and directors of the Surviving Corporation immediately after the
Effective Time, and shall hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation and until their
successors are duly appointed or elected in accordance with applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ADS AND MERGER SUB
ADS and Merger Sub represent and warrant to the Company that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure statement delivered by ADS and Merger Sub to the Company concurrently
herewith and identified as the "ADS Disclosure Statement." All exceptions noted
in the ADS Disclosure Statement shall be numbered to correspond to the
applicable sections to which such exception refers; provided, however, that for
purposes of this Agreement and the ADS Disclosure Statement, any disclosure set
forth on any particular schedule shall be deemed disclosed in reference to all
applicable schedules.
3.1 ORGANIZATION, STANDING AND QUALIFICATION. Each of ADS, Merger Sub and
each of the Subsidiaries of ADS other than Merger Sub (each such Subsidiary
singularly "ADS Subsidiary" or collectively "ADS Subsidiaries") (i) is a
corporation duly incorporated, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation; (ii) has all requisite
power and authority to own or lease, and operate its respective properties and
assets, and to carry on its respective businesses as now conducted and as
currently proposed to be conducted, except where the failure to have such power
and authority would not have an ADS Material Adverse Effect (as defined herein)
and to consummate the transactions contemplated hereby; (iii) is duly qualified
or licensed to do business and is in good standing in all jurisdictions in which
it owns or leases property or in which the conduct of its respective businesses
requires it to so qualify or be licensed, except where the failure to so
qualify, individually or in the aggregate, would not have an ADS Material
Adverse Effect; and (iv) has obtained all licenses, permits, franchises and
other governmental authorizations necessary to the ownership or operation of its
respective properties or the conduct of its respective businesses, except where
the failure to have obtained such licenses, permits, franchises or
authorizations would not have an ADS Material Adverse Effect. A complete and
correct copy of ADS's and Merger Sub's Articles or Certificate of Incorporation
and By-Laws, each as amended to date, has been previously furnished to the
Company or have been made available for the Company's review and are in full
force and effect. None of ADS, Merger Sub or any ADS Subsidiary is in violation
of any provision of its Articles or Certificate of Incorporation or By-Laws. For
purposes of this Agreement, a "Material Adverse Effect" when used with respect
to any entity means (a) a material adverse effect on the business, results of
operations, financial condition or prospects of such entity and its
Subsidiaries, taken as a whole, or (b) a material impairment in the ability of
such entity or its Subsidiaries to perform any of their obligations under this
Agreement or to consummate the Merger.
3.2 AUTHORIZATION OF AGREEMENT AND OTHER DOCUMENTS. The execution and
delivery of this Agreement and the other documents executed or to be executed in
connection herewith to which ADS or Merger Sub is a party (collectively, the
"ADS Ancillary Documents"), have been duly authorized by the Board of Directors
of
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ADS and Merger Sub, and no other proceedings on the part of ADS or Merger Sub
are necessary to authorize the execution, delivery or performance of this
Agreement or any ADS Ancillary Document, except the approval of the Merger by
the stockholders of ADS, as provided in Section 5.3 of this Agreement, and the
increase in the number of shares of authorized ADS Common Stock contemplated by
Section 6.1(g) hereof. This Agreement is, and, as of the Closing Date, each of
the ADS Ancillary Documents will be, a valid and binding obligation of ADS
and/or Merger Sub, as the case may be, enforceable against ADS and/or Merger
Sub, as the case may be, in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws affecting enforcement of
creditors' rights generally, and by general principles of equity (regardless of
whether enforcement is considered in a proceeding at law or in equity) and
subject to receipt of approval of the Merger by the ADS stockholders.
3.3 NO VIOLATION. Neither the execution and delivery by ADS and Merger Sub
of this Agreement or the ADS Ancillary Documents, nor the consummation by ADS
and Merger Sub of the transactions contemplated hereby and thereby in accordance
with their respective terms, will (a) assuming approval of the Merger by the
stockholders of ADS, conflict with or result in a breach of any provisions of
the Articles or Certificate of Incorporation or By-Laws of ADS or Merger Sub;
(b) result in a breach or violation of, a default under, or the triggering of
any payment or other material obligations pursuant to, or accelerate vesting
under, any of the ADS stock option plans, or any grant or award made under any
of the foregoing; (c) subject to obtaining the consents set forth in the ADS
Disclosure Statement, violate, conflict with, result in a breach of any
provision of, constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, result in the termination, or
in a right of termination or cancellation of, accelerate the performance
required by, result in the triggering of any payment or other material
obligations pursuant to, result in the creation of any lien, security interest,
charge or encumbrance upon any of the material properties of ADS, Merger Sub or
any of the ADS Subsidiaries, other than as disclosed in the ADS Disclosure
Statement, under, or result in being declared void, voidable, or without further
binding effect, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust or any material license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which ADS, Merger Sub or any of the ADS Subsidiaries is a party, or by which
ADS, Merger Sub or any of the ADS Subsidiaries or any of their respective
properties is bound or affected, except for any of the foregoing matters which
would not have an ADS Material Adverse Effect; (d) assuming the Merger is so
approved by stockholders of ADS, and assuming all required consents and
approvals are obtained and all applicable filings are made, contravene or
conflict with or constitute a violation of any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to ADS or
Merger Sub, except for any of the foregoing matters which would not have an ADS
Material Adverse Effect; or (e) other than the filings provided for in Sections
1.3 and 5.7, filings required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"), the Exchange Act, the Securities Act, or applicable
state securities and "Blue Sky" laws or filings in connection with the
maintenance of qualification to do business in other jurisdictions
(collectively, the "Regulatory Filings"), require any material consent, approval
or authorization of, or declaration of, or filing or registration with, any
domestic governmental or regulatory authority, the failure to obtain or make
which would have an ADS Material Adverse Effect.
3.4 SEC DOCUMENTS. ADS has delivered or made available to the Company each
registration statement, report, proxy statement or information statement (as
defined in Regulation 14C under the Exchange Act) prepared by it since December
31, 1996, which reports constitute all of the documents (other than preliminary
material) required to be filed by ADS with the Securities and Exchange
Commission ("SEC") since such date, each in the form (including exhibits and any
amendments thereto) filed with the SEC (collectively, the "ADS Reports"). As of
their respective dates, each of the ADS Reports complied and, in the case of
filings after the date hereof, will comply as to form in all material respects
with the applicable requirements of the Securities Act and/or the Exchange Act,
as the case may be, and the rules and regulations thereunder. None of the ADS
Reports contained, as of the date they were filed, any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. ADS has filed with the
SEC all reports required to be filed under Sections 13, 14 and 15(d) of the
Exchange Act
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since December 31, 1996. Each of the consolidated balance sheets of ADS included
in or incorporated by reference into the ADS Reports (including the related
notes and schedules) fairly present in all material respects the consolidated
financial position of ADS and the ADS Subsidiaries as of its date (subject, in
the case of unaudited statements, to normal year-end audit adjustments which
would not be material in amount or effect), and each of the consolidated
statements of income, retained earnings and cash flows of ADS included in or
incorporated by reference into the ADS Reports (including any related notes and
schedules) fairly present in all material respects the results of operations,
retained earnings or cash flows, as the case may be, of ADS and the ADS
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect). Except as and to the extent reflected or reserved
against in the financial statements included in the ADS's Annual Report on Form
10-K for the year ended December 31, 1999 (the "ADS Form 10-K") or as disclosed
herein or in the ADS Disclosure Statement, neither ADS nor any of the ADS
Subsidiaries had as of such date any liability or obligation of any kind,
whether accrued, absolute, contingent, unliquidated or other and whether due or
to become due (including any liability for breach of contract, breach of
warranty, torts, infringements, claims or lawsuits), which was material to the
business, assets, results of operations or financial conditions of ADS and the
ADS Subsidiaries taken as a whole. Except as set forth in the ADS Disclosure
Statement, since December 31, 1999, neither ADS nor any of the ADS Subsidiaries
has incurred any liability or obligation of any kind which, in any case or in
the aggregate, is material to the business, assets, results of operations or
financial condition of ADS and the ADS Subsidiaries taken as a whole, except in
the ordinary course of business. There are no extraordinary or material
non-recurring items of income or expense during the periods covered by such
financial statements, and the consolidated balance sheets of ADS included or
incorporated therein do not reflect any write-up or revaluation increasing the
book value of any assets, except in either case as specifically disclosed in the
notes thereto. The financial statements of ADS, including the notes thereto,
included in or incorporated by reference into the ADS Reports comply as to form
in all material respects with the published rules and regulations of the SEC
with respect thereto, and have been prepared in accordance with generally
accepted accounting principles consistently applied ("GAAP") (except as may be
indicated in the notes thereto). Since December 31, 1996, there has been no
change in ADS's accounting methods or principles that would be required to be
disclosed in ADS financial statements in accordance with GAAP, except as
described in the notes to such ADS financial statements.
3.5 NO UNDISCLOSED LIABILITIES. There are no material liabilities or
obligations of any nature (whether accrued, absolute or contingent) of ADS or
the ADS Subsidiaries other than (i) liabilities disclosed or provided for in the
most recent financial statements contained in the ADS Reports; (ii) liabilities
which, individually or in the aggregate, are not material to ADS or the ADS
Subsidiaries; (iii) liabilities under this Agreement (or contemplated hereby) or
disclosed in the ADS Disclosure Statement; and (iv) liabilities incurred since
December 31, 1999 in the ordinary course of business and consistent with past
practices.
3.6 NO BROKERS. Except as set forth on the ADS Disclosure Statement, ADS
has not entered into any contract, arrangement or understanding with any person
or firm which may result in the obligation of the Company or ADS, Merger Sub or
their respective Subsidiaries to pay any finder's fee, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
3.7 ADS COMMON STOCK. Subject to obtaining the approval of the
stockholders of ADS of (i) the increase in the number of shares of authorized
ADS Common Stock contemplated by Section 6.1(g) hereof, and (ii) the issuance of
ADS Common Stock in connection with the Merger and this Agreement, the issuance
and delivery by ADS of shares of ADS Common Stock in connection with the Merger
and this Agreement have been duly and validly authorized by all necessary
corporate action on the part of ADS. The shares of ADS Common Stock to be issued
in connection with the Merger and this Agreement, when issued in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable and free of preemptive rights.
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3.8 CAPITALIZATION.
(a) The total authorized capital stock of ADS consists of (i) 80,000,000
shares of ADS Common Stock, $.001 par value per share, 50,398,739 shares of
which are issued and outstanding as of April 15, 2000, and 2,856,193 of which
are held by ADS in its treasury, and (ii) 5,000,000 shares of ADS Preferred
Stock, $10.00 par value per share, one (1) share of which is designated as the
ADS Class B Voting Preferred Stock and is issued and outstanding as of April 15,
2000. The authorized capital stock of Merger Sub consists of 50,000,000 shares
of common stock, $.00005 par value per share, 20,000,000 shares of which, as of
the date hereof, are issued and outstanding and are held by ADS. There are no
shares of capital stock of ADS or Merger Sub of any other class authorized,
issued or outstanding.
(b) Except as set forth in the ADS Disclosure Statement, there are
currently no outstanding, and as of the Closing, there will be no outstanding
(i) securities convertible into or exchangeable for any capital stock of ADS,
Merger Sub or any of the ADS Subsidiaries, (ii) options, warrants or other
rights to purchase or subscribe to capital stock of ADS, Merger Sub or any of
the ADS Subsidiaries or securities convertible into or exchangeable for capital
stock of ADS or any of the ADS Subsidiaries, or (iii) contracts, commitments,
agreements, understandings, arrangements, calls or claims of any kind relating
to the issuance of any capital stock of ADS or any of the ADS Subsidiaries.
3.9 MATERIAL ADVERSE CHANGE. Since December 31, 1999 to the date of this
Agreement, ADS, Merger Sub and the ADS Subsidiaries, taken as a whole, have not
suffered any change in their businesses, operations, assets, liabilities,
financial condition or prospects which had or would reasonably have an ADS
Material Adverse Effect; provided, that an ADS Material Adverse Effect will not
be deemed to have occurred solely as a result of fluctuations in the trading
price of the ADS Common Stock.
3.10 DISCLOSURE DOCUMENTS. None of the information supplied or to be
supplied by ADS or any of its affiliates, directors, officers, employees, agents
or representatives, in writing specifically for inclusion or incorporation by
reference in, and which is included or incorporated by reference in, (i) the
Form S-4 (as defined in Section 5.7 of this Agreement) or any amendment or
supplement thereto, (ii) the proxy statement to be mailed to Company's
stockholders (the "Company Proxy Statement") in connection with the meeting of
Company's stockholders called to consider and vote upon the approval of the
Merger (the "Company Stockholder Meeting") or any amendment or supplement
thereto, (iii) the proxy statement to be mailed to ADS's stockholders (the "ADS
Proxy Statement") in connection with the meeting of ADS's stockholders called to
consider and vote upon the approval of the Merger (the "ADS Stockholder
Meeting"), or (iv) any other documents filed or to be filed by ADS with the SEC
or any other Governmental Authority (as defined in Section 3.12(f) hereof) in
connection with the transactions contemplated hereby, will, at the respective
times such documents are filed, and, in the case of the Form S-4 or any
amendment or supplement thereto, when the same becomes effective, at the date of
Company Stockholder Meeting and at the Effective Time, and, in the case of the
ADS Proxy Statement or any amendment or supplement thereto, at the time of
mailing to ADS stockholders or at the time of the ADS Stockholder Meeting, and
in the case of the Company Proxy Statement, or any amendment or supplement
thereto, at the time of the Company Stockholder Meeting, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading or necessary to correct any statement in
any earlier communication with respect to the solicitation of any proxy for the
Company Stockholder Meeting. The Form S-4 will comply as to form in all material
respects with the applicable provisions of the Securities Act, the Exchange Act,
and the respective rules and regulations under any such Act (except that no
representation is made as to the form of the Company Proxy Statement to be
included as the prospectus therein).
3.11 TAX REORGANIZATION. Neither ADS nor any of the ADS Subsidiaries has
taken or failed to take any action which would prevent the Merger from
constituting a reorganization within the meaning of Section 368(a) of the Code.
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3.12 COMPLIANCE WITH LAWS.
(a) ADS, Merger Sub and each of the ADS Subsidiaries hold all permits,
licenses, variances, exemptions, orders, approvals, authorizations,
certificates, filings, franchises, notices and rights of all Governmental
Authorities necessary for each of them to own, lease or operate its properties
and assets and for the lawful conduct of its business (the "Permits"), except
where the failure to hold such Permits would not have an ADS Material Adverse
Effect. None of such Permits is or will be materially impaired by the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(b) ADS, Merger Sub and each of the ADS Subsidiaries are in compliance with
the terms of its Permits in all material respects.
(c) ADS, Merger Sub and each of the ADS Subsidiaries are in compliance with
all statutes, laws, ordinances, orders, rules, or regulations of any
Governmental Authority (including, but not limited to, those related to
occupational health and safety, or employment and employment practices) that are
applicable to ADS, Merger Sub or any of the ADS Subsidiaries or that affect or
relate to this Agreement or the transactions contemplated hereby, except for any
noncompliance that would not have an ADS Material Adverse Effect.
(d) As of the date of this Agreement, and as of the Closing, no
investigation, review, inquiry or proceeding by any Governmental Authority with
respect to ADS, Merger Sub or any of the ADS Subsidiaries is, to the knowledge
of ADS, pending or threatened which, if determined unfavorably, would have an
ADS Material Adverse Effect.
(e) Neither ADS nor Merger Sub nor any of the ADS Subsidiaries are subject
to any agreement, contract, judgment, order or decree with any Governmental
Authority arising out of any current or previously existing violations of any
laws, ordinances or regulations applicable to ADS, Merger Sub or any of the ADS
Subsidiaries.
(f) For the purposes of this Agreement, "Governmental Authority" shall mean
any nation, or government, any state, regional, local or other political
subdivision thereof, and any entity or official exercising executive,
legislative, judicial, regulatory, or administrative functions or pertaining to
government.
3.13 LITIGATION. Except as set forth in the ADS Reports filed with the SEC
prior to the date hereof or as set forth in the ADS Disclosure Statement, (i)
there is no litigation or proceeding including, without limitation, any
arbitration proceeding, in law or in equity, and there are no proceedings or
governmental investigations before any commission or other administrative
authority, pending or, to ADS's knowledge, threatened against ADS, Merger Sub or
any of the ADS Subsidiaries which, if adversely determined, is reasonably likely
to have, either individually or in the aggregate, an ADS Material Adverse
Effect; (ii) there is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator applicable to ADS, the Merger Sub or any of the ADS Subsidiaries
having, or which is reasonably likely to have, either individually or in the
aggregate, an ADS Material Adverse Effect; and (iii) to the knowledge of ADS,
there is no action, suit, proceeding or investigation pending or threatened
against ADS, the Merger Sub or any of the ADS Subsidiaries which seeks to
restrain, enjoin or delay the consummation of the Merger or any of the other
transactions contemplated hereby or which seeks damages in connection therewith,
and no injunction of any type referred to in Section 6.1(c) has been entered or
issued.
3.14 TAXES.
(a) As used in this Agreement, (i) the term "Taxes" means all federal,
state, local, foreign and other net income, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, lease, service, service
use, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties or other taxes, fees,
assessments or charges of any kind whatever of a nature similar to taxes,
together with any interest and any penalties, additions to tax or additional
amounts with respect thereto, and the term "Tax" means any one of the foregoing
Taxes; and (ii) the term "Returns" means all returns, declarations, reports,
statements and other documents required to be filed in respect of Taxes, and the
term "Return" means any one of the foregoing Returns.
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(b) There have been properly completed and filed on a timely basis and in
correct form all Returns required to be filed by ADS or any of the ADS
Subsidiaries on or before the date hereof and will be properly completed and
filed on a timely basis and in correct form all Returns required to be filed by
ADS or any of the ADS Subsidiaries with respect to any period ending with or
before, or including the period prior to, the Effective Time. The foregoing
Returns are, or will be, correct, and complete in all material respects. Except
as set forth in the ADS Disclosure Statement, an extension of time within which
to file any Return which has not been filed has not been requested or granted.
