PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 22, 1999
[Graphic Omitted]
This prospectus supplement includes copies of the following reports which
Applied Digital Solutions, Inc. has filed under the Securities Exchange Act of
1934, as amended:
o our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
(excluding the exhibits), which we filed with the SEC on August 16,
1999, and
o our Amendment No. 1 to Current Report on Form 8-K which we filed with
the SEC on August 12, 1999, in which we provided certain financial
information relating to Bostek, Inc. and Micro Components
International, Incorporated, which our subsidiary Intellesale.com,
Inc. acquired in June 1999.
This supplements, forms a part of, and shall be delivered together with our
Prospectus dated June 22, 1999, relating to 3,849,590 shares of our common stock
which are to be issued from time to time upon exchange or redemption of
exchangeable shares of TigerTel Services Limited (formerly Commstar Ltd.) which
is one of our subsidiaries. The prospectus also relates to the resale from time
to time of our common stock after shares of common stock have been issued in
exchange for the exchangeable shares of TigerTel.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus supplement is August 20, 1999.
<PAGE>
As Filed with the Securities and Exchange Commission on August 16, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______ to _______
Commission File Number: 000-26020
APPLIED DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction
of incorporation or organization)
43-1641533
(IRS Employer
Identification number)
400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
(561) 366-4800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
APPLIED CELLULAR TECHNOLOGY, INC.
(Former Name)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
The number of shares outstanding of each of the issuer's classes of common
stock as of the close of business on August 12, 1999:
Class Number of Shares
Common Stock; $.001 Par Value 46,449,084
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations -
Three and Six Months ended June 30, 1999 and 1998
(unaudited) 4
Consolidated Statements of Stockholders' Equity -
Six Months ended June 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows -
Six Months ended June 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II - OTHER INFORMATION
1. Legal Proceedings 35
2. Changes In Securities 36
3. Defaults Upon Senior Securities 36
4. Submission of Matters to a Vote of Security Holders 37
5. Other Information 37
6. Exhibits and Reports on Form 8-K 38
SIGNATURE 39
EXHIBITS 40
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Assets
<TABLE>
<CAPTION>
June 30, 1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,575 $ 4,555
Accounts receivable (net of allowance for doubtful accounts
of $1,504 in 1999 and $990 in 1998) 54,202 34,390
Inventories 31,444 20,657
Notes receivable 3,324 3,600
Prepaid expenses and other current assets 3,253 2,042
-------- ---------
Total Current Assets 97,798 65,244
Property And Equipment, Net 18,709 15,627
Notes Receivable 920 1,445
Goodwill, Net 78,255 33,430
Other Assets 11,939 8,370
--------- ---------
$ 207,621 $ 124,116
========= =========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities
Notes payable $ 17,814 $ 23,217
Current maturities of long-term debt 9,195 1,158
Due to shareholders of acquired subsidiary 15,000 --
Accounts payable and accrued expenses 37,304 26,382
--------- ---------
Total Current Liabilities 79,313 50,757
Long-Term Debt 34,404 2,838
--------- ---------
Total Liabilities 113,717 53,595
--------- ---------
Minority Interest 9,275 2,961
--------- ---------
Stockholders' Equity
Preferred shares:
Authorized 5,000 shares of $10 par value; special voting,
issued and outstanding 1 share, Class B voting, issued
and outstanding 1 share -- --
Common shares:
Authorized 80,000 shares of $.001 par value; issued 46,078
shares and outstanding 45,972 shares in 1999 and issued
35,683 shares and outstanding 35,577 shares in 1998 46 36
Common and preferred additional paid-in capital 79,119 60,517
Retained earnings 5,928 7,232
Treasury stock (carried at cost, 106 shares) (337) (337)
Accumulated other comprehensive income (127) 112
--------- ---------
Total Stockholders' Equity 84,629 67,560
--------- ---------
$ 207,621 $ 124,116
========= =========
</TABLE>
See the accompanying notes to consolidated financial statements.
3
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
---------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $72,955 $53,680 $124,528 $92,464
Cost Of Goods Sold 46,672 36,072 79,782 64,299
------- ------- -------- -------
Gross Profit 26,283 17,608 44,746 28,165
------- ------- -------- -------
Operating Costs And Expenses
Selling, general and administrative
expenses 21,724 12,333 37,816 20,840
Depreciation and amortization 2,275 1,092 3,761 1,787
Restructuring and unusual costs -- -- 2,550 --
------- ------- -------- -------
Total Operating Costs And Expenses 23,999 13,425 44,127 22,627
------- ------- -------- -------
Operating Income 2,284 4,183 619 5,538
Interest Income 144 113 278 219
Interest Expense (690) (432) (1,135) (666)
------- ------- -------- -------
Income (Loss) Before Provision For Income Taxes,
Minority Interest And Extraordinary Loss 1,738 3,864 (238) 5,091
Provision For Income Taxes 1,017 1,224 442 1,742
------- ------- -------- -------
Income (Loss) Before Minority Interest And
Extraordinary Loss 721 2,640 (680) 3,349
Minority Interest 220 275 464 369
------- ------- -------- ------
Income (Loss) Before Extraordinary Loss 501 2,365 (1,144) 2,980
Extraordinary Loss (net of taxes of $89) 160 -- 160 --
------- ------- -------- -------
Net Income 341 2,365 (1,304) 2,980
Preferred Stock Dividends -- 14 -- 32
------- ------- -------- -------
Net Income (Loss) Available to Common
Stockholders $ 341 $ 2,351 $ (1,304) $ 2,948
======= ======= ======== =======
Income (Loss) Before Extraordinary Loss $ .01 $ .07 $ (.03) $ .11
Extraordinary Loss -- -- -- --
------- ------- -------- -------
Net Income (Loss) Per Common Share - Basic $ .01 $ .07 $ (.03) $ .11
======= ======= ======== =======
Income (Loss) Before Extraordinary Loss $ .01 $ .07 $ (.03) $ .10
Extraordinary Loss -- -- -- --
------- ------- -------- -------
Net Income (Loss) Per Common Share - Diluted $ .01 $ .07 $ (.03) $ .10
------- ------- -------- -------
Weighted Average Number Of
Common Shares Outstanding - Basic 46,325 31,761 45,347 27,759
Weighted Average Number of Common
Shares Outstanding - Diluted 46,829 32,928 45,989 29,053
------- ------- -------- -------
</TABLE>
See the accompanying notes to consolidated financial statements.
4
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six Month Periods Ended June 30, 1999 And 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Shares Common Shares Other Total
---------------- -------------- Additional Retained Tresaury Comprehensive Stockholders'
Number Amount Number Amount Paid-In Earnings Stock Income Equity
------- ------ ------ ------ ---------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 -- $ -- 20,672 $ 21 $33,680 $ 2,586 $ -- $ (2) $ 36,285
------- ------ ------ ------ ------- ------- ------ ------ ---------
Net income -- -- -- -- -- 2,980 -- -- 2,980
Comprehensive income -
foreign currency translation -- -- -- -- -- -- -- 75 75
unrealized gain on securities -- -- -- -- -- -- -- 14 14
------- ------ ------ ------ ------- ------- ------ ------ ---------
Total Comprehensive Income -- -- -- -- -- 2,980 -- 89 3,069
Issuance of common shares -- -- 9,629 9 15,666 -- -- -- 15,675
Issuance of preferred shares -- -- -- -- 7,825 -- -- -- 7,825
Warrants redeemed -- -- 850 1 1,949 -- -- -- 1,950
Preferred shares dividends paid -- -- -- -- -- (32) -- -- (32)
------- ------ ------ ------ ------- ------- ------ ------ ---------
Balance - June 30, 1998 -- $ -- 31,151 $ 31 $59,120 $ 5,534 $ -- $ 87 $ 64,772
======= ====== ====== ====== ======= ======= ====== ====== =========
Balance - January 1, 1999 -- $ -- 35,577 $ 36 $60,517 $ 7,232 $(337) $ 112 $ 67,560
------- ------ ------ ------ ------- ------- ------ ------ ---------
Net loss -- -- -- -- -- (1,304) -- -- (1,304)
Comprehensive income - --
foreign currency translation -- -- -- -- -- -- -- (241) (241)
unrealized gain on securities -- -- -- -- -- -- -- 2 2
------- ------ ------ ------ ------- ------- ------ ------ ---------
Total Comprehensive Income -- -- -- -- -- (1,304) -- (239) (1,543)
Issuance of common shares -- -- 5 -- 16 -- -- -- 16
Issuance of common shares
for acquisition -- -- 10,390 10 18,586 -- -- -- 18,596
------- ------ ------ ------ ------- ------- ------ ------ ---------
Balance - June 30, 1999 -- $ -- 45,972 $ 46 $79,119 $ 5,928 $(337) $(127) $ 84,629
======= ====== ====== ====== ======= ======= ====== ====== =========
</TABLE>
See the accompanying notes to consolidated financial statements.
5
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $(1,304) $2,980
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 3,761 1,787
Minority interest 464 369
Loss on sale of equipment 59 73
Non-cash on restructuring cost 251 --
Change in assets and liabilities:
(Increase) in accounts receivable (4,781) (3,012)
(Increase) in inventories (5,809) (1,842)
(Increase) in prepaid expenses (277) (1,142)
(Increase) in deferred tax asset -- (38)
Increase (decrease) in accounts payable and accrued
expenses 4,776 (45)
------- -------
Net Cash Used In Operating Activities (2,860) (870)
------- -------
Cash Flows From Investing Activities
Increase in notes receivable - officers (34) (276)
(Increase) in other assets (1,081) (1,359)
Proceeds from sale of property and equipment 90 111
Payments for property and equipment (2,586) (1,933)
Proceeds from (payments for) asset and business
acquisitions (net of cash balances acquired) (15,838) 639
------- -------
Net Cash Used In Investing Activities (19,449) (2,818)
------- -------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable (11,119) 481
Proceeds from long-term debt 44,765 891
Payments on long-term debt (7,252) (2,115)
Redemption of preferred shares -- (200)
Preferred stock dividends paid -- (72)
Issuance of common shares -- 2,350
Other financing costs (3,065) --
------- -------
Net Cash Provided By Financing Activities 23,329 1,335
------- -------
Net Increase (Decrease) In Cash And Cash Equivalents 1,020 (2,353)
Cash And Cash Equivalents - Beginning Of Period 4,555 7,657
------- -------
Cash And Cash Equivalents - End Of Period $ 5,575 $5,304
======= ======
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 483 $1,479
Interest paid 1,275 587
Noncash investing and financing activities:
Assets acquired for long-term debt 633 508
Due to shareholders of acquired subsidiary 15,000 --
------- -------
See the accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
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. (formerly Applied Cellular Technology, Inc.) (the
"Company") as of June 30, 1999 and December 31, 1998 and for the three and six
months ended June 30, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X 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 Copmpany'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 and six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year. These statements should be read in conjunction
with the consolidated financial statements and related notes thereto included in
our Annual Report on Form 10-K for the year ended December 31, 1998.
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 June 30, 1999 and December 31, 1998 consists of:
June 30, December 31,
1999 1998
---------------- -----------------
Raw materials $ 4,033 $ 4,437
Work in process 2,742 2,349
Finished goods 25,633 15,246
---------------- -----------------
32,408 22,032
Allowance for warranty, excess (964) (1,375)
and obsolescence ================ =================
$31,444 $ 20,657
================ =================
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.
7
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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. The
Term and Revolving Credit Agreement provides for:
(a) a revolving credit line of up to $33.5 million, designated
as follows: (i) a USA revolving credit line of up to $22
million, (ii) a Canadian revolving credit line of up to $8.5
million, and (iii) a United Kingdom revolving credit line of
up to $3 million.
(b) a term loan A of up $22 million.
(c) a term loan B of up to $35 million, and
(d) a term loan C designated in Canadian dollars of up to
CND$6.645 million (See Note 11).
