<PAGE>
As filed with the Securities and Exchange Commission on November 14, 2000
-------------------------------------------------------------------------------
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 September 30, 2000
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 43-1641533
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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)
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 November 13, 2000:
Class Number of Shares
Common Stock; $.001 Par Value 102,101,653
<PAGE>
<PAGE>
<TABLE>
APPLIED DIGITAL SOLUTIONS, INC.
TABLE OF CONTENTS
<CAPTION>
Item Description Page
<S> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations -
Three and Nine Months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Nine Months ended September 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows -
Nine Months ended September 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
3. Quantitative and Qualitative Disclosures About Market Risk 44
PART II - OTHER INFORMATION
1. Legal Proceedings 45
2. Changes In Securities 45
3. Defaults Upon Senior Securities 46
4. Submission of Matters to a Vote of Security Holders 46
5. Other Information 47
6. Exhibits and Reports on Form 8-K 48
SIGNATURE 50
EXHIBITS 51
</TABLE>
2
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
<CAPTION>
SEPTEMBER 30,
2000 December 31,
(UNAUDITED) 1999
---------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 9,508 $ 5,138
Due from buyer of divested subsidiary -- 31,302
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $4,433 in 2000 and $1,698 in 1999) 55,646 52,170
Inventories 42,577 40,448
Notes receivable 4,477 3,822
Prepaid expenses and other current assets 10,796 6,001
----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 123,004 138,881
PROPERTY AND EQUIPMENT, NET 19,387 13,886
NOTES RECEIVABLE 3,260 3,297
GOODWILL, NET 175,642 62,000
OTHER ASSETS 20,333 10,912
----------------------------------------------------------------------------------------------------------------
$ 341,626 $ 228,976
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 632 $ 818
Current maturities of long-term debt 5,694 8,038
Due to shareholders of acquired subsidiary 10,000 15,000
Accounts payable 24,917 29,499
Accrued expenses 16,692 17,672
Other current liabilities -- 2,745
----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 57,935 73,772
LONG-TERM DEBT 81,673 59,710
----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 139,608 133,482
----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
----------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 2,247 2,558
----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred shares:
Authorized 5,000 shares in 2000 and 1999 of $10 par value; special voting,
issued and outstanding 1 share in 2000 and 1999, Class B voting, issued
and outstanding 1 share in 2000 and 1999 -- --
Common shares:
Authorized 245,000 shares in 2000 and 80,000 in 1999 of $.001 par value;
84,077 shares issued and 82,861 shares outstanding in 2000
and 51,116 shares issued and 48,260 shares outstanding in 1999 83 48
Common and preferred additional paid-in capital 209,598 87,470
Retained earnings (7,976) 12,664
Common stock warrants 1,656 --
Treasury stock (carried at cost, 1,216 shares in 2000 and 2,856 in 1999) (2,802) (7,310)
Accumulated other comprehensive income (loss) (788) 64
----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 199,771 92,936
----------------------------------------------------------------------------------------------------------------
$ 341,626 $ 228,976
================================================================================================================
----------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 3
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUE $ 73,846 $ 107,262 $ 222,862 $ 231,790
COST OF GOODS SOLD 50,814 78,596 159,384 158,378
UNUSUAL INVENTORY CHARGE -- -- 8,500 --
----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 23,032 28,666 54,978 73,412
----------------------------------------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (21,227) (24,022) (65,751) (61,838)
DEPRECIATION AND AMORTIZATION (3,136) (2,612) (7,535) (6,373)
UNUSUAL AND RESTRUCTURING CHARGES -- -- (8,500) (2,550)
INTEREST INCOME 110 155 676 433
INTEREST EXPENSE (1,636) (1,160) (4,103) (2,295)
----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY LOSS (2,857) 1,027 (30,235) 789
PROVISION (BENEFIT) FOR INCOME TAXES (1,219) 644 (9,940) 1,086
----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS (1,638) 383 (20,295) (297)
MINORITY INTEREST 102 (64) 345 400
----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (1,740) 447 (20,640) (697)
EXTRAORDINARY LOSS (NET OF TAXES OF $89) -- -- -- 160
----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (1,740) $ 447 $ (20,640) $ (857)
============================================================================================================================
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS $ (.03) $ .01 $ (.38) $ (.02)
EXTRAORDINARY LOSS -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (.03) $ .01 $ (.38) $ (.02)
============================================================================================================================
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS $ (.03) $ .01 $ (.38) $ (.02)
EXTRAORDINARY LOSS -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (.03) $ .01 $ (.38) $ (.02)
============================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 63,862 47,087 54,623 46,102
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 63,862 47,424 54,623 46,102
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 4
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
(In thousands)
(UNAUDITED)
<CAPTION>
ACCUMULATED
PREFERRED SHARES COMMON SHARES ADDITIONAL COMMON OTHER TOTAL
---------------- ------------- PAID-IN RETAINED STOCK TREASURY COMPREHENSIVE STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL EARNINGS WARRANTS STOCK INCOME (LOSS) EQUITY
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1999 -- $ -- 48,260 $48 $ 87,470 $ 12,664 $ -- $(7,310) $ 64 $ 92,936
Net loss -- -- -- -- -- (20,640) -- - --
Comprehensive loss -
foreign currency translation -- -- -- -- -- -- -- -- (852)
Total comprehensive loss -- -- -- -- -- (20,640) -- -- (852) (21,492)
Issuance of common shares -- -- 1,635 2 4,849 -- -- -- -- 4,851
Issuance of common shares for
acquisition -- -- 31,006 31 120,822 -- -- -- -- 120,853
Assumption of common stock
warrants for acquisition -- -- -- -- -- -- 1,672 -- -- 1,672
Warrants redeemed for common
shares -- -- 320 -- 967 -- (16) -- -- 951
Reissue of treasury shares -- -- 1,640 2 (4,510) -- -- 4,508 -- --
------------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2000 -- $ -- 82,861 $83 $209,598 $ (7,976) $1,656 $(2,802) $(788) $199,771
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 5
</TABLE>
<PAGE>
<PAGE>
<TABLE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (20,640) $ (857)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,535 6,373
Minority interest 345 400
(Gain) loss on sale of equipment and other assets (449) 62
Non-cash unusual and restructuring charges 17,000 251
Change in assets and liabilities, excluding unusual charges:
Increase (decrease) in accounts receivable 741 (22,767)
Increase in inventories (5,809) (15,121)
Increase in prepaid expenses and other current assets (4,311) (2,603)
Increase in deferred tax asset (8,475) --
Increase (decrease) in accounts payable and accrued
expenses (19,531) 19,966
---------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (33,594) (14,296)
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in due from buyer of divested subsidiary 31,302 --
Increase in notes receivable (617) (857)
Increase in other assets (680) (1,304)
Proceeds from sale of equipment and other assets 829 360
Payments for property and equipment (5,476) (3,771)
Payments for asset and business
acquisitions (net of cash balances acquired) (10,490) (15,852)
---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,868 (21,424)
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on notes payable 8,935 (70)
Proceeds from long-term debt 16,271 51,942
Payments on long-term debt (7,212) (8,334)
Issuance of common shares 5,487 --
Other financing costs (385) (3,340)
---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,096 40,198
---------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,370 4,478
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,138 4,555
---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,508 $ 9,033
=========================================================================================================
---------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 6
</TABLE>
<PAGE>
<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. (the "Company") as of September 30, 2000 and
December 31, 1999 (the December 31, 1999 financial information included
herein has been extracted from the Company's audited financial statements
included in the Company's 1999 Annual Report on Form 10-K) and for the three
and nine months ended September 30, 2000 and 1999 have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company's management, all adjustments (consisting of only
normal recurring adjustments) considered necessary to present fairly the
consolidated financial statements have been made.
The consolidated statements of operations for the three and nine
months ended September 30, 2000 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, 1999.
Certain items in the consolidated financial statements for the 1999
periods have been reclassified for comparative purposes.
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
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Raw materials $ 4,402 $ 4,648
Work in process 1,859 1,195
Finished goods 37,195 35,602
------------------ ------------------
43,456 41,445
Allowance for excess and obsolescence (879) (997)
------------------ ------------------
$ 42,577 $ 40,448
================== ==================
</TABLE>
As discussed in Note 5, the $8.5 million unusual charge to gross
profit recorded in the second quarter of 2000 has been recognized as a
write-down of specific inventory items.
4. FINANCING AGREEMENTS
In August 1998, the Company entered into a $20.0 million line of
credit with State Street Bank 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
7
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
increased to $23.0 million. On May 25, 1999, the Company entered into a
Term and Revolving Credit Agreement with IBM Credit Corporation (the
"IBM Agreement"). On May 26, 1999, the Company repaid the amount due to
State Street Bank and Trust Company. On July 30, 1999 the IBM Agreement
was amended and restated, and it was again amended on January 27, 2000.
On October 17, 2000, the Company entered into a Second Amended and
Restated Term and Revolving Credit Agreement with IBM Credit Corporation
("the Second IBM Agreement").
The Second IBM Agreement provides for:
(a) a revolving credit line of up to $67.260 million, subject
to availability under a borrowing base formula, designated
as follows: (i) a USA revolving credit line of up to
$63.405 million, and (ii) a Canadian revolving credit line
of up to $3.855 million,
(b) a term loan A of up $25.0 million, and
(c) a term loan C of up to $2.740 million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and
is repayable in full on May 25, 2002. The USA revolving credit line bears
interest at the 30-day LIBOR rate plus 2.75%; the Canadian revolving credit
line bears interest at the base rate as announced by the Toronto-Dominion
Bank of Canada each month plus 1.17%. As of September 30, 2000, the LIBOR
rate was approximately 6.6% and approximately $33.7 million was outstanding
on the revolving credit line, which is included in long-term debt.