(c) With respect to all amounts in respect of Taxes imposed upon ADS or any
of the ADS Subsidiaries, or for which ADS or any of the ADS Subsidiaries is or
could be liable, whether to taxing authorities (as, for example, under law) or
to other persons or entities (as, for example, under tax allocation agreements),
with respect to all taxable periods or portions of periods ending on or before
the Effective Time, (i) all applicable tax laws and agreements have been, or
will be, complied with in all material respects, and (ii) all amounts required
to be paid and reported by ADS or the ADS Subsidiaries, to taxing authorities or
others, on or before the Effective Time, have been, or will be, paid and any
Taxes accrued but not due and payable as of the Effective Time have been accrued
or otherwise reserved for in financial statements contained in the most recent
ADS Report or will be reserved for in the financial statements to be prepared
with respect to the period beginning after the period covered by the most recent
ADS Report and ending with or before, or including the period prior to, the
Effective Time. No Taxes have been (or will prior to the Closing Date be)
recorded by ADS or any of the ADS Subsidiaries other than in the ordinary course
of business. There are no Liens filed against any asset of ADS or any of the ADS
Subsidiaries resulting from the failure to pay any Tax when due.
(d) No material issues have been raised (and are currently pending) by any
taxing authority in connection with any of the Returns. No waivers of statutes
of limitation with respect to the Returns have been given by ADS or any of the
ADS Subsidiaries (or with respect to any Return which a taxing authority has
asserted should have been filed by ADS or any of the ADS Subsidiaries) which
waivers are still in effect. The ADS Disclosure Statement sets forth, for the
past seven years, the years for which examinations or audits of Florida and
Missouri state taxes and federal income tax returns have been completed, those
years for which examinations or audits are presently being conducted, and those
years for which such returns will be required but are not yet due to be filed
and have not yet been filed. All deficiencies asserted or assessments made as a
result of any examinations have been fully paid, or are fully reflected as a
liability in the financial statements contained in the ADS Report, or are being
contested and an adequate reserve therefor has been established and is fully
reflected as a liability in the financial statements contained in the most
recent ADS Report. Neither ADS nor any ADS Subsidiary has entered into any
closing agreement with the Internal Revenue Service under Section 7121 of the
Code or with any state taxing authority under a similar state tax law provision.
No consent under Section 341(f) of the Code has been filed with respect to ADS
or any ADS Subsidiary. Neither ADS nor any ADS Subsidiary has agreed to, or is
required to make, any adjustment under Section 481(a) of the Code.
(e) The unpaid Taxes of ADS or any of the ADS Subsidiaries do not
materially exceed the reserve for tax liability (excluding any reserve for
deferred Taxes established to reflect timing differences between book and tax
income) set forth or included in the financial statements included in the most
recent ADS Report, as adjusted for the passage of time through the Closing. ADS
and ADS Subsidiaries will not be liable for any material amount of penalties or
interest with respect to Taxes reported or required to have been reported on any
Returns which have been filed or were required to have been filed through the
Closing.
(f) Neither ADS nor any of the ADS Subsidiaries is or at any time has been
a party to or bound by (nor will ADS or any of the ADS Subsidiaries become a
party to or bound by) any tax indemnity, tax sharing or tax allocation
agreement.
(g) All material elections with respect to Taxes affecting ADS or any of
the ADS Subsidiaries that are currently effective as of the date hereof that are
not reflected in ADS's Returns are set forth in the ADS Disclosure Statement.
(h) There are no challenges on appeals pending regarding the amount of
Taxes on, or the addressed valuation of, the real estate owned or leased by ADS
or any of the ADS Subsidiaries, and no special
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arrangements or agreements exist with any governmental authority with respect
thereto (provided, that the representations and warranties contained in this
Section 3.14(h) shall not be deemed to be breached by any prospective general
increase in real estate taxes.)
(i) There is no assessment for Taxes (in addition to the normal, annual
general real estate tax assessment) pending against ADS or any of the ADS
Subsidiaries, or to ADS's knowledge, threatened with respect to any portion of
the real estate owned by ADS or any of the ADS Subsidiaries, or to the extent
ADS or any of the ADS Subsidiaries is liable for payment of the real estate
leased by them.
3.15 AFFILIATED TRANSACTIONS. Except as disclosed in any ADS Report filed
with the SEC prior to the date of this Agreement or as set forth in the ADS
Disclosure Statement, since December 31, 1999, neither ADS nor any of the ADS
Subsidiaries has been a party to any transactions (other than employee
compensation and other ordinary incidents of employment) with an "ADS Related
Party," For purposes of this Agreement, the term "ADS Related Party" shall mean:
any present officer or director, 10% stockholder (including any officers or
directors thereof) or present affiliate of ADS or any of the ADS Subsidiaries,
any present or former known spouse of any of the aforementioned persons or any
trust or other similar entity for the benefit of any of the foregoing persons.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to ADS and Merger Sub that the
statements contained in this Article IV are true and correct, except as set
forth in the disclosure statement delivered by the Company to ADS and Merger Sub
concurrently herewith and identified as the "Disclosure Statement." All
exceptions noted in the Disclosure Statement shall be numbered to correspond to
the applicable sections to which such exception refers; provided, however, that
for purposes of this Agreement and the Disclosure Statement, any disclosure set
forth on any particular schedule shall be deemed disclosed in reference to all
applicable schedules.
4.1 ORGANIZATION, STANDING AND QUALIFICATION. The Company and each of its
Subsidiaries (i) is a corporation duly incorporated, validly existing and in
good standing under the laws of its respective jurisdiction of incorporation;
(ii) has all requisite power and authority to own or lease, and operate its
respective properties and assets, and to carry on its respective businesses as
now conducted and as currently proposed to be conducted, except where the
failure to have such power and authority would not have a Company Material
Adverse Effect, and to consummate the transactions contemplated hereby; (iii) is
duly qualified or licensed to do business and is in good standing in all
jurisdictions in which it owns or leases property or in which the conduct of its
respective businesses requires it to so qualify or be licensed, except where the
failure to so qualify, individually or in the aggregate, would not have a
Company Material Adverse Effect; and (iv) has obtained all licenses, permits,
franchises and other governmental authorizations necessary to the ownership or
operation of its respective properties or the conduct of its respective
businesses, except where the failure to have obtained such licenses, permits,
franchises or authorizations would not have a Company Material Adverse Effect. A
complete and correct copy of the Company's and each of its Subsidiaries'
Articles or Certificate of Incorporation and Bylaws (or equivalent
organizational documents), each as amended to date, has been previously
furnished to ADS and are in full force and effect. None of Company or any of its
Subsidiaries is in violation of any provision of its Articles or Certificate of
Incorporation and Bylaws (or equivalent organizational documents).
4.2 CAPITALIZATION.
(a) The total authorized capital stock of the Company consists of (i)
20,000,000 shares of common stock, par value $0.01 per share, 13,640,772 shares
of which are issued and outstanding as of April 15, 2000 and no such shares are
held by the Company in its treasury; and (ii) no shares of preferred stock.
There are no shares of capital stock of the Company of any other class
authorized, issued or outstanding.
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(b) Each share outstanding of Company Common Stock is duly authorized and
validly issued, fully paid and nonassessable and free of preemptive and similar
rights.
(c) Except as set forth in the Disclosure Statement, there are currently no
outstanding, and, except as permitted pursuant to Section 5.2, as of the
Closing, there will be no outstanding (i) securities convertible into or
exchangeable for any capital stock of the Company or any of its Subsidiaries,
(ii) options, warrants or other rights to purchase or subscribe to capital stock
of the Company or any of its Subsidiaries or securities convertible into or
exchangeable for capital stock of the Company or any of its Subsidiaries, or
(iii) contracts, commitments, agreements, understandings, arrangements, calls or
claims of any kind to which the Company or any of its Subsidiaries is a party or
is bound relating to the issuance of any capital stock of the Company or any of
its Subsidiaries. The Disclosure Statement identifies, as of the date hereof,
the option holder, the number of shares subject to each option, the exercise
price, the vesting schedule and the expiration date of each outstanding option
to purchase capital stock of the Company or any of its Subsidiaries.
4.3 SUBSIDIARIES. The Company owns directly or indirectly each of the
outstanding shares of capital stock of (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to) each of the Company's Subsidiaries
indicated in the Disclosure Statement as being owned by the Company. Each of the
outstanding shares of capital stock owned by the Company of each of the
Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by the Company free and
clear of all Liens (as defined below), other than Liens imposed by local law
which are not material. The following information for each Subsidiary of the
Company is listed in the Disclosure Statement, if applicable: (a) its name and
jurisdiction of incorporation or organization, and (b) the location of its
principal executive office. "Lien" means any mortgage, pledge, security
interest, attachment, encumbrance, lien (statutory or otherwise), license,
claim, option, conditional sale agreement, right of first refusal, first offer,
termination, participation or purchase or charge of any kind (including any
agreement to give any of the statutory liens for Taxes, which are not yet due
and payable or are being contested in good faith by appropriate proceedings,
(ii) statutory or common law liens to secure landlords, lessors or renters under
leases or rental agreements confined to the premises rented, (iii) deposits or
pledges made in connection with, or to secure payment of, workers' compensation,
unemployment insurance, old age pension or other social security programs
mandated under applicable laws, (iv) statutory or common law liens in favor of
carriers, warehousemen, mechanics and materialmen, to secure claims for labor,
materials or supplies and other like liens, and (v) restrictions on transfer of
securities imposed by applicable state and federal securities laws.
4.4 OWNERSHIP INTERESTS. Except for the interests in the Company's
Subsidiaries, neither the Company nor any of its Subsidiaries owns any direct or
indirect interest in any corporation, joint venture, limited liability company,
partnership, association or other entity. Since December 31, 1999, the Company
has not (i) disposed of the capital stock (other than Company Common Stock) or
all or substantially all of the assets of any ongoing business, or (ii)
purchased the business and/or all or substantially all of the assets of another
person, firm or corporation (whether by purchase of stock, assets, merger or
otherwise).
4.5 STOCK RECORDS. Except as set forth on the Disclosure Statement, a
complete and correct copy of all stock records, and all corporate minute books
and records of the Company and each of its Subsidiaries, have been furnished or
made available by the Company to ADS for inspection to the extent requested by
ADS. The corporate minute books and records of the Company and its Subsidiaries
contain true and complete copies of all resolutions adopted by the stockholders
or the Board of Directors of the Company and its Subsidiaries and any other
action formally taken by them respectively as such since September 8, 1993. The
Company has provided to ADS a copy of its stock ledger as of a recent
practicable date certified by the Company's transfer agent.
4.6 AUTHORIZATION OF AGREEMENT AND OTHER DOCUMENTS. The execution and
delivery of this Agreement and the other documents executed or to be executed in
connection herewith to which the Company is a party (collectively, the
"Ancillary Documents"), have been duly authorized by the Board of Directors of
the Company, and no other proceedings on the part of the Company are necessary
to authorize the execution, delivery or performance of this Agreement or any
Ancillary Document, except the approval of the Merger by
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the stockholders of the Company as provided in Section 5.3. This Agreement is,
and, as of the Closing Date, each of the Ancillary Documents will be, a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent that enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws affecting enforcement of creditors' rights
generally, and by general principles of equity (regardless of whether
enforcement is considered in a proceeding at law or in equity) and subject to
the receipt of approval of the Merger by the Company's stockholders.
4.7 NO VIOLATION. Neither the execution and delivery of this Agreement or
the Ancillary Documents by the Company, nor the consummation by the Company of
the transactions contemplated hereby and thereby in accordance with their
respective terms, will (a) assuming approval of the Merger by the Company's
stockholders, conflict with or result in a breach of any provisions of the
Articles or Certificate of Incorporation or By-Laws (or equivalent
organizational documents) of the Company or any of its Subsidiaries; (b) result
in a breach or violation of, a default under, or the triggering of any payment
or other material obligations pursuant to, or except as otherwise provided in
any of the individual option agreements under the Company Stock Option Plans,
accelerate vesting under, any of the Company Stock Option Plans, or any grant or
award made under any of the foregoing; (c) subject to obtaining the consents set
forth in the Disclosure Statement, violate, conflict with, result in a breach of
any provision of, constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, result in the termination,
or in a right of termination or cancellation of, accelerate the performance
required by, result in the triggering of any payment or other obligations
pursuant to, result in the creation of any lien, security interest, charge or
encumbrance upon any of the material properties of the Company or any of its
Subsidiaries other than as disclosed in the Disclosure Statement, under, or
result in being declared void, voidable, or without further binding effect, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust or any material license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the Company or
any of its Subsidiaries is a party, or by which the Company or any of its
Subsidiaries or any of their respective properties is bound or affected, except
for any of the foregoing matters which would not have a Company Material Adverse
Effect; (d) assuming the Merger is so approved by the Company's stockholders,
and assuming all required consents and approvals are obtained and all applicable
filings are made, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to the Company or any of its Subsidiaries, except for any of
the foregoing matters which would not have a Company Material Adverse Effect; or
(e) other than the Regulatory Filings, require any consent, approval or
authorization of, or declaration of, or filing or registration with, any
domestic governmental or regulatory authority, the failure to obtain or make
which would have a Company Material Adverse Effect.
4.8 COMPLIANCE WITH LAWS.
(a) Except as set forth in the Disclosure Statement, the Company and each
of its Subsidiaries hold all permits, licenses, variances, exemptions, orders,
approvals, authorizations, certificates, filings, franchises, notices and rights
of all Governmental Authorities necessary for each of them to own, lease or
operate its properties and assets and for the lawful conduct of its business
(the "Permits"). Except as set forth in the Disclosure Statement, none of such
Permits is or will be impaired by the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(b) The Company and its Subsidiaries are in compliance with the terms of
its Permits in all material respects.
(c) The Company and its Subsidiaries are in compliance with all statutes,
laws, ordinances, orders, rules, or regulations of any Governmental Authority
(including, but not limited to, those related to occupational health and safety,
or employment and employment practices) that are applicable to the Company or
any of its Subsidiaries or that affect or relate to this Agreement or the
transactions contemplated hereby, except for any non-compliance that would not
have a Company Material Adverse Effect.
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(d) Except as set forth on the Disclosure Statement, as of the date of this
Agreement, and as of the Closing, no investigation, review, inquiry or
proceeding by any Governmental Authority with respect to the Company or any of
its Subsidiaries is pending or, to the knowledge of the Company, threatened.
(e) Neither the Company nor any of its Subsidiaries is subject to any
agreement, contract, judgment, order or decree with any Governmental Authority
arising out of any current or previously existing violations of any laws,
ordinances or regulations applicable to the Company or any of its Subsidiaries.
(f) The Company and each its Subsidiaries are in substantial compliance
with all Federal, foreign and state laws applicable to the manufacture,
processing, packing, testing and sale of its products to the extent such laws
are applicable to them and all rules and regulations of the U.S. Food and Drug
Administration ("FDA"), the U.S. Department of Agriculture (the "USDA"), the
U.S. Federal Communications Commission ("FCC") and the U.S. Environmental
Protection Agency ("EPA") to the extent such rules and regulations are
applicable to them.
(g) Neither the Company nor any of its Subsidiaries has received any
written notice that the FDA, USDA, FCC or EPA has commenced, or threatened to
initiate, any judicial action against the Company or any of its Subsidiaries or
to withdraw its approval or request the recall of any product of or commenced or
threatened to initiate any action to enjoin production at any facility owned or
used by the Company or any of its Subsidiaries or any other facility at which
any of products of the Company or any of its Subsidiaries are manufactured,
processed, packaged, labeled, stored, distributed, tested or otherwise handled.
(h) The Company has made available to ADS copies of any and all material
reports of inspection observations, establishment inspection reports, warning
letters and any other material documents received from or issued by the FDA,
USDA or EPA that indicate or suggest a lack of material compliance with the FDA,
USDA or EPA regulatory requirements by the Company or any of its Subsidiaries.
4.9 BOOKS AND RECORDS. The Company's and its Subsidiaries' books, accounts
and records are, and have been, maintained in the Company's and its Subsidiaries
usual, regular and ordinary manner, in accordance with GAAP, and all
transactions to which the Company or any of its Subsidiaries is or has been a
party are properly reflected therein.
4.10 SEC DOCUMENTS. The Company has delivered or made available to ADS
each registration statement, report, proxy statement or information statement
(as defined in Regulation 14C under the Exchange Act) prepared by it since
September 30, 1996, which reports constitute all of the documents (other than
preliminary material) required to be filed by the Company with the SEC since
such date, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "Company Reports"). As of their respective
dates, each of the Company Reports complied and, in the case of filings after
the date hereof, will comply as to form in all material respects with the
applicable requirements of the Securities Act and/or the Exchange Act, as the
case may be, and the rules and regulations thereunder. None of the Company
Reports contained, as of the date they were filed, any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. The Company has filed
with the SEC all reports required to be filed under Sections 13, 14 and 15(d) of
the Exchange Act since September 30, 1996. Each of the consolidated balance
sheets of the Company included in or incorporated by reference into the Company
Reports (including the related notes and schedules) fairly present in all
material respects the consolidated financial position of the Company and its
Subsidiaries as of its date (subject, in the case of unaudited statements, to
normal year-end audit adjustments which would not be material in amount or
effect), and each of the consolidated statements of income, retained earnings
and cash flows of the Company included in or incorporated by reference into the
Company Reports (including any related notes and schedules) fairly present in
all material respects the results of operations, retained earnings or cash
flows, as the case may be, of the Company and its Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments which would not be material in amount or effect).
There are no extraordinary or non-recurring items of income or expense during
the periods covered by such financial statements and the consolidated balance
sheets of the Company included or incorporated therein do not reflect any
write-up or revaluation increasing the book value of any assets, except in
either case
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as specifically disclosed in the notes thereto. Except as and to the extent
reflected or reserved against in the financial statements included in the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999
(the "Company Form 10-Q") or as disclosed therein or in the Disclosure
Statement, neither the Company nor any of its Subsidiaries had as of such date
any liability or obligation of any kind, whether accrued, absolute, contingent,
unliquidated or other and whether due or to become due (including any liability
for breach of contract, breach of warranty, torts, infringements, claims or
lawsuits), which was material to the business, assets, results of operations or
financial condition of the Company and its Subsidiaries taken as a whole. Except
as set forth in the Disclosure Statement, since December 31, 1999, neither the
Company nor any Company Subsidiary has incurred any liability or obligation of
any kind which, in any case or in the aggregate, is material to the business,
assets, results of operations or financial condition of the Company and its
Subsidiaries taken as a whole, except in the ordinary course of business. The
financial statements of the Company, including the notes thereto, included in or
incorporated by reference into the Company Reports comply as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto, and have been prepared in accordance with GAAP (except as may
be indicated in the notes thereto). Since September 30, 1996, there has been no
change in the Company's accounting methods or principles that would be required
to be disclosed in the Company's financial statements in accordance with GAAP,
except as described in the notes to such Company financial statements.
4.11 ADEQUACY OF PROPERTIES.
(a) The properties and assets owned or leased by the Company and its
Subsidiaries (including, without limitation, the Real Property and Leased
Premises) are suitable and adequate for the conduct of their respective
businesses and operations and, except as otherwise disclosed in the Company
Reports filed with the Commission prior to the date hereof, the Company and its
Subsidiaries have good and marketable title to or valid leasehold or other
contractual interests in such properties and assets, free and clear of all Liens
other than Permitted Encumbrances.