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes. The USA
revolving credit line bears interest at the 30-day LIBOR rate plus 1.75%; 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%; the UK revolving
credit line bears interest at the base rate as announced by the National
Westminster Bank PLC of England each month plus 1.4207%. As of June 30, 1999,
the LIBOR rate was approximately 4.9% and approximately $9.8 million was
outstanding on the revolving credit line.
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%, will be amortized
in quarterly installments over six years and is repayable in full on the third
anniversary of the closing date of the loan. As of June 30, 1999, approximately
$22.0 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%, will be amortized in quarterly installments over
six years and is repayable in full on the third anniversary of the closing date
of the loan. As of June 30, 1999, approximately $15.8 million was outstanding on
this loan.
Term loan C, which will be used by our Canadian subsidiaries to repay
their outstanding loans to their existing lenders, bears interest at the base
rate as announced by the Toronto-Dominion Bank of Canada each month plus
0.1707%, will be amortized in quarterly installments over six years and is
repayable in full on the third anniversary of the closing date of the loan. As
of June 30, 1999, no advances had been made under the Term loan C facility. (See
Note 11).
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 June 30, 1999, the Company was in compliance
with all debt covenants.
8
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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 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 Telecommunications and Application Technology 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.
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through June 30, 1999:
<TABLE>
<CAPTION>
Balance, Balance,
January 1, June 30,
Type of Cost 1999 Additions Deductions 1999
--------------------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Asset Impairment $ -- $ 1,522 $ (1,522) $ --
Lease terminations -- 541 (30) 511
Employee separations -- 173 (30) 143
========= ======== ========= ========
Total $ -- $ 2,236 $ (1,582) $ 654
========= ======== ========= ========
</TABLE>
Management believes that the remaining reserves for business
restructuring are adequate to complete its plan and anticipates completing the
plan and paying all related cash amounts by the end of 1999.
Unusual Items
During the first quarter of 1999, as part of the Company's core
business reorganization, the Company realigned certain operations within its
Telecommunications division and has recognized impairment charges and other
related costs of $314. The total charge reduced net income by $223.
6. 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 classified as an extraordinary loss was
$160, net of income taxes.
9
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
7. Earnings Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $341 $2,365 $(1,304) $2,980
Preferred stock dividends -- (14) -- (32)
------------------------------------------------------
Numerator for basic earnings per share -
Net income available to common stockholders 341 2,351 (1,304) 2,948
Effect of dilutive securities:
Preferred stock dividends -- 14 -- 32
------------------------------------------------------
Numerator for diluted earnings per share -
Net income available to common stockholders $341 $2,365 $(1,304) $2,980
======================================================
Denominator:
Denominator for basic earnings per share -
Weighted-average shares (1) 46,325 31,761 45,347 27,759
------------------------------------------------------
Effect of dilutive securities -
Redeemable preferred stock -- 122 -- 122
Warrants 155 752 229 860
Employee stock options 349 201 413 266
Contingent stock - acquisitions -- 92 -- 46
------------------------------------------------------
Dilutive potential common shares 504 1,167 642 1,294
------------------------------------------------------
Denominator for diluted earnings per share - Adjusted
Weighted-average shares and assumed conversions
46,829 32,928 45,989 29,053
======================================================
Basic earnings per share $0.01 $0.07 $ (0.03) $0.11
======================================================
Diluted earnings per share $0.01 $0.07 $ (0.03) $0.10
======================================================
<FN>
- -----------------------
1. Includes, for the three and six month periods ended June 30, 1999,
1,393 and 1,353 shares of common stock reserved for issuance to the
holders of TigerTel Services Ltd.,'s Exchangeable Shares and ACT-GFX
Canada, Inc.'s Exchangeable Shares, respectively.
</FN>
</TABLE>
10
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
8. Segment Information
In 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, Disclosures about Segments of an Enterprise and Related
Information. Prior year information has been restated to present our reportable
segments.
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, 1998, except
that intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices. It is on this
basis that management utilizes the financial information to assist in making
internal operating decisions. Segment performance is evaluated based on
stand-alone segment operating income.
Following is the selected segment data as of and for the three months
ended June 30, 1999:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $13,523 $8,501 2,121 $12,096 $7,943 $23,499 $ 5,253 $19 $ -- $72,955
Intersegment revenue -- -- -- -- -- 655 -- -- (655) --
--------- -------- ------ ---------- ------- -------- -------- --------- ---------- ----------
Total revenue 13,523 8,501 2,121 12,096 7,943 24,154 5,253 19 (655) 72,955
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
Operating income
(loss) 285 796 274 631 443 1,566 198 (1,221) (688) 2,284
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
Total assets 27,382 8,250 2,128 17,912 26,367 49,664 14,196 61,722 -- 207,621
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
</TABLE>
Following is the selected segment data as of and for the six months
ended June 30, 1999:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $23,532 $12,507 2,121 $22,389 $14,698 $39,072 $10,170 $39 $ -- $ 124,528
Intersegment revenue -- -- -- -- -- 2,188 -- -- (2,188) --
--------- -------- ------ ---------- ------- -------- -------- --------- --------- ----------
Total revenue 23,532 12,507 2,121 22,389 14,698 41,260 10,170 39 (2,188) $ 124,528
========= ======== ====== ========== ======= ======== ======== ========= ========= ==========
Operating income
(loss) 750 1,014 271 691 61 3,936 387 (5,416) (1,075) 619
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
Total assets 27,382 8,250 2,128 17,912 26,367 49,664 14,196 61,722 -- 207,621
========= ======== ====== ========== ======= ======== ======== ========= ========== ==========
</TABLE>
11
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Following is the selected segment data as of and for the three months
ended June 30, 1998:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- --------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $ 8,497 $ 5,131 $ -- $ 11,881 $ 4,585 $ 17,575 $ 6,224 $ (213) $ -- $ 53,680
Intersegment revenue -- -- -- -- -- 299 -- -- (299) --
--------- -------- ------ ---------- -------- --------- -------- --------- ---------- ----------
Total revenue 8,497 5,131 -- 11,881 4,585 17,874 6,224 (213) (299) 53,680
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Operating income
(loss) 1,514 197 -- 1,274 434 1,556 280 (763) (309) 4,183
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Total assets 19,128 4,574 -- 16,624 20,448 12,651 13,684 26,576 -- 113,685
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
</TABLE>
Following is the selected segment data as of and for the six months
ended June 30, 1998:
<TABLE>
<CAPTION>
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
Communi Appli-
Tele- Network cations cation
communi- Infra- Inter- Infra- Techno- Intelle- Corporate
cations structure net structure logy sale.com Non-Core Overhead Elimination Consolidated
--------- -------- ------ ---------- ------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $ 15,521 $10,577 $ -- $ 23,803 $ 6,288 $ 28,196 $ 8,079 $ -- $ -- $ 92,464
Intersegment revenue -- -- -- -- -- 532 -- -- (532) --
--------- -------- ------ ---------- -------- --------- -------- --------- ---------- ----------
Total revenue 15,521 10,577 -- 23,803 6,288 28,728 8,079 -- (532) 92,464
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Operating income
(loss) 1,874 809 -- 1,724 475 2,391 232 (1,426) (541) 5,538
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
Total assets 19,128 4,574 -- 16,624 20,448 12,651 13,684 26,576 -- 113,685
========= ======== ====== ========== ======== ========= ======== ========= ========== ==========
</TABLE>
During the second quarter of 1999, several adjustments were made to the
composition of the Telecommunications, Internet, Communications Infrastructure
and Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. Following is the selected segment data
as of and for the three months ended June 30, 1998 had these adjustments not
occurred.
<TABLE>
<CAPTION>
----------------- -------- -------------- --------
Communications
Telecommunications Internet Infrastructure Non-Core
------------------ -------- -------------- --------
<S> <C> <C> <C> <C>
External revenue $ 7,599 $ 898 $ 10,342 $ 7,763
Intersegment revenue -- -- -- --
------- ------ -------- -------
Total revenue 7,599 898 10,342 7,763
======= ====== ======== =======
Operating income (loss)
1,359 155 1,242 312
======= ====== ======== =======
Total assets 18,460 668 13,997 16,311
======= ====== ======== =======
</TABLE>
12
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Following is the selected segment data as of and for the six months
ended June 30, 1998 had these adjustments not occurred.
<TABLE>
<CAPTION>
----------------- -------- -------------- --------
Communications
Telecommunications Internet Infrastructure Non-Core
------------------ -------- -------------- --------
<S> <C> <C> <C> <C>
External revenue $ 14,623 $ 898 $ 20,346 $11,536
Intersegment revenue -- -- -- --
-------- ------ --------- -------
Total revenue 14,623 898 20,346 11,536
======== ====== ========= =======
Operating income (loss)
1,719 155 1,654 302
======== ====== ========= =======
Total assets 18,460 668 13,997 16,311
======== ====== ========= =======
</TABLE>
9. Mergers and Acquisitions
In April 1999, in transactions accounted for under the purchase method
of accounting, we acquired:
(a) 100% of the outstanding shares of common stock of Port Consulting,
Inc., an integrator of information technology application systems and custom
application development services in consideration for $621 at closing, and the
assumption of debt of approximately $579. Up to an additional $2,000 is payable
in each of 2002 and 2004 if certain earnings targets are achieved.
(b) 100% of the outstanding common shares of Hornbuckle Engineering,
Inc., an integrated voice and data solutions provider based in Monterey,
California, for $3,680 paid with 555 shares of our Common Stock with a fair
value of approximately $2,000 and a cash payment of approximately $1,700. Up to
an additional $2,000 is payable in the future if certain earnings targets are
achieved.
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California in exchange for 773 shares of our Common
Stock with a fair value of $2,526 and up to an additional $3,200 payable in the
future if certain earnings targets are achieved.
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio in exchange for 932 shares of our Common Stock with a fair value of $3,050
and up to an additional $8,000 payable in the future if certain earnings targets
are achieved.
These four acquisitions were accounted for using the purchase method of
accounting. Fair value of net assets acquired and liabilities assumed was
$1,029, resulting in goodwill of $8,898. This goodwill will be amortized over 20
years.
In May 1999, the Company entered into an agreement to merge its wholly
owned Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. The Company received, in a reverse merger
transaction, 19,769 shares of Contour's common stock, representing approximately
75% of the total outstanding shares, with a fair value of $5,627. The
transaction was accounted for under the purchase method of accounting. Fair
value of net assets acquired and liabilities assumed was $875, resulting in
goodwill of $4,752. This goodwill will be amortized over 20 years.
13
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
In June 1999, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek") for $25,200, of which $10,200 was paid in cash at
closing. Upon a successful initial public offering of Intellesale.com, $10,000
will be payable in stock of Intellesale.com and the remaining amount will be
payable in cash over time. In the event an initial public offering does not
occur, the $10,000 will be payable in cash. An additional $5,000 is contingent
upon the achievement of certain earnings targets. 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. The
transaction was accounted for under the purchase method of accounting. Fair
value of net assets acquired and liabilities assumed was $3,747, resulting in
goodwill of $21,458. This goodwill will be amortized over 20 years.
Total assets acquired, including goodwill, during the second quarter of
1999 are summarized as follows:
Purchase price $40,759
Net assets acquired 5,650
-----------
Goodwill $35,109
===========
Unaudited pro forma results of operations for the six months ended June
30, 1999 and 1998 are included below. Such pro forma information assumes that
the above transactions had occurred as of January 1, 1999 and 1998,
respectively.
Six Months Ended June 30,
1999 1998
----------- -------------
Revenues $178,205 $149,223
Income (loss) before extraordinary loss (1,286) 2,909
Net income (loss) (1,446) 2,909
10. Amendments to Purchase Agreements
In the second quarter of 1999, the Company settled put options that
were entered into with the selling shareholders of various companies in which
the Company acquired a less than 100% interest. The Company agreed to pay $3.9
million in a combination of cash and stock of one of the Company's subsidiaries,
Intellesale.com, in exchange for the remaining ownership interest.