Term loan A bears interest at the 30-day LIBOR rate plus 3.50%, is
amortized in quarterly installments over six years and is repayable in full
on May 25, 2002. As of September 30, 2000, approximately $17.4 million was
outstanding on this loan.
Term loan B bears interest at the 30-day LIBOR rate plus 1.75% to
1.90%. As of September 30, 2000, approximately $32.6 million was outstanding
on this loan. On October 17, 2000, Term loan B was terminated and the
balance was transferred into the revolving credit line.
Term loan C, which was used by our Canadian subsidiary to pay off
their bank debt, bears interest at the base rate as announced by the
Toronto-Dominion Bank of Canada each month plus 1.17%, is amortized in
quarterly installments over six years and is repayable in full on May 25,
2002. As of September 30, 2000, Toronto-Dominion's rate was approximately
7.5% and approximately $2.1 million was outstanding on this loan.
The agreement contains standard debt covenants relating to the
financial position and performance of the Company as well as restrictions
on the declarations and payment of dividends. As of September 30, 2000, the
Company was in compliance with all debt covenants.
8
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. UNUSUAL AND RESTRUCTURING CHARGES
Unusual Charges
---------------
In the second quarter of 2000 the Company's subsidiary,
IntelleSale.com, Inc. ("IntelleSale"), recorded a pre-tax charge of $17.0
million, $14.0 million of which related to reserves established in
association with the discovery of potential impropriety and possible fraud
and misrepresentations in connection with the purchase of Bostek, Inc. and
affiliate ("Bostek"), which was acquired by IntelleSale in June 1999, and
$3.0 million of which related to fees and expenses incurred in connection
with IntelleSale's cancelled Initial Public Offering ("IPO") and certain
other intangible assets. The $14.0 million charge is composed of an
inventory reserve of $8.5 million for products IntelleSale expects to sell
below cost (included as a component of cost of goods sold in the
accompanying Consolidated Statements of Operations for the nine months ended
September 30, 2000) and $5.5 million related to specific accounts and other
receivables.
The former Bostek owners filed a lawsuit against the Company and
IntelleSale claiming that their earnout payment was inadequate. The Company
and IntelleSale believe that the claim is without merit and intend to defend
it vigorously, and have filed counterclaims alleging, among other things,
fraud on the part of the former Bostek owners. IntelleSale has also filed a
lawsuit in Massachusetts seeking to recover the damages it has sustained.
Restructuring Charge
--------------------
In the first quarter of 1999, a pre-tax charge of $2.5 million was
recorded to cover restructuring costs of $2.2 million and unusual charges of
$0.3 million.
As part of the Company's reorganization of its core business into
four reportable business groups, the Company has implemented a restructuring
plan. The restructuring plan includes the exiting of selected lines of
business within the Company's Telephony and Applications business groups,
and the associated write-off of assets. The restructuring charge of $2.2
million included asset impairments, primarily software and other intangible
assets, of $1.5 million, lease terminations of $0.5 million, and employee
separations of $0.2 million. The total charge reduced net income by $1.6
million.
The following table sets forth the rollforward of the liabilities
for business restructuring from January 1, 1999 through September 30, 2000:
<TABLE>
<CAPTION>
Balance, Balance Balance
January 1, December 31, September 30,
Type of Cost 1999 Additions Deductions 1999 Deductions 2000
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset impairment $ -- $ 1,522 $ 1,522 $ -- $ -- $ --
Lease terminations -- 541 342 199 199 --
Employee separations -- 173 123 50 -- 50
------------------------------------------------------------------------------------------
Total $ -- $ 2,236 $ 1,987 $ 249 $ 199 $ 50
==========================================================================================
</TABLE>
9
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 $0.2 million, net of income taxes.
7. EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominator
of basic and diluted earnings (loss) per share
<TABLE>
<CAPTION>
--------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) available to common stockholders $(1,740) $447 $(20,640) $(857)
==================================================
DENOMINATOR:
Denominator for basic income (loss) per share -
Weighted-average shares(1) 63,862 47,087 54,623 46,102
Effect of dilutive securities -
Warrants -- 85 -- --
Employee stock options -- 252 -- --
--------------------------------------------------
Denominator for diluted income (loss) per share(2) 63,862 47,424 54,623 46,102
==================================================
Basic income (loss) per share $(0.03) $ 0.01 $(0.38) $ (0.02)
==================================================
Diluted income (loss) per share $(0.03) $ 0.01 $(0.38) $ (0.02)
==================================================
<FN>
(1) Includes, for the three and nine month periods ended September 30, 2000
and 1999, 5 hundred and 0.8 million shares of common stock,
respectively, reserved for issuance to the holders of ACT-GFX, Inc.'s
exchangeable shares.
(2) The weighted average shares listed below were not included in the
computation of diluted loss per share because to do so would have been
anti-dilutive for the periods presented:
<CAPTION>
------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------
2000 2000 1999
---- ---- ----
<S> <C> <C> <C>
Employee stock options 1,960 3,319 448
Warrants 184 321 186
Contingent stock - acquisitions -- 39 --
------------------------------------------
2,144 3,679 634
==========================================
</TABLE>
10
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. SEGMENT INFORMATION
The Company is organized into six operating segments. The
"eliminations" category includes all amounts recognized upon consolidation
of the Company's subsidiaries such as the elimination of intersegment
revenues, expenses, assets and liabilities and goodwill amortization
expense. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies in the
Company's Annual Report on Form 10-K filed for the year ended December 31,
1999, except that intersegment sales and transfers are generally accounted
for as if the sales or transfers were to third parties at current market
prices and segment data includes an allocated charge for the corporate
headquarters costs. It is on this basis that management utilizes the
financial information to assist in making internal operating decisions. The
Company evaluates performance based on stand-alone segment operating income.
Certain prior period information has been reclassified for comparative
purposes.
Following is the selected segment data as of and for the three
months ended September 30, 2000:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Corporate
Telephony Network Internet Applications IntelleSale Non-Core Overhead Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External
revenue $ 12,276 $ 12,758 $ 4,248 $ 11,638 $ 20,342 $ 12,532 $ 52 $ -- $ 73,846
Intersegment
revenue -- -- -- -- 1,105 -- -- (1,105) --
-------------------------------------------------------------------------------------------------------------
Total revenue $ 12,276 $ 12,758 $ 4,248 $ 11,638 $ 21,447 $ 12,532 $ 52 $ (1,105) $ 73,846
=============================================================================================================
Income (loss)
before benefit
for income
taxes and
minority
interest $ 648 $ 607 $ 221 $ 519 $ (1,076) $ 725 $ (2,896) $ (1,605) $ (2,857)
=============================================================================================================
Total assets $ 30,253 $ 11,481 $ 4,567 $ 35,625 $ 48,057 $ 27,670 $341,111 $(157,138) $ 341,626
=============================================================================================================
</TABLE>
Following is the selected segment data as of and for the nine
months ended September 30, 2000:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Corporate
Telephony Network Internet Applications IntelleSale Non-Core Overhead Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External
revenue $ 27,210 $ 31,026 $ 9,071 $ 30,069 $ 89,753 $ 35,566 $ 167 $ -- $ 222,862
Intersegment
revenue -- -- -- -- 5,112 -- -- (5,112) --
-------------------------------------------------------------------------------------------------------------
Total revenue $ 27,210 $ 31,026 $ 9,071 $ 30,069 $ 94,865 $ 35,566 $ 167 $ (5,112) $ 222,862
=============================================================================================================
Income (loss)
before benefit
for income
taxes and
minority
interest $ 1,799 $ 1,450 $ 175 $ (135) $(22,288) $ 937 $ (8,607) $ (3,566) $ (30,235)
=============================================================================================================
Total assets $ 30,253 $ 11,481 $ 4,567 $ 35,625 $ 48,057 $ 27,670 $341,111 $(157,138) $ 341,626
=============================================================================================================
</TABLE>
11
<PAGE>
<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 September 30, 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Corporate
Telephony Network Internet Applications IntelleSale Non-Core Overhead Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $ 17,265 $ 7,399 $ 2,285 $ 11,800 $ 48,663 $ 19,820 $ 30 $ -- $ 107,262
Intersegment
revenue -- -- -- -- 2,818 -- -- (2,818) --
-------------------------------------------------------------------------------------------------------------
Total revenue $ 17,265 $ 7,399 $ 2,285 $ 11,800 $ 51,481 $ 19,820 $ 30 $ (2,818) $ 107,262
=============================================================================================================
Income (loss)
before provision
(benefit) for
income taxes,
minority
interest and
extraordinary
loss $ 402 $ 569 $ 261 $ 164 $ 1,606 $ 560 $ (1,678) $ (857) $ 1,027
=============================================================================================================
Total assets $ 39,211 $ 7,242 $ 2,166 $ 26,874 $ 72,166 $ 35,272 $213,012 $(155,468) $ 240,475
=============================================================================================================
</TABLE>
Following is the selected segment data as of and for the nine
months ended September 30, 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Corporate
Telephony Network Internet Applications IntelleSale Non-Core Overhead Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $ 40,797 $ 19,905 $ 4,405 $ 26,498 $ 87,735 $ 52,379 $ 71 $ -- $ 231,790
Intersegment
revenue -- -- -- -- 5,007 -- -- (5,007) --
-------------------------------------------------------------------------------------------------------------
Total revenue $ 40,797 $ 19,905 $ 4,405 $ 26,498 $ 92,742 $ 52,379 $ 71 $ (5,007) $ 231,790
=============================================================================================================
Income (loss)
before provision
(benefit) for
income taxes,
minority
interest and
extraordinary
loss $ 958 $ 1,495 $ 526 $ 26 $ 5,262 $ 1,504 $ (7,300) $ (1,682) $ 789
=============================================================================================================
Total assets $ 39,211 $ 7,242 $ 2,166 $ 26,874 $ 72,166 $ 35,272 $213,012 $(155,468) $ 240,475
=============================================================================================================
</TABLE>
12
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
9. MERGERS, ACQUISITIONS AND DISPOSITIONS
The following represents acquisitions which occurred in the first
nine months of 2000 and during 1999:
<TABLE>
<CAPTION>
Common
Date of Percent Acquisition Shares
Acquisition Acquired Price Issued Business Description
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 Acquisitions:
------------------
Independent Business Consultants 04/01/00 100% $5,547 958 Network integration company
P-Tech, Inc. 04/01/00 100% 4,830 1,182 Software development company
Timely Technology Corp. 04/01/00 100% 1,315 215 Software developer and
application service provider
Computer Equity Corporation 06/01/00 100% 24,712 4,829 Communications integration company
WebNet Services, Inc. 07/01/00 100% 958 268 Network integrator and website
developer
Destron Fearing Corporation 09/08/00 100% 84,642 20,821 Animal identification and
microchip technology company
1999 Acquisitions:
------------------
Port Consulting, Inc. 04/01/99 100% 1,292 303 Integrator of information
technology application systems
Hornbuckle Engineering, Inc. 04/01/99 100% 5,103 631 Integrated voice and data
solutions provider
Lynch Marks & Associates, Inc. 04/01/99 100% 2,571 773 Network integration company
STR, Inc. 04/01/99 100% 6,822 1,332 Software solutions provider for
retailers
Contour Telecom Management, Inc. 05/01/99 75% 5,627 --- Provider of outsourced
(Divested effective 12/31/99) telecommunications management
services
Bostek, Inc. & affiliate 06/01/99 100% 27,466 --- Seller of computer systems and
peripherals
</TABLE>
All acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the consolidated financial statements
reflect the results of operations of each company from the date of
acquisition. The costs of acquisitions include all payments according to the
acquisition agreements plus costs for investment banking services, legal and
accounting services that were direct costs of acquiring these assets.