(b) All trade receivables and notes receivables which are reflected in the
financial statements contained in the Company Reports or which arose subsequent
to December 31, 1999, whether billed or unbilled, (i) arose out of bona fide,
arm's-length transactions for the sale of goods or performance of services (ii)
are good and collectible (or have been collected) in the ordinary course of
business using normal collection practices at the aggregate recorded amounts
thereof, less the amount of applicable reserves for doubtful accounts and for
allowances and discounts, which reserves are adequate in accordance with GAAP,
and (iii) are subject to no disputes regarding the collectability of any such
trade receivables that would reasonably be expected to have a Company Material
Adverse Effect.
(c) All inventory of the Company or any of its Subsidiaries which is held
for sale or resale, materials and supplies (collectively, "Inventory"), consists
of items of a quantity and quality historically useable and/or saleable in the
normal course of their respective businesses. Since December 31, 1999, there has
not been a material change in the level of the Inventory. All Inventory is
located at the Real Estate (as defined herein) or at the Leased Premises (as
defined herein).
(d) Set forth in the Disclosure Statement is a list and description of each
item of real or tangible personal property owned by the Company or any of its
Subsidiaries which has a net book value in excess of $10,000. The Disclosure
Statement lists all properties and assets used by the Company or any of its
Subsidiaries in connection with the operation of their respective businesses
which are held under any lease or under any conditional sale or other title
retention agreement to the extent the Company's or its Subsidiaries' remaining
obligations under any such lease or agreement exceed $5,000 and such remaining
obligations extend for one year or more from the date hereof.
(e) For purposes of this Agreement, the term "Permitted Encumbrances" shall
mean the following Liens with respect to the properties and assets of the
Company or any of its Subsidiaries: (A) Liens for Taxes, assessments or other
governmental charges or levies not at the time delinquent or thereafter payable
without penalty or being contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set aside on
the Company's books; (B) Liens of carriers, warehousemen, mechanics, materialmen
and landlords incurred in the ordinary course of business for sums
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not overdue or being contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with GAAP shall have been set aside on the
Company's books; (C) Liens incurred in the ordinary course of business in
connection with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of tenders,
statutory obligations, leases and contracts (other than for borrowed money)
entered into in the ordinary course of business or to secure obligations on
surety or appeal bonds; and (D) purchase money security interests or Liens on
property acquired or held by the Company in the ordinary course of business to
secure the purchase price of such property or to secure indebtedness incurred
solely for the purpose of financing the acquisition of such property, provided
that the security interests permitted under clause (D) shall not exceed $20,000
at any time outstanding and shall be listed on the Company Disclosure Statement.
4.12 REAL ESTATE.
(a) Neither the Company nor any of its Subsidiaries owns any real estate,
or has the option to acquire any real estate, other than the premises identified
in the Disclosure Statement (the "Real Estate"). The Disclosure Statement
accurately sets forth the street addresses of the Real Estate. The Real Estate
is not subject to any leases or tenancies. None of the improvements comprising
the Real Estate or the businesses conducted or proposed to be conducted by the
Company or its Subsidiaries thereon are in material violation of any use or
occupancy restriction, limitation, condition or covenant of record or any zoning
or building law, code, ordinance or public utility easement or any other
applicable law. No material expenditures are required to be made for the repair
or maintenance of any improvements on the Real Estate or for the Real Estate to
be used for its intended purposes.
(b) Neither the Company nor any of its Subsidiaries leases or licenses any
real estate other than the premises identified in the Disclosure Statement as
being so leased or licensed (the "Leased Premises"). The Leased Premises are
leased to the Company or its Subsidiaries pursuant to written leases, true,
correct and complete copies, including all amendments thereto, of which have
been provided to ADS or its counsel. None of the improvements comprising the
Leased Premises, or the businesses conducted by the Company or its Subsidiaries
thereon, are in violation of any building line or use or occupancy restriction,
limitation, condition or covenant of record or any zoning or building law, code
or ordinance, public utility or other easements or other applicable law. No
expenditures are required to be made for the repair or maintenance of any
improvements on the Leased Premises which exceed, in the aggregate, $20,000 per
year other than routine repairs and maintenance in the ordinary course of
business. The Company or its Subsidiaries have valid leasehold interests in the
Leased Premises, which leasehold interests are free and clear of all Liens other
than Permitted Encumbrances. Neither the Company nor its Subsidiaries are in
default under any material agreement relating to the Leased Premises nor is any
other party thereto in default thereunder. All options in favor of the Company
or its Subsidiaries to purchase any of the Leased Premises, if any, are in full
force and effect.
(c) There are no condemnation proceedings pending against the Company or,
to its knowledge, threatened with respect to any portion of the Real Estate or
the Leased Premises.
(d) The buildings and other facilities located on the Real Estate and the
Leased Premises are free of any patent structural or engineering defects or, to
the Company's knowledge, any material latent structural or engineering defects.
4.13 CONTRACTS.
(a) Neither the Company nor any of its Subsidiaries is a party to or bound
by, and neither they nor their properties are subject to, any contracts,
agreements or arrangements required to be disclosed in a Form 10-K, Form 10-Q or
Form 8-K under the Exchange Act which is not filed as an exhibit to one or more
of the Company Reports filed and made publicly available prior to the date of
this Agreement.
(b) Neither the Company nor any of its Subsidiaries is a party to, or bound
by, any undischarged written or oral: (i) agreement or arrangement to which the
Company or its Subsidiaries is a party or by which the Company or its
Subsidiaries or any of their respective assets is bound which would be required
to be filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1999; (ii) except as
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set forth in the Disclosure Statement, any agreement or arrangement obligating
the Company or its Subsidiaries to pay or receive, or pursuant to which the
Company or its Subsidiaries has previously paid or received, an amount in excess
of $20,000 (excluding purchase and sale orders entered into by the Company or
its Subsidiaries in the ordinary course of business consistent with past
practices); (iii) except as set forth in the Disclosure Statement, any
employment or consulting agreement or arrangement involving an amount in excess
of $15,000; (iv) plan or contract or arrangement providing for bonuses,
severance, options, deferred compensation, retirement payments, profit sharing,
medical and dental benefits or the like covering employees of the Company, other
than Plans, Welfare Plans and Employee Benefit Plans (in each case as defined
herein) described in the Disclosure Statement; (v) agreement restricting in any
manner the Company's right to compete with any other person or entity, the
Company's right to sell to or purchase from any other person or entity, the
right of any other party to compete with the Company, or the ability of such
person or entity to employ any of the Company's employees; (vi) secrecy or
confidentiality agreements (except for secrecy and confidentiality agreements
which (A) are terminable at will at any time by the Company, (B) do not provide
for any payment of consideration and (C) do not contain any "standstill"
provision or similar restriction on the Company's ability to negotiate an
acquisition of another entity); (vii) except as set forth in the Disclosure
Statement, any distributorship, non-employee commission or marketing agent,
representative or franchise agreement providing for the marketing and/or sale of
the products or services of the Company or any of its Subsidiaries; (viii)
agreement between the Company and any of its affiliates or other Related Parties
(as herein defined) (excluding any such agreement disclosed in the Company Form
10-K); (ix) any guaranty, performance, bid or completion bond, or surety or
indemnification agreement (excluding (A) any such item between the Company and
its Subsidiaries; (B) any indemnification agreement entered into in the
Company's and/or its Subsidiaries' ordinary course of business with a customer
of the Company (such ordinary course of business policy is set forth in all
material respects in the general performance agreements attached to the
Disclosure Statement) and (C) any indemnification obligation the Company has
with respect to its officers, directors, employees and/or other Persons under
its Certificate of Incorporation or Bylaws and the applicable provisions of the
DGCL unless set forth in the form of an agreement, then only to the extent set
forth in the Disclosure Statement; (x) requirements contract; (xi) except as set
forth in the Disclosure Statement, loan or credit agreement, pledge agreement,
note, security agreement, mortgage, debenture, indenture, factoring agreement or
letter of credit relating to borrowed money; (xii) except as set forth in the
Disclosure Statement, agreements with respect to compliance with Environmental
Laws (as defined herein); (xiii) any agreement relating to the ownership or
control of any interest in a partnership, corporation, limited liability
company, joint venture or other entity or similar arrangement other than as
otherwise disclosed herein; (xiv) except as set forth in the Disclosure
Statement, any contract or agreement containing change of control provisions; or
(xv) any other agreement not entered into in the ordinary course of business.
Neither the Company nor any of its Subsidiaries are currently negotiating (and
have not entered into preliminary discussions with respect to) any transaction
involving an aggregate payment by the Company or its Subsidiaries and/or
receipts to the Company or its Subsidiaries in excess of $50,000 excluding
purchase and sale orders entered into by the Company or its Subsidiaries in the
ordinary course of business consistent with past practices.
(c) All agreements, leases, subleases and other instruments referred to in
this Section 4.13, are, pursuant to their terms, in full force and binding upon
the Company or its Subsidiaries, and the other parties thereto, assuming the
valid execution thereof by such other parties, except in each case to the extent
such failure would not cause a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries is and none of the other parties thereto are
in default of a material provision under any such agreement, lease, sublease or
other instrument. Neither the Company nor any of its Subsidiaries has been
notified in writing that the Company is in default under any such lease
agreement, sublease or other instrument, and no event has occurred, and it is
not aware of the existence of a condition which, with the lapse of time, the
giving of notice, or both, or the happening of any further event or condition,
would become a default of a material provision under any such agreement, lease,
sublease or other instrument by the Company or its Subsidiaries, or the other
contracting party. Neither the Company nor any of its Subsidiaries has released
or waived any right under any such agreement, lease, sublease or other
instrument other than in the ordinary course of business consistent with past
practices.
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(d) Other than the Company Stock Option Plans, immediately after the
Closing, except as contemplated by this Agreement, neither the Company nor any
of its Subsidiaries will be bound by the terms of any stock option agreement,
registration rights agreement, stockholders agreement, management agreement,
consulting agreement or any other agreement relating to the equity or management
of the Company or its Subsidiaries.
4.14 INTELLECTUAL PROPERTY.
(a) The Disclosure Statement sets forth, for the Intellectual Property (as
defined herein) owned by the Company or its Subsidiaries, a complete and
accurate list of all United States and foreign patent, copyright, trademark,
service mark, trade dress, domain name and other registrations and applications,
indicating for each the applicable jurisdiction, registration number (or
application number), and date issued or filed, and all material unregistered
Intellectual Property.
(b) All registered Intellectual Property of the Company and its
Subsidiaries is currently in compliance in all material respects with all legal
requirements (including timely filings, proofs and payments of fees), is valid
and enforceable, and is not subject to any filings, fees or other actions
falling due within 90 days after the Effective Time. Except as set forth in the
Disclosure Statement, no registered Intellectual Property of the Company or its
Subsidiaries has been or is now involved in any cancellation, dispute or
litigation, and, to the knowledge of the Company, no such action is threatened.
Except as set forth in the Disclosure Statement, no patent of the Company or its
Subsidiaries has been or is now involved in any interference, reissue, re-
examination or opposition proceeding.
(c) The Disclosure Statement sets forth a complete and accurate list of all
licenses, sublicenses, consent, royalty or other agreements concerning
Intellectual Property to which the Company or any Subsidiary is a party or by
which any of their assets are bound (other than generally commercially
available, non-custom, off-the-shelf software application programs having a
retail acquisition price of less than $10,000 per license) (collectively,
"License Agreements"). All of the Company's License Agreements are valid and
binding obligations of Company or its Subsidiaries that are parties thereto,
enforceable in accordance with their terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally, and there exists no event or
condition which will result in a material violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default by the Company
or any of its Subsidiaries under any such License Agreement.
(d) The Company and its Subsidiaries own or have the valid right to use all
of the Intellectual Property necessary for the conduct of the Company's and each
of its Subsidiaries' business substantially as currently conducted or
contemplated to be conducted and for the ownership, maintenance and operation of
the Company's and its Subsidiaries' properties and assets. No royalties,
honoraria or other fees are payable by the Company or its Subsidiaries to any
third parties for the use of or right to use any Intellectual Property, except
as set forth in the Disclosure Statement.
(e) All Intellectual Property owned by the Company and its Subsidiaries is
described in the Disclosure Statement. The Company and its Subsidiaries
exclusively own, free and clear of all Liens or obligations to license all such
owned Intellectual Property, and the Company and its Subsidiaries have executed
all necessary agreements and performed all necessary due diligence to make the
foregoing statement. The Company and its Subsidiaries have a valid, enforceable
and, subject to obtaining required consents set forth in the Disclosure
Statement, transferable right to use all their licensed Intellectual Property.
Except as disclosed in the Disclosure Statement, the Company and its
Subsidiaries have the right to use all of their owned and licensed Intellectual
Property in all jurisdictions in which they conduct or propose to conduct their
businesses.
(f) The Company and each of its Subsidiaries have taken all reasonable
steps to maintain, police and protect the Intellectual Property which it owns,
including the proper policing activities and the execution of appropriate
confidentiality agreements and intellectual property and work product
assignments and releases. Except as disclosed in the Disclosure Statement, (i)
the conduct of the Company's and its Subsidiaries' businesses as currently
conducted or planned to be conducted does not infringe or otherwise impair or
conflict
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with ("Infringe") any Intellectual Property rights of any third party, and the
Intellectual Property rights of the Company and its Subsidiaries are not being
Infringed by any third party; and (ii) there is no litigation or order pending
or outstanding, to the knowledge of the Company, threatened or imminent, that
seeks to limit or challenge or that concerns the ownership, use, validity or
enforceability of any Intellectual Property of the Company and its Subsidiaries
and the Company's and its Subsidiaries' use of any Intellectual Property owned
by a third party, and, to the knowledge of the Company, there is no valid basis
for the same.
(g) Except as set forth in the Disclosure Statement, the consummation of
the transactions contemplated hereby will not result in the alteration, loss or
impairment of the validity, enforceability of the Company's or any of its
Subsidiaries' right to own or use any of the Intellectual Property, nor will
such transactions require the approval of any Governmental Authority or third
party in respect of any Intellectual Property.
(h) The Disclosure Statement lists all software (i) (other than generally
commercially available, non-custom, off-the-shelf software application programs
having a retail acquisition price of less than $10,000 per license) which are
owned, licensed to or by the Company or any of its Subsidiaries, leased to or by
the Company or any of its Subsidiaries, or otherwise used by the Company or any
of its Subsidiaries, and identifies which software is owned, licensed, leased or
otherwise used, as the case may be; and (ii) which are sold, licensed, leased or
otherwise distributed by the Company or any of its Subsidiaries to any third
party, and identifies which Software is sold, licensed, leased, or otherwise
distributed, as the case may be. All software owned by the Company or any of its
Subsidiaries, and all software licensed from third parties by the Company or any
of its Subsidiaries, (i) is free from any material defect, bug, virus, or
programming, design or documentation error; (ii) operates and runs in a
reasonable and efficient business manner; and (iii) conforms in all material
respects to the specifications and purposes thereof. The Company and its
Subsidiaries have taken all reasonable steps to protect the Company's and its
Subsidiaries' rights in their confidential information and trade secrets. Except
as disclosed in the Disclosure Statement, each employee, consultant and
contractor who has had access to proprietary Intellectual Property has executed
an agreement to maintain the confidentiality of such Intellectual Property has
executed appropriate agreements that are substantially consistent with the
Company's standard forms thereof (true and complete copies of which have been
delivered to ADS). Except under confidentiality obligations, there has been no
material disclosure of any of the Company's or its Subsidiaries' confidential
information or trade secrets to any third party.
(i) "Intellectual Property" means all United States and foreign
intellectual property, including all worldwide trademarks, service marks, trade
names, URLs and Internet domain names, designs, slogans, logos, and trade dress,
together with all goodwill related to the foregoing; patents, copyrights,
computer software, technology, trade secrets and other confidential information,
customer lists, know-how, processes, formulae, algorithms, models, user
interfaces, inventions, advertising and promotional materials, and all
registrations, applications, recordings, renewals, continuations,
continuations-in-part, divisions, reissues, reexaminations, foreign
counterparts, and other legal protections and rights related to the foregoing.
4.15 YEAR 2000 COMPLIANCE AND SECURITY.
(a) The Company's and its Subsidiaries' products, software, services,
servers, systems and other computer and telecom assets and equipment
("Systems"), when used in accordance with their associated documentation will at
all times (i) record, store, process, calculate and present calendar dates
falling before, on and after (and if applicable, spans of time including)
January 1, 2000; and (ii) create, calculate, recognize, accept, display, store,
retrieve, access, compare, sort, manipulate, or process any information
dependent on or relating to dates on or after January 1, 2000 or otherwise
provide use of dates or date-dependent or date-related data, including, but not
limited to, century recognition, day-of-the week recognition, leap years, date
values and interfaces of date functionalities, without loss of accuracy,
functionality, data integrity and performance; and (iii) respond to two-digit
input in a way that resolves ambiguity as to century in a disclosed, defined and
pre-determined manner (the foregoing ability, "Year 2000 Compliant"). All of the
Company's and all of its Subsidiaries' Systems which are material to the
operation of the business of the Company and its Subsidiaries are Year 2000
Compliant.
(b) The Company and its Subsidiaries have taken and take all reasonable
actions to maintain, protect and police the integrity and security of their
Systems, including the protection and policing against all
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unauthorized use of, access to, or "hacking" into the Systems, or the
introduction into the Systems of viruses or other unauthorized, damaging or
corrupting elements.
4.16 DISTRIBUTORS AND CUSTOMERS. Listed in the Disclosure Statement are
the names of all of the current distributors of the products and services of the
Company and its Subsidiaries, their annual sales of such products and services
for the fiscal year ended September 30, 1999 and any exclusivity provisions.
Listed in the Disclosure Statement are the names of the ten largest customers
(by sales revenue) of the products of the Company and its Subsidiaries, their
annual sales of such products for the fiscal year ended September 30, 1999 and
any exclusivity provisions. The Company has previously furnished to ADS all
copies of all written agreements between the Company or any of its Subsidiaries
and any such distributors and customers. Except as disclosed on the Disclosure
Statement, neither the Company nor any of its Subsidiaries has received any
written notice that any such distributor or customer has ceased or will cease
being a distributor or customer, respectively, for the Company or any of its
Subsidiaries, or has substantially reduced, or will substantially reduce, its
volume of sales or purchases of products or services of the Company or its
Subsidiaries.