Several of the purchase agreements for the subsidiaries contained a
provision whereby the seller could obtain additional "earnout paymnents" upon
achievement of certain earnings targets. The Company entered into agreements
during the second quarter of 1999 to fix the amount of these payments at $6.4
million in a combination of cash and stock of Intellesale.com.
The above settlements are contingent upon the successful completion of
a planned public offering of Intellesale.com within one year of the date of the
settlement.
14
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
11. Subsequent Events
On July 30, 1999, we amended and restated the IBM Agreement to reflect
the refinancing of our Canadian subsidiaries' term debt and revolving credit
lines with an affiliate of IBM Credit Corporation. The amended and restated IBM
Agreement provides for, amongst other things, (i) an increase in the Canadian
revolving line of credit from C$8.5 million to C$9.0 million, and (ii) an
increase in Term Loan C from C$6.645 million to C$10.0 million. On July 30, 1999
and August 4, 1999, C$6.0 million and C$4.0 million were borrowed against Term
Loan C, respectively.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes in Item 1 of this report as
well as our Annual Report on Form 10-K for the year ended December 31, 1998.
Certain statements made in this report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see the Risk Factors sections later in this Item.
OUTLOOK
Our objective is to continue to grow each of our operating segments
internally and through acquisitions, both domestically and abroad. Our strategy
has been, and continues to be, to invest in and acquire businesses that
complement and add to our existing business base. We have expanded significantly
through acquisitions in the past and continue to do so. Our financial results
and cash flows are substantially dependent on not only our ability to sustain
and grow existing businesses, but to continue to grow through acquisition. We
expect to continue to pursue our acquisition strategy in 1999 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.
RECENT DEVELOPMENTS
During the second quarter of 1999, the Company undertook several
acquisitions. In April 1999, we acquired:
(a) 100% of the outstanding shares of common stock of Port Consulting,
Inc., an integrator of information technology application systems and custom
application development services,
(b) 100% of the outstanding common shares of Hornbuckle Engineering,
Inc., an integrated voice and data solutions provider based in Monterey,
California,
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California,
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio.
In May 1999, the Company entered into an agreement to merge its wholly
owned Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. The Company 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, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek"). 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.
16
<PAGE>
All acquisitions were accounted for using the purchase method of
accounting. Total assets acquired, including goodwill, during the second quarter
of 1999 are summarized as follows:
Purchase price $40,759
Net assets acquired 5,650
==========
Goodwill $35,109
==========
The Company is planning to file a registration statement with the
Securities and Exchange Commission (SEC) in preparation for the offering of
shares of one of its subsidiaries, Intellesale.com, to the public. In connection
with the proposed registration, in the second quarter of 1999, the Company
settled put options that were entered into with the selling shareholders of
various companies in which the Company acquired a less than 100% interest. The
Company agreed to pay $3.9 million in a combination of cash and stock of
Intellesale.com, in exchange for the remaining ownership interest. Several of
the purchase agreements for the subsidiaries contained a provision whereby the
seller could obtain additional "earnout payments" upon achievement of certain
earnings targets. The Company entered into agreements during the second quarter
of 1999 to fix the amount of these payments at $6.4 million in a combination of
cash and stock of Intellesale.com. The above settlements are contingent upon the
successful completion of the planned public offering of Intellesale.com within
one year of the date of the settlement.
During the second quarter of 1999, several adjustments were made to the
composition of the Telecommunications, Internet, Communications Infrastructure
and Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. Prior year information has been restated
to present our reportable segments.
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 Telecommunications and Application Technology business groups, and
the associated write-off of assets. In the first quarter of 1999, the Company
incurred a restructuring charge of $2,236 that includes asset impairments,
primarily software and other intangible assets, of $1,522, lease terminations of
$541, and employee separations of $173. In addition, during the first quarter of
1999, as part of the Company's core business reorganization, the Company
realigned certain operations within its Telecommunications division and has
recognized impairment charges and other related costs of $314.
The Company 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 Credit Corporation agreement
provides for a revolving credit line of up to $33.5 million, a term loan A of up
$22 million, a term loan B of up to $35 million, and term loan C designated in
Canadian dollars of up to C$10.0 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,
net of income taxes.
Beginning in the fourth quarter of 1998 and continuing into 1999, we
reorganized into seven 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 Telecommunications, Internet and Non-core divisions to
better align the strengths of the respective divisions with the objectives of
those divisions. Prior year information has been restated to present our
reportable segments. The five operating segments that represent our core
competency are:
17
<PAGE>
o Telecommunications - The Telecommunications division provides
telephone services and systems, computer telephony integration,
interactive voice response, call centers and voice messaging.
o Network Infrastructure - The Network Infrastructure division
provides computer systems, local area networks and application
servers.
o Internet - The Internet division provides electronic commerce,
intranet and extranet services and wide area networks.
o Communications Infrastructure - The Communications Infrastructure
division provides communications towers, fiber optics, cabling,
power distribution and communications equipment.
o Application Technology - The Application Technology division
provides global positioning systems, satellite systems, field
automation, asset management, corporate enterprise access,
decision support and voice/data technology.
Operating segments outside our core competency are:
o Intellesale.com - The Intellesale.com division, formerly known as
Inteletek, purchases and sells new and used computer equipment,
and provides peripherals, components, consulting, systems
integration and transportation of all types of computer systems.
o Non-Core - The Non-Core division provides electrical components,
control panels, design engineering, manufacturing engineering,
automation systems and vacuum pumps.
18
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a
percentage of revenue for the three and six month periods ended June 30, 1999
and 1998 and is derived from the unaudited consolidated statements of operations
in Part I, Item, 1 of this report.
<TABLE>
<CAPTION>
Relationship to Revenue
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
% % % %
Revenue 100.0 100.0 100.0 100.0
Cost of goods sold 64.0 67.2 64.1 69.5
--------------------------------------------------
Gross profit 36.0 32.8 35.9 30.5
Selling, general and administrative expenses 29.8 23.0 30.4 22.5
Depreciation and amortization 3.1 2.0 3.0 2.0
Restructuring and unusual charges 0.0 0.0 2.0 0.0
--------------------------------------------------
Operating income 3.1 7.8 0.5 6.0
Interest income 0.2 0.2 0.2 0.2
Interest expense (0.9) (0.8) (0.9) (0.7)
--------------------------------------------------
Income (loss) before provision for income taxes, 2.4 7.2 (0.2) 5.5
minority interest and extraordinary loss
Provision for income taxes 1.4 2.3 0.3 1.9
--------------------------------------------------
Income (loss) before minority interest and 1.0 4.9 (0.5) 3.6
extraordinary loss
Minority interest 0.3 0.5 0.4 0.4
--------------------------------------------------
Income (loss) before extraordinary loss 0.7 4.4 (0.9) 3.2
Extraordinary loss 0.2 0.0 0.1 0.0
==================================================
Net income (loss) available to common stockholders 0.5 4.4 (1.0) 3.2
==================================================
</TABLE>
Company Overview
Revenue
Revenue for the three months ended June 30, 1999 was $73.0 million, an
increase of $19.3 million, or 35.9%, from $53.7 million for the three months
ended June 30, 1998. Revenue for the six months ended June 30, 1999 was $124.5
million, an increase of $32.1 million, or 34.7%, from $92.5 million for the six
months ended June 30, 1998.
19
<PAGE>
Revenue generated during the three and six months ended June 30, 1999
and 1998 by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications $13,523 $ 8,497 $ 23,532 $15,521
Network Infrastructure 8,501 5,131 12,507 10,577
Internet 2,121 -- 2,121 --
Communications Infrastructure 12,096 11,881 22,389 23,803
Application Technology 7,943 4,585 14,698 6,288
Intellesale.com 24,154 17,874 41,260 28,728
Non-Core 5,253 6,224 10,170 8,079
Corporate (including amounts incurred during (636) (512) (2,149) (532)
consolidation)
--------------------------------------------------
Consolidated $72,955 $53,680 $124,528 $92,464
==================================================
</TABLE>
Revenue growth occurred in almost every division in the second quarter
of 1999 compared to the second quarter of 1998 and in the six months ended June
30, 1999 compared to the six months ended June 30, 1998. In the Intellesale.com
division, revenue for the three and six month periods ended June 30, 1999
compared to the three and six month periods ended June 30, 1998 grew 35.1% and
43.6%, respectively. Approximately 20.6% and 60.0% came from internal growth for
the three and six month periods, respectively. In the Application Technology
division, revenue for the three and six month periods ended June 30, 1999
compared to the three and six month periods ended June 30, 1998 grew 73.2% and
133.7%, respectively. Almost all of this growth came from companies acquired
subsequent to March 31, 1998. In the Telecommunications division, revenue for
the three and six month periods ended June 30, 1999 compared to the three and
six month periods ended June 30, 1998 grew 59.2% and 51.6%, respectively.
Approximately 50.0% and 68.8% came from internal growth for the three and six
month periods, respectively. The Internet division is a new division in 1999. In
addition to several acquisitions made after March 31, 1998, the Intellesale.com
division increased revenue as a result of the divisions' growth of business
conducted over the Internet and the Telecommunications division increased
revenue through continued expansion into the Canadian marketplace.
Gross Profit and Margin
Gross profit for the three months ended June 30, 1999 was $26.3
million, an increase of $8.7 million, or 49.3%, from $17.6 million for the three
months ended June 30, 1998. Gross profit for the six months ended June 30, 1999
was $44.7 million, an increase of $16.6 million, or 58.9%, from $28.2 million
for the six months ended June 30, 1998. As a percentage of revenue, the gross
margin was 36.0% and 32.8% for the three months ended June 30, 1999 and 1998,
respectively and was 35.9% and 30.5% for the six months ended June 30, 1999 and
1998, respectively.
20
<PAGE>
Gross profit for the three and six months ended June 30, 1999 and 1998
by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications $ 5,606 $4,586 $11,017 $ 8,188
Network Infrastructure 2,833 757 3,654 1,897
Internet 1,618 -- 1,618 --
Communications Infrastructure 2,676 3,093 4,802 4,955
Application Technology 5,538 2,956 9,169 4,266
Intellesale.com 6,514 4,624 11,643 6,537
Non-Core 1,480 1,686 2,804 2,322
Corporate (including amounts incurred during 18 (94) 39 --
consolidation) --------------------------------------------------
Consolidated $26,283 $17,608 $44,746 $28,165
==================================================
</TABLE>
Gross margin for the three and six months ended June 30, 1999 and 1998
by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
% % % %
--- --- --- ---
Telecommunications 41.5 54.0 46.8 52.8
Network Infrastructure 33.3 14.8 29.2 17.9
Internet 76.3 -- 76.3 --
Communications Infrastructure 22.1 26.0 21.4 20.8
Application Technology 69.7 64.5 62.4 67.8
Intellesale.com 27.0 25.9 28.2 22.8
Non-Core 28.2 27.1 27.6 28.7
------------------------------------------------
Consolidated 36.0 32.8 35.9 30.5
================================================
</TABLE>
This significant dollar increase is attributable to growth through
acquisition of companies acquired after March 31, 1998. The change in percentage
is primarily a result of the different cost structures amongst the acquired
companies. Also affecting the gross margin percentages were changes within the
business mix and shifts in the competitive marketplace.
The largest growth of gross profit dollar contributions in the second
quarter of 1999 compared to the second quarter of 1998 came from the Application
Technology, Intellesale.com and Internet divisions. The Application Technology
division contributed $5.5 million in gross profit during the three months ended
June 30, 1999, an increase of $2.5 million or 87.3% over the $3.0 million for
the three months ended June 30, 1998. This growth was largely a result of a new
acquisition in the second quarter of 1999. The Intellesale.com division
contributed $6.5 million in gross profit for the three months ended June 30,
1999, an increase of $1.9 million or 40.9% over the $4.6 million for the three
months ended June 30, 1998. This increase was a result of the division's growth
of business conducted over the Internet and a new acquisition made in the second
quarter of 1999. Gross margin percentages in the Intellesale.com division have
increased due to changes in the mix of products sold and additional services
offered as a result of new business lines acquired. The Internet division is a
new division in 1999. The birth of the Internet division, with its high gross
21
<PAGE>
margin percentage was the largest factor in the increase of the consolidated
gross margin percentage to 36.0% during the three months ended June 30, 1999
compared to 32.8% during the three months ended June 30, 1998. Gross profit
dollars and gross margin percentages increased in the Network Infrastructure
division due to acquisitions made in the second quarter of 1999.