Goodwill resulting from these acquisitions is being amortized on a
straight-line basis over twenty years.
Major Acquisitions
------------------
On September 8, 2000, the Company completed the acquisition of
Destron Fearing Corporation through a merger of its wholly-owned subsidiary,
Digital Angel.net Inc., into Destron Fearing Corporation. As a result of the
merger, Destron Fearing is now a wholly-owned subsidiary of the Company and
has been renamed "Digital Angel.net Inc."
13
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
In connection with the merger, each outstanding share of Destron
Fearing common stock was exchanged for 1.5 shares of the Company's common
stock, with fractional shares settled in cash. In addition, outstanding
options and warrants to purchase shares of Destron Fearing common stock were
converted into a right to purchase that number of shares of the Company's
common stock as the holders would have been entitled to receive had they
exercised such options and warrants prior to September 8, 2000 and
participated in the merger. The Company issued 20.5 million shares if its
common stock in exchange for all the outstanding common stock of Destron
Fearing and 0.3 million shares of its common stock as a transaction fee. The
Company will issue up to 2.7 million shares of its common stock upon the
exercise of the Destron Fearing options and warrants. The aggregate purchase
price of approximately $84.6 million, including the liabilities, was
allocated to the identifiable assets with the remainder of $75.1 million
recorded as goodwill, which is being amortized over 20 years.
Effective June 1, 2000, the Company acquired all of the outstanding
common stock of Computer Equity Corporation. The aggregate purchase price
was approximately $24.7 million, $15.8 million of which was paid in shares
of the Company's common stock and $8.9 million of which was payable in cash
and paid in August, 2000. An additional $10.3 million is contingent upon
achievement of certain earnings targets during the two years ended June 30,
2002. The total purchase price of Computer Equity Corporation, including the
liabilities, was allocated to the identifiable assets with the remainder of
$15.9 million recorded as goodwill, which is being amortized over 20 years.
Effective June 1, 1999, IntelleSale acquired all of the outstanding
common stock of Bostek. The aggregate purchase price was approximately $27.0
million, of which $10.2 million was paid in cash at closing, $5 million was
paid in cash in January 2000 and $1.8 million for the 1999 earnout was paid
in cash in February 2000. The earnout accrual was included in the other
current liabilities at December 31, 1999. An additional $3.2 million is
contingent upon achievement of certain additional earnings targets. The
total purchase price of Bostek, including the liabilities, was allocated to
the identifiable assets with the remainder of $24.4 million recorded as
goodwill, which is being amortized over 20 years. Under the terms of the
agreement, the former owners of Bostek were entitled to be paid $10.0
million in cash on June 30, 2000. As previously discussed, due to the
litigation between the Company, IntelleSale and the former Bostek owners,
the $10.0 million payment was not paid on June 30, 2000 because the Company
and IntelleSale believe it is not owed. The Company and IntelleSale intend
to vigorously assert their position set forth in their counterclaims and
lawsuits that such payments are not owed, but continue to carry this amount
as a liability pending the outcome of the litigation.
14
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Unaudited pro forma results of operations for the nine months ended
September 30, 2000 and 1999 are included below. Such pro forma information
assumes that the above transactions had occurred as of January 1, 2000 and
1999, respectively.
<TABLE>
<CAPTION>
-------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues $ 249,113 $ 335,618
Income (loss) before extraordinary loss (22,545) 368
Net income (loss) (22,545) 208
Earnings per common shares - basic (0.41) 0.01
Earnings per common share - diluted (0.41) 0.01
</TABLE>
Earnout and Put Agreements
--------------------------
Certain acquisition agreements include additional consideration
contingent on profits of the acquired subsidiary. Upon earning this
additional consideration, the value will be recorded as additional goodwill.
The acquisitions above include contingent shares earned upon attainment of
certain profits by subsidiaries through September 30, 2000. Under these
agreements, assuming all earnout profits are achieved, the Company is
contingently liable for additional consideration of approximately $19.6
million in 2001, $9.1 million in 2002 and $2.0 million in 2004, of which
$1.0 million would be payable in cash and $29.7 million would be payable in
stock.
The Company has entered into put options with the sellers of those
companies in which the Company acquired less than a 100% interest. These
options require the Company to purchase the remaining portion it does not
own after periods ranging from four to five years from the dates of
acquisition at amounts per share generally equal to 10% to 20% of the
average annual earnings per share of the acquired company before income
taxes for, generally, a two year period ending on the effective date of the
put multiplied by a multiple ranging from four to five. The purchases under
these put options are recorded as changes in minority interest based upon
current operating results.
In June 2000, the Company entered into agreements to issue, in the
aggregate, 2.3 million shares of its common stock, 1.6 million of which have
been issued, to acquire $10.0 million in put options and to settle earnout
payments in certain companies owned by IntelleSale. These agreements
superseded agreements entered into during the second quarter of 1999.
During the first nine months of 2000 and 1999, 2.4 million and 6.0
million shares of common stock, respectively, were issued to satisfy
earnouts and to purchase minority interests.
Dispositions
------------
Effective October 1, 1999, the Company entered into a Stock
Purchase Agreement for the sale of all outstanding shares of common stock of
four non-core subsidiaries. In consideration, the Company received a note
for $2.5 million, and 2.8 million shares of the Company's common stock,
recorded as treasury stock in the amount of $7.0 million. No gain was
recorded on this transaction, because the shareholders of the purchaser of
the divested assets were deemed to be significant shareholders of the
15
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Company. The operating results of these companies are properly included in
the Company's financial statements through the date of disposition.
Effective December 30, 1999, the Company sold its approximately 4.9
million shares in TigerTel, Inc., its Toronto-based telecommunications
subsidiary. The total proceeds were $31.3 million in cash, resulting in a
pre-tax gain of $20.1 million. Payment of the proceeds was received on
January 10, 2000. The operating results of TigerTel are properly included in
the Company's financial statements through the date of disposition.
10. SUBSEQUENT EVENTS
SERIES C PREFERRED STOCK TRANSACTION
The Preferred Stock. On October 26, 2000, the Company issued 26
thousand shares of Series C convertible preferred stock to a select group of
institutional investors in a private placement. The stated value of the
preferred stock is $1,000 per share, or an aggregate of $26.0 million, and
the purchase price of the preferred stock and the related warrants was an
aggregate of $20.0 million. The preferred stock is convertible into shares
of the Company's common stock initially at a rate of $7.56 in stated value
per share, which is reduced to $5.672 in stated value per share 91 days
after issuance of the preferred stock. At the earlier of 90 days after the
issuance of the preferred stock or upon the effective date of the Company's
registration statement relating to the common stock issuable on the
conversion of the initial series of preferred stock, the holders also have
the option to convert the stated value of the preferred stock to common
stock at an alternative conversion rate starting at 140% and declining to
110% of the average closing price for the 10 trading days preceding the date
of the notice of conversion. The conversion price and the alternative
conversion price are subject to adjustment based on certain events,
including the Company's issuance of shares of common stock, or options or
other rights to acquire common stock, at an issuance price lower than the
conversion price of the preferred stock, or issuance of convertible
securities that have a more favorable price adjustment provision than the
preferred stock. The Company will be required to accrete the discount on the
preferred stock through equity. However, the accretion will reduce the
income available to common stockholders and earnings per shares. The value
assigned to the warrants will increase the discount on the preferred stock.