4.17 INSURANCE. The Company has delivered to ADS prior to the date of this
Agreement copies of all insurance policies which are owned by the Company or its
Subsidiaries or which name the Company or any of its Subsidiaries as an insured
(or loss payee), including without limitation those which pertain to the
Company's or its Subsidiaries' assets, employees or operations. All such
insurance policies are in full force and effect, and are valid and enforceable,
and all premiums due thereunder have been paid and cover against the risks of
the nature normally insured against by entities in the same or similar lines of
business in coverage amounts typically and reasonable carried by such entities.
Neither the Company nor any of its Subsidiaries have received written notice of
cancellation of any such insurance policies.
4.18 LITIGATION. Except as set forth in the Company Reports filed with the
SEC prior to the date hereof or as set forth in the Disclosure Statement, (i)
there is no litigation or proceeding, including, without limitation, any
arbitration proceeding, in law or in equity, and there are no proceedings or
governmental investigations before any commission or other administrative
authority, pending or, to the Company's knowledge, threatened against the
Company or any of its Subsidiaries, which, if adversely determined, is
reasonably likely to have, either individually or in the aggregate, a Company
Material Adverse Effect; (ii) there is no judgment, decree, injunction, rule or
order of any court, governmental department, commission, agency, instrumentality
or arbitrator applicable to the Company or any of its Subsidiaries having, or
which is reasonably likely to have, either individually or in the aggregate, a
Company Material Adverse Effect; and (iii) there is no action, suit, proceeding
or investigation pending or, to the Company's knowledge, threatened against the
Company, which seeks to restrain, enjoin or delay the consummation of the Merger
or any of the other transactions contemplated hereby or which seeks damages in
connection therewith, and no injunction of any type referred to in Section
6.1(c) has been entered or issued.
4.19 WARRANTIES. Except as set forth in the Disclosure Statement, neither
the Company nor any of its Subsidiaries has made any oral or written warranties
with respect to the quality or absence of defects of its products or services
which they have sold or performed which are in force as of the date hereof.
There are no claims pending or to the Company's knowledge, threatened against
the Company or any of its Subsidiaries with respect to the quality of or absence
of defects in such products or services nor are there any facts known to the
Company relating to the quality of or absence of defects in such products or
services which, if known by a potential claimant or governmental authority,
would reasonably give rise to a claim or proceeding. The Company's warranty
policy is generally described in the Disclosure Statement. The Company has no
knowledge of or reason to believe that the percentage of warranty claims for
products sold or services rendered by the Company and its Subsidiaries prior to
the Closing Date will exceed historical levels.
4.20 PRODUCTS LIABILITY. Neither the Company nor any of its Subsidiaries
has received any written notice relating to, nor does the Company have knowledge
of any facts or circumstances which could give rise to, any claim involving any
product manufactured, serviced, produced, distributed or sold by or on behalf of
the Company or its Subsidiaries resulting from an alleged defect in design,
manufacture, materials or workmanship, or any alleged failure to warn, or from
any breach of implied warranties or representations, any
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of which would have a Company Material Adverse Effect, other than notices or
claims that have been settled or resolved by the Company or its Subsidiaries
prior to the date of this Agreement.
4.21 TAXES.
(a) There have been properly completed and filed on a timely basis and in
correct form all Returns required to be filed by the Company and/or any of its
Subsidiaries on or before the date hereof and will be properly completed and
filed on a timely basis and in correct form all Returns required to be filed by
Company and/or any of its Subsidiaries with respect to any period ending with or
before, or including the period prior to, the Effective Time. The foregoing
Returns are, or will be, correct and complete in all material respects. Except
as set forth in the Disclosure Statement, an extension of time within which to
file any Return which has not been filed has not been requested or granted.
(b) With respect to all amounts in respect of Taxes imposed upon the
Company or any of its Subsidiaries, or for which the Company or any of its
Subsidiaries is or could be liable, whether to taxing authorities (as, for
example, under law) or to other persons or entities (as, for example, under tax
allocation agreements), with respect to all taxable periods or portions of
periods ending on or before the Effective Time, (i) all applicable tax laws and
agreements have been, or will be, complied with in all material respects, and
(ii) all amounts required to be paid and reported by the Company or its
Subsidiaries, to taxing authorities or others, on or before the Effective Time,
have been, or will be, paid and any Taxes accrued but not due and payable as of
the Effective Time have been accrued or otherwise reserved for in financial
statements contained in the most recent Company Report or will be reserved for
in the financial statements to be prepared with respect to the period beginning
after the period covered by the most recent Company Report and ending with or
before, or including the period prior to, the Effective Time. No Taxes have been
(or will prior to the Closing Date be) recorded by the Company or any of its
Subsidiaries other than in the ordinary course of business. There are no Liens
filed against any asset of the Company or any of its Subsidiaries resulting from
the failure to pay any Tax when due.
(c) No material issues have been raised (and are currently pending) by any
taxing authority in connection with any of the Returns. No waivers of statutes
of limitation with respect to the Returns have been given by the Company or any
of its Subsidiaries (or with respect to any Return which a taxing authority has
asserted should have been filed by the Company or any of its Subsidiaries) which
waivers are still in effect. The Disclosure Statement sets forth, for the past
seven years, the years for which examinations or audits of Minnesota or Delaware
state taxes and federal income tax returns have been completed, those years for
which examinations or audits are presently being conducted, and those years for
which such returns will be required but are not yet due to be filed and have not
yet been filed. All deficiencies asserted or assessments made as a result of any
examinations have been fully paid, or are fully reflected as a liability in the
financial statements contained in the Company Report, or are being contested and
an adequate reserve therefor has been established and is fully reflected as a
liability in the financial statements contained in the most recent Company
Report. Neither the Company nor any of its Subsidiaries has entered into any
closing agreement with the Internal Revenue Service under Section 7121 of the
Code or with any state taxing authority under a similar state tax law provision.
No consent under Section 341(f) of the Code has been filed with respect to the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has agreed to, or is required to make, any adjustment under Section
481(a) of the Code.
(d) The unpaid Taxes of the Company or any of its Subsidiaries do not
materially exceed the reserve for tax liability (excluding any reserve for
deferred Taxes established to reflect timing differences between book and tax
income) set forth or included in the financial statements included in the most
recent Company Report, as adjusted for the passage of time through the Closing.
The Company and its Subsidiaries will not be liable for any material amount of
penalties or interest with respect to Taxes reported or required to have been
reported on any Returns which have been filed or were required to have been
filed through the Closing.
(e) Neither the Company nor any of its Subsidiaries is or at any time has
been a party to or bound by (nor will the Company or any of its Subsidiaries
become a party to or bound by) any tax indemnity, tax sharing or tax allocation
agreement.
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(f) All material elections with respect to Taxes affecting the Company or
any of its Subsidiaries that are currently effective as of the date hereof that
are not reflected in the Company's Returns are set forth in the Disclosure
Statement.
(g) There are no challenges on appeals pending regarding the amount of
Taxes on, or the addressed valuation of, the Real Estate or, to the Company's
knowledge, the Leased Premises, and no special arrangements or agreements exist
with any governmental authority with respect thereto (provided, that the
representations and warranties contained in this Section 4.21(h) shall not be
deemed to be breached by any prospective general increase in real estate taxes.)
(h) There is no assessment for Taxes (in addition to the normal, annual
general real estate tax assessment) pending against the Company or, to the
Company's knowledge, threatened with respect to any portion of the Real Estate,
or to the extent the Company or its Subsidiaries is liable for payment of the
Leased Premises.
4.22 ERISA.
(a) The Disclosure Statement contains a list and brief description of all
"employee pension benefit plans" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes
referred to herein as "Pension Plans"), "employee welfare benefit plans" (as
defined in Section 3(1) of ERISA and referred to herein as a "Welfare Plan") and
all other Benefit Plans (defined herein as any Pension Plan, Welfare Plan and
any other plan, fund, program, arrangement or agreement to provide employees,
leased employees, directors, independent contractors, officers or agents of any
Commonly Controlled Entity (as defined herein) with medical, health, life,
bonus, stock (option, ownership or purchase), deferred compensation, severance,
salary continuation, vacation, sick leave, fringe, incentive insurance or other
benefits) sponsored, maintained, or contributed to, or required to be
contributed to, by the Company or any of its Subsidiaries or any other Person
that, together with the Company at any time during the last six years, is or was
treated as a single employer under Section 414(b), (c), (m) or (o) of the Code
(the Company and each such other Person, a "Commonly Controlled Entity"). The
Company has delivered or made available to ADS true, complete and correct copies
of (i) each Benefit Plan (or, in the case of any unwritten Benefit Plans,
descriptions thereof); (ii) the most recent annual report on Form 5500 filed
with the Internal Revenue Service with respect to each Benefit Plan (if any such
report was required); (iii) the most recent summary plan description for each
Benefit Plan for which such summary plan description is required; (iv) each
trust agreement and group annuity contract relating to any Benefit Plan; and (v)
a list of all assets and liabilities of, allocated to or accounted for
separately with respect to every Benefit Plan (including insurance contracts
associated with every Benefit Plan regardless of whether any current cash value
exists). Each Benefit Plan has been established, funded, maintained and
administered in all material respects in accordance with its terms and is in
compliance with the applicable provisions of ERISA, the Code, all other
applicable laws and all applicable collective bargaining agreements except where
the failure to comply would not be reasonably expected to result in a Company
Material Adverse Effect.
(b) All Pension Plans have been the subject of favorable and up-to-date
(through any applicable remedial amendment period) determination letters from
the Internal Revenue Service, or a timely application therefor has been or will
be filed, to the effect that such Pension Plans are qualified and exempt from
federal income taxes under Section 401(a) and 501(a), respectively, of the Code,
and no such determination letter has been revoked nor has any such Pension Plan
been amended since the date of its most recent determination letter or
application therefor in any respect that would adversely affect its
qualification or increase its costs.
(c) Except as provided in the Disclosure Statement, neither the Company,
nor any of its Subsidiaries, nor any Commonly Controlled Entity has adopted or
been obligated to contribute to any "defined benefit pension plan" as defined in
Section 3(35) of ERISA subject to Title IV of ERISA in the five years preceding
the date hereof.
(d) Neither the Company, nor any of its Subsidiaries, nor any Commonly
Controlled Entity has been required at any time within the five calendar years
preceding the date hereof or is required currently to contribute to any
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has
withdrawn
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from any multiemployer plan where such withdrawal has either: (i) resulted or
would result in any "withdrawal liability" (within the meaning of Section 4201
of ERISA) that has not been fully paid; or (ii) engaged in a transaction that
might have resulted in withdrawal liability but for the application of Section
4204 of ERISA.
(e) With respect to any Welfare Plan, (i) no such Welfare Plan is funded
through a "welfare benefits fund", as such term is defined in Section 419(e) of
the Code, (ii) no such Welfare Plan is self-insured, and (iii) each such Welfare
Plan that is a "group health plan", as such term is defined in Section
5000(b)(1) of the Code, complies with the applicable requirements of Section
4980B(f) of the Code and the Health Insurance Portability and Accountability Act
of 1996.
(f) Neither the Company, nor any of its Subsidiaries, nor any Commonly
Controlled Entity nor any Person acting on behalf of the Company, its
Subsidiaries or any Commonly Controlled Entity has, in contemplation of any
corporate transaction involving ADS, issued any written communication to, or
otherwise made or entered into any legally binding commitment with, any
employees of the Company, any of its Subsidiaries or of any Commonly Controlled
Entity to the effect that, following the date hereof, (i) any benefits or
compensation provided to such employees under existing Benefit Plans or under
any other plan or arrangement will be enhanced, (ii) any new plans or
arrangements providing benefits or compensation will be adopted, (iii) any
Benefit Plans will be continued for any period of time or cannot be amended or
terminated at any time or for any reason, or (iv) any plans or arrangements
provided by ADS will be made available to such employees.
(g) Neither the Company, nor any of its Subsidiaries, nor any Commonly
Controlled Entity has ever promised or been obligated to provide former
employees with coverage or benefits under Benefit Plans, other than as required
by Section 4980B of the Code.
(h) All contributions or premiums owed by the Company, any of its
Subsidiaries and Commonly Controlled Entities with respect to Benefit Plans
under law, contract or otherwise have been made in full and on a timely basis
and the Company, its Subsidiaries and Commonly Controlled Entities are not
obligated to contribute with respect to any Benefit Plan that involves a
retroactive contribution, assessment or funding waiver arrangement. All
administrative costs attributable to Benefit Plans have been paid when due.
(i) No Pension Plan or Welfare Plan or any "fiduciary" or
"party-in-interest" (as such terms are respectively defined by Sections 3(21)
and 3(14) of ERISA) thereto has engaged in a transaction prohibited by Section
406 of ERISA or 4975 of the Code for which a valid exception is not available.
(j) There are no pending or threatened likely claims, proceedings,
disputes, lawsuits, arbitrations or audits asserted or instituted against any
Benefit Plan, any fiduciary (as defined by Section 3(21) of ERISA) thereto, the
Company, any of its Subsidiaries, any Commonly Controlled Entity or any employee
or administrator thereof in connection with the existence, operation or
administration of a Benefit Plan, other than routine claims for benefits.
(k) Nothing in this Agreement or the transactions contemplated hereunder
will: (i) cause the termination or repricing of any insurance contract to which
the Company, any of its Subsidiaries or a Commonly Controlled Entity or Benefit
Plan is a party to the purposes of providing employee benefits; (ii) except as
described in the Disclosure Statement, trigger a right of any employee of the
Company, any of its Subsidiaries, or any Commonly Controlled Entity to
accelerate, accrue or receive any additional benefits, severance, deferred
compensation or retirement benefits; or (iii) cause any early withdrawal or
premature termination penalty with respect to any asset held in connection with
any Benefit Plan.
(l) Neither the Company, nor any of its Subsidiaries, nor any Commonly
Controlled Entity maintains any unfunded plan of deferred compensation or
post-retirement benefits.
4.23 LABOR MATTERS. Except for events that occur after the date hereof
which are disclosed in writing by the Company to ADS, (a) there is no labor
strike, dispute, slowdown, work stoppage or lockout pending or, to the Company's
knowledge, threatened against the Company or any of its Subsidiaries, and,
during the past three years, there has not been any such action; (b) except as
set forth in the Disclosure Statement, there are
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no union claims to represent the employees of the Company or any of its
Subsidiaries, (c) except as set forth in the Disclosure Statement, neither the
Company nor any of its Subsidiaries is a party to or bound by any collective
bargaining or similar agreement with any labor organization, or work rules or
practices agreed to with any labor organization or employee association
applicable to employees of the Company or any of its Subsidiaries; (d) except as
set forth in the Disclosure Statement, none of the employees of the Company or
any of its Subsidiaries are represented by any labor organization, and the
Company does not have any knowledge of any current union organizing activities
among the employees of the Company or any of its Subsidiaries, nor does any
question concerning representation exist with respect to such employees; (e)
neither the Company nor any of its Subsidiaries is delinquent in payments to any
of its employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them to the date of this Agreement or
amounts required to be reimbursed to such employees; (f) except as set forth in
the Disclosure Statement, upon termination of the employment of any of the
employees of the Company or any of its Subsidiaries after the Closing, neither
the Company nor any of its Subsidiaries will be liable to any of its employees
for severance pay, except as otherwise required by federal law; (g) except as
set forth in the Disclosure Statement, the employment of each of the Company's
or its Subsidiaries' employees is terminable at will without cost to the Company
or any of its Subsidiaries except for payments disclosed on the Disclosure
Statement or required under the Plans, Welfare Plans and Employee Benefit Plans
and payment of accrued salaries or wages and vacation pay; (h) the Disclosure
Statement contains a true and complete list of all employees who are employed by
the Company or any of its Subsidiaries as of March 31, 2000, and said list
correctly reflects their salaries, wages and other compensation (other than
benefits under the Plans, Welfare Plans and Employee Benefit Plans).
4.24 ENVIRONMENTAL MATTERS.
(a) The Company has obtained all licenses, Permits and other authorizations
under Environmental Laws (as hereafter defined) required for the conduct and
operation of its business and is in compliance with the terms and conditions
contained therein and is in compliance with other provisions of applicable
Environmental Laws, except where the failure to obtain such licenses, Permits
and other authorizations or the non-compliance with the terms and conditions
contained therein or the non-compliance with other provisions of applicable
Environmental Laws would not individually or in the aggregate create a Company
Material Adverse Effect.
(b) To the Company's knowledge, there is no condition on any property
currently or formerly owned or leased by the Company that would create liability
for the Company under Environmental Laws, except for liability that would not
singly or in the aggregate create a Company Material Adverse Effect.
(c) To the Company's knowledge, there is no condition on any other property
owned by any third party that would create liability for the Company under
Environmental Laws, except for liability that would not singly or in the
aggregate create a Company Material Adverse Effect.
(d) There are no non-compliance orders or notices of violation
(collectively "Notices"), claims, suits, actions, judgments, penalties, fines,
or administrative or judicial investigations or proceedings (collectively
"Proceedings") pending or, to the Company's knowledge, threatened against or
involving the Company or its business, operations, properties or assets, issued
by any Governmental Authority with respect to any Environmental Laws or licenses
issued to the Company thereunder in connection with, related to or arising out
of the ownership by the Company of its properties or assets or the operation of
its business, which have not been resolved in a manner that would not impose any
obligation, burden or continuing liability on ADS or the Company in the event
that the transactions contemplated by this Agreement are consummated, or which
could have a Material Adverse Effect on the Company.
(e) The Company does not use, nor has it used, any Aboveground Storage
Tanks (as defined in clause (g) below) or Underground Storage Tanks (as defined
in clause (g) below), and there are not now any Underground Storage Tanks
beneath any real property currently owned or leased by the Company that are
required to be registered under applicable Environmental Laws.
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(f) The Disclosure Statement identifies (i) all environmental audits,
assessments or occupational health studies undertaken by the Company or its
agents or undertaken by any Governmental Authority and known to the Company,
relating to the Company or any real property currently or previously owned or
leased by the Company; (ii) the results of any ground, water or soil monitoring
undertaken by the Company or undertaken by any Governmental Authority and known
to the Company relating to the Company or any real property currently or
previously owned or leased by the Company; and (iii) all written communications
between the Company and any Governmental Authority arising under or related to
Environmental Laws.
(g) For purposes of this Section 4.24, the following terms shall have the
meanings ascribed to them below:
"Aboveground Storage Tank" shall have the meaning ascribed to such
term in Section 6901 ET SEQ., as amended, of RCRA (as defined in this
clause (g)), or any applicable state or local statute, law, ordinance,
code, rule, regulation, order ruling, or decree governing Aboveground
Storage Tanks.
"Company" means the Company and its Subsidiaries.