For the first six months of 1999 compared to the first six months of
1998, the largest growth of gross profit dollar contributions came from the
Intellesale.com, Application Technology and Telecommunications divisions. The
Intellesale.com division contributed $11.6 million in gross profit for the six
months ended June 30, 1999, an increase of $5.1 million or 78.1% over the $6.5
million for the six months ended June 30, 1998. This increase was a result of
the division's growth of business conducted over the Internet and a new
acquisition made in the second quarter of 1999. Gross margin percentages have
increased in the Intellesale.com division due to changes in the mix of products
sold and additional services offered as a result of new business lines acquired.
The Application Technology division contributed $9.2 million in gross profit for
the six months ended June 30, 1999, an increase of $4.9 million or 114.9% over
the $4.3 million for the six months ended June 30, 1998. This increase was a
result of new companies acquired subsequent to March 31, 1998. The
Telecommunications division contributed $11.0 million in gross profit for the
six months ended June 30, 1999, an increase of $2.8 million or 34.6% over the
$8.2 million for the six months ended June 30, 1998. This growth came mostly
from the division's continued expansion into the Canadian marketplace, both
through internal growth and via acquisition. The decreases in the gross margin
percentage in the Telecommunications division are a result of the continued
overall competitive pressures experienced in the telecommunications industry.
Gross profit dollars and gross margin percentages increased in the Network
Infrastructure division due to acquisitions made in the second quarter of 1999.
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended
June 30, 1999 was $21.7 million, an increase of $9.4 million, or 76.2%, from
$12.3 million for the three months ended June 30, 1998. Selling, general and
administrative expense for the six months ended June 30, 1999 was $37.8 million,
an increase of $17.0 million, or 81.5%, from $20.8 million for the six months
ended June 30, 1998. As a percentage of revenue, selling, general and
administrative expense was 29.8% and 23.0% for the three months ended June 30,
1999 and 1998, respectively and was 30.4% and 22.5% for the six months ended
June 30, 1999 and 1998, respectively.
22
<PAGE>
Selling, general and administrative expense for the three and six
months ended June 30, 1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications $ 4,928 $ 2,902 $ 9,605 $ 6,085
Network Infrastructure 2,007 551 2,605 1,071
Internet 1,321 -- 1,324 --
Communications Infrastructure 1,886 1,686 3,830 2,993
Application Technology (1) 4,696 2,238 8,014 3,311
Intellesale.com 4,860 3,004 7,522 4,038
Non-Core 1,121 1,288 2,113 1,940
Corporate (including amounts incurred during 905 664 2,803 1,402
consolidation) (1) --------------------------------------------
Consolidated $21,724 $12,333 $37,816 $20,840
============================================
<FN>
- ----------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of $348 in the Application Technology division and
$2,202 in the corporate overhead expense.
</FN>
</TABLE>
Selling, general and administrative expense as a percentage of revenue
for the three and six months ended June 30, 1999 and 1998 by operating segment
was:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
1999 1998 1999 1998
------- ------ ------ -----
<S> <C> <C> <C> <C>
% % % %
---- ---- ---- ----
Telecommunications 36.4 34.2 40.8 39.2
Network Infrastructure 23.6 10.7 20.8 10.1
Internet 62.3 -- 62.3 --
Communications Infrastructure 15.6 14.2 17.1 12.6
Application Technology (1) 59.1 48.8 54.5 52.7
Intellesale.com 20.1 16.8 18.2 14.1
Non-Core 21.3 20.7 20.8 24.0
-------------------------------------------
Consolidated (1) 29.8 23.0 30.4 22.5
===========================================
<FN>
- --------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of 0.3% in the Application Technology division and 1.8%
in the corporate overhead expense.
</FN>
</TABLE>
The increased dollars spent on selling, general and administrative
expenses is partially a result of several acquisitions made after March 31,
1998. Acquisitions were made in the Network Infrastructure, Intenet, Application
Technology and Intellesale.com divisions. In addition, investments were made in
the Intellesale.com division related to the growth of the Internet business and
in the Telecommunications division to fuel the expansion into Canada. As a
percentage of revenue, the increase is due to the strengthening of the corporate
infrastructure and additional costs incurred as part of our reorganization into
seven business segments. Also contributing to the changes in percentage are the
different cost structures amongst the acquired companies.
23
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense for the three months ended June
30, 1999 was $2.3 million, an increase of $1.2 million, or 108.2%, from $1.1
million for the three months ended June 30, 1998. Depreciation and amortization
expense for the six months ended June 30, 1999 was $3.8 million, an increase of
$2.0 million, or 110.4%, from $1.8 million for the six months ended June 30,
1998. The increase in expense is due to depreciation on assets of companies
acquired subsequent to March 31, 1998 and to additional purchases of property,
plant and equipment of existing companies. Amortization expense is associated
with the Company's intangible assets and goodwill from acquired companies. The
increase in amortization expense is predominantly a result of additional
goodwill associated with companies acquired subsequent to March 31, 1998. As of
June 30, 1999 the Company has goodwill of $78.3 million which is being amortized
over a period of 20 years.
Depreciation and amortization expense for the three and six months
ended June 30, 1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Telecommunications $ 393 $ 170 $ 662 $ 229
Network Infrastructure 30 9 35 17
Internet 23 -- 23 --
Communications Infrastructure 159 133 281 238
Application Technology 399 284 746 480
Intellesale.com 88 64 185 108
Non-Core 160 118 304 150
Corporate (including amounts incurred during 1,023 314 1,525 565
consolidation)
------ ------ ------ ------
Consolidated $2,275 $1,092 $3,761 $1,787
====== ====== ====== ======
</TABLE>
Restructuring and Unusual Charges
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 Telecommunications and Application Technology 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. In addition,
during the first quarter of 1999, as part of the Company's core business
reorganization, the Company realigned certain operations within its
Telecommunications division and has recognized impairment charges and other
related costs of $314.
Operating Income (Loss)
Operating income for the three months ended June 30, 1999 was $2.3
million, a decrease of $1.9 million, or 45.4%, from $4.2 million for the three
months ended June 30, 1998. Operating income for the six months ended June 30,
1999 was $0.6 million, a decrease of $4.9 million, or 88.8%, from $5.5 million
for the six months ended June 30, 1998. Changes in operating income are a result
of the factors discussed above.
24
<PAGE>
Excluding the $2.6 million restructuring and unusual charges mentioned
above, operating income for the six months ended June 30, 1999 was $3.2 million.
Operating income (loss) during the three and six months ended June 30,
1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Telecommunications $ 285 $1,514 $ 750 $1,874
Network Infrastructure 796 197 1,014 809
Internet 274 -- 274 --
Communications Infrastructure 631 1,274 691 1,724
Application Technology (1) 443 434 409 475
Intellesale.com 1,566 1,556 3,936 2,391
Non-Core 198 280 387 232
Corporate (including amounts incurred during (1,909) (1,072) (4,291) (1,967)
consolidation) (1)
--------------------------------------------
Consolidated $2,284 $4,183 $3,170 $5,538
============================================
<FN>
- -------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of $348 in the Application Technology division and
$2,202 in the corporate overhead expense.
</FN>
</TABLE>
Operating income as a percentage of revenue for the three and six
months ended June 30, 1999 and 1998 by operating segment was:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
1999 1998 1999 1998
% % % %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telecommunications 2.1 17.8 3.2 12.1
Network Infrastructure 9.4 3.8 8.1 7.6
Internet 12.9 -- 12.9 --
Communications Infrastructure 5.2 10.7 3.1 7.2
Application Technology (1) 5.6 9.5 2.8 7.6
Intellesale.com 6.5 8.7 9.5 8.3
Non-Core 3.8 4.5 3.8 2.9
-------------------------------------------
Consolidated (1) 3.1 7.8 2.5 6.0
===========================================
<FN>
- -------------
1. Excludes restructuring and unusual charges incurred in the first six
months of 1999 of 0.3% in the Application Technology division and 1.8%
in the corporate overhead expense.
</FN>
</TABLE>
Interest Income and Expense
Interest income was $0.1 million for the three months ended June 30,
1999 and 1998 and was $0.3 million and $0.2 million for the six months ended
June 30, 1999 and 1998, respectively. Interest income is earned primarily from
short term investments and notes receivable.
Interest expense was $0.7 million and $0.4 million for the three months
ended June 30, 1999 and 1998, respectively and was $1.1 million and $0.7 million
25
<PAGE>
for the six months ended June 30, 1999 and 1998, respectively. Interest expense
is principally associated with revolving credit lines and notes payable.
Income Taxes
We had an effective income tax rate of 58.5% and 31.7% for the three
months ended June 30, 1999 and 1998, respectively and 34.2% for the six months
ended June 30, 1998. For the six months ended June 30, 1999, there was a
provision of $0.4 million on a pre-tax loss of $0.2 million. The fluctuations in
the tax rate during 1999 are a result of the loss arising in the first quarter
of 1999, primarily due to the $2.6 million restructuring and unusual charges
mentioned above, and the effect of various State income tax laws. Changes in the
effective rate also arise from the effect of purchase accounting and the
resulting amortization of goodwill, which is substantially non-deductible for
income tax purposes.
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 classified as an extraordinary loss was
$160, net of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, cash and cash equivalents totaled $5.6 million, an
increase of $1.0 million, or 22.4% from $4.6 million at December 31, 1998. Cash
of $2.9 million and $0.9 million was used in operations during the first six
months of 1999 and 1998, respectively. Excluding assets and liabilities acquired
or assumed in connection with acquisitions, cash used in the first six months of
1999 was due to the net loss, after adjusting for non-cash expenses and
increases in accounts receivable, inventories and accounts payable and accrued
expenses. Accounts receivable increased $4.8 million, or 13.9% from $34.4
million at December 31, 1998 as a result of increased levels of sales and
slightly slower collections. Inventories increased by $5.8 million, or 28.1%
from $20.7 million at December 31, 1998. This increase was related primarily to
the growth in sales over the Internet within the Intellesale.com division.
Accounts payable and accrued expenses increased by $4.8 million, or 18.1% from
$26.4 million at December 31, 1998 due to the higher inventory levels discussed
above. Excluding assets and liabilities acquired or assumed in connection with
acquisitions, cash used in the first six months of 1998 was primarily due to net
income, after adjusting for non-cash expenses, and increases in accounts
receivable, inventories and prepaid expenses of $3.0 million, $1.8 million and
$1.1 million, respectively.
Investing activities used cash of $19.4 million and $2.8 million during
the first six months of 1999 and 1998, respectively. In the first six months of
1999, cash of $15.8 million was used to pay for the cost of asset and business
acquisitions, $1.1 million was spent on other assets and payments of $2.6
million were made for property and equipment. During the first six months of
1998, $1.9 million was used to purchase property and equipment, $1.3 million was
paid for other assets and $0.3 million was loaned to officers of the Company.
This use of cash was partially offset by proceeds from the cost of asset and
business acquisitions (net of cash balances acquired) totaling $0.7 million.
Financing activities provided cash of $23.3 million and $1.3 million
during the first six months of 1999 and 1998, respectively. During the first six
months of 1999, $44.8 million was raised through long term debt, which was
offset mainly by payments of $11.1 million on notes payable, $7.3 million on
26
<PAGE>
long term debt and $3.1 million in other financing costs. During the first six
months of 1998, $2.4 million was raised through the issuance of common shares,
$0.9 million was raised through long term debt and $0.5 million was raised
through notes payable. These sources of cash were offset mostly by payments of
$2.1 million on long term debt and $0.2 million paid for the redemption of
preferred shares.