The holders of the preferred stock are entitled to receive annual dividends
of 4% of the stated value (or 5.2% of the purchase price) payable in either
cash or additional shares of preferred stock.
If certain triggering events occur in respect of the preferred
stock, the holders may require the Company to redeem the preferred stock at
a price per share equal to 130% of the stated value (or an aggregate of
$33.8 million) plus accrued dividends, as long as such redemption is not
prohibited under the Company's credit agreement. In addition, under certain
circumstances during the occurrence of a triggering event, the conversion
price per share of the preferred stock would be reduced to 50% of the lowest
closing price of the Company's common stock during such period. The
triggering events include (i) failure to have the registration statement
relating to the common stock issuable on the conversion of the preferred
stock declared effective on or prior to 180 days after issuance of the
preferred stock or the suspension of the effectiveness of such registration
statement, (ii) suspensions in trading of or failure to list the common
stock issuable on conversion of the preferred stock, (iii) failure to obtain
shareholder approval at least by June 30, 2001 for the issuance of the
common stock upon the conversion of the preferred stock
16
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
and upon the exercise of the warrants, and (iv) certain defaults in payment
of or acceleration of our payment obligations under our credit agreement.
Warrants. The holders of the preferred stock have also received 0.8
million warrants to purchase up to 0.8 million shares of our common stock
over the next five years. The exercise price is $4.73 per share, subject to
adjustment for various events, including the issuance of shares of common
stock, or options or other rights to acquire common stock, at an issuance
price lower than the exercise price under the warrants. The exercise price
may be paid in cash, in shares of common stock or by surrendering warrants.
Option to Acquire Additional Preferred Stock. The investors may
purchase up to an additional $26.0 million in stated value of Series C
convertible preferred stock and warrants with an initial conversion price of
$5.00 per share, for an aggregate purchase price of $20.0 million, at any
time up to ten months following the effective date of the Company's
registration statement relating to the common stock issuable on conversion
of the initial series of the preferred stock. The additional preferred stock
will have the same preferences, qualifications and rights as the initial
preferred stock.
ACQUISITIONS AND DISPOSITIONS
Effective as of October 19, 2000, the Company entered into
transactions with MCY.com, Inc. (OTC-BB:MCYC) ("MCY") under which it sold to
MCY a non-exclusive perpetual worldwide license to use its recently-acquired
Net-Vu product, an Internet-based Automatic Contact Distributor, for $9.0
million in cash plus $1.0 million in shares of MCY. In addition, MCY granted
to the Company an exclusive perpetual license to MCY's digital encryption and
distribution systems, including its NETrax(TM) software for use in various
non-entertainment business-to-business applications, in consideration for
11.8 million shares of our common stock valued at $40.0 million. These
transactions with MCY are subject to governmental clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
On October 25, 2000, the Company acquired Pacific Decision Sciences
Corporation, a California corporation ("PDSC"). In the merger transaction,
the Company issued approximately 8.6 million shares of its common stock. In
addition, for each of the twelve-month periods ending September 30, 2001 and
September 30, 2002, the former stockholders of PDSC will be entitled to
receive earnout payments, payable in cash or in shares of our common stock,
of $9.7 million plus 4.0 times EBITDA (as defined in the merger agreement)
in excess of $3.7 million, subject to reduction by 4.0 times the shortfall
from the Projected EBITDA Amount (as defined in the merger agreement).
Goodwill associated with the acquisition amounted to approximately $23.5
million and will be amortized over 20 years at the rate of approximately
$1.2 million per year. Pro forma financial information related to this
acquisition will be included in the Company's Current Report on Form 8-K/A,
which will be filed on or before December 30, 2000. PDSC, based in Santa
Ana, California, is a provider of proprietary web-based customer
relationship management software. It develops, sells and implements software
systems that enable automated, single point of contact delivery of customer
service.
On October 27, 2000, the Company acquired 16% of the capital stock
of ATEC Group, Inc. (AMEX:TEC), in consideration for shares of its common
stock valued at approximately $9.1 million.
17
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Goodwill associated with the acquisition amounted to approximately $7.8
million and will be amortized over 20 years at the rate of approximately
$0.4 million per year. Based in Commack, New York, ATEC is a leading system
integrator and provider of a full line of information technology products
and services.
On October 31, 2000, under an agreement dated November 3, 2000, the
Company sold its wholly-owned subsidiary STC Netcom, Inc.
On November 2, 2000 the Company acquired 80% of the capital stock
of Connect Intelligence Limited, in consideration for shares of its common
stock valued at approximately $10.0 million. Goodwill associated with the
acquisition amounted to approximately $7.1 million and will be amortized
over 20 years at the rate of approximately $0.4 million per year. Based in
Ireland, Connect Intelligence has successfully completed a vetting procedure
and has now been formally offered up to 70 high-speed fiber optic circuits
from the Irish government's Department of Enterprise and Employment. The
offering, part of the Irish government's e-commerce infrastructure
initiative, grants Connect Intelligence and its partners exclusive rights to
nearly one half of all circuits to and from the Republic of Ireland.
On November 13, 2000 the Company entered into an agreement to
acquire approximately 54% of the outstanding capital stock of SysComm
International Corporation (NASDAQ:SYCM) in consideration for a combination
of cash and shares of its common stock valued at $4.5 million. No goodwill
was associated with the acquisition. Concurrently, the Company agreed to
sell its interest in Information Products Corporation to SysComm. Based in
Shirley, New York, SysComm is a network and systems integrator and reseller
of computer hardware.
18
<PAGE>
<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 1999 Annual Report on Form 10-K. 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.
Applied Digital Solutions, Inc. is a leading edge, single-source
provider of e-business solutions. We differentiate ourselves in the
marketplace by enabling e-business through Computer Telephony Internet
Integration (CTII(TM)). Beginning in the fourth quarter of 1998 and
continuing into 1999 and 2000, we reorganized to refocus our strategic
direction, organizing into four core business groups: Telephony, Network,
Internet and Applications. With CTII we provide the full range of services
and skills companies need to conduct business online.
Our objective is to continue to grow each of our core 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 2000 and future years, but there can be no assurance that
management will be able to continue to find, acquire, finance and integrate
high quality companies at attractive prices.
As part of the reorganization of our core business into four
reportable business groups, we implemented a restructuring plan in the first
quarter of 1999. The restructuring plan included the exiting of selected
lines of business within our Telephony and Applications business groups, and
the associated write-off of assets. In the first quarter of 1999, we
incurred a restructuring charge of $2.2 million that included asset
impairments, primarily software and other intangible assets, of $1.5
million, lease terminations of $0.5 million, and employee separations of
$0.2 million. In addition, during the first quarter of 1999, as part of our
core business reorganization, we realigned certain operations within our
Telephony division and recognized impairment charges and other related costs
of $0.3 million.
In the second quarter of 2000, IntelleSale recorded a pre-tax
charge of $17.0 million. Included in this charge is an inventory reserve of
$8.5 million for products IntelleSale expects to sell below cost, $5.5
million related to specific accounts and other receivables, and $3.0 million
related to fees and expenses incurred in connection with IntelleSale's
cancelled IPO and certain other intangible assets. The former Bostek owners
filed a lawsuit against the Company and IntelleSale claiming that their
earnout payment was inadequate. The Company and IntelleSale believe that the
claim is without merit and intend to defend it vigorously, and have filed
counterclaims alleging, among other things, fraud on the part of the former
Bostek owners. IntelleSale has also filed a lawsuit in Massachusetts seeking
to recover the damages it has sustained.
19
<PAGE>
<PAGE>
RECENT DEVELOPMENTS
SERIES C PREFERRED STOCK TRANSACTION
The Preferred Stock. On October 26, 2000, we issued 26 thousand
shares of Series C convertible preferred stock to a select group of
institutional investors in a private placement. The stated value of the
preferred stock is $1,000 per share, or an aggregate of $26.0 million, and
the purchase price of the preferred stock and the related warrants was an
aggregate of $20.0 million. The preferred stock is convertible into shares
of our common stock initially at a rate of $7.56 in stated value per share,
which is reduced to $5.672 in stated value per share 91 days after issuance
of the preferred stock. At the earlier of 90 days after the issuance of the
preferred stock or upon the effective date of our registration statement
relating to the common stock issuable on the conversion of the initial
series of preferred stock, the holders also have the option to convert the
stated value of the preferred stock to common stock at an alternative
conversion rate starting at 140% and declining to 110% of the average
closing price for the 10 trading days preceding the date of the notice of
conversion. The conversion price and the alternative conversion price are
subject to adjustment based on certain events, including our issuance of
shares of common stock, or options or other rights to acquire common stock,
at an issuance price lower than the conversion price of the preferred stock,
or issuance of convertible securities that have a more favorable price
adjustment provision than the preferred stock. We will be required to
accrete the discount on the preferred stock through equity. However, the
accretion will reduce the income available to common stockholders and
earnings per shares. The value assigned to the warrants will increase the
discount on the preferred stock. The holders of the preferred stock are
entitled to receive annual dividends of 4% of the stated value (or 5.2% of
the purchase price) payable in either cash or additional shares of preferred
stock.