"Environmental Laws" means all federal, state, regional or local
statutes, laws, rules, regulations, codes, orders, plans, injunctions,
decrees, rulings, and changes or ordinances or judicial or administrative
interpretations thereof, or similar laws of foreign jurisdictions where the
Company conducts business, currently in existence any of which govern or
relate to pollution, protection of the environment, public health and
safety, air emissions, water discharges, hazardous or toxic substances,
solid or hazardous waste or occupational health and safety, as any of these
terms are or may be defined in such statutes, laws, rules, regulations,
codes, orders, plans, injunctions, decrees, rulings and changes or
ordinances, or judicial or administrative interpretations thereof,
including, without limitation: the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund
Amendment and Reauthorization Act of 1986, 42 U.S.C. ss.9601, ET SEQ.
(collectively "CERCLA"); the Solid Waste Disposal Act, as amended by the
Resource Conservation and Recovery Act of 1976 and subsequent Hazardous and
Solid Waste Amendments of 1984, 42 U.S.C. ss.6901 ET SEQ. (collectively
"RCRA"); the Hazardous Materials Transportation Act, as amended, 49 U.S.C.
ss.1801, ET SEQ.; the Clean Water Act, as amended, 33 U.S.C. ss.1311, ET
SEQ.; the Clean Air Act, as amended (42 U.S.C. ss.7401-7642); the Toxic
Substances Control Act, as amended, 15 U.S.C. ss.2601 ET SEQ.; the Federal
Insecticide, Fungicide, and Rodenticide Act as amended, 7 U.S.C.
ss.136-136y ("FIFRA"); the Emergency Planning and Community Right-to-Know
Act of 1986 as amended, 42 U.S.C. ss.11001, ET SEQ. (Title III of SARA)
("EPCRA"); the Occupational Safety and Health Act of 1970, as amended, 29
U.S.C. ss.651, ET SEQ. ("OSHA"); Chapters 115, 168, and 514, Minnesota
Statutes; and Minnesota common law.
"Underground Storage Tank" shall have the meaning ascribed to such
term in Section 6901 ET SEQ., as amended, of RCRA, or any applicable state
or local statute, law, ordinance, code, rule, regulation, order ruling, or
decree governing Underground Storage Tanks.
4.25 INTERIM CONDUCT OF BUSINESS. Except as otherwise contemplated by this
Agreement, since December 31, 1999 neither the Company nor any of its
Subsidiaries has:
(a) sold, assigned, leased, exchanged, transferred or otherwise
disposed of any portion of its assets or property, except for sales of
Inventory and cash applied in the payment of the Company's or its
Subsidiaries' liabilities in the usual and ordinary course of business in
accordance with the Company's or its Subsidiaries' past practices;
(b) written off any asset outside the ordinary course of business
which has a net book value which exceeds $25,000 in the aggregate in value,
or written off any amounts in the ordinary course of business in excess of
reserves which have been established for such purpose, which reserves are
adequate in accordance with GAAP applied on a consistent basis;
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(c) suffered any casualty, damage, destruction or loss, or
interruption in use, of any asset, property or portion of Inventory
(whether or not covered by insurance), on account of fire, flood, riot,
strike or other hazard or Act of God;
(d) waived any right arising out of any agreement other than in the
ordinary course of business;
(e) made (or committed to make) capital expenditures in an amount
which exceeds $100,000 for any item or $225,000 in the aggregate;
(f) made any change in accounting methods or principles which are
required to be disclosed in the Company's financial statements in
accordance with GAAP;
(g) borrowed any money or issued any bonds, debentures, notes or other
corporate securities (other than equity securities), including without
limitation, those evidencing borrowed money;
(h) except as described in the Disclosure Statement, entered into any
transaction with, or made any payment to, or incurred any liability to, any
Related Party (as defined herein) (except for payment of salary and other
customary expense reimbursements made in the ordinary course of business to
Related Parties who are employees of the Company or its Subsidiaries);
(i) increased the compensation payable to any employee, except for
normal pay increases in the ordinary course of business consistent with
past practices;
(j) made any payments or distributions to its employees, officers or
directors except such amounts as constitute currently effective
compensation for services rendered, or reimbursement for reasonable
ordinary and necessary out-of-pocket business expenses;
(k) paid or incurred any management or consulting fees, or engaged any
consultants, except in the ordinary course of business;
(l) hired any employee who has an annual salary in excess of $75,000;
(m) terminated any employee having an annual salary or wages in excess
of $50,000;
(n) adopted any new Plan, Welfare Plan or Employee Benefit Plan;
(o) issued or sold any securities of any class, except for the
exercise of options to purchase Company Common Stock under the Company
Option Plans;
(p) paid, declared or set aside any dividend or other distribution on
its securities of any class, or purchased, exchanged or redeemed any of its
securities of any class; or
(q) without limitation by the enumeration of any of the foregoing,
entered into any transaction other than in the usual and ordinary course of
business in accordance with past practices.
Notwithstanding the foregoing, the Company shall not be deemed to have breached
the terms of this Section 4.25 by entering into this Agreement or by
consummating the transactions contemplated hereby.
4.26 AFFILIATED TRANSACTIONS. Except as disclosed in any Company Report
filed with the SEC prior to the date of this Agreement and the Disclosure
Statement, since December 31, 1999, neither the Company nor any of its
Subsidiaries has been a party to any transactions (other than employee
compensation and other ordinary incidents of employment) with a "Related Party."
For purposes of this Agreement, the term "Related Party" shall mean: any present
officer or director, 10% stockholder (including any officers or directors
thereof) or present affiliate of the Company or any of its Subsidiaries, any
present or former known spouse of any of the aforementioned persons or any trust
or other similar entity for the benefit of any of the foregoing Persons. Prior
to the Closing, all amounts due and owing to or from the Company or its
Subsidiaries by or to any of the Related Parties (excluding employee
compensation and other incidents of employment) shall be paid in full.
4.27 MATERIAL ADVERSE CHANGE. Since December 31, 1999 to the date of this
Agreement, there has not been any material adverse change in the business,
operations, assets, liabilities, financial condition or prospects
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of the Company or its Subsidiaries, taken as a whole; provided, that no material
adverse change will be deemed to occur solely as a result of fluctuations in the
trading price of Company Common Stock.
4.28 INAPPROPRIATE PAYMENTS. Neither the Company, its Subsidiaries nor any
of their respective officers, directors, principal stockholders, employees,
agents or representatives has made, directly or indirectly, with respect to the
Company, its Subsidiaries or their respective business activities, any bribes or
kickbacks, illegal political contributions, payments from corporate funds not
recorded on the books and records of the Company or its Subsidiaries, payments
from corporate funds to governmental officials, in their individual capacities,
for the purpose of affecting their action or the action of the government they
represent, to obtain favorable treatment in securing business or licenses or to
obtain special concessions, or illegal payments from corporate funds to obtain
or retain business.
4.29 ABSENCE OF INDEMNIFIABLE CLAIMS, ETC. There are no pending claims and
no facts known to the Company that would reasonably entitle any director,
officer or employee of the Company or its Subsidiaries to indemnification by the
Company or its Subsidiaries under applicable law, the Articles or Certificate of
Incorporation or By-laws (or equivalent organizational documents) of the Company
or its Subsidiaries or any insurance policy maintained by the Company or its
Subsidiaries.
4.30 NO UNDISCLOSED LIABILITIES. There are no material liabilities or
obligations of any nature (whether accrued, absolute or contingent) of the
Company or its Subsidiaries other than (i) liabilities disclosed or provided for
in the most recent financial statements contained in the Company Reports; (ii)
liabilities which, individually or in the aggregate, are not material to the
Company or its Subsidiaries, taken as a whole; (iii) liabilities under this
Agreement (or contemplated hereby) or disclosed in the Disclosure Statement; and
(iv) liabilities incurred since December 31, 1999 in the ordinary course of
business and consistent with past practices.
4.31 NO BROKERS. Except as set forth in the Disclosure Statement, Neither
the Company nor any of its Subsidiaries has entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Company or ADS, Merger Sub or their respective Subsidiaries to
pay any finder's fee, brokerage or agent's commissions or other like payments in
connection with negotiations leading to this Agreement or the consummation of
the transactions contemplated hereby.
4.32 TAX REORGANIZATION. Neither the Company nor any of its Subsidiaries
has taken or failed to take any action which would prevent the Merger from
constituting a reorganization within the meaning of Section 368(a) of the Code.
4.33 OPINION OF FINANCIAL ADVISOR. The Company has received the opinion of
Roth Capital Partners to the effect that, as of the date of such opinion, the
Merger Consideration to be received by the stockholders of the Company pursuant
to the Merger is fair to such stockholders from a financial point of view.
4.34 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company or any of its affiliates, directors, officers,
employees, agents or representatives in writing specifically for inclusion or
incorporation by reference in, and which is included or incorporated by
reference in, (i) the Form S-4 (as defined in Section 5.7 of this Agreement) or
any amendment or supplement thereto; (ii) the Company Proxy Statement; (iii) the
ADS Proxy Statement; or (iv) any other documents filed or to be filed by the
Company with the SEC or any other Governmental Authority in connection with the
transactions contemplated hereby, will, at the respective times such documents
are filed, and, in the case of the Form S-4 or any amendment or supplement
thereto, when the same becomes effective, at the date of the Company Stockholder
Meeting and at the Effective Time, and, in the case of the Company Proxy
Statement or any amendment or supplement thereto, at the time of mailing of the
Company Proxy Statement to Company's stockholders or at the time of the Company
Stockholder Meeting or any other meeting of the Company's stockholders to be
held in connection with the Merger, and, in the case of the ADS Proxy Statement
or any amendment or supplement thereto, at the time of the ADS Stockholder
Meeting, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the Company Stockholder Meeting.
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The Form S-4 (to the extent that the Company Proxy Statement constitutes the
prospectus thereunder) and the Company Proxy Statement will comply as to form in
all material respects with the applicable provisions of the Securities Act, the
Exchange Act and the respective rules and regulations under any such Act.
4.35 NO EXISTING DISCUSSIONS. As of the date hereof, the Company is not
engaged, directly or indirectly, in any negotiations or discussions with any
other party with respect to an Alternative Proposal (as hereinafter defined).
4.36 TAKEOVER STATUTES. The Board of Directors of the Company has approved
this Agreement and the Company Voting Agreement, and such Company approvals are
sufficient to render inapplicable to this Agreement, the Company Voting
Agreement and the transactions contemplated hereby and thereby the provisions of
Section 203 of the DGCL. No other "fair price," "moratorium," or "control share
acquisition" or other similar antitakeover, statute or regulation enacted under
state or federal laws of the United States, applicable to the Company or any of
its Subsidiaries, is applicable to the Merger or other transactions contemplated
hereby.
ARTICLE V
COVENANTS
5.1 ALTERNATIVE PROPOSALS.
(a) Prior to the Effective Time, the Company agrees that neither it nor any
of its Subsidiaries shall, and it shall direct and use its reasonable best
efforts to cause its officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of the Subsidiaries) not to, (i) initiate or solicit,
directly or indirectly, or encourage (including by way of furnishing
information) or take any other action to facilitate knowingly, any inquiries or
the making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to the stockholders of the Company) with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, the Company or its Subsidiaries (any such proposal or
offer, other than a proposal or offer made by ADS, any ADS Subsidiary, or any
officer, director, employee, agent, or representative thereof, being hereinafter
referred to as an "Alternative Proposal"), (ii) engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to an Alternative Proposal, or otherwise
facilitate any effort or attempt to make or implement an Alternative Proposal;
or (iii) subject to subsection (b) of this Section 5.1, enter into any agreement
or understanding with any Person other than ADS and Merger Sub with the intent
to effect any Alternative Proposal; PROVIDED that nothing contained in this
Section 5.1 shall prohibit the Company or the Board of Directors of the Company
(the "Company Board"), (A) to the extent applicable, from complying with Rule
14d-9 and Rule 14e-2 promulgated under the Exchange Act with respect to an
Alternative Proposal; or (B) to the extent required by their fiduciary duties
under applicable law, from providing information to, or participating in
discussions or negotiations with, any party that makes an unsolicited inquiry
with respect to the Company if the Company Board reasonably believes such party
may propose an Alternative Proposal on terms that are superior, from a financial
point of view, to the terms of the Merger for the stockholders of the Company
and that such Alternative Proposal is reasonably capable of being completed, as
determined by the Company Board in good faith after consultation with its
financial advisers. The Company will immediately give written notice to ADS of
its receipt of any Alternative Proposal or inquiry with respect to making an
Alternative Proposal, and prior to providing any requested information or
entering into discussions or negotiations with such Person, require such Person
to enter into with the Company a confidentiality agreement no more favorable to
such Person than the Confidentiality Agreement dated March 3, 2000 between ADS
and the Company. Nothing contained herein shall be construed to prohibit the
Company or the Company Board from making any disclosure to its stockholders
which, in the judgment of the Company Board as advised by counsel, may be
required by applicable law in connection with any such proposal or offer.
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(b) Except as set forth in this Section 5.1, the Company Board shall not
approve or recommend, or cause the Company to enter into any agreement with
respect to, any Alternative Proposal. Notwithstanding the foregoing, if the
Company Board, after consultation with and based upon the advice of independent
legal counsel, determines in good faith that it is necessary to do so in order
to comply with its fiduciary duties to stockholders under applicable law, the
Company Board may approve or recommend a Superior Proposal (as defined below) or
cause the Company to enter into an agreement with respect to, a Superior
Proposal, but in each case only after providing prompt written notice to ADS
advising that the Company Board has determined to approve or recommend, or
authorize the Company to enter into an agreement with respect to, a Superior
Proposal. For purposes of this Agreement, a "Superior Proposal" means an
Alternative Proposal on terms which the Company Board determines in its good
faith judgment to be more favorable to the Company's stockholders than the
Merger.
5.2 INTERIM OPERATIONS.
(a) During the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement or the Effective Time, except
as set forth in the Disclosure Statement, or unless ADS has consented in writing
thereto (which consent shall not be unreasonably withheld), the Company shall,
and shall cause each of its Subsidiaries to:
(i) conduct their respective operations according to their usual,
regular and ordinary course in substantially the same manner as heretofore
conducted;
(ii) to the extent consistent with their respective businesses, use
commercially reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective officers and employees and maintain satisfactory relationships
with those persons having business relationships with them;
(iii) not amend their respective Articles or Certificates of
Incorporation or By-Laws or comparable governing instruments;
(iv) promptly notify ADS of any Company Material Adverse Effect, any
litigation or governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the breach
of any representation or warranty contained herein;
(v) promptly deliver to ADS true and correct copies of any report,
statement or schedule filed by the Company with the SEC subsequent to the
date of this Agreement;
(vi) not (A) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its capitalization as it
existed on the date hereof; (B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire
any shares of its capital stock; (C) increase any compensation or enter
into or amend any employment agreement with any of its present or future
officers, directors or employees; (D) grant any severance or termination
package to any employee or consultant, except to the extent consistent with
past practices; (E) hire any new employee who shall have, or terminate the
employment of any employee who has, an annual salary in excess of $50,000;
or (F) adopt any new employee benefit plan (including any stock option,
stock benefit or stock purchase plan) or amend any existing employee
benefit plan in any material respect, except for changes which are less
favorable to participants in such plans;
(vii) not (A) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or
other ownership interests; or (B) directly or indirectly, redeem, purchase
or otherwise acquire any shares of its capital stock, or make any
commitment for any such action;
(viii) not enter into any agreement or transaction, or agree to enter
into any agreement or transaction, outside the ordinary course of business,
including, without limitation, any transaction involving a merger,
consolidation, joint venture, license agreement, partial or complete
liquidation or
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dissolution, reorganization, recapitalization, restructuring or a purchase,
sale, lease or other disposition of a portion of assets or capital stock;
(ix) not incur any indebtedness for borrowed money or guarantee any
such indebtedness except in the ordinary course of business consistent with
past practice or issue or sell any debt securities or warrants or rights to
acquire any debt securities of others;
(x) continue to make regularly scheduled payments on its existing
indebtedness, leases and other obligations;
(xi) not make any loans, advances or capital contributions to, or
investments in, any other Person in excess of $10,000;
(xii) except as described in the Disclosure Statement, not make or
commit to made any capital expenditures in excess of $100,000 individually
or $225,000 in the aggregate;
(xiii) not apply any of its assets to the direct or indirect payment,
discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any affiliate or Related Party or enter
into any transaction with any affiliate or Related Party (except for
payment of salary and other customary expense reimbursements made in the
ordinary course of business to Related Parties who are employees, directors
or consultants of the Company or its Subsidiaries);
(xiv) not voluntarily elect to alter the manner of keeping its books,
accounts or records, or change in any manner the accounting practices
therein reflected, except for changes in accounting laws which affect all
companies in the business of the Company generally and those indicated by
good accounting practices;
(xv) not grant or make any mortgage or pledge or subject itself or any
of its properties or assets to any Lien, charge or encumbrance of any kind;
and
(xvi) maintain insurance on its tangible assets and its businesses in
such amounts and against such risks and losses as are currently in effect.
(b) During the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement or the Effective Time, except
as set forth in the Disclosure Statement, or unless the Company has consented in
writing thereto (which consent shall not be unreasonably withheld), ADS shall,
and shall cause each of its Subsidiaries to:
(i) conduct their respective operations according to their usual,
regular and ordinary course in substantially the same manner as heretofore
conducted;
(ii) promptly deliver to the Company true and correct copies of any
report, statement or schedule filed by ADS with the SEC subsequent to the
date of this Agreement;
(iii) promptly notify the Company of any ADS Material Adverse Effect,
any litigation or governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the breach
of any representation or warranty contained herein;
(iv) not take any action that would result in a failure to maintain
the trading of ADS Common Stock on the NASDAQ;
(v) with respect to ADS only (and not its Subsidiaries), not (A)
declare, set aside or pay any dividend or make any other distribution or
payment with respect to any shares of its capital stock or other ownership
interests; or (B) directly or indirectly, redeem, purchase or otherwise
acquire any shares of its capital stock, or make any commitment for any
such action; and
(vi) to the extent consistent with their respective businesses, use
commercially reasonable efforts to preserve intact their respective
business organizations and goodwill.
5.3 MEETINGS OF STOCKHOLDERS. Each of ADS and the Company will take all
action necessary in accordance with applicable law and its Articles or
Certificate of Incorporation and Bylaws to convene the ADS Stockholder Meeting
and the Company Stockholder Meeting as promptly as practicable to consider and
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vote upon the approval of the Merger, this Agreement and the transactions
contemplated hereby. The Board of Directors of ADS and the Company Board
(subject in the case of the Company Board to Section 5.1(b)) shall recommend
such approval, and each of ADS and the Company shall take all lawful action to
solicit such approval, including, without limitation, timely mailing the ADS
Proxy Statement and the Company Proxy Statement.