One of our stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength. However, due
to our significant growth rate, our investment needs have increased.
Consequently, we may continue, in the future, to use cash from operations and
may 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, we 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, we entered into a Term and Revolving Credit Agreement
with IBM Credit Corporation (the "IBM Agreement"). On May 26, 1999 we repaid the
amount due to State Street Bank and Trust Company. On July 30, 1999, the IBM
Agreement was amended and restated to reflect the refinancing of the debt of our
Canadian subsidiaries. The Amended and Restated Term and Revolving Credit
Agreement provides for:
(a) a revolving credit line of up to $33.5 million, designated as
follows: (i) a USA revolving credit line of up to $22 million,
(ii) a Canadian revolving credit line of up to $8.5 million, and
(iii) a United Kingdom revolving credit line of up to $3 million.
(b) a term loan A of up $22 million.
(c) a term loan B of up to $35 million, and
(d) a term loan C designated in Canadian dollars of up to C$10.0
million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes. The USA
revolving credit line bears interest at the 30-day LIBOR rate plus 1.75%; 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%; the UK revolving
credit line bears interest at the base rate as announced by the National
Westminster Bank PLC of England each month plus 1.4207%. As of August 4, 1999,
the LIBOR rate was approximately 5.0% and approximately $19.0 million was
outstanding on the revolving credit line.
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%, will be amortized
in quarterly installments over six years and is repayable in full on the third
anniversary of the closing date of the loan. As of August 4, 1999, approximately
$21.1 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%, will be amortized in quarterly installments over
six years and is repayable in full on the third anniversary of the closing date
of the loan. As of August 4, 1999, approximately $20.4 million was outstanding
on this loan.
27
<PAGE>
Term loan C, which will be used by our Canadian subsidiaries to repay
their outstanding loans to their existing lenders, bears interest at the base
rate as announced by the Toronto-Dominion Bank of Canada each month plus
0.1707%, will be amortized in quarterly installments over six years and is
repayable in full on the third anniversary of the closing date of the loan. As
of August 4, 1999, approximately $6.7 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 August 4, 1999, the Company was in compliance
with all debt covenants.
As of June 30, 1999, there were 45,972,339 shares of Common Stock
outstanding. In addition, 1,352,877 shares of Common Stock are reserved for
issuance in exchange for the exchangeable shares of ACT-GFX Canada, Inc. and the
exchangeable shares of TigerTel Services Limited (formerly Commstar, Ltd.), both
wholly owned subsidiaries. Since January 1, 1999, we have issued an aggregate of
10,417,253 shares of Common Stock, of which 5,928,220 shares of Common Stock
were issued as earnout payments in acquisitions, 2,432,104 were issued in
connection with new acquisitions, 1,992,263 were issued in exchange for
exchangeable shares, and 64,666 shares of Common Stock were issued for services
rendered, including services under employment agreements and employee bonuses.
We have entered into earnout arrangements with selling shareholders
under which they are entitled to additional consideration for their interests in
the companies they sold to us. Under these agreements, assuming that all
earnouts are achieved, and assuming certain levels of profitability in the
future, we are contingently liable for additional consideration amounting to
approximately $4.5 million based on achieved 1999 results, approximately $8.3
million based on achieved 2000 results, approximately $10.9 million based on
achieved 2001 results and approximately $2.0 million in each of the years 2002,
2003 and 2004. All amounts earned and payable have been accrued in the
accompanying balance sheets. During the second quarter of 1999, the Company
entered into agreements with some of the subsidiaries to fix the earnout
payments due to such subsidiaries' former shareholders at $6.4 million in a
combination of cash and stock of one of the Company's subsidiaries,
Intellesale.com. These agreements are contingent upon the successful completion
of a planned public offering of Intellesale.com within one year of the date of
the agreements.
We have entered into put options with the selling shareholders of those
companies in which we acquired less than a 100% interest. These options provide
for us to acquire the remaining portion we do not own after periods ranging from
4 to 5 years from the dates of acquisition at amounts per share generally equal
to 10% - 20% of the average annual earnings per share of the company before
income taxes for, generally, a two-year period ending on the effective date of
the put multiplied by a multiple ranging from 4 to 5. These requirements are
recorded as changes in minority interest based upon current operating results.
During the second quarter of 1999, the Company agreed to pay $3.9 million in a
combination of cash and stock of one of the Company's subsidiaries,
Intellesale.com, in exchange for the remaining ownership interest of certain of
its subsidiaries. These agreements are contingent upon the successful completion
of a planned public offering of Intellesale.com within one year of the date of
the agreements.
Our sources of liquidity include, but are not limited to, funds from
operations and funds available under the IBM Agreement. We may be able to use
additional bank borrowings, 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 placement or public
offerings. There can be no assurance however, that these options will be
available, or if available, on favorable terms. We believe that our current cash
28
<PAGE>
position, augmented by financing activities, if available, will provide us with
sufficient resources to finance our working capital requirements for the
foreseeable future. Our capital requirements depend on a variety of factors,
including but not limited to, the rate of increase or decrease in our existing
business base; the success, timing, and amount of investment required to bring
new products on-line; revenue growth or decline; and potential acquisitions. We
believe that we have the financial resources to meet our future business
requirements.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements in this Form 10-Q, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Applied Digital Solutions intends that such forward-looking statements be
subject to the safe harbors created thereby. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
our continued ability to sustain our growth through product development and
business acquisitions; the successful completion and integration of future
acquisitions; the ability to hire and retain key personnel; the continued
development of technical, manufacturing, sales, marketing and management
capabilities; relationships with and dependence on third-party suppliers;
anticipated competition; uncertainties relating to economic conditions where we
operate; uncertainties relating to government and regulatory policies;
uncertainties relating to customer plans and commitments; rapid technological
developments and obsolescence in the industries in which we operate and compete;
potential performance issues with suppliers and customers; governmental export
and import policies; global trade policies; worldwide political stability and
economic growth; the highly competitive environment in which we operate;
potential entry of new, well-capitalized competitors into our markets; changes
in our capital structure and cost of capital; and uncertainties inherent in
international operations and foreign currency fluctuations. The words "believe",
"expect", "anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
Risk Factors
In addition to the other information contained herein, the following
factors should be considered carefully in evaluating our company and its
business.
Competition
Each segment of our business is highly competitive, and it is expected
that competitive pressures will continue. Many of our competitors have far
greater financial, technological, marketing, personnel and other resources. The
areas that we have 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 we will
have the financial, technical, marketing and other resources required to compete
successfully in this environment in the future.
29
<PAGE>
Uncertainty of Future Financial Results
While we have been profitable for the last three fiscal years, future
financial results are uncertain. There can be no assurance that we will continue
to be operated in a profitable manner. Profitability depends upon many factors,
including the success of our various marketing programs, the maintenance or
reduction of expense levels and our ability to successfully coordinate the
efforts of the different segments of our company and its business.
Future Sales of and Market for the Shares
Although we previously announced that we intended to limit the use of
stock in future acquisitions and to focus on cash transactions, we have
effected, and may continue to effect, acquisitions or contract for certain
services through the issuance of Common Stock or other equity securities as we
have typically done in the past. In addition, we have agreed to certain "price
protection" provisions in acquisition agreements which may result in additional
shares of common stock being issued to selling shareholders as of the effective
date of the registration of the shares such selling shareholder previously
received as consideration. Such issuances of additional securities may be viewed
as being 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.
Risks Associated with Acquisitions and Expansion
We have engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to our lines of business,
and it is anticipated that such acquisitions will continue to occur. Our total
assets were approximately $208 million as of June 30, 1999 and $124 million, $61
million, $33 million and $4 million as of December 31, 1998, 1997, 1996 and
1995, respectively. Our revenue was approximately $125 million for the six
months ended March 31, 1999 and approximately $207 million, $103 million, $20
million and $2 million for the years ended December 31, 1998, 1997, 1996 and
1995, respectively. Managing these dramatic changes in the scope of the business
will present ongoing challenges to management, and there can be no assurance
that our operations as currently structured, or as affected by future
acquisitions, will be successful.
We may require substantial additional capital, and there can be no
assurance as to the availability of such capital when needed, nor as to the
terms on which such capital might be made available to us.
It is our policy to retain existing management of acquired companies,
under the overall supervision of 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.
Dependence on Key Individuals
Our future success is highly dependent upon our ability to attract and
retain qualified key employees. We are organized with a small senior management
team, with each of our separate operations under the day-to-day control of local
managers. If we were to lose the services of any member of our central
management team, the overall operations could be adversely affected, and the
operations of any of the individual facilities could be adversely affected if
the services of the local managers should be unavailable. We have entered into
employment contracts with key officers and employees of senior management 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.
30
<PAGE>
Lack of Dividends on Common Stock; Issuance of Preferred Stock
We do not have a history of paying dividends on our Common Stock, and
there can be no assurance that such dividends will be paid in the foreseeable
future. Under the terms of the IBM Agreement, there are restrictions on the
declaration and payment of dividends. We intend to use any earnings which may be
generated to finance the growth of the businesses. Our Board of Directors has
the right to authorize the issuance of preferred stock, without further
stockholder approval, the holders of which may have preferences as to payment of
dividends.
Possible Volatility of Stock Price
Our Common Stock is quoted on the Nasdaq Stock Market(R), which stock
market has experienced and is likely to experience in the future significant
price and volume fluctuations which could adversely affect the market price of
our Common Stock without regard to our operating performance. In addition, we
believe that factors such as the significant changes to the business resulting
from continued acquisitions and expansions, quarterly fluctuations in the
financial results or cash flows, shortfalls in earnings or sales below analyst
expectations, changes in the performance of other companies in the same market
sectors and the performance of the overall economy and the financial markets
could cause the price of our Common Stock to fluctuate substantially.
YEAR 2000 COMPLIANCE
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millenium Bug" or "Year 2000 problem".
Assessment. The Year 2000 problem could affect computers, software, and
other equipment used, operated, or maintained by us. Accordingly, we are
reviewing our internal computers, software, applications and related equipment
and our systems other than information technology systems to ensure that they
will be Year 2000 compliant. We believe that our Year 2000 plan will be
completed in all material respects prior to the anticipated Year 2000 failure
dates. We spent approximately $200,000 in 1998 on our Year 2000 compliance plan
and estimate an additional $450,000 will be spent in 1999, most of which relates
to new equipment. There can be no assurance however, that the total costs will
be limited to this amount.
Software Sold to Consumers. We are in the process of identifying all
potential Year 2000 problems with any of the software products we develop and
market. However, we believe that it is not possible to determine with complete
certainty that all Year 2000 problems affecting our software products will be
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 our control. For non-compliant products, we
are providing 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 our 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 may lead to lawsuits against us. The outcome of any such
31
<PAGE>
lawsuits and the impact on our financial results of operations, cash flow and
financial position are not estimable at this time.
Internal Infrastructure. We believe that our major computers, software
applications, and related equipment used in connection with our internal
operations are not subject to significant Year 2000 problems, because the
computer programs we use are primarily off-the-shelf, recently developed
programs from third-party vendors. We are in the process of obtaining assurances
from such vendors as to the Year 2000 compliance of their products. Most vendors
are reluctant to provide written assurances and, although some vendors may make
verbal assurances of Year 2000 compliance, there can be no certainty that the
systems utilized will not be affected. We have assessed all 39 of our operating
locations and have determined that 25 of the 39 locations are Year 2000
compliant. Of the remaining 14 locations, 9 are in the process of upgrading
their current systems and 4 are replacing their systems. We are in the process
of evaluating the alternatives for 1 location. All internal infrastructure
systems and equipment are expected to be Year 2000 compliant prior to the
anticipated Year 2000 failure dates.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 problem. We
have assessed all 39 of our operating locations and have determined that 37 of
the 39 locations are Year 2000 compliant. The remaining 2 locations are in the
process of upgrading or replacing the current systems. All non-information
technology systems and equipment are expected to be Year 2000 compliant prior to
the anticipated Year 2000 failure dates.