If certain triggering events occur in respect of the preferred
stock, the holders may require us to redeem the preferred stock at a price
per share equal to 130% of the stated value (or an aggregate of $33.8
million) plus accrued dividends, as long as such redemption is not
prohibited under our credit agreement. In addition, under certain
circumstances during the occurrence of a triggering event, the conversion
price per share of the preferred stock would be reduced to 50% of the lowest
closing price of our common stock during such period. The triggering events
include (i) failure to have the registration statement relating to the
common stock issuable on the conversion of the preferred stock declared
effective on or prior to 180 days after issuance of the preferred stock or
the suspension of the effectiveness of such registration statement, (ii)
suspensions in trading of or failure to list the common stock issuable on
conversion of the preferred stock, (iii) failure to obtain shareholder
approval at least by June 30, 2001 for the issuance of the common stock upon
the conversion of the preferred stock and upon the exercise of the warrants,
and (iv) certain defaults in payment of or acceleration of our payment
obligations under our credit agreement.
Warrants. The holders of the preferred stock have also received 0.8
million warrants to purchase up to 0.8 million shares of our common stock
over the next five years. The exercise price is $4.73 per share, subject to
adjustment for various events, including the issuance of shares of common
stock, or options or other rights to acquire common stock, at an issuance
price lower than the exercise price under the warrants. The exercise price
may be paid in cash, in shares of common stock or by surrendering warrants.
Option to Acquire Additional Preferred Stock. The investors may
purchase up to an additional $26.0 million in stated value of Series C
convertible preferred stock and warrants with an initial conversion price of
$5.00 per share, for an aggregate purchase price of $20.0 million, at any
time up to ten months following the effective date of the Company's
registration statement relating to the common stock issuable
20
<PAGE>
<PAGE>
on conversion of the initial series of the preferred stock. The additional
preferred stock will have the same preferences, qualifications and rights as
the initial preferred stock.
ACQUISITIONS AND DISPOSITIONS
In April 1999, we acquired:
(a) 100% of Port Consulting, Inc., an integrator of information
technology application systems and custom application development services
based in Jacksonville, Florida;
(b) 100% 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; and
(d) 100% of STR, Inc., a software solutions company based in
Cleveland, Ohio.
In May 1999, we entered into an agreement to merge our wholly owned
Canadian subsidiary, TigerTel Services Limited, with Contour Telecom
Management, Inc., a Canadian company. We received, in a reverse merger
transaction, 19,769 shares of Contour's common stock, representing
approximately 75% of the total outstanding shares. In November 1999,
TigerTel received an all cash bid for all of its outstanding common shares
from AT&T Canada, Inc. We entered into a lock-up agreement with AT&T to
tender the approximately 65% of the outstanding shares we owned and, on
December 30, 1999, AT&T purchased all of the shares tendered. We recorded a
pre-tax gain in the fourth quarter of 1999 of approximately $20.1 million,
and received gross proceeds of approximately $31.3 million in January 2000,
which we applied against the outstanding balance on our domestic revolving
credit line.
In June 1999, IntelleSale purchased all of the shares of 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.
In October 1999, we disposed of the main business units comprising
our Communications Infrastructure division and dissolved this group. As
consideration for the sale, we received approximately 2.8 million shares of
our common stock and a note for $2.5 million. The treasury shares were
recorded at the book value of the divested assets ($2.54 per share), which
resulted in no gain being recognized. The transaction was reflected at book
value because the shareholders of the purchaser of the divested assets were
collectively deemed to be significant shareholders of the Company.
Since April 1, 2000, we acquired, in transactions accounted for under
the purchase method of accounting:
* 100% of the capital stock of Independent Business Consultants, a
network integration company based in Valley Village, California,
effective as of April 1, 2000;
* 100% of the capital stock of Timely Technology Corp., a software
developer and application service provider based in Riverside,
California, effective as of April 1, 2000;
21
<PAGE>
<PAGE>
* 100% of the capital stock of P-Tech, Inc., a software development
company based in Manchester, New Hampshire, effective as of April
1, 2000;
* 100% of the capital stock of Computer Equity Corporation, a
communications integration company based in Chantilly, Virginia,
effective as of June 1, 2000;
* 100% of the capital stock of WebNet Services, Inc., an internet
service provider, network integrator and website developer,
effective July 1, 2000; and
On September 8, 2000, we completed our acquisition of Destron
Fearing Corporation, through a merger of our wholly-owned subsidiary,
Digital Angel.net Inc., into Destron Fearing. As a result of the merger,
Destron Fearing is now our wholly-owned subsidiary and has been renamed
"Digital Angel.net Inc." The transaction was accounted for under the
purchase method of accounting.
In connection with the merger, each outstanding share of Destron
Fearing common stock was exchanged for 1.5 shares of the Company's common
stock, with fractional shares settled in cash. In addition, outstanding
options and warrants to purchase shares of Destron Fearing common stock were
converted into a right to purchase that number of shares of the Company's
common stock as the holders would have been entitled to receive had they
exercised such options an warrants prior to September 8, 2000 and
participated in the merger. The Company issued 20.5 million shares if its
common stock in exchange for all the outstanding common stock of Destron
Fearing and 0.3 million shares of its common stock as a transaction fee. The
Company will issue up to 2.7 million shares of its common stock upon the
exercise of the Destron Fearing options and warrants.
Destron Fearing has been in the animal identification business
since 1945. For over 50 years, Destron Fearing has developed, manufactured
and marketed a broad range of individual animal identification products.
Destron Fearing owns patents worldwide in microchip technology and is a
leader in the world evolution of radio frequency animal identification.
Effective as of October 19, 2000, we entered into transactions with
MCY.com, Inc. (OTC-BB:MCYC) ("MCY") under which we sold to MCY a
non-exclusive worldwide license to use our recently-acquired Net-Vu product,
an Internet-based Automatic Contact Distributor, for $9.0 million in cash
plus $1.0 million in shares of MCY. In addition, MCY granted to us an
exclusive license to MCY's digital encryption and distribution systems,
including its NETrax(TM) software for use in various non-entertainment
business-to-business applications, in consideration for 11.8 million shares
of our common stock valued of $40.0 million. These transactions with MCY are
subject to governmental clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
On October 25, 2000, we acquired Pacific Decision Sciences
Corporation, a California corporation ("PDSC"). In the merger transaction,
we issued approximately 8.6 million shares of our common stock. In addition,
for each of the twelve-month periods ending September 30, 2001 and September
30, 2002, the former stockholders of PDSC will be entitled to receive
earnout payments, payable in cash or in shares of our common stock, of $9.7
million plus 4.0 times EBITDA (as defined in the merger agreement) in excess
of $3.7 million, subject to reduction by 4.0 times the shortfall from the
Projected EBITDA Amount (as defined in the merger agreement). Goodwill
associated with the acquisition amounted to approximately $23.5 million and
will be amortized over 20 years at the rate of approximately $1.2 million
per year. PDSC, based in Santa Ana, California, is a provider of proprietary
web-based customer relationship management software. It develops, sells and
implements software systems that enable automated, single point of contact
delivery of customer service.
22
<PAGE>
<PAGE>
On October 27, 2000, we acquired 16% of the capital stock of ATEC
Group, Inc. (AMEX:TEC), in consideration for shares of our common stock
valued at approximately $9.1 million. Goodwill associated with the
acquisition amounted to approximately $7.8 million and will be amortized
over 20 years at the rate of approximately $0.4 million per year. Based in
Commack, New York, ATEC is a leading system integrator and provider of a
full line of information technology products and services.
On October 31, 2000, under an agreement dated November 3, 2000, we
sold our wholly-owned subsidiary STC Netcom, Inc.
On November 2, 2000 we acquired 80% of the capital stock of Connect
Intelligence Limited, in consideration for shares of our common stock valued
at approximately $10.0 million. Goodwill associated with the acquisition
amounted to approximately $7.1 million and will be amortized over 20 years
at the rate of approximately $0.4 million per year. Based in Ireland,
Connect Intelligence has successfully completed a vetting procedure and has
now been formally offered up to 70 high-speed fiber optic circuits from the
Irish government's Department of Enterprise and Employment. The offering,
part of the Irish government's e-commerce infrastructure initiative, grants
Connect Intelligence and its partners exclusive rights to nearly one half of
all circuits to and from the Republic of Ireland.
On November 13, 2000 we entered into an agreement to acquire
approximately 54% of the outstanding capital stock of SysComm International
Corporation (NASDAQ:SYCM) in consideration for a combination of cash and
shares of our common stock valued at $4.5 million. No goodwill was associated
with the acquisition. Concurrently, we agreed to sell our interest in
Information Products Corporation to SysComm. Based in Shirley, New York,
SysComm is a network and systems integrator and reseller of computer
hardware.
OUR BUSINESS
Beginning in the fourth quarter of 1998 and continuing into 1999
and 2000, we reorganized into six operating segments to more effectively and
efficiently provide integrated communications products and services to a
broad base of customers. During the second quarter of 1999, several
adjustments were made to the composition of the Telephony, Internet and
Non-core divisions to better align the strengths of the respective divisions
with the objectives of those divisions. In October 1999, we disposed of the
main business units comprising our Communication Infrastructure division and
dissolved this group. Prior period information has been restated to present
our reportable segments.
CORE BUSINESS
Our primary businesses, other than IntelleSale, the Non-Core
Business Group, and Digital Angel, are now organized into four business
divisions:
* TELEPHONY -- implements telecommunications and Computer Technology
Integration (CTI) solutions for e-business. We integrate a wide
range of voice and data solutions from communications systems to
voice over Internet Protocol and Virtual Private Networking (VPN).
We provide complete design, project management, cable/fiber
infrastructure, installation and ongoing support for the customers
we support. On December 30, 1999, as discussed above, we sold our
interest in our Canadian subsidiary, TigerTel, Inc. to concentrate
our efforts on our domestic CTI solutions.