5.4 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, the Company and ADS shall: (a) promptly make their respective filings
and thereafter make any other required submissions under the HSR Act with
respect to the Merger; (b) use all reasonable efforts to cooperate with one
another in (i) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby; and (ii) timely
making all such filings and timely seeking all such consents, approvals, permits
or authorizations; (c) use commercially reasonable efforts to obtain all
consents under or with respect to, any Permit, contract, lease, agreement,
purchase order, sales order or other instrument, where the consummation of the
transactions contemplated hereby would be prohibited or constitute an event of
default, or grounds for acceleration or termination, in the absence of such
consent; and (d) take, or cause to be taken, all other commercially reasonable
actions as are reasonably necessary, proper or appropriate to consummate and
make effective the transactions contemplated by this Agreement.
5.5 INSPECTION OF RECORDS. From the date hereof to the Effective Time, the
Company shall (a) allow all officers, attorneys, accountants and other
representatives designated by ADS reasonable access at all reasonable times to
the offices, records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the Company and
its Subsidiaries; (b) furnish to ADS, its counsel, financial advisors, auditors
and other authorized representatives such financial and operating data and other
information as such persons may reasonably request; and (c) instruct the
employees, counsel and financial advisors of the Company and its Subsidiaries to
cooperate with ADS and its investigation of the business of the Company and its
Subsidiaries. From the date hereof to the Effective Time, ADS shall (a) furnish
to the Company, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
persons may reasonably request, and (b) instruct the officers, counsel and
financial advisors of ADS to cooperate with the Company in its investigation of
the business of ADS and its Subsidiaries. All information disclosed by the
Company to ADS and its representatives or by ADS to the Company and its
representatives shall be subject to the terms of that certain Confidentiality
Agreement (the "Confidentiality Agreement") dated as of March 3, 2000 between
ADS and the Company.
5.6 PUBLICITY. Neither party hereto shall make any press release or public
announcement with respect to this Agreement, the Merger or the transactions
contemplated hereby without the prior written consent of the other parties
hereto (which consent shall not be unreasonably withheld); provided, however,
that each party hereto may make any disclosure or announcement which such party,
in the opinion of its legal counsel, is obligated to make pursuant to applicable
law or regulation of the NASDAQ, in which case the party desiring to make the
disclosure shall consult with the other party hereto prior to making such
disclosure or announcement.
5.7 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) ADS and the Company shall cooperate and promptly prepare and file with
the SEC as soon as practicable (i) the Company Proxy Statement, (ii) the ADS
Proxy Statement and (iii) a Registration Statement on Form S-4 (the "Form S-4")
under the Securities Act, with respect to the ADS Common Stock issuable in the
Merger, and a portion of which Registration Statement shall also serve as the
Company Proxy Statement. The respective parties will cause the Company Proxy
Statement, the ADS Proxy Statement and the Form S-4 to comply as to form in all
material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations promulgated thereunder. ADS shall use
all reasonable efforts, and the Company will cooperate with ADS, to cause the
Form S-4 to be declared effective by the SEC as
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promptly as practicable and to continue to be effective as of the Effective
Time. ADS shall use its reasonable efforts to obtain, prior to the effective
date of the Form S-4, all necessary state securities law or "Blue Sky" permits
or approvals required to carry out the transactions contemplated by this
Agreement and will pay all expenses incident thereto. No amendment or supplement
to the Company Proxy Statement, the ADS Proxy Statement or the Form S-4 will be
made by ADS or the Company without the approval of the other party, which
approval shall not be unreasonably withheld. ADS will advise the Company,
promptly after it receives notice thereof, of the time when the Form S-4 has
become effective, the issuance of any stop order of any Governmental Authority,
or the suspension of the qualification of the ADS Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction.
(b) Each of ADS and the Company shall notify the other party promptly after
receipt by such first party of any comments of the SEC on, or of any request by
the SEC for amendments or supplements to, the Company Proxy Statement, the ADS
Proxy Statement or the Form S-4. Each of ADS and the Company shall supply the
other party with copies of all correspondence between such party or any of its
representatives and the SEC with respect to any of the foregoing filings. If at
any time prior to the ADS Stockholder Meeting any event shall occur relating to
the Company or any of its Subsidiaries or any of their respective officers,
directors or affiliates which should be described in an amendment to the ADS
Proxy Statement, the Company shall inform ADS promptly after becoming aware of
such event. If at any time prior to the Effective Time, any event shall occur
relating to the Company or any of its Subsidiaries or any of their respective
officers, directors or affiliates which should be described in an amendment or
supplement to the Company Proxy Statement or the Form S-4, the Company shall
inform ADS promptly after becoming aware of such event. If at any time prior to
the Company Stockholder Meeting, any event shall occur relating to ADS or any of
its Subsidiaries or any of their respective officers, directors or affiliates
which should be described in an amendment or supplement to the Company Proxy
Statement, ADS shall inform the Company promptly after becoming aware of such
event. Whenever the Company or ADS learns of the occurrence of any event which
should be described in an amendment of, or supplement to, the ADS Proxy
Statement, the Company Proxy Statement or the Form S-4, the parties shall
cooperate to promptly cause such amendment or supplement to be prepared, filed
with and cleared by the SEC and, if required by applicable law, disseminated to
the persons and in the manner required.
5.8 FURTHER ACTION. Subject to the terms and conditions of this Agreement
and applicable law, each of the parties hereto shall use its reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement as soon as reasonably
practicable, including such actions or things as any other party hereto may
reasonably request in order to cause any of the conditions to such other party's
obligation to consummate such transactions specified in Article VI to be fully
satisfied. Without limiting the generality of the foregoing, the parties shall
(and shall cause their respective Subsidiaries, and use their reasonable efforts
to cause their respective affiliates, directors, officers, employees, agents,
attorneys, accountants and representatives, to) consult and fully cooperate with
and provide reasonable assistance to each other in (i) the preparation and
filing with the SEC of the Form S-4, the Company Proxy Statement, the ADS Proxy
Statement, and any necessary amendments or supplements to any thereof; (ii)
seeking to have each such proxy statement cleared, and the Form S-4 declared
effective, by the SEC as soon as reasonably practicable after filing; (iii)
taking such actions as may be required under applicable state securities or blue
sky laws in connection with the issuance of the ADS Common Stock pursuant to the
Merger; (iv) obtaining all necessary consents, approvals, waivers, licenses,
permits, authorizations, registrations, qualifications, or other permissions or
actions by, and giving all necessary notices to and making all necessary filings
with and applications and submissions to, any Governmental Authority or other
Person or entity; (v) lifting any permanent or preliminary injunction or
restraining order or other similar order issued or entered by any court or
governmental entity of any type referred to in Section 6.1(c), or lifting any
stop order of any Governmental Authority, or the suspension of the qualification
of the ADS Common Stock issuable in connection with the Merger for offer or sale
in any jurisdiction; (vi) obtaining the tax opinions referred to in Sections
6.2(f) and 6.3(h); (vii) providing all such information about such party, its
Subsidiaries and its officers, directors and affiliates and making all
applications and filings as may be necessary or reasonably requested in
connection
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with any of the foregoing; and (viii) in general, consummating and making
effective the transactions contemplated hereby.
5.9 AFFILIATE LETTERS. At least 10 days prior to the Closing Date, the
Company shall deliver to ADS a list of names and addresses of those persons who
were or will be, in the Company's judgment, at the record date for its
stockholders' meeting to approve the Merger, "affiliates" (each such person, an
"Affiliate") of the Company within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act. The Company shall deliver or
cause to be delivered to ADS, prior to the Closing Date, from each of the
Affiliates of the Company identified in the foregoing list, an Affiliate Letter
in substantially the form attached hereto as EXHIBIT A. ADS shall be entitled to
place legends as specified in such Affiliate Letters on the certificates
evidencing any ADS Common Stock to be received by such Affiliates pursuant to
the terms of this Agreement, and to issue appropriate stop transfer instructions
to the transfer agent for the ADS Common Stock, consistent with the terms of
such Affiliate Letters.
5.10 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
(a) as otherwise expressly provided for herein; (b) as otherwise provided in
Section 7.5(a); and (c) the expenses incurred in connection with printing and
mailing the Form S-4 and the Company Proxy Statement and the HSR Act filing fees
in connection with the Merger shall be shared equally by the Company and ADS.
5.11 TAX TREATMENT OF MERGER. From and after the date hereof and until the
Effective Time, neither ADS nor the Company nor any of their respective
Subsidiaries or other Affiliates shall (a) knowingly take any action, or
knowingly fail to take any action, that would jeopardize qualification of the
Merger as a reorganization within the meaning of Section 368(a) of the Code; or
(b) enter into any contract, agreement, commitment or arrangement with respect
to the foregoing. After the Effective Time, ADS shall not take or fail to take
(and shall cause the Surviving Corporation not to take or fail to take) any
action that is reasonably likely to jeopardize qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
5.12 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Until six years from the Effective Time, unless otherwise required by
Law, the certificate of incorporation and by-laws of the Surviving Corporation
shall contain provisions no less favorable with respect to the elimination of
liability of directors and the indemnification of (and advancement of expenses
to) directors, officers, employees and agents that are set forth in the
Certificate of Incorporation and By-Laws of the Company, as in effect on the
date hereof.
(b) From and after the Effective Time, ADS and the Surviving Corporation
shall, jointly and severally, indemnify, defend and hold harmless each Person
who is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, employee or agent of
the Company or any of its Subsidiaries (collectively, the "Indemnified Parties")
against all losses, reasonable expenses (including reasonable attorneys' fees),
claims, damages, liabilities or amounts that are paid in settlement of, or
otherwise in connection with, any threatened or actual claim, action, suit,
proceeding or investigation (a "Claim"), based in whole or in part on or arising
in whole or in part out of the fact that the Indemnified Party (or the Person
controlled by the Indemnified Party) is or was a director, officer, employee or
agent of the Company or any of its Subsidiaries and pertaining to any matter
existing or arising out of actions or omissions occurring at or prior to the
Effective Time, including, without limitation, any Claim arising out of this
Agreement or any of the transactions contemplated hereby), whether asserted or
claimed prior to, at or after the Effective Time, in each case to the fullest
extent permitted under applicable law, and shall pay any expenses, as incurred,
in advance of the final disposition of any such action or proceeding to each
Indemnified Party to the fullest extent permitted under applicable law. Without
limiting the foregoing, if any such Claim is brought against any of the
Indemnified Parties, (i) such Indemnified Parties may retain counsel (including
local counsel) satisfactory to them and which shall be reasonably satisfactory
to ADS and the Surviving Corporation, and ADS and the Surviving Corporation
shall pay, jointly and severally, all reasonable fees and expenses of such
counsel for such Indemnified Parties; and (ii) ADS and the Surviving Corporation
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shall use all reasonable efforts to assist in the defense of any such Claim,
provided that ADS and the Surviving Corporation shall not be liable for any
settlement effected without their written consent, which consent, however, shall
not be unreasonably withheld. Notwithstanding the foregoing, nothing contained
in this Section 5.13 shall be deemed to grant any right to any Indemnified Party
which is not permitted to be granted to an officer, director, employee or agent
of the Company under Delaware law, assuming for such purposes that the Company's
Certificate of Incorporation and By-Laws provide for the maximum indemnification
permitted by law.
5.13 VOTING AGREEMENT -- COMPANY. On the date hereof, each of Randolph
Geissler, Thomas Patin, James P. Santelli, William Battista, Kenneth Larson,
Stanley Goldberg, John Beattie, David Henderson, Gary S. Kohler, Douglas M.
Pihl, Richard Jahnke, Robert C. Calgren and Ezekiel Mejia, acting solely in
their capacity as securityholders of the Company, shall enter into a voting
agreement in the form attached hereto as EXHIBIT B.
5.14 CONFIDENTIALITY. Each party shall, and shall use its reasonable
efforts to cause its officers, employees and authorized representatives to, (i)
hold in confidence all confidential information obtained by it or them from any
other party or any of such other party's officers, employees or authorized
representatives pursuant to this Agreement (unless such information is or
becomes publicly available or readily ascertainable from public or published
information or trade sources through no wrongful act of such first party), and
(ii) use all such data and information solely for the purpose of consummating
the transactions contemplated hereby, except, in either case, as may be
otherwise required by law or legal process or as may be necessary or appropriate
in connection with the enforcement of, or any litigation concerning, this
Agreement. If this Agreement is terminated, each party shall promptly return, if
so requested by any other party, all nonpublic documents obtained from such
other party in connection with the transactions contemplated hereby and any
copies thereof which may have been made by such first party and shall use its
reasonable efforts to cause its officers, employees and authorized
representatives to whom such documents were furnished promptly to return such
documents and any copies thereof any of them may have made.
5.15 DEFENSE OF LITIGATION. Each of the parties agrees to vigorously
defend against all actions, suits or proceedings in which such party is named as
a defendant which seek to enjoin, restrain or prohibit the transactions
contemplated hereby or seek damages with respect to such transactions. No party
shall settle any such action, suit or proceeding or fail to perfect on a timely
basis any right to appeal any judgment rendered or order entered against such
party therein without the consent of the other parties (which consent shall not
be withheld unreasonably). Each of the parties further agrees to use its
reasonable efforts to cause each of its Affiliates, directors and officers to
vigorously defend any action, suit or proceeding in which such Affiliate,
director or officer is named as a defendant and which seeks any such relief to
comply with this Section to the same extent as if such person were a party
hereto.
5.16 ACTIONS BY MERGER SUB. In its capacity as sole stockholder of Merger
Sub, ADS shall cause Merger Sub to approve and adopt the Merger and to take all
corporate action necessary on its part to consummate the Merger and the
transactions contemplated hereby.
5.17 TAKEOVER STATUTES. If any "fair price", "moratorium", "control share
acquisition" or other form of anti-takeover statute or regulation shall become
applicable to the transactions contemplated hereby, each of the Company, ADS and
Merger Sub and the respective members of their Boards of Directors shall grant
such approvals to take such actions as are necessary so that the transactions
contemplated by this Agreement may be consummated as promptly as practicable on
the terms contemplated herein and otherwise act to eliminate or minimize the
effects of such statute or regulation on the transactions contemplated herein.
5.18 NASDAQ LISTING. ADS agrees to use its reasonable efforts to cause the
ADS Common Stock to be issued to the stockholders of the Company to have been
authorized for trading on the NASDAQ, subject only to official notice of
listing.
5.19 TERMINATION OF CONFIDENTIALITY AND SECRECY AGREEMENTS. The Company
shall terminate all exchange of information provisions contained in all
confidentiality agreements and secrecy agreements to which it and any of it
Subsidiaries are a party relating to the exchange of information for purposes of
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evaluating potential acquisitions of any entity, other than the Confidentiality
Agreement dated as of March 3, 2000 by and between ADS and the Company.
5.20 EMPLOYEE BENEFIT PLANS. To the extent the existing benefit plans and
arrangements provided by the Company to its employees are terminated, such
employees who remain employees of the Surviving Corporation and meet the
necessary eligibility requirements shall be entitled to participate in all
benefit plans and arrangements that are available and subsequently become
available to ADS' employees on the same basis as ADS' employees in similar
positions are eligible to participate. The Company, ADS and Merger Sub will take
all reasonable and lawful action before and after the Closing to effect such
participation.
5.21 ISSUANCE OF OPTIONS IN THE SURVIVING CORPORATION. On the Closing
Date, Merger Sub shall issue options to purchase its common stock to certain
officers of the Company in such amount and on such terms and conditions to be
agreed to by the parties hereto.
5.22 SECTION 16 MATTERS. Prior to the Effective Time, ADS and the Company
shall take all such steps, including obtaining the appropriate board approvals,
as may be required to cause any dispositions of Company Common Stock (including
derivative securities with respect to Company Common Stock) or acquisitions of
ADS Common Stock (including derivative securities with respect to ADS Common
Stock) resulting from the transactions contemplated by Article I or Article II
of this Agreement by each individual who is subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to ADS, to be
exempt under Rule 16b-3 promulgated under the Exchange Act, such steps to be
taken in accordance with the No-Action Letter dated January 12, 1999 issued by
the SEC to Skadden, Arps, Slate, Meagher & Flom LLP.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions (unless waived by each of the parties hereto in accordance with the
provisions of Section 7.6 hereof):
(a) This Agreement and the Merger and other transactions contemplated
hereby shall have been approved and adopted by the requisite vote of the
stockholders of ADS and the Company.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger or
changes the terms or conditions of this Agreement shall have been issued
and remain in effect. If any such order or injunction shall have been
issued, each party agrees to use its reasonable efforts to have any such
injunction lifted.
(d) The Form S-4 shall have become effective under the Securities Act
and shall be effective at the Effective Time, and no stop order suspending
the effectiveness of the Form S-4 shall have been issued and be continuing,
no action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities laws relating to the issuance or
trading of the ADS Common Stock to be issued to the stockholders of the
Company in connection with the Merger shall have been received.
(e) The parties shall have obtained all material consents,
authorizations, orders and approvals of (or filings or registrations with)
any governmental commission, board or other regulatory body required in
connection with the execution, delivery and performance of this Agreement,
except for filings in connection with the Merger and any other documents
required to be filed after the Effective Time and except where the failure
to obtain such consent or approval is not reasonably likely to have a
Surviving Corporation Material Adverse Effect or is not reasonably likely
to prevent or materially burden or
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materially impair the ability of the parties to consummate the transactions
contemplated by this Agreement.
(f) The ADS Common Stock to be issued to the stockholders of the
Company in connection with the Merger shall have been authorized for
trading on the NASDAQ, subject only to official notice of issuance.
(g) The stockholders of ADS shall have approved and adopted an
amendment to the Articles of Incorporation of ADS increasing the number of
authorized ADS Common Stock from 80,000,000 to a number sufficient to
satisfy ADS' obligations under this Agreement.
6.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date each of the following conditions
(unless waived by the Company in accordance with the provisions of Section 7.6
hereof):
(a) Each of ADS and Merger Sub shall have performed, in all material
respects, all of its agreements contained herein that are required to be
performed by ADS on or prior to the Closing Date, and the Company shall
have received a certificate of the Chairman or President of ADS, dated the
Closing Date, certifying to such effect.
(b) The representations and warranties of ADS and Merger Sub contained
in this Agreement and in any document delivered in connection herewith
shall be true and correct in all material respects, as of the Closing
(except to the extent such representations and warranties speak of a
specified earlier date and except as specifically contemplated by this
Agreement), and the Company shall have received a certificate of the
President of ADS, dated the Closing Date, certifying to such effect.
(c) The Company shall have received from ADS certified copies of the
resolutions of ADS's and Merger Sub's Boards of Directors and stockholders
approving and adopting this Agreement, the ADS Ancillary Documents and the
transactions contemplated hereby and thereby.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that has had an ADS Material Adverse
Effect; provided, that such an event will not be deemed to have occurred
solely as a result of fluctuations in the trading price of the ADS Common
Stock or solely as a result of changes in the industry which generally
impact on all companies in ADS's business (other than specifically on ADS).