Suppliers. We have initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by us to identify and, to the extent possible, to resolve issues
involving the Year 2000 problem. However, we have limited or no control over the
actions of these third party suppliers. Thus, while we expect that we will be
able to resolve any significant Year 2000 problems with these systems, there can
be no assurance that these suppliers will resolve any or all Year 2000 problems
with these systems before the occurrence of a material disruption to our
business or any of our customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
Internet. As more of our business is conducted over the internet, it is
possible that we experience dispersed, intermittent telecommunications problems
experienced by local internet service providers and their users throughout the
country and world, preventing those customers from being able to access our
Web-site. This could be combined with, or result from, intermittent power
problems which could cause similar problems with accessing the Web-site.
Additionally, many customers may be using older systems which may not be Year
2000 compliant, and this would prevent them from accessing our Web-site. Under
this scenario, we would continue operations, but our Web-site would be
inaccessible to the individuals or groups affected by these problems. If our
credit card processors are not Year 2000 compliant, we will not be able to
process credit card sales. If our vendors are not Year 2000 compliant, we will
not be able to obtain products from our vendors or our vendors may not be able
to ship products sold to our customers. In the event of this worst case
scenario, we could lose significant revenues from customers unable to purchase
from the site, be unable to ensure delivery of products to customers, incur
expenses to repair our systems, face interruptions in the work of our employees,
lose advertising revenue and suffer damage to our reputation.
32
<PAGE>
Contingency Plans. At certain subsidiaries, where we feel it is
necessary, we are preparing contingency plans relating specifically to
identified Year 2000 risks and developing cost estimates relating to these
plans. Contingency plans may include stockpiling raw materials, increasing
inventory levels, securing alternate sources of supply and other appropriate
measures. We anticipate completion of the Year 2000 contingency plans prior to
the anticipated Year 2000 failure dates. Once developed, Year 2000 contingency
plans and related cost estimates will be tested in certain respects and
continually refined as additional information becomes available.
Most Likely Consequences of Year 2000 Problems. We expect to identify
and resolve all Year 2000 problems that could materially adversely affect our
business operations and cash flows. However, we believe that it is not possible
to determine with complete certainty that all Year 2000 problems have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, one
cannot accurately predict how many Year 2000 problem-related failures will occur
or the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we expect that we may suffer the following consequences:
1. A significant number of operational inconveniences and
inefficiencies for us and our clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. A lesser number of serious system failures that may require
significant efforts by us or our customers to prevent or alleviate material
business disruptions.
Based on the activities described above, we do not believe that the
Year 2000 problem will have a material adverse effect on our business, results
of operations or cash flows. The estimate of the potential impact on our
financial position, overall results of operations or cash flows for the Year
2000 problem could change in the future. The discussion of our efforts, and
management's expectations, relating to Year 2000 compliance are forward-looking
statements. Our 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,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued FAS 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FAS 133. We do not have any derivative instruments or hedging
transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With our Canadian and United Kingdom subsidiaries, we have operations
and sales in various regions of the world. Additionally, we may export and
import to and from other countries. Our 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 our product prices and operating costs or those of our competitors.
33
<PAGE>
We presently do not use any derivative financial instruments to hedge
our exposure to adverse fluctuations in interest rates, foreign exchange rates,
fluctuations in commodity prices or other market risks, nor do we invest in
speculative financial instruments.
Borrowings under our Credit Agreement are at the London Interbank
Offered Rate. Such rate is subject to adjustment at any time.
34
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and certain of our subsidiaries are parties to various legal
actions as either plaintiff or defendant. In the opinion of management, these
proceedings will not have a material adverse effect on the financial position,
cash flows or overall trends in our results. The estimate of the potential
impact on our financial position, overall results of operations or cash flows
for these proceedings could change in the future. We are not subject to any
environmental or governmental proceedings.
On May 17, 1999, we were named as defendants in a suit brought in the
United States District Court for the District of New Hampshire, in a matter
styled John H. Martin, Jr. v. Applied Cellular Technology, Inc. The plaintiff, a
former Vice President of sales and Chief Operating Officer of our former
subsidiary, Tech Tools, Inc., alleges that: (i) we verbally agreed to sell our
controlling interest in Tech Tools to plaintiff; (ii) we repudiated the sale;
and (iii) we caused Tech Tools to commence a wrongful civil action against
plaintiff for conversion and to file a false report against plaintiff alleging
plaintiff's illegal diversion of Tech Tool's funds which subjected plaintiff to
criminal proceedings. Based on these allegations, plaintiff is seeking monetary
damages in the amount of $20 million. We believe that plaintiff's claims are
without merit and intend to defend ourselves vigorously. We do not expect this
litigation to have a material adverse effect on our financial position, overall
results of operations or cash flows.
35
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by us from
January 1, 1999 through June 30, 1999. These shares were issued without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
<TABLE>
<CAPTION>
Number of
Issued Common
Name/Entity/Nature Note For Shares
<S> <C> <C> <C>
The Americom Group, Inc. 1 Acquisition 106,581
Advanced Telecommunications, Inc. 1 Acquisition 550,000
Consolidated Micro Components 1,2 Acquisition 649,696
Cra-Tek Company 5 Acquisition 121,465
Cybertech Station, Inc. 1 Acquisition 49,806
Data Path Technologies, Inc. 1,2 Acquisition 1,393,230
GDB Software Services, Inc. 1,2 Acquisition 627,879
Hornbuckle Engineering, Inc. 7 Acquisition 554,563
Information Products Center, Inc. 1 Acquisition 662,252
Innovative Vacuum Solutions, Inc. 1 Acquisition 426,213
Lynch, Marks & Associates, Inc. 6 Acquisition 773,142
PPL, Ltd. 1 Acquisition 929,230
STR, Inc. 6 Acquisition 932,039
TigerTel Services Limited 2 Acquisition 43,877
Winward Electric Service Inc. 1 Acquisition 533,333
Charles Phillips 3 Asset Acquisition 7,018
Services 4 Services 64,666
---------------
Total 8,424,990
===============
<FN>
-----------------
1. Represents shares issued in connection with the earnout provision of
the Agreement of Sale.
2. Represents shares issued as a finders fee in connection with the
acquisition of the company.
3. Represents shares issued in connection with the acquisition of certain
assets by one of the Company's subsidiaries, Intellesale.com.
4. Represents shares issued for professional services or under employment
or other such agreements.
5. Represents shares issued to a selling shareholder to acquire such
shareholders minority interest.
6. Represents shares issued to the selling shareholders to acquire such
shareholders 100% interest in such company.
7. Represents shares issued to the selling shareholders, as partial
consideration, to acquire such shareholders 100% interest in such
company.
</FN>
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
36
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUTIRY HOLDERS
An Annual Meeting of Stockholders was held on June 5, 1999 to:
(a) Elect three directors, one to hold office until the 2000 Annual
Meeting of Stockholders (Group B), and two to hold office until the
2002 Annual Meeting of Stockholders (Group A), or in each case until
their respective successors have been elected or appointed. The result
of the vote to elect the three directors were as follows:
Votes Received
----------------------------------------
Name Group For Against Abstentions
---------------------- ------- ------------ ----------- ---------------
Daniel E. Penni A 26,665,968 -- 3,090,206
Angela M. Sullivan A 28,274,038 -- 4,482,168
Constance K. Weaver B 31,464,007 -- 1,292,199
(b) Ratify the appointment of PricewaterhouseCoopers LLP as independent
auditors of the Company for the 1999 calendar year. The proposal
received 30,739,667 votes for, 1,959,277 votes against, and 57,262
abstentions.
(c) Approve the change of the Company's name to Applied Digital Solutions,
Inc. The proposal received 31,954,378 votes for, 763,077 votes
against, and 38,744 abstentions.
(d) Approve an amendment and restatement of the Company's Articles of
Incorporation to reflect the name change. The proposal received
31,417,791 votes for, 1,252,884 votes against, and 85,524 abstentions.
(e) Approve the Company's 1999 Flexible Stock Plan. The proposal received
9,790,993 votes for, 4,102,439 votes against, and 75,899 abstentions.
(f) Approve the Company's 1999 Employees Stock Purchase Plan. The proposal
received 11,617,045 votes for, 2,275,705 votes against, and 76,581
abstentions.
(g) Ratify options granted under the Company's 1996 Non Qualified Stock
Option Plan. The proposal received 10,451,478 votes for, 3,910,051
votes against, and 118,527 abstentions.
ITEM 5. OTHER INFORMATION
Mergers and Acquisitions
During the second quarter of 1999, the Company undertook several acquisitions.
In April 1999, we acquired:
(a) 100% of the outstanding shares of common stock of Port Consulting,
Inc., an integrator of information technology application systems and custom
application development services,
(b) 100% of the outstanding common shares of Hornbuckle Engineering,
Inc., an integrated voice and data solutions provider based in Monterey,
California,
37
<PAGE>
(c) 100% of Lynch Marks & Associates, Inc., a network integration
company based in Berkley, California,
(d) 100% of STR, Inc., a software solutions company based in Cleveland,
Ohio.
In May 1999, the Company entered into an agreement to merge its wholly
owned Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. The Company 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, our subsidiary Intellesale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek"). 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.
Financing Agreements
On May 25, 1999, we entered into a Term and Revolving Credit Agreement
with IBM Credit Corporation. On May 26, 1999 we repaid the full amount borrowed
from State Street Bank and Trust Company. On July 30, 1999, we entered into an
Amended and Restated Term and Revolving Credit Agreement with IBM Credit
Corporation. The Amended and Restated Term and Revolving Credit Agreement is
attached hereto as Exhibit 99.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
99.1 Amended and Restated Term and Revolving Credit Agreement dated
as of July 30, 1999, among the Registrant, and certain of its
affiliates, and IBM Credit Corporation, and certain of its
affiliates*.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company
between April 1, 1999, and the date of this report:
(1) On June 2, 1999, the Company filed a Current Report on Form
8-K reporting that it had entered into a Term and Revolving
Credit Agreement with IBM Credit Corporation.
(2) On June 11, 1999, the Company filed a Current Report on Form
8-K reporting that its subsidiary, Intellesale.com, Inc. had
purchased all of the issued and outstanding shares of
Bostek, Inc. and Micro Components International,
Incorporated. On August 12, 1999, the Company filed
Amendment No. 1 to this Form 8-K, and included the required
financial statements and pro forma financial information.
- -------------------
* The Registrant agrees to furnish supplementally a copy of any omitted
attachments and exhibits to this Agreement, on request of the Commission.
38
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED DIGITAL SOLUTIONS, INC.
(Registrant)
Date: August 16, 1999 By: /S/ DAVID A. LOPPERT
----------------------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial Officer
39
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
(Amending Form 8-K filed on June 11, 1999)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 4, 1999
APPLIED DIGITAL SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
000-26020
- --------------------------------------------------------------------------------
(Commission File Number)
43-1641533
- --------------------------------------------------------------------------------
(IRS Employer Identification No.)
400 Royal Palm Way, Suite 410, Palm Beach, Florida 33480
- --------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: 561-366-4800
Applied Cellular Technology, Inc.
- --------------------------------------------------------------------------------
(Former Name)
<PAGE>
Item 7. Financial Statements and Exhibits.
On June 11, 1999, the Registrant, Applied Digital Solutions, Inc. (formerly
Applied Cellular Technology, Inc.) filed a Current Report on Form 8-K reporting
the acquisition of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek"). By this amendment, the Registrant is filing the
required financial statements and pro forma financial information.
(a) Financial Statements of Businesses Acquired
Financial statements of Bostek for the year ended December 31,
1998 are attached as Exhibit 99.3 hereto.