23
<PAGE>
<PAGE>
* NETWORK -- is a professional services organization dedicated to
delivering quality e-business services and support to our client
partners, providing e-business infrastructure design and
deployment, personal computer network infrastructure for the
development of local and wide area networks as well as site
analysis, configuration proposals, training and customer support
services.
* INTERNET -- equips our customers with the necessary tools and
support services to enable them to make a successful transition to
implementing e-business practices, Enterprise Resource Planning
(ERP) and Customer Relationship Management (CRM) solutions, website
design, and application and internet access services to customers
of our other divisions.
* APPLICATIONS -- provides software applications for large retail
application environments, including point of sale, data
acquisition, asset management and decision support systems and
develops programs for portable data collection equipment, including
wireless hand-held devices. It is also involved in the design,
manufacture and support of satellite communication technology
including satellite modems, data broadcast receivers and wireless
global positioning systems for commercial and military
applications.
INTELLESALE
IntelleSale sells refurbished and new computer equipment and
related components online, through its website at www.IntelleSale.com, and
through other Internet companies, as well as through traditional channels,
which includes sales made by IntelleSale's sales force.
THE NON-CORE BUSINESS GROUP
This group is comprised of six individually managed companies whose
businesses are as follows:
* Gavin-Graham Electronic Products is a custom manufacturer of
electrical products, specializing in digital and analog
panelboards, switchboards, motor controls and general control
panels. The company also provides custom manufacturing processes
such as shearing, punching, forming, welding, grinding, painting
and assembly of various component structures.
* Ground Effects, Ltd., based in Windsor, Canada, is a certified
manufacturer and tier one supplier of standard and specialized
vehicle accessory products to the automotive industry. The company
exports over 80% of the products it produces to the United States,
Mexico, South America, the Far East and the Middle East.
* Hopper Manufacturing Co., Inc. remanufactures and distributes
automotive parts. This primarily includes alternators, starters,
water pumps, distributors and smog pumps.
* Innovative Vacuum Solutions, Inc. designs, installs and
re-manufactures vacuum systems used in industry.
* Americom and STC Netcom are each involved in the fabrication,
installation and maintenance of microwave, cellular and digital
personal communication services towers.
We previously announced our intention to divest, in the ordinary
course of business, our non-core businesses at such time and on such terms
as our Board of Directors determines advisable. During the third quarter of
2000, we sold ACT Leasing for no gain or loss, and effective October 31,
2000, we sold
24
<PAGE>
<PAGE>
STC Netcom, Inc. There can be no assurance that we will divest
of any or all of these remaining businesses or as to the terms of any
divestiture transaction.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations
as a percentage of net operating revenue for the three and nine month
periods ended September 30, 2000 and 1999 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
% % % %
- - - -
<S> <C> <C> <C> <C>
Net operating revenue 100.0 100.0 100.00 100.0
Cost of goods sold 68.8 73.3 71.5 68.3
Unusual inventory charge 0.0 0.0 3.8 0.0
-------------------------------------
Gross profit 31.2 26.7 24.7 31.7
Selling, general and administrative expenses 28.8 22.4 29.5 26.7
Depreciation and amortization 4.2 2.4 3.4 2.8
Unusual and restructuring charges 0.0 0.0 3.8 1.1
Interest income (0.1) (0.2) (0.3) (0.2)
Interest expense 2.2 1.1 1.9 1.0
-------------------------------------
Income (loss) before provision (benefit) for income taxes, minority
interest and extraordinary loss (3.9) 1.0 (13.6) 0.3
Provision (benefit) for income taxes (1.7) 0.6 (4.5) 0.4
-------------------------------------
Income (loss) before minority interest and extraordinary loss (2.2) 0.4 (9.1) (0.1)
Minority interest 0.2 0.0 0.2 0.2
-------------------------------------
Income (loss) before extraordinary loss (2.4) 0.4 (9.3) (0.3)
Extraordinary loss 0.0 0.0 0.0 0.1
-------------------------------------
Net income (loss) available to common stockholders (2.4) 0.4 (9.3) (0.4)
=====================================
</TABLE>
COMPANY OVERVIEW
Revenue
-------
Revenue for the three months ended September 30, 2000 was $73.8
million, a decrease of $33.5 million, or 31.2%, from $107.3 million for the
three months ended September 30, 1999. Revenue for the nine months ended
September 30, 2000 was $222.9 million, a decrease of $8.9 million, or 3.8%,
from $231.8 million for the nine months ended September 30, 1999. The
decrease for the three and nine month periods is due primarily to the
dispositions during 1999. Also, revenue for the third quarter has decreased
because we ceased selling certain low-margin Bostek products during the
second quarter of 2000, as more fully discussed below. Partially offsetting
these decreases were revenues from acquisition during the nine months ended
September 30, 2000.
25
<PAGE>
<PAGE>
Revenue for each of the operating segments was:
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telephony(1) $12,276 $ 17,265 $ 27,210 $ 40,797
Network 12,758 7,399 31,026 19,905
Internet 4,248 2,285 9,071 4,405
Applications 11,638 11,800 30,069 26,498
IntelleSale 21,447 51,481 94,865 92,742
Non-Core(2) 12,532 19,820 35,566 52,379
Corporate Consolidating Eliminations (1,053) (2,788) (4,945) (4,936)
----------------------------------------------------
Consolidated $73,846 $107,262 $222,862 $231,790
====================================================
<FN>
---------
(1) Includes TigerTel's revenue of $12.4 million and $25.8 million for
the three and nine months ending September 30, 1999.
(2) Includes revenue from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Revenue
for these disposed entities included above amounted to $10.5
million and $26.4 million during the three and nine months ended
September 30, 1999.
</TABLE>
Changes during the quarter were:
* Telephony revenue decreased 28.9% for the quarter and 33.3% for the
nine months primarily as a result of the sale of TigerTel in
December 1999. Revenue from the remaining entities increased by
$7.4 million in the quarter and $12.2 million for the nine months
primarily as a result of the acquisition, in the second quarter of
2000, of Computer Equity Corporation.
* Network revenue increased 72.4% for the quarter and 55.9% for the
nine months. The acquisition of Independent Business Consultants in
the second quarter of 2000 contributed $2.9 million and $5.3
million, representing 54.1% and 47.6% of the increase for the
quarter and nine months, respectively. Growth of existing business
contributed the additional increase in the three and nine month
periods.
* Internet revenue increased by 85.9% in the quarter and 105.9% for
the nine months. The increases were due to the result of the growth
of Port Consulting, Inc., which was acquired on April 1, 1999 and
to the acquisitions of Timely Technology Corp. on April 1, 2000 and
WebNet Services, Inc. on July 1, 2000.
* Applications revenue decreased by 1.4% in the quarter and increased
by 13.5% for the nine months. The decline in the quarter is due to
a delay in implementations of retail application software and a
shift into new geographic markets for existing businesses.
Partially offsetting the decrease in revenue for the quarter and
the primary contributors to the increase in revenue for the nine
months are the acquisitions of Destron Fearing Corporation, which
was acquired on September 8, 2000, and P-Tech, Inc., which was
acquired during the second quarter of 2000. During the nine months
of 2000, Destron Fearing Corporation and P-Tech, Inc. contributed
revenue of $2.7 million and $2.4 million, respectively.
26
<PAGE>
<PAGE>
* IntelleSale's revenue decreased 58.3% in the quarter, while revenue
for the nine months increased 2.3%. As previously discussed, the
Company and IntelleSale are in a dispute with the former owners of
Bostek and have ceased selling certain high-volume, low-margin
Bostek products in the second quarter of 2000. Revenue remained
relatively stable for the nine months periods despite the loss of
revenue from Bostek products due to increased business in several
of IntelleSale's subsidiaries.
* Non-core revenue, which includes revenue from the former
Communications Infrastructure group, decreased $7.3 million, or
36.8%, in the third quarter and $16.8 million, or 32.1%, for the
nine months. Four entities in this segment were sold during 1999
and their revenue is no longer included, and certain lines of
business within this segment continue to suffer from competition
and lost market share. Partially offsetting the decrease was an
increase in Ground Effect's revenue due to increased business.
Gross Profit and Gross Margin Percentage
----------------------------------------
Gross profit for the three months ended September 30, 2000 was
$23.0 million, a decrease of $5.7 million, or 19.9%, from $28.7 million for
the three months ended September 30, 1999. Gross profit for the nine months
ended September 30, 2000 was $55.0 million, a decrease of $18.4 million, or
25.1% from $73.4 million for the nine months ended September 30, 1999. As a
percentage of revenue, the gross margin was 31.2% and 26.7% for the three
months ended September 30, 2000 and 1999, and was 24.7% and 31.7% for the
nine months ended September 30, 2000 and 1999 respectively.
Gross profit for the three and nine months ended September 30, 2000
and 1999 by each of the operating segments was:
(In thousands)
<TABLE>
<CAPTION>
------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telephony(1) $ 4,214 $ 5,837 $10,853 $16,853
Network 2,899 2,574 8,048 6,226
Internet 2,845 1,696 6,824 3,314
Applications 5,747 5,367 15,350 14,537
IntelleSale 4,253 7,943 5,623 19,588
Non-Core(2) 3,015 5,219 8,113 12,825
Corporate 59 30 167 69
------------------------------------------------------
Consolidated $23,032 $28,666 $54,978 $73,412
======================================================
<FN>
---------
(1) Includes TigerTel's gross profit of $3.8 million and $11.1 million
for the three and nine months ended September 30, 1999.
(2) Includes gross profit from the Communications Infrastructure group
of companies, the majority of which were disposed of in 1999. Gross
profit for these disposed entities included above amounted to $2.4
million and $5.7 million during the three and nine months ended
September 30, 1999.