(e) The fairness opinion of Roth Capital Partners, to the effect that
the Merger or Merger Consideration, as the case maybe, is fair to the
stockholders of the Company from a financial point of view, as described in
Section 4.33, has not been withdrawn; provided, however, that such
withdrawal shall permit the Company not to fulfill its obligations to
effect the Merger only if the withdrawal of such opinion is a result of a
material adverse change in the financial condition, business, operations or
prospects of ADS and its Subsidiaries, taken as a whole.
(f) The Company shall have received, prior to the earlier of the date
the Company Proxy Statement is first mailed to the Company's stockholders
and the effective date of the S-4, the opinion of Winthrop & Weinstine,
P.A., counsel to the Company, to the effect that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, and that the Company and ADS will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code. In rendering such opinion, counsel shall be entitled to rely upon,
among other things, reasonable assumptions as well as representations and
covenants of ADS, Merger Sub and the Company.
(g) The Company shall have received the opinion of Akerman, Senterfitt
& Eidson, P.A. to such matters as the Company or its counsel shall
reasonably request.
(h) ADS and Merger Sub shall have executed and delivered such other
documents and taken such other actions as the Company shall reasonably
request.
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6.3 CONDITIONS TO OBLIGATION OF ADS AND MERGER SUB TO EFFECT THE
MERGER. The obligations of ADS and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of each of the
following conditions (unless waived by ADS in accordance with the provisions of
Section 7.6 hereof):
(a) The Company shall have performed, in all material respects, all of
its agreements contained herein that are required to be performed by the
Company on or prior to the Closing Date, and ADS shall have received a
certificate of the Chairman or President of the Company, dated the Closing
Date, certifying to such effect.
(b) The representations and warranties of the Company contained in
this Agreement and in any document delivered in connection herewith shall
be true and correct, in all material respects, as of the Closing (except to
the extent such representations and warranties speak as of a specified
earlier date and except as specifically contemplated by this Agreement),
and ADS shall have received a certificate of the Chairman or President of
the Company, dated the Closing Date, certifying to such effect.
(c) ADS shall have received from the Company certified copies of the
resolutions of the Company's Board of Directors and stockholders approving
and adopting this Agreement, the Ancillary Documents and the transactions
contemplated hereby and thereby.
(d) ADS shall have received the opinion of Winthrop & Weinstine, P.A.
to such matters as ADS or ADS's counsel shall reasonably request.
(e) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that has had a Company Material Adverse
Effect; provided, that such an event will not be deemed to have occurred
solely as a result of fluctuations in the trading price of the Company
Common Stock or solely as a result of changes in the industry which
generally impact on all companies in the Company's business (other than
specifically on the Company).
(f) The Company shall have received all necessary consents with
respect to any contract, lease, purchase order, sales order, license
agreement, Permit, Environmental Permit and license which are required as a
result of a change of control of the Company except in those instances
where failure to receive any such consent would not have a Company Material
Adverse Effect.
(g) ADS shall have received, prior to the earlier of the date the
Company Proxy Statement is first mailed to the Company's stockholders and
the effective date of the S-4, the opinion of Akerman, Senterfitt & Eidson,
P.A., counsel to ADS, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, and that the Company and ADS will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code. In rendering such opinion, counsel shall be entitled to rely upon,
among other things, reasonable assumptions as well as representations and
covenants of ADS, Merger Sub and the Company.
(h) Each of Randolph K. Geissler and James P. Santelli shall have
executed and delivered an Employment Agreement in the form attached hereto
as EXHIBIT C and EXHIBIT D, respectively.
(i) The Company shall have executed and delivered such other documents
and taken such other actions as ADS shall reasonably request.
ARTICLE VII
TERMINATION
7.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of ADS and the Company,
by the mutual written consent of ADS and the Company.
7.2 TERMINATION BY EITHER ADS OR THE COMPANY. This Agreement may be
terminated and the Merger may be abandoned by action of either the Company Board
or the Board of Directors of ADS if (a) the Merger shall not have been
consummated by September 30, 2000; provided, however, that the right to
terminate this
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Agreement under this Section 7.2(a) will not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Merger to occur on or before such date; (b) the
approval of the stockholders of ADS and the Company required by Section 6.1(a)
shall not have been obtained at meetings duly convened therefor or at any
adjournment thereof; provided, however, that neither party shall have the right
to terminate this Agreement under this Section 7.2(b) if the other party has
caused (directly or indirectly) or aided in the failure to obtain such approval;
provided, however, that the Company shall not be deemed to have caused or aided
in the failure to obtain such approval if the Company Board withdraws its
recommendation to the Company's stockholders in accordance with Section 5.3 by
accepting or recommending a Superior Proposal; (c) a court of competent
jurisdiction or a governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action either (i) permanently restraining, enjoining or otherwise prohibiting
the transactions contemplated by this Agreement; or (ii) compelling ADS, Merger
Sub or the Surviving Corporation to dispose of or hold separate all or a
material portion of the respective businesses or assets of ADS and the Company,
or sell or license any material product of ADS or the Company, and such order,
decree, ruling or other action shall have become final and non-appealable; (d)
the Average Closing Price as determined in accordance with Section 1.4(f) hereof
(for the purposes hereof, substituting the Meeting Date for the Closing Date) of
ADS Common Stock is less than $6.00 per share or more than $24.00 per share;
provided, that such termination shall be effective only if notice thereof is
delivered by the terminating party to the other not later than 6:00 pm Eastern
time on the Trading Day prior to the earlier to occur of the date for the
Company Stockholder Meeting or the ADS Stockholder Meeting ("Meeting Date") or;
(e) 5% or more of the issued and outstanding shares of Company Common Stock
shall have duly demanded and perfected dissenters' rights of appraisal in
accordance with Section 1.9 of this Agreement and Section 262 of the DGCL.
7.3 TERMINATION BY THE COMPANY. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the adoption and approval by the stockholders of the Company or ADS, by
action of the Company Board, if (a) there has been a breach by ADS or Merger Sub
of any representation or warranty contained in this Agreement which would have
an ADS Material Adverse Effect; or (b) there has been a material breach of any
of the covenants or agreements set forth in this Agreement on the part of ADS,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by the Company to ADS.
7.4 TERMINATION BY ADS. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the stockholders of the Company or ADS, by action of
the Board of Directors of ADS, if (a) the Company Board shall have recommended a
Superior Proposal to the stockholders of the Company; (b) there has been a
breach by the Company of any representation or warranty contained in this
Agreement which would have a Company Material Adverse Effect; or (c) there has
been a breach of any of the covenants or agreements set forth in this Agreement
on the part of the Company, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given by ADS to the
Company.
7.5 EFFECT OF TERMINATION AND ABANDONMENT.
(a) If this Agreement is terminated by ADS pursuant to Section 7.4(a), then
the Company shall pay to ADS no later than five (5) Trading Days after the
Effective Date of such termination by wire transfer of same day funds a fee in
an amount equal to $2,000,000 (the "Termination Expenses"). The parties
acknowledge that the agreements contained in this Section 7.5(a) are an integral
part of the transactions contemplated by this Agreement, and that, without these
agreements, ADS would not enter into this Agreement. Accordingly, if the Company
fails to pay the amounts pursuant to this Section 7.5(a) when due, and, in order
to obtain such payment, ADS commences a suit which results in a final,
non-appealable judgment against the Company for the amounts set forth in this
Section 7.5(a), the Company shall pay to ADS its costs and expenses (including
attorneys' fees) incurred in connection with such suit, together with interest
on the amount of the fee at the rate of 12% per annum.
(b) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article 7, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to
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<PAGE> 215
this Section 7.5 and the provisions of Sections 5.6, 5.10, 5.15 and 5.16, which
obligations shall survive the termination of this Agreement , and neither the
Company nor ADS shall be relieved or released from any liabilities or damages
arising out of its willful material breach of this Agreement.
7.6 EXTENSION; WAIVER. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto; (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto; and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of those rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the
representations, warranties, covenants and agreements contained in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except that the agreements contained in Sections
1.4, 1.5, 1.6, 1.7, 1.9, 1.10, 5.10, 5.11, 5.13, 5.20, 5.21 and 5.22 and
Articles II and VIII and the agreements delivered pursuant to this Agreement
shall survive the Merger.
8.2 NOTICES. All notices required or permitted to be given hereunder shall
be in writing and may be delivered by hand, by facsimile, by nationally
recognized private courier, or by United States mail. Notices delivered by mail
shall be deemed given three (3) business days after being deposited in the
United States mail, postage prepaid, registered or certified mail. Notices
delivered by hand, by facsimile, or by nationally recognized private carrier
shall be deemed given on the day following receipt; provided, however, that a
notice delivered by facsimile shall be effective only if such notice is also
delivered by hand, or deposited in the United States mail, postage prepaid,
registered or certified mail, on or before two (2) Trading Days after its
delivery by facsimile. All notices shall be addressed as follows:
<TABLE>
<S> <C>
If to ADS or Merger Sub: If to the Company:
Applied Digital Solutions, Inc. Destron Fearing Corporation
400 Royal Palm Way, Suite 410 490 Villaume Avenue
Palm Beach, Florida 33480 South St. Paul, Minnesota
Fax: (561) 366-0002 Fax: (651) 455-0413
Attn: Richard J. Sullivan, Attn: Randolph K. Geissler
Chairman and Chief Executive Officer President and Chief Executive Officer
With copies to: With copies to:
Akerman, Senterfitt & Eidson P.A. Winthrop & Weinstine, P.A.
One S.E. 3rd Avenue 3000 Dain Rauscher Plaza
Miami, Florida 33131 60 South Sixth Street
Fax: (305) 374-5095 Minneapolis, Minnesota 55402
Attn: Geoffrey Cheney, Esq. Fax: (614) 347-0600
Attn: Richard Hoel, Esq.
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
8.3 ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for the provisions
of Sections 1.4, 1.5, 1.6, 2.3 and 5.13, nothing in this Agreement, express or
implied, is intended to confer on any
A-1-40
<PAGE> 216
person other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
8.4 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Disclosure
Statement, the ADS Disclosure Statement, the Ancillary Documents, the ADS
Ancillary Documents, and any other documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matters hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
8.5 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of each of the Company and ADS, but after any such stockholder
approval, no amendment shall be made which by law requires the further approval
of stockholders without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
8.7 COUNTERPARTS. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
8.8 HEADINGS. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
8.9 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders, and words
denoting natural persons shall include corporations and partnerships and vice
versa.
8.10 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
8.11 INCORPORATION OF EXHIBITS. The Disclosure Statement, the ADS
Disclosure Statement and any and all Exhibits attached hereto and referred to
herein are hereby incorporated herein and made a part hereof for all purposes as
if fully set forth herein.
8.12 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
8.13 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur if any of the provisions of this Agreement was not performed
in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
A-1-41
<PAGE> 217
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ RICHARD J. SULLIVAN
--------------------------------------
Richard J. Sullivan,
Chairman and Chief Executive Officer
DIGITAL ANGEL.NET INC.
By: /s/ RICHARD J. SULLIVAN
--------------------------------------
Richard J. Sullivan,
Chairman
DESTRON FEARING CORPORATION
By: /s/ RANDOLPH K. GEISSLER
--------------------------------------
Randolph K. Geissler,
President and Chief Executive Officer
[Signature Page of Agreement and Plan of Merger]
A-1-42
<PAGE> 218
ANNEX A-2
AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
This Amendment (the "Amendment") dated as of May 25, 2000 to the Agreement
and Plan of Merger (the "Merger Agreement") dated as of April 24, 2000 by and
among Applied Digital Solutions, Inc., a Missouri corporation ("ADS"), Digital
Angel.net Inc., a Delaware corporation and a wholly-owned subsidiary of ADS
("Merger Sub"), and Destron Fearing Corporation, a Delaware corporation (the
"Company"), is entered into by and among ADS, Merger Sub and the Company.
RECITALS
ADS, Merger Sub and the Company have heretofore entered into the Merger
Agreement providing for the merger of Merger Sub with and into the Company, with
the Company surviving the Merger. All capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Status of the Merger Agreement. Except as specifically set forth
herein, the Merger Agreement shall remain in full force and effect and shall not
be waived, modified, superseded or otherwise affected by this Amendment. This
Amendment is not to be construed as a release, waiver or modification of any of
the terms, conditions, representations, warranties, covenants, rights or
remedies set forth in the Merger Agreement, except as specifically set forth
herein.
2. Amendment to the Merger Agreement.
(a) Section 1.4(b) of the Merger Agreement is hereby deleted in its
entirety and replaced by the following:
"(b) Subject to Section 1.5(f), at the Effective Time, by virtue of the
Merger and without any action on the part of ADS, Merger Sub, the
Company or the holders of Company common stock, par value $.01 per share
(the "Company Common Stock"), each share of Company Common Stock
outstanding immediately prior to the Effective Time shall be converted
into the right to receive 1.5 (herein called the "Exchange Ratio")
shares of common stock, $.001 par value, of ADS ("ADS Common Stock").
The shares of ADS Common Stock to be received as consideration pursuant
hereto (together with cash in lieu of fractional shares of ADS Common
Stock as specified in Section 1.5(f) below) are referred to herein as
the "Merger Consideration."
(b) Section 1.4(c) of the Merger Agreement is hereby deleted in its
entirety and intentionally left blank.
(c) Section 5.23 of the Merger Agreement is hereby created and shall read
as follows:
"Section 5.23 Additional Acquisitions. ADS agrees that until the earlier
to occur of the termination of the Agreement or the Effective Date,
neither ADS nor its Subsidiaries shall enter into, without the prior
written consent of the Company, any agreement with respect to any
transaction involving an acquisition by ADS or any of its Subsidiaries
of the all or substantially all of the capital stock or all or
substantially all of the assets of any Person which has shares of
capital stock registered under the Exchange Act."
(d) Section 7.2(d) of the Merger Agreement is hereby deleted in its
entirety and intentionally left blank.
A-2-1
<PAGE> 219
3. Representations and Warranties of Entities. Each of the Company, ADS
and Merger Sub represents and warrants that its execution, delivery and
performance of this Amendment has been duly authorized by all necessary
corporate action and this Amendment is a legal, valid and binding obligation of
such entity enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws affecting enforcement of
creditors' rights generally, and by general principles of equity (regardless of
whether enforcement is considered in a proceeding at law or in equity) and
subject to receipt of approval of the merger by the stockholders of ADS and the
Company.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
5. Governing Law. This Amendment shall be a contract made under and
governed by the laws of the State of Delaware, without regard to conflicts of
law principles.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
A-2-2
<PAGE> 220
IN WITNESS WHEREOF, the parties have executed this Amendment and caused the
same to be duly delivered on their behalf on the day and year first written
above.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ RICHARD J. SULLIVAN
------------------------------------
Richard J. Sullivan, Chairman and
CEO
DIGITAL ANGEL.NET INC.
By: /s/ RICHARD J. SULLIVAN
------------------------------------
Richard J. Sullivan, President
DESTRON FEARING CORPORATION
By: /s/ RANDOLPH K. GEISSLER
------------------------------------
Randolph K. Geissler, President and
CEO
A-2-3
<PAGE> 221
ANNEX B-1
OPINION OF ROTH CAPITAL PARTNERS, INC. AND
AGRICAPITAL SECURITIES, INC.
April 24, 2000
Board of Directors
Destron Fearing Corporation
490 Villaume Avenue
South Saint Paul, MN 55075
Gentlemen:
We have been requested by the Board of Directors of Destron Fearing
Corporation ("Destron") to render our opinion with respect to the fairness, from
a financial point of view, to the shareholders of Destron of the proposed merger
(the "Merger") of Destron with Digital Angel.net Inc., ("Digital Angel"), a
wholly owned subsidiary of Applied Digital Solutions, Inc., ("Applied").
We understand that Applied, Digital Angel, and Destron have entered into an
Agreement and Plan of Merger, dated as of April 24, 2000 (the "Merger
Agreement"). The terms of the Merger Agreement require Applied to acquire all of
the outstanding capital stock of Destron with newly-issued shares of Applied
common stock in a transaction that is expected to be tax-free to shareholders.
Destron stockholders will receive 0.75 shares of Applied stock for every share
of Destron; provided, however, if during the time period immediately prior to
closing, the average price of Applied common stock is less than $8.00 per share
or more than $16.00 per share, the exchange ratio would be adjusted to provide
that Destron stockholders receive a minimum of $6.00 or a maximum of $12.00 per
share in value of Applied common stock. If the average price of Applied common
stock is below $6.00 or more than $24.00, either Applied or Destron can
terminate the Merger Agreement. The "average price" is the average per share
last daily closing price of Applied common stock as quoted on The Nasdaq
National Market during the 20 consecutive trading days preceding the fifth
trading day immediately preceding the closing date for the Merger. All
outstanding Destron options and warrants will be assumed by Applied based on the
exchange ratio. The terms and conditions of the Merger are set forth in more
detail in the Merger Agreement.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other information about Destron and
Applied, including the consolidated financial statements for recent years and
interim periods, and certain other relevant financial and operating data; (ii)
reviewed certain business and financial information regarding Destron and
Applied furnished to us by them, including financial forecasts and related
assumptions; (iii) reviewed the financial terms and conditions of the Merger
Agreement; (iv) reviewed information concerning the trading of Destron Common
Stock and Applied Common Stock; (v) compared Destron and Applied Digital with
certain other publicly-traded companies which we deemed to be relevant; (vi)
considered the financial terms of selected recent business combinations of
companies which we deemed to be comparable to the Merger; and (vii) performed
such other analyses and examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information received from Destron and
Applied and have relied on its being accurate and complete in all material
respects. With respect to the financial forecasts for Destron and Applied, we
have assumed that the respective management have reasonably prepared the
forecasts of financial performance reflecting the best available estimates and
judgments at the time of preparation and that the forecasts provide a reasonable
basis to assist us in forming our opinion. Neither Destron nor Applied publicly
discloses internal management forecasts of the type provided to us in connection
with our review of the Merger. Such forecasts were not prepared with a view
toward public disclosure. In addition, such forecasts were based upon numerous
variables and assumptions that are inherently uncertain including, without
limitation, factors related to general
B-1
<PAGE> 222
economic and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such forecasts. We have assumed no
liability for such forecasts. We have also assumed that there have been no
material changes in Destron's or Applied's assets, financial condition, results
of operations, business or prospects since the respective dates of their last
financial statements made available to us. We have relied on advice of counsel
and independent accountants of Destron as to all legal and financial reporting
matters with respect to Destron, the Merger and the Merger Agreement. We have
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934 and all
other applicable federal and state statutes, rules and regulations. In addition,
we have not assumed responsibility for making an independent evaluation,
appraisal or physical inspection of any of the assets or liabilities (contingent
or otherwise) of Destron or Applied, nor have we been furnished with any such
appraisals. Finally, our opinion is based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. Accordingly, although subsequent developments may affect
this opinion, we have not assumed any obligation to update, revise or reaffirm
this opinion.