(b) Pro Forma Financial Information
Pro forma financial information is attached as Exhibit 99.4
hereto.
(c) Exhibits
99.3 Financial Statements of Bostek for the year ended December
31, 1998.
99.4 Pro forma financial information
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED DIGITAL SOLUTIONS, INC.
(Registrant)
Date: August 11, 1999 /s/ Michael Krawitz
-------------------------------
Assistant Vice President
and General Counsel
Exhibit 99.3
BOSTEK, INC. AND AFFILIATE
COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1998
<PAGE>
BOSTEK, INC. AND AFFILIATE
DECEMBER 31, 1998
TABLE OF CONTENTS
Page
Independent Auditor's Report 1
Financial Statements
Combined Balance Sheet 2
Combined Statement of Income and Retained Earnings 3
Combined Statement of Cash Flows 4
Notes to Combined Financial Statements 5 - 11
<PAGE>
April 6, 1999
(Except for Note 13, which is as of June 4, 1999)
To the Board of Directors
Bostek, Inc. and Affiliate
Hanover, MA
Re: Independent Auditor's Report
Bostek, Inc.
Micro Components International, Inc.
Gentlemen:
We have audited the accompanying combined balance sheet of Bostek,
Inc.(a Massachusetts corporation) and affiliate as of December 31,
1998, and the related combined statements of income and retained
earnings, and cash flows for the year then ended. These combined
financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the combined financial
statements are free of material misstatement. An audit include
examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
Bostek, Inc. and affiliate as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountant
- 1 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 105,096
Account Receivable Trade, Net (Note 1) 4,739,295
Inventory (Note 1) 5,454,646
Prepaid Expenses 75,645
Due from Employees 130,691
Due from Realty Trust (Note 3) 93,695
-----------
TOTAL CURRENT ASSETS 10,599,068
PROPERTY AND EQUIPMENT, NET (Note 1) 258,501
-----------
TOTAL ASSETS $10,857,569
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line-of-Credit (Note 4) $ 6,115,000
Accounts Payable 426,505
Warranty Reserve (Note 5) 250,000
Accrued Expenses 14,334
Accrued State Taxes 64,939
-----------
TOTAL CURRENT LIABILITIES 6,870,778
STOCKHOLDERS' EQUITY
Common Stock (Note 12) $ 247,914
Additional Paid-in Capital 33,000
Less: Treasury Stock, At Cost (Note 12) ( 81,000)
Retained Earnings 3,786,877
----------
TOTAL STOCKHOLDERS' EQUITY 3,986,791
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,857,569
===========
See Independent Auditor's Report and accompanying notes.
- 2 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
REVENUE $ 60,772,443
COST OF SALES 53,366,139
------------
GROSS PROFIT ON SALES 7,406,304
OPERATING EXPENSES 5,720,778
------------
INCOME FROM OPERATIONS 1,685,526
OTHER INCOME (EXPENSE)
Gain on Sale of Investments (Note 8) $ 381,665
Interest Income 10,800
Interest Expense (Note 4) (353,250) 39,215
--------- ------------
INCOME BEFORE PROVISION
FOR TAXES 1,724,741
PROVISION FOR INCOME TAXES (Note 1) 27,972
---------
NET INCOME 1,696,769
RETAINED EARNINGS - BEGINNING BALANCE 3,180,893
LESS: DIVIDENDS PAID ( 1,090,785)
-----------
RETAINED EARNINGS - ENDING BALANCE $ 3,786,877
===========
See Independent Auditor's Report and accompanying notes.
- 3 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income $ 1,696,769
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation 45,500
Allowance for Bad Debts ( 294,613)
Changes in Assets and Liabilities:
Accounts Receivable ( 638,364)
Inventory (1,984,695)
Prepaid Expenses ( 37,149)
Due from Employees ( 64,588)
Accounts Payable ( 479,602)
Warranty Reserve ( 402,777)
Accrued Expenses ( 224,748)
Accrued State Taxes 19,939
Due from Related Parties 37,302
-----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (2,327,026)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Fixed Assets $( 207,605)
-----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ( 207,605)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid $(1,090,785)
Loans from Officers ( 482,789)
Net Borrowings on Line of Credit 3,115,000
Proceeds from Issuance of Common Stock 200
Capital Contributions 30,000
----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 1,571,626
----------
NET CHANGE IN CASH ( 963,005)
CASH - BEGINNING OF YEAR 1,068,101
----------
CASH - END OF YEAR $ 105,096
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest Expense Paid $ 353,250
Taxes Paid - State $ 98,230
See Independent Auditor's Report and accompanying notes.
- 4 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations
Bostek, Inc. and its affiliate Micro Components International, Inc.
were incorporated in the Commonwealth of Massachusetts in 1990 and
1998, respectively. The Companies operate as a single segment as
wholesalers/retailers of personal computer hardware and peripheral
products. Micro Components International, Inc. the affiliate, is not a
subsidiary of Bostek, Inc. but does have the same shareholders and
directors.
In March 1998, Bostek established a new method of distribution for
personal computer products and components, American Discount Warehouse
("ADW"). ADW sells personal computer related equipment to individual
consumers over the Internet. For 1998, ADW was treated as a DBA (Doing
Business As) of Bostek.
B. Combined Statements
The accompanying combined financial statements include the accounts of
Bostek, Inc. and Micro Components International, Inc.
The Companies are affiliated by virtue of having the same stockholders
and not through parent subsidiary stock ownership. All significant
intercompany balances have been eliminated and there were no
intercompany sales transactions for the year ended December 31, 1998.
C. Method of Accounting
The financial statements are prepared using the accrual basis of
accounting in compliance with generally accepted accounting
principles. They accordingly reflect all significant receivables,
payables and other liabilities.
D. Revenue Recognition
Bostek, Inc. and Micro Components recognize revenues when the product
is shipped. The Companies' return policy provides for money back
guarantees on certain items. An allowance for potential product
returns based upon historical trends has been established.
- 5 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
E. Accounts Receivable
The Companies provide for bad debts on the allowance method of
accounting. The allowance for uncollectible accounts was $483,387 in
1998.
F. Inventories
Inventories consist of computer hardware and components and are stated
at historical cost (determined under the first-in, first-out cost
method) or market whichever is lower. All inventories are of goods
available for immediate resale, with no raw materials or work in
process inventory. The personal computer industry is characterized by
rapid technological advancement and declining market prices. Should
demand for the current generation of personal computers prove to be
significantly less than anticipated, the ultimate realizable value of
such products could be substantially less than the amount shown on the
balance sheet.
G. Income Taxes
In 1995, Bostek, Inc. elected to be treated as an S Corporation under
provisions of the current Internal Revenue Code. The federal income
tax liability for Bostek, Inc.'s income is the responsibility of the
individual shareholders. Massachusetts laws vary from Federal in that
a company having receipts of $6,000,000 or more is liable for the
income measure of the corporate excise tax. Therefore, Bostek, Inc.
has made a provision for income taxes net of over accruals of previous
years of $27,972 for the year ending December 31, 1998.
Micro Components International, Inc. (a C Corporation) provides for
income taxes under the provisions of SFAS No. 109 "Accounting for
Income Taxes". SFAS No. 109 requires an asset and liability based
approach in accounting for income taxes. The Company has a net
operating loss of $430,870 for the year ended December 31, 1998. The
deferred tax asset associated with the potential future benefit from
this net operating loss is fully offset by a valuation allowance.
There are no other temporary differences.
- 6 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
H. Property and Equipment
The Companies record property and equipment at cost. These assets are
depreciated using straight-line and accelerated methods over the
estimated lives of the respective assets. The difference in
depreciation calculated under current tax laws as compared to
generally accepted accounting principles is not material.
The following is a summary of property and equipment at cost, less
accumulated depreciation:
Furniture and Fixtures $ 475,685
Vehicles 108,224
----------
Total 583,909
Accumulated Depreciation (325,408)
---------
Net Property and Equipment $ 258,501
=========
I. Cash and Cash Equivalents
For the purpose of the Statement of Cash Flows, the Companies consider
all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents. The Companies did not
have any cash equivalents for the year ended December 31, 1998.
J. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses for the period. Actual results may differ from those
estimates.
- 7 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 2 - OPERATING LEASES
The Companies leases office space, vehicles and equipment under
certain operating leases in excess of one year. Rent expense under
leases was $171,811 for 1998.
The following is a schedule of future minimum rental payments required
under the above leases:
Year Ending
December 31
-----------
1999 $197,120
2000 179,649
2001 160,884
2002 144,000
2003 144,000
-------
$825,653
========
NOTE 3 - RELATED PARTY TRANSACTIONS
Bostek, Inc. leases its corporate headquarters and warehouse
facilities from a trust controlled by the shareholders of the Company.
The lease is classified as an operating lease and provides for minimum
annual rentals of $144,000. There is also a mortgage on the property
of $250,000 payable to Citizens Bank of Massachusetts that is
guaranteed by the Company.
During 1998, the shareholders loans totaling $482,789 were paid.
- 8 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
Bostek, Inc. had sales to an entity in which the shareholders owned
greater than 40% of the stock. Effective May, 1998, shareholders no
longer owned stock in this Company. The following is a summary of
transactions and balances with related parties for 1998.
Sales to Related Parties $212,956
Cost of Sales to Affiliates 204,438
Due from Realty Trust 93,695
During 1998, the shareholders of Bostek, Inc. established Micro
Components International, Inc. The operations of the affiliate are
similar to those of the Company. The shareholders are in a position
to, and in the future may, influence the sales volume of the Company
for the benefit of the other company in the same line of business that
are under their control.
NOTE 4 - LINE-OF-CREDIT
On January 24, 1997, Bostek, Inc. entered into a revolving
line-of-credit agreement with a financial institution providing a
maximum loan balance of $8,000,000. The outstanding balance bears
interest at a rate equal to the bank's prime rate. The Loan Agreement
is collateralized by substantially all of the Company's assets.
Additionally, one of the principal shareholders pledged stock in the
Company as collateral. The Loan Agreement provides for certain
covenants including among others, minimum levels of working capital
and certain ratios. At December 31, 1998, the outstanding balance was
$6,115,000 bearing interest of 8.00%. This revolving line-of-credit
replaced all existing lines of credit.
On March 24, 1998, Bostek, Inc. increased its line-of-credit from
$8,000,000 to $10,000,000. All other terms of the loan remained
substantially the same.
The loan agreement on the revolving line-of-credit contains various
covenants pertaining to minimum requirements for accounts receivables
and inventory balances. At December 31, 1998, the Company was out of
compliance of their loan agreement. The bank has waived that
requirement of the agreement as of April 6, 1999.
- 9 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 5 - WARRANTY RESERVE
The Bostek, Inc. has an allowance for warranty products and returns.
This allowance is based upon the cost of handling returns and warranty
items using historical return rates and costs. The allowance for
warranty approximated $250,000 at December 31, 1998.
NOTE 6 - RETIREMENT PLAN
Bostek, Inc. provides a 401(k) deferred contribution plan for all
full-time employees who are over the age of twenty-one and have
completed one year of service. An employee is fully vested in matching
contributions after six years of service. Employees may contribute up
to 15% of their salary to the plan. Bostek, Inc. has the option to
make a discretionary matching contribution equal to a percentage of
each employee's contribution, the exact percentage to be determined
each year by the Company. Bostek, Inc.'s contributions for any plan
year shall not exceed the maximum amount allowable as a deduction to
the Company. Retirement expense for the year ended 1998 was $- 0 -.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Bostek, Inc. and its affiliate are involved in various claims arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position, operating results, or cash
flows.
NOTE 8 - GAIN ON SALE OF INVESTMENT
During 1998, Bostek, Inc. accepted stock in lieu of payment of an
account receivable. The stock subsequently appreciated and the Company
sold the stock for a $381,665 gain in 1998.