</TABLE>
27
<PAGE>
<PAGE>
Gross margin percentage for the three and nine months ended
September 30, 2000 and 1999 by operating segments was:
<TABLE>
<CAPTION>
-----------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
% % % %
- - - -
<S> <C> <C> <C> <C>
Telephony(1) 34.3 33.8 39.9 41.3
Network 22.7 34.8 25.9 31.3
Internet 67.0 74.2 75.2 75.2
Applications 49.4 45.5 51.0 54.9
IntelleSale 19.8 15.4 5.9 21.1
Non-Core(2) 24.1 26.3 22.8 24.5
-----------------------------------------------------
Consolidated 31.2 26.7 24.7 31.7
=====================================================
<FN>
---------
(1) Includes TigerTel's gross profit margin of 30.6% and 43.0% and for
the three and nine months ended September 30, 1999.
(2) Includes gross profit margin from the Communications Infrastructure
group of companies, the majority of which were disposed of in 1999.
Gross profit margin for these disposed entities included above
amounted to 22.9% and 21.6% during the three and nine months ended
September 30, 1999.
</TABLE>
Changes during the quarters were:
* Telephony gross profit decreased by 27.8% for the quarter and 35.6%
for the nine months primarily as a result of the sale of TigerTel
in December 1999. This was partially offset by the acquisition, in
the second quarter of 2000, of Computer Equity Corporation, which
contributed $1.7 million and $3.0 million in gross profit for the
three and nine months periods, respectively. Margins increased to
34.3% from 33.8% for the quarter primarily due to higher margins
from existing businesses and decreased to 39.9% from 41.3% for the
nine months primarily as a result of the sale of TigerTel.
* Network gross profit increased in the quarter and nine months due
to the acquisition of Independent Business Consultants during the
second quarter of 2000 and increased profits from our existing
businesses. Gross margins decreased for the quarter and nine months
primarily because Independent Business Consultants earns lower
margins than our existing businesses.
* Internet gross profit increased for the three and nine month
periods as a result of increased business from Port Consulting,
Inc., acquired in the second quarter of 1999 and the inclusion of
Timely Technology Corp., acquired in the second quarter of 2000 and
WebNet Services, Inc., acquired July 1, 2000. Timely Technology and
WebNet Services, Inc. earn lower margins than Port Consulting,
which resulted in the slight decrease in the quarter. Margins
remained stable for the nine months. Generally, gross profit and
margins are higher in this division as it is service oriented and
most of its operating costs are recorded in selling, general and
administrative expense.
* Applications gross profit increased $0.4 million or 7.1% in the
quarter and increased $0.8 million or 5.6% for the nine months.
Margins increased 3.9% and decreased 3.9% for the three and nine
month periods, respectively. The increase in margins for the
quarter is due primarily to the acquisitions of Destron Fearing
Corporation and P-Tech, Inc. The decrease in margins for the nine
months is due primarily to a delay in implementations of
applications for one our existing
28
<PAGE>
<PAGE>
businesses. Also, we are continuing to implement our planned exit
from a once highly profitable but declining modem and
communications market in the United Kingdom.
* IntelleSale's gross profit decreased in the quarter and nine
months. As previously discussed, the Company and IntelleSale are in
a dispute with the former owners of Bostek and have ceased selling
certain high-volume, low-margin Bostek products. During the second
quarter of 2000, the Company set up an inventory reserve of $8.5
million and, in addition, inventory was liquidated at below cost
resulting in a loss of approximately $3.4 million, both of which
affected IntelleSale's gross profit and margins in the nine months.
Gross margin increased in the quarter primarily as a result of
ceasing the sales of the low margin products discussed above.
* Non-core gross profit and margins decreased primarily as a result
of the sale of four businesses during 1999. Improved business
conditions at Ground Effects partially offset the decrease in gross
profit for the nine months.
Selling, General and Administrative Expense
-------------------------------------------
Selling, general and administrative expense for the three months
ended September 30, 2000 was $21.2 million, a decrease of $2.8 million, or
11.7%, from $24.0 million for the three months ended September 30, 1999.
Selling, general and administrative expense for the nine months ended
September 30, 2000 was $65.8 million, an increase of $4.0 million, or 6.5%
from $61.8 million for the nine months ended September 30, 1999. As a
percentage of revenue, selling, general and administrative expense was 28.8%
and 22.4% for the three months ended September 30, 2000 and 1999, and was
29.5% and 26.7% for the nine months ended September 30, 2000 and 1999,
respectively.
Selling, general and administrative expense for the three and nine
months ended September 30, 2000 and 1999 by each of the operating segments
was:
(In thousands)
<TABLE>
<CAPTION>
------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telephony(1) $ 3,400 $ 4,829 $ 8,424 $14,459
Network 1,616 1,913 5,808 4,566
Internet 2,505 1,397 6,386 2,716
Applications 4,697 4,616 14,111 12,617
IntelleSale 3,850 5,737 15,560 13,259
Non-Core(2) 1,932 4,196 5,934 10,083
Corporate 3,227 1,334 9,528 4,138
------------------------------------------
Consolidated $21,227 $24,022 $65,751 $61,838
==========================================
<FN>
---------
(1) Includes TigerTel's SG&A of $2.8 million and $8.2 million for the
three and nine months ended September 30, 1999.
(2) Includes SG&A from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. SG&A for
these disposed entities included above amounted to $1.8 million and
$4.6 million in the three and nine months ended September 30, 1999.
</TABLE>
29
<PAGE>
<PAGE>
Selling, general and administrative expense as a percentage of revenue for
the three and nine months ended September 30, 2000 and 1999 by each of the
operating segments was:
<TABLE>
<CAPTION>
--------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
% % % %
- - - -
<S> <C> <C> <C> <C>
Telephony(1) 27.7 28.0 31.0 35.4
Network 12.7 25.9 18.7 22.9
Internet 59.0 61.1 70.4 61.7
Applications 40.4 39.1 46.9 47.6
IntelleSale 18.0 11.1 16.4 14.3
Non-Core(2) 15.4 21.2 16.7 19.3
--------------------------------------------
Consolidated 28.8 22.4 29.5 26.7
============================================
<FN>
---------
(1) Includes TigerTel's SG&A of 22.6% and 31.8% for the three and nine
months ended September 30, 1999.
(2) Includes SG&A from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. SG&A for
these disposed entities included above amounted to 17.1% and 17.4%
for the three and nine months ended September 30, 1999.
</TABLE>
Changes during the quarter were:
* Telephony decreased $1.4 million or 29.2% in the quarter and $6.0
million or 41.4% in the nine months primarily due to the sale of
TigerTel in December 1999. As a percentage of revenue, SG&A expense
in this division decreased for both periods as a result of lower
SG&A costs excluding TigerTel, which had a historically higher
percentage of SG&A to revenue.
* Network remained relatively stable in dollar terms for the third
quarter of 2000. The increase of $1.2 million or 26.3% for the nine
months is due to increases in salaries and related benefits, rent
and additional sales and marketing expenses, some of which is
attributable to the acquisition of Creative Computers in April
2000. As a percentage of revenue, SG&A expense in this division
decreased 13.2% in the quarter and 4.2% for the nine months
primarily because Creative Computers incurs lower SG&A expense as a
percentage of revenue than our existing businesses.
* Internet increased in dollar terms for the three and nine month
periods as a result of increased business by Port Consulting,
acquired in the second quarter of 1999 and the inclusion of Timely
Technology Corp., acquired in the second quarter of 2000 and the
acquisition of WebNet Services, Inc. on July 1, 2000. As a
percentage of revenue, SG&A decreased for the quarter primarily due
the acquisitions of Timely Technology Corp. and WebNet Services,
Inc. which have lower SG&A costs and increased for the nine months
due to higher expenses associated with our expansion of Port
Consulting. As a rule, entities comprising this group are service
oriented companies with lower cost of goods sold but higher SG&A
expenses.
* Applications increased $0.1 million or 2.2% for the quarter and
$1.5 million or 11.9% for the nine months due to the acquisition of
P-Tech, Inc. in the second quarter of 2000 and Destron Fearing
Corporation on September 8, 2000. Partially offsetting these
increases was a decrease in SG&A
30
<PAGE>
<PAGE>
expenses of existing businesses. As a percentage of revenue, SG&A
expense in this division has remained relatively stable over the
comparable 1999 periods.
* IntelleSale's SG&A expenses decreased in dollar terms in the
quarter primarily as a result of a reduction in personnel related
costs as we consolidated the businesses and ceased certain
operations related to Bostek. SG&A expenses increased in the nine
months as a result of the acquisition of Bostek in June 1999 and
the expansion of that company's infrastructure to handle increases
in both its traditional and internet related business and the
consolidation of operations into one facility. As a percentage of
revenue, SG&A expense in this division has increased 6.9% and 2.1%
in the quarter and nine months, respectively, primarily due to
lower sales from Bostek.
* Non-core SG&A decreased in dollar terms and as a percentage of
revenue primarily as a result of the sale of four entities during
1999.
* Corporate SG&A increased $1.9 million or 142.4% in the quarter and
$5.4 million or 130.5% for the nine months as a result of the
establishment of a corporate office in June of 1999, and the
corresponding costs associated therewith, including increases in
personnel and the associated costs therewith, facilities costs,
increases in the remuneration of outside directors, insurance and
legal and other professional fees.
Depreciation and Amortization
-----------------------------
Depreciation and amortization expense for the three months ended
September 30, 2000 was $3.1 million, an increase of $0.5 million or 19.2%,
from $2.6 million for the three months ended September 30, 1999.