We have further assumed that the Merger will be consummated in accordance
with the terms described in the Merger Agreement, without any further amendments
thereto, and without waiver by Destron or Applied of any of the conditions to
its obligations thereunder.
In the ordinary course of our business, we may actively trade the equity
securities of Destron or Applied for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Merger is fair, from a financial point of view, to
the stockholders of Destron as of the date hereof.
This opinion is directed to the Board of Directors of Destron in its
consideration of the Merger and is not a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Merger and does not address
the relative merits of the Merger and any alternatives to the Merger, Destron's
underlying decision to proceed with or effect the Merger or any other aspect of
the Merger. This opinion may not be used o referred to by Destron, or quoted or
disclosed to any person in any manner, without our prior written consent, which
consent is hereby given to the inclusion of this opinion in any
solicitation/recommendation statement, proxy statement or prospectus filed with
the Securities and Exchange Commission in connection with the Merger. In
furnishing this opinion, we do not admit that we are experts within the meaning
of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
<TABLE>
<S> <C>
/s/ Roth Capital Partners, Inc. /s/ AgriCapital Securities, Inc.
------------------------------------------------ ------------------------------------------------
Roth Capital Partners, Inc. AgriCapital Securities, Inc.
24 Corporate Plaza 135 W. 50th Street
Newport Beach, California 92660 New York, New York 10020
</TABLE>
B-2
<PAGE> 223
ANNEX B-2
OPINION LETTER SUPPLEMENT OF ROTH CAPITAL PARTNERS, INC
AND AGRICAPITAL SECURITIES, INC
May 24, 2000
Board of Directors
Destron Fearing Corporation
490 Villaume Avenue
South Saint Paul, MN 55075
Gentlemen:
On April 24, 2000, we rendered our opinion with respect to the fairness,
from a financial point of view, to the shareholders of Destron of the proposed
merger (the "Merger") of Destron with Digital Angel.net Inc., ("Digital Angel"),
a wholly-owned subsidiary of Applied Digital Solutions, Inc., ("Applied
Digital"). That opinion is incorporated by reference.
On May 24, 2000, the Board of Directors of Destron considered a proposal
revision (the "Proposal") to the terms of the Agreement and Plan of Merger,
dated April 24, 2000 (the "Merger Agreement"). Under the terms of the Proposal,
Destron stockholders would receive 1.5 shares of Applied Digital stock for every
share of Destron with no adjustments in the exchange ratio to be made for
changes in Applied Digital's stock price. Neither party would have the right to
terminate the Merger Agreement based on market conditions or Applied Digital's
stock price. All outstanding Destron options and warrants will be assumed by
Applied Digital based on the exchange ratio set forth in the Proposal. The terms
and conditions are set forth in more detail in the Proposal.
We have considered the terms of the Merger Agreement and, as it would be
amended pursuant to the Proposal, and we have updated our analysis to reflect
current stock prices of publicly traded companies. Based upon our analyses, it
is our opinion as investment bankers that the Merger Agreement, as proposed to
be amended pursuant to the terms of the Proposal, is fair, from a financial
point of view, to the stockholders of Destron as of the date hereof.
This opinion is directed to the Board of Directors of Destron in its
consideration of the Merger and is not a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Merger and does not address
the relative merits of the Merger and any alternatives to the Merger, Destron's
underlying decision to proceed with or effect the Merger or any other aspect of
the Merger. This opinion may not be used or referred to by Destron, or quoted or
disclosed to any person in any manner, without our prior written consent, which
consent is hereby given to the inclusion of this opinion in any
solicitation/recommendation statement, proxy statement or prospectus filed with
the Securities and Exchange Commission in connection with the Merger. In
furnishing this opinion, we do not admit that we are experts within the meaning
of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
<TABLE>
<S> <C>
/s/ Roth Capital Partners, Inc. /s/ AgriCapital Securities, Inc.
------------------------------------------------ ------------------------------------------------
Roth Capital Partners, Inc. AgriCapital Securities, Inc.
24 Corporate Plaza 135 W. 50th Street
Newport Beach, California 92660 New York, New York 10020
</TABLE>
B-3
<PAGE> 224
ANNEX C
AMENDED AND RESTATED VOTING AGREEMENT AND IRREVOCABLE PROXY
THIS VOTING AGREEMENT AND IRREVOCABLE PROXY (the "Agreement") is entered
into as of May 25, 2000, between the undersigned security holders (the
"Stockholders"), of Destron Fearing Corporation, a Delaware corporation (the
"Company"), and Applied Digital Solutions, Inc., a Missouri corporation ("ADS").
WHEREAS, Digital Angel.net Inc., a Delaware corporation, and a wholly-owned
subsidiary of ADS ("Merger Sub"), ADS and the Company had entered into an
Agreement and Plan of Merger dated as of April 24, 2000 (the "Merger
Agreement"), providing for the merger of Merger Sub with and into the Company
(the "Merger") pursuant to the terms and conditions of the Merger Agreement, and
setting forth certain representations, warranties, covenants and agreements of
the parties thereto in connection with the Merger;
WHEREAS, concurrently with execution and delivery of the Merger Agreement,
the Stockholders entered into a Voting Agreement and Irrevocable Proxy with ADS,
dated April 24, 2000, pursuant to which each Stockholder agreed to vote any
Company Common Stock (as defined in the Merger Agreement) owned by him in favor
of the Merger;
WHEREAS, Merger Sub, ADS and the Company have entered into an Amendment to
the Agreement and Plan of Merger, dated as of May 25, 2000 (the "Amendment",
collectively with the Merger Agreement, the "Amended Merger Agreement"),
amending the terms of the Merger Agreement; and
WHEREAS, as an inducement and a condition to ADS entering into the
Amendment pursuant to which each Stockholder, subject to the requirements and
adjustments set forth in the Amended Merger Agreement, will receive 1.5 shares
of ADS Common Stock (as defined in the Amended Merger Agreement) in exchange for
each share of Company Common Stock (as defined in the Amended Merger Agreement)
owned by such Stockholder, the Stockholders each have agreed to enter into this
Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. REPRESENTATIONS OF STOCKHOLDERS. Each of the Stockholders severally
represents as to itself that such Stockholder:
(a) is the holder in the capacity set forth on Exhibit A hereto of
that number of shares, and/or options to purchase shares, of Company Common
Stock set forth opposite such Stockholder's name on Exhibit A (such
Stockholder's shares of Company Common Stock, the "Shares", and the Shares
and the options to purchase Common Stock of the Company and the Shares are
collectively referred to herein as the "Securities");
(b) does not beneficially own (as such term is defined in the
Securities Exchange Act of 1934, as amended (the "1934 Act")) any shares,
or options to purchase shares, of Company Common Stock or other Company
capital stock other than its Securities;
(c) has the right, power and authority to execute and deliver this
Agreement and to perform its obligations under this Agreement, and this
Agreement has been duly executed and delivered by such Stockholder and
constitutes a valid and legally binding agreement of such Stockholder,
enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles; and such execution, delivery and
performance by Stockholder of this Agreement will not (i) conflict with,
require a consent, waiver or approval under, or result in a breach of or
default under, any of the terms of any contract, commitment or other
agreement to which such Stockholder is bound; (ii) violate any order, writ,
injunction decree or statute, or any rule or regulation, applicable to
Stockholder or any of the properties or assets of Stockholder or (iii)
result in the creation of,
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or impose any obligation on such Stockholder to create, any lien, charge or
other encumbrance of any nature whatsoever upon the Shares; and
(d) the Securities are now and will at all times during the term of
this Agreement be held by such Stockholder, or by a nominee or custodian
for the account of such Stockholder, free and clear of all pledges, liens,
proxies, claims, shares, security interests, preemptive rights and any
other encumbrances whatsoever with respect to the ownership, transfer or
voting of such Securities; and there are no outstanding options, warrants
or rights to purchase or acquire, or other agreements relating to, such
Securities other than this Agreement.
The representations and warranties contained herein shall be made as the date
hereof and as of each date from the date hereof through and including the date
that the Merger is consummated.
2. AGREEMENT TO VOTE SHARES. Each of the Stockholders severally agrees to
vote its Shares and any New Shares (as defined in Section 7 hereof), and shall
cause any holder of record of its Shares or New Shares to vote, (a) in favor of
adoption and approval of the Amended Merger Agreement and the Merger (and each
other action and transaction contemplated by the Amended Merger Agreement and
this Agreement) at every meeting of the stockholders of the Company at which
such matters are considered (each, a "Company Stockholder Meeting") and at every
adjournment thereof, and (b) against any actions or approval that would compete
with or could serve to materially interfere with, delay, discourage, adversely
affect or inhibit the timely consummation of the Merger including, without
limitation, any Alternative Proposal (as defined in the Amended Merger
Agreement). Any such vote shall be cast or consent shall be given in accordance
with such procedures relating thereto as shall ensure that it is duly counted
for purposes of determining that a quorum is present and for purposes of
recording the results of such vote or consent. Each Stockholder also agrees to
use its reasonable efforts to take, or cause to be taken, all action, and do, or
cause to be done, all things necessary or advisable in order to consummate and
make effective the transactions contemplated by this Agreement.
3. IRREVOCABLE PROXY. Each of the Stockholders hereby constitutes and
appoints ADS or any nominee of ADS, with full power of substitution, as its true
and lawful attorney and proxy and hereby authorizes each, for and in its name,
place and stead, to present and to vote all of the Shares and New Shares (a) in
favor of the adoption and approval of the Amended Merger Agreement and the
Merger (and each other action and transaction contemplated by the Amended Merger
Agreement and this Agreement) and (b) against any action or approval that would
compete with or could serve to materially interfere with, delay, discharge,
adversely affect or inhibit the timely consummation of the Amended Merger
Agreement, including, without limitation, any Alternative Proposal (as defined
in the Merger Agreement), at every Company Stockholder Meeting and at every
adjournment or postponement thereof, to the same extent and with the same effect
as the Stockholder might or could do under applicable law, rules and
regulations. The proxy granted pursuant to the immediately preceding sentence is
given in consideration of and as an inducement to ADS to enter into the Amended
Merger Agreement and as such is coupled with an interest and shall be
irrevocable unless and until this Agreement terminates pursuant to Section 11(d)
hereof. Each of the Stockholders hereby revokes any and all previous proxies
granted with respect to any of the Shares and shall not hereafter, unless and
until this Agreement terminates pursuant to Section 11(d) hereof, purport to
grant any other proxy or power of attorney with respect to any of the Shares or
the New Shares or enter into any agreement (other than this Agreement),
arrangement or understanding with any person, directly or indirectly, to vote,
grant any proxy or give instructions with respect to the voting of any of the
Shares or the New Shares covering the subject matter hereof.
4. NO VOTING TRUSTS. After the date hereof, the Stockholders severally
agree that they will not, nor will they permit any entity under their control
to, deposit any of their Shares in voting trust or subject any of their Shares
to any arrangement with respect to the voting of such Shares other than
agreements entered into with ADS or Merger Sub.
5. NO PROXY SOLICITATIONS. Each of the Stockholders severally agrees that
such Stockholder will not, nor will such Stockholder permit any entity under
their control to, (a) solicit proxies or become a "participant" in a
"solicitation" (as such terms are defined in Regulation 14A under the 1934 Act)
in opposition to or competition with the consummation of the Merger or otherwise
encourage or assist any party
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in taking or planning any action which would compete with or otherwise could
serve to materially interfere with, delay, discourage, adversely affect or
inhibit the timely consummation of the Merger in accordance with the terms of
the Amended Merger Agreement, (b) directly or indirectly encourage, initiate or
cooperate in a stockholders' vote or action by consent of the Company's
stockholders in opposition to or in competition with the consummation of the
Merger, or (c) become a member of a "group" (as such term is used in Section
13(d) of the 1934 Act) with respect to any voting securities of the Company for
the purpose of opposing or competing with the consummation of the Merger;
provided, that the foregoing shall not restrict any director of the Company from
taking any action such director believes is necessary to satisfy such director's
fiduciary duty to stockholders of the Company.
6. TRANSFER AND ENCUMBRANCE. On or after the date hereof, each of the
Stockholders severally agrees not to voluntarily transfer, sell, offer, pledge
or otherwise dispose of or encumber ("Transfer") any of its Securities or New
Shares prior to the earlier of (a) the effective date of the Merger or (b) the
date this Agreement shall be terminated in accordance with its terms.
7. ADDITIONAL PURCHASES. Each of the Stockholders severally agrees that
if (i) there occurs any stock dividend, stock split, recapitalization,
reclassification, combination or exchange of shares of capital stock of the
Company on, of or affecting the Securities of a Stockholder, (ii) such
Stockholder purchases or otherwise acquires beneficial ownership of any shares
of Company Common Stock or Company capital stock after the execution of this
Agreement, including, but not limited to, through the exercise of such
Stockholders' options, or (iii) such Stockholder voluntarily acquires the right
to vote any shares of Company Common Stock or Company capital stock other than
the Shares (collectively, "New Shares"), all such New Shares acquired or
purchased by it shall be subject to the terms of this Agreement to the same
extent as if they constituted Shares.
8. SPECIFIC PERFORMANCE. Each party hereto severally acknowledges that it
will be impossible to measure in money the damage to the other party if the
party hereto fails to comply with any of the obligations imposed by this
Agreement, that every such obligation is material and that, in the event of any
such failure, the other party will not have an adequate remedy at law or
damages. Accordingly, each party hereto severally agrees that injunctive relief
or other equitable remedy, in addition to remedies at law or damages, is the
appropriate remedy for any such failure and will not oppose the granting of such
relief on the basis that the other party has an adequate remedy at law. Each
party hereto severally agrees that it will not seek, and agrees to waive any
requirement for, the securing or posting of a bond in connection with any other
party's seeking or obtaining such equitable relief.
9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and assigns
and shall not be assignable without the written consent of all other parties
hereto.
10. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and contains the entire agreement among the parties with respect to the
subject matter hereof. This Agreement may not be amended, supplemented or
modified, and no provisions hereof may be modified or waived, except by an
instrument in writing signed by all the parties hereto. No waiver of any
provisions hereof by any party shall be deemed a waiver of any other provisions
hereof by any such party, nor shall any such waiver be deemed a continuing
waiver of any provision hereof by such party.
11. MISCELLANEOUS.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
Delaware.
(b) If any provision of this Agreement or the application of such
provision to any person or circumstances shall be held invalid by a court
of competent jurisdiction, the remainder of the provision held invalid and
the application of such provision to persons or circumstances, other than
the party as to which it is held invalid, shall not be affected.
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(c) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) This Agreement shall terminate upon the earliest to occur of (i)
the Effective Time of the Merger (as defined in the Amended Merger
Agreement), and (ii) termination of the Amended Merger Agreement.
(e) All Section headings herein are for convenience of reference only
and are not part of this Agreement, and no construction or reference shall
be derived therefrom.
(f) The obligations of the Stockholders set forth in this Agreement
shall not be effective or binding upon any Stockholder until after such
time as the Amended Merger Agreement is executed and delivered by the
Company, ADS and Merger Sub, and the parties agree that, except as provided
herein, there is not and has not been any other agreement, arrangement or
understanding between the parties hereto with respect to the matters set
forth herein.
[SIGNATURES ON THE FOLLOWING PAGE]
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<PAGE> 228
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ RICHARD J. SULLIVAN
--------------------------------------------------------
Richard J. Sullivan
Chairman of the Board and Chief
Executive Officer
THE STOCKHOLDERS
<TABLE>
<S> <C>
/s/ RANDOLPH GEISSLER /s/ DOUGLAS M. PIHL
--------------------------------------------- ---------------------------------------------
Randolph Geissler Douglas M. Pihl
/s/ THOMAS PATIN /s/ RICHARD JAHNKE
--------------------------------------------- ---------------------------------------------
Thomas Patin Richard Jahnke
/s/ JAMES P. SANTELLI /s/ ROBERT C. CALGREN
--------------------------------------------- ---------------------------------------------
James P. Santelli Robert C. Calgren
/s/ WILLIAM BATTISTA /s/ EZEKIEL MEJIA
--------------------------------------------- ---------------------------------------------
William Battista Ezekiel Mejia
/s/ KENNETH LARSON
---------------------------------------------
Kenneth Larson
/s/ STANLEY GOLDBERG
---------------------------------------------
Stanley Goldberg
/s/ JOHN BEATTIE
---------------------------------------------
John Beattie
/s/ DAVID HENDERSON
---------------------------------------------
David Henderson
/s/ GARY S. KOHLER
---------------------------------------------
Gary S. Kohler
</TABLE>
[SIGNATURE PAGE TO AMENDED AND RESTATED VOTING AGREEMENT AND IRREVOCABLE PROXY]
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<PAGE> 229
EXHIBIT "A" TO AMENDED AND RESTATED VOTING AGREEMENT AND
IRREVOCABLE PROXY
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF OPTIONS TO
STOCKHOLDER COMPANY COMMON STOCK PURCHASE COMMON STOCK
----------- -------------------- ---------------------
<S> <C> <C>
Geissler........................................... 486,000 245,000
Santelli........................................... 0 140,000
Patin.............................................. 157,500 45,000
Battista........................................... 0 112,500
Mejia.............................................. 1,000 127,500
Calgren............................................ 0 68,000
Larson............................................. 82,500 0
Goldberg........................................... 0 40,000
Beattie............................................ 54,700 37,500
Henderson.......................................... 24,000 30,000
Kohler............................................. 47,500 20,000
Pihl............................................... 0 40,000
Jahnke............................................. 0 40,000
</TABLE>
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ANNEX D
FORM OF PROPOSED AMENDMENT TO SECOND
RESTATED ARTICLES OF INCORPORATION OF
APPLIED DIGITAL SOLUTIONS, INC.
The Articles of Incorporation of this corporation are to be amended as
follows:
The first sentence of Article Three is amended in its entirety to read
as follows:
The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is Two Hundred, Fifty Million
(250,000,000) shares, of which Five Million (5,000,000) shares shall be
preferred stock ("Preferred Stock") having a par value of $10.00 per
share and Two Hundred, Forty-Five Million (245,000,000) shares shall be
common stock ("Common Stock") having a par value of $.001 per share.
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<PAGE> 231
ANNEX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certification of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a
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provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not mo re than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
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effective date of the merger or consolidation, any stockholder shall have the
right to withdraw such stockholder's demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining the fair rate of
interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforce, whether such surviving or
resulting corporation be a corporation of this State or of any state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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