NOTE 9 - ADVERTISING COSTS
Advertising costs are charged to operations when incurred. The
advertising expense for Bostek, Inc. for 1998 amounted to $436,644.
- 10 -
<PAGE>
BOSTEK, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable and
line-of-credit approximates fair value because of the short maturity
of those instruments. The fair value of the amounts due from employees
does not differ materially from the carrying value recorded in the
accompanying balance sheet.
NOTE 11 - NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS
130). Implementation of the standard had no material impact on the
company's financial statements as presented.
NOTE 12 - COMMON STOCK AND TREASURY STOCK
Shares
Shares Issued and
Company Type Authorized Outstanding Amount
------- ---- ---------- ----------- ------
Bostek, Inc. No Par 15,000 4,000 $ 247,714
Less Treasury Stock (2,000) ( 81,000)
Micro Components
International, Inc. No Par 10,000 2,000 200
---------
Total Common Stock $ 166,914
=========
NOTE 13 - SALE OF COMPANY
In June, 1999, Intellesale. Com, Inc. a subsidiary of Applied Cellular
Technology, Inc. purchased all of the outstanding shares of common
stock, no par value of Micro Components International, Incorporated
and Bostek, Incorporated for the aggregate purchase price of
$25,055,000 subject to adjustment as set forth in the Agreement of
Purchase and Sale.
- 11 -
Exhibit 99.4
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The accompanying unaudited pro forma condensed consolidated financial
statements reflect the consolidated financial position of Applied Digital
Solutions, Inc. (formerly Applied Cellular Technology, Inc.), (the "Company") as
of March 31, 1999, and the results of its condensed consolidated operations for
the three months ended March 31, 1999 and the year ended December 31, 1998 after
giving pro forma effect to the acquisition of Bostek, Inc. and Micro Components
International, Incorporated (collectively, "Bostek").
On June 4, 1999, our subsidiary, Intellesale.com, acquired all of the
outstanding common shares of Bostek in a transaction accounted for under the
purchase method of accounting. The aggregate purchase price was approximately
$25.1 million, of which approximately $10.1 million was paid in cash at closing
which was financed through borrowings under our Term Loan B facility with IBM
Credit Corporation, and the balance, approximately $15.0 million, will be
payable in cash or Intellesale.com stock over time. An additional $5.0 million
of purchase price is contingent upon Bostek achieving certain earnings targets
in the next twenty-four months. The purchase price for Bostek was assigned to
the assets acquired and the liabilities assumed based on their estimated fair
values at the acquisition date, which approximated their book values. Based on
such allocations, the aggregate purchase price exceeded the estimated fair value
of the net assets acquired (goodwill) by approximately $20.9 million, which is
being amortized over 20 years and will result in an annual amortization charge
of approximately $1.0 million. Any additional amounts paid out under the
purchase price contingency provision noted above are expected to result in
additional goodwill.
The unaudited pro forma condensed consolidated balance sheet is based
on the historical balance sheets of the Company and Bostek as of March 31, 1999
and has been prepared to reflect the acquisition by the Company of Bostek as of
March 31, 1999. The unaudited pro forma condensed consolidated statements of
operations are based on the historical statements of operations of the Company
and Bostek for the three months ended March 31, 1999 and for the year ended
December 31, 1998 and have been prepared to reflect the acquisition by the
Company of Bostek as if the acquisition occurred on January 1, 1999 and January
1, 1998, respectively. The unaudited pro forma financial information does not
purport to be indicative of actual results that would have been achieved had the
acquisitions actually been completed on the dates indicated on the following
pages nor of actual results which may be achieved in the future.
1
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Applied Digital Solutions, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 1999
($'000)
Company Bostek, Inc. and Proforma Proforma
Actual Affiliate (a) Adjustments Consolidated
<S> <C> <C> <C> <C>
Current assets $ 64,578 $ 10,816 $ - $ 75,394
Property, plant and equipment, net 15,914 329 - 16,243
Notes receivable 1,538 - - 1,538
Goodwill, net 41,708 - 20,946 (b) 62,654
Other assets 8,326 - - 8,326
--------- ---------- --------- ----------
Total assets $ 132,064 $ 11,145 $ 20,946 $ 164,155
========= ========== ========= ==========
Current liabilities $ 55,772 $ 6,836 $ 15,200 (b) $ 77,808
Long term debt 3,081 - 10,055 (b) 13,136
--------- ---------- --------- ----------
Total liabilities 58,853 6,836 25,255 90,944
Minority interest 3,204 - - 3,204
Stockholders' equity 70,007 4,309 (4,309) (b) 70,007
--------- ---------- --------- ----------
Total liabilities and stockholders' equity $ 132,064 $ 11,145 $ 20,946 $ 164,155
========= ========== ========= ==========
See accompanying notes to the unaudited pro forma condensed consolidated financial statements 2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Applied Digital Solutions, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the three months ended March 31, 1999
($'000)
Company Bostek, Inc. and Proforma Proforma
Actual Affiliate (c) Adjustments Consolidated
<S> <C> <C> <C> <C>
Revenues $ 51,573 $ 20,180 $ - $ 71,753
Cost of goods sold 33,176 18,018 - 51,194
---------- --------- ------- -----------
Gross profit 18,397 2,162 - 20,559
Operating expenses 20,062 1,611 266 (d) 21,939
---------- --------- ------- -----------
Operating income (loss) (1,665) 551 (266) (1,380)
Interest income 134 - - 134
Interest expense (445) (94) (211)(e) (750)
---------- --------- ------- -----------
Income (loss) before (benefit) provision
for income taxes and minority interest (1,976) 457 (477) (1,996)
(Benefit) provision for income tax (575) - 71 (f) (504)
---------- --------- ------- -----------
Income (loss) before minority interest (1,401) 457 (548) (1,492)
Minority Interest 244 - - 244
---------- --------- ------- -----------
Net income (loss) (1,645) 457 (548) (1,736)
Dividends - - -
---------- --------- ------- -----------
Net income (loss) applicable to common
shareholders $ (1,645) $ 457 $ (548) $ (1,736)
========== ========= ======= ===========
Net (loss) per common share - Basic $ (0.04) $ (0.04)
Net (loss) per common share - Diluted $ (0.04) $ (0.04)
Weighted average number of common shares
outstanding - basic 41,236 41,236
Weighted average number of common shares
outstanding - diluted 41,909 41,909
See accompanying notes to the unaudited pro forma condensed consolidated financial statements 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Applied Digital Solutions, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1998
($'000)
Company Bostek, Inc, and Proforma Pro Forma
Actual Affiliate (g) Adjustments Consolidated
<S> <C> <C> <C> <C>
Revenues $ 207,081 $ 60,772 $ - $ 267,853
Cost of goods sold 142,893 53,366 - 196,259
---------- ---------- --------- -------------
Gross profit 64,188 7,406 - 71,594
Operating expenses 55,253 5,720 1,095 (h) 62,028
---------- ---------- --------- -------------
Operating income 8,935 1,686 (1,095) 9,526
Interest and other income 420 392 - 812
Interest expense (1,653) (353) (846)(i) (2,852)
---------- ---------- --------- -------------
Income before provision for income taxes
and minority interest 7,702 1,725 (1,941) 7,486
Provision for income tax 2,588 28 267 (j) 2,883
---------- ---------- --------- -------------
Income before minority interest 5,114 1,697 (2,208) 4,603
Minority interest 424 - - 424
---------- ---------- --------- -------------
Net income 4,690 1,697 (2,208) 4,179
Dividends 44 - - 44
---------- ---------- --------- -------------
Net income applicable to
common shareholders $ 4,646 $ 1,697 $ (2,208) $ 4,135
========== ========== ========= =============
Net income per common share - Basic $ 0.14 $ 0.13
Net income per common share - Diluted $ 0.13 $ 0.12
Weighted average number of common shares
outstanding - basic 32,318 32,318
Weighted average number of common shares
outstanding - diluted 34,800 34,800
See accompanying notes to the unaudited pro forma condensed consolidated financial statements 4
</TABLE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheet at March
31, 1999 gives effect to the financial position, as if the acquisition of Bostek
occurred on March 31, 1999. Such consolidated financial position is not
necessarily indicative of the consolidated financial position of the Company as
it may be in the future, or as it might have been had these events been
effective as of or prior to March 31, 1999.
The unaudited pro forma condensed consolidated statement of operations
for the three months ended March 31, 1999 gives effect to the consolidated
results of operations for the three months ended March 31, 1999 as if the
acquisition of Bostek occurred on January 1, 1999. These results are not
necessarily indicative of the consolidated results of operations of the Company
as they may be in the future, or as they might have been had these events been
effective on January 1, 1999.
The unaudited pro forma condensed consolidated statement of operations
for the year ended December 31, 1998 gives effect to the consolidated results of
operations for the year ended December 31, 1998 as if the acquisition of Bostek
occurred on January 1, 1998. These results are not necessarily indicative of the
consolidated results of operations of the Company as they may be in the future,
or as they might have been had these events been effective on January 1, 1998.
The unaudited pro forma condensed consolidated financial information
should be read in conjunction with the historical financial statements of the
Company and of Bostek and related notes thereto.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET AT MARCH 31, 1999 ARE AS FOLLOWS:
(a). Represents the historical unaudited condensed combined financial
position of Bostek at March 31, 1999.
(b). Reflects the adjustments necessary to record the purchase of Bostek,
Inc. and Affiliate, consisting of accruals of $15.0 million due to the
Bostek sellers in the future, accrued expenses in connection with the
acquisition of $0.2 million, and $10.055 million in additional
long-term debt incurred in connection with the payment to the Bostek
sellers at closing. Bostek's historical equity is eliminated and,
assuming the book value of Bostek's net assets represents their fair
value, (since Bostek consists primarily of current assets and
liabilities and property and equipment approximate fair value),
goodwill of $20.946 million has been recorded for the amount of excess
of cost over fair value of net assets acquired.
<PAGE>
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 ARE AS
FOLLOWS:
(c). Represents the historical unaudited condensed combined results of
Bostek for the three months ended March 31, 1999.
(d). Represents the net increase to amortization expense for the three
months ended March 31, 1999 for goodwill relative to the acquisition of
Bostek amortized over a period of twenty years, as follows:
($ in thousands)
Pro forma Goodwill at January 1, 1999 $ 21,268
Divided by 20 years for annual amortization $ 1,063
Divided by 4 for quarterly amortization $ 266
(e). Represents the net increase to interest expense for the three months
ended March 31, 1999 associated with debt issued in connection with the
purchase of Bostek, based upon borrowing the $10.055 million paid to
the Bostek sellers at closing, borrowed at a 8.41% interest rate.
(f). Represents an increase in the tax provision due to Bostek's earnings,
as reduced by pro forma interest expense, multiplied by the Company's
effective income tax rate. Bostek was an S-Corp for tax purposes and
accordingly no provision was made for federal income taxes on a
pre-acquisition historical basis. Amortization is not deducted in
computing the pro forma income tax provision.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 ARE AS FOLLOWS:
(g). Represents the historical audited condensed combined results of
Bostek, Inc. and Affiliate for the year ended December 31, 1998.
(h). Represents the net increase to amortization expense for the year ended
December 31, 1998 for goodwill relative to the acquisition of Bostek
amortized over a period of twenty years, as follows:
($ in thousands)
Pro forma Goodwill at January 1, 1998 $ 21,905
Divided by 20 years for annual amortization $ 1,095
(i). Represents the net increase to interest expense for the year ended
December 31, 1998 associated with debt issued in connection with the
purchase of Bostek, based upon borrowing the $10.055 million paid to
the Bostek sellers at closing, borrowed at a 8.41% interest rate.
(j). Represents an increase in the tax provision due to Bostek's earnings as
reduced by pro forma interest expense, multiplied by the Company's
effective income tax rate. Bostek was an S-Corp for tax purposes and
accordingly no provision was made for federal income taxes on a
pre-acquisition historical basis. Amortization is not deducted in
computing the pro forma income tax provision.