Depreciation from companies disposed was offset by depreciation from
companies acquired and fixed asset additions. Depreciation and amortization
expense for the nine months ended September 30, 2000 was $7.5 million, an
increase of $1.1 million, or 17.2%, from $6.4 million for the nine months
ended September 30, 1999.
31
<PAGE>
<PAGE>
Depreciation and amortization expense for the three and nine months
ended September 30, 2000 and 1999 by operating segments was:
<TABLE>
<CAPTION>
---------------------------------------------------
(In thousands) THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telephony(1) $ 201 $ 465 $ 428 $1,127
Network 32 51 117 86
Internet 72 23 150 46
Applications 332 461 841 1,208
IntelleSale 232 132 575 317
Non-Core(2) 245 364 852 949
Corporate(3) 2,022 1,116 4,572 2,640
---------------------------------------------------
Consolidated $3,136 $2,612 $7,535 $6,373
===================================================
<FN>
---------
(1) Includes TigerTel's depreciation and amortization of $0.4 million
and $0.9 million in the three and nine months ended September 30,
1999.
(2) Includes depreciation and amortization from the Communications
Infrastructure group of companies, the majority of which were
disposed of in 1999. Depreciation and amortization for these
disposed entities included above amounted to $0.1 million and $0.3
million in the three and nine months ended September 30, of 1999.
(3) Includes consolidation adjustments of $1.6 million and $0.9 million
in the third quarters ended September 30, 2000 and 1999,
respectively, and $3.6 million and $1.9 million in the first nine
months ended September 30, 2000 and 1999, respectively.
</TABLE>
Changes during the quarter were
* Telephony decreased primarily as a result of the sale of TigerTel
in December 1999.
* Network decrease in the quarter as a result of assets retired in
previous quarters and increased in the nine month period due to an
increase in depreciable assets in this group during 1999 and 2000.
* Internet increased due to the increase in depreciable assets
associated with the expansion of this division during 1999 and 2000
and the acquisitions of Timely Technology Corp. in the second
quarter of 2000 and WebNet Services, Inc. on July 1, 2000.
* Applications decreased due primarily to the reduction of
depreciable assets in this division during 2000.
* IntelleSale increased as a result of the increase in depreciable
assets during 1999 and the first half of 2000 associated with the
consolidation of the businesses into one facility.
* Non-core decreased in 2000 due primarily to the sale of assets
associated with the Communications Infrastructure group of
companies in 1999.
On an annual basis, goodwill amortization will be approximately $8.8 million
for goodwill recorded as of September 30, 2000.
32
<PAGE>
<PAGE>
Interest Income and Expense
---------------------------
Interest income was $0.1 million and $0.2 million for the three
months ended September 30, 2000 and 1999, respectively, and was $0.7 million
and $0.4 million for the nine months ended September 30, 2000 and 1999,
respectively. Interest income is earned primarily from short-term
investments and notes receivable.
Interest expense was $1.6 million and $1.2 million for the three
months ended September 30, 2000 and 1999, respectively, and was $4.1 million
and $2.3 million for the nine months ended September 30, 2000 and 1999,
respectively. Interest expense is principally associated with revolving
credit lines, notes payable and term loans.
Income Taxes
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The effective tax rates were 42.7% and 62.7% for the three months
ended September 30, 2000 and 1999, respectively and 32.9% and 137.6% for the
nine months ended September 30, 2000 and 1999, respectively. The income tax
benefits are the result of losses arising in the periods. The effective tax
rates differed from the statutory federal income tax rate of 34% primarily
as a result of non-deductible goodwill amortization associated with
acquisitions and state taxes net of federal benefits.
Extraordinary Loss
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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 $0.2 million, net of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, cash and cash equivalents totaled $9.5
million, an increase of $4.4 million, or 86.3% from $5.1 million at December
31, 1999. We utilize a cash management system to apply excess cash on hand
against our revolving credit facility for which we had availability of $0.2
million at September 30, 2000, down from $11.8 million at December 31, 1999.
Working capital was $65.1 million at both September 30, 2000 and December
31, 1999. Cash used by operating activities totaled $33.6 million in the
first nine months of 2000 as compared to cash used by operating activities
of $14.3 million in the first nine months of 1999. Excluding assets and
liabilities acquired or assumed in connection with acquisitions, cash used
in the first nine months of 2000 was due to the net loss, after adjusting
for non-cash expenses, and increases in inventories, prepaid expenses and
other current assets, deferred taxes and decreases in accounts payable and
accrued expenses. Partially offsetting these uses was cash received on the
collection of accounts receivable. Excluding assets and liabilities acquired
or assumed in connection with acquisitions, cash used in the first nine
months of 1999 was due to the net loss, after adjusting for non-cash
expenses, and increases in receivables, inventories and prepaid expenses and
other current assets. An increase in accounts payable and accrued expenses
partially offset these uses.
"Due from buyer of divested subsidiary" at December 31, 1999
represents the net proceeds due from AT&T Canada, Inc. on the sale of
TigerTel, Inc. This amount was paid in January 2000, and we applied the
proceeds against our domestic line of credit.
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Accounts and unbilled receivables, net of allowance for doubtful
accounts, increased by $3.4 million, or 6.5%, to $55.6 million at September
30, 2000 from $52.2 million at December 31, 1999. This increase was
primarily attributable to the receivables associated with companies acquired
during 2000, partially offset by the unusual charge against receivables in
the second quarter of 2000.
Inventories increased by $2.2 million, or 5.4%, to $42.6 million at
September 30, 2000 from $40.4 million at December 31, 1999. This increase
was primarily attributable to inventories associated with companies acquired
during 2000, partially offset by write-downs of inventories associated with
the second quarter unusual charges.
Prepaid expenses and other current assets increased by 80.0%, or
$4.8 million to $10.8 million at September 30, 2000 from $6.0 million at
December 31, 1999. This increase was primarily attributable to prepaid
expenses and other current assets associated with companies acquired during
2000 and income tax receivable associated with the carryback of net
operating losses.
Other assets increased by $9.4 million, or 86%, to $20.3 million at
September 30, 2000 from $10.9 million at December 31, 1999. The increase was
primarily attributable to other assets associated with the companies
acquired during 2000 and deferred income taxes associated with net operating
losses.
"Due to shareholders of acquired subsidiary" decreased by $5.0
million, or 33.3%, to $10.0 million at September 30, 2000 from $15.0 million
at December 31, 1999. At September 30, 2000, the balance consisted of $10.0
million due to the former owners of Bostek. As previously discussed, due to
the litigation between the Company, IntelleSale and the former Bostek
owners, the $10.0 million payment due to the former Bostek owners on June
30, 2000 was not paid. The Company and IntelleSale intend to vigorously
assert their position set forth in their counterclaims and lawsuits that
such payments are not owed, but continue to carry this amount as a liability
pending the outcome of the litigation.
Accounts payable decreased by $4.6 million, or 15.6%, to $24.9
million at September 30, 2000 from $29.5 million at December 31, 1999. This
decrease was primarily attributable to a reduction of higher payables
incurred in the fourth quarter of 1999 to support year end sales, partially
offset by accounts payable associated with companies acquired in 2000.
Accrued expenses decreased by $1.0 million, or 5.6%, to $16.7
million at September 30, 2000 from $17.7 million at December 31, 1999 due
primarily to a reduction in accrued personnel related costs.
Other current liabilities represent accrued earnout payments of
$2.7 million at December 31, 1999.
Investing activities provided cash of $14.9 million and used cash
of $21.4 million in the first nine months of 2000 and 1999, respectively. In
the first nine months of 2000, cash proceeds of $31.3 million was collected
on the sale of TigerTel, while cash of $10.5 million was used in connection
with acquired businesses, $5.5 million was spent to acquire property and
equipment, $0.6 million was advanced against notes receivable and $0.7
million was used to increase other assets. In the first nine months of 1999,
cash of $15.8 million was used to acquire businesses, $3.8 million was used
to acquire property and equipment and $1.3 million was used to increase
other assets. Partially offsetting these uses was $0.8 million and $0.4
million in proceeds from the sales of property, equipment and other assets
in the first nine months of 2000 and 1999, respectively.
Cash of $23.1 million and $40.2 million was provided by financing
activities in the first nine months of 2000 and 1999, respectively. In the
nine months of 2000, $8.9 million was borrowed under
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notes payable, $7.2 million was repaid and $16.3 million was borrowed on
long-term debt, while $5.5 million was obtained through the issuance of
common shares and $0.4 million was used for other financing costs. In the
nine months of 1999, $51.9 million was borrowed and $8.3 million was repaid
on long-term debt, while $0.1 million was used to repay borrowings under
notes payable and $3.3 million was used for other financing costs.
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 will continue, in the future, to use cash
from operations and will continue to finance this use of cash through
financing activities such as the sale of common and preferred stock and/or
bank borrowing, if available.
In August 1998, we entered into a $20.0 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 $23.0 million. On May 25, 1999, we entered into a
Term and Revolving Credit Agreement with IBM Credit Corporation (the "IBM
Agreement") and, 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, and it was again amended on January 27, 2000. On October 17, 2000,
we entered into a Second Amended and Restated Term and Revolving Credit
Agreement with IBM Credit Corporation. The Second IBM Agreement provides
for: (a) a revolving credit line of up to $67.260 million, subject to
availability under a borrowing base formula, designated as follows: (i) a
U.S. revolving credit line of up to $63.405 million, (ii) a Canadian
revolving credit line of up to $3.855 million, and (b) a term loan A of up
to $25.0 million, and (c) a Canadian term loan C of up to $2.740 million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes and
is payable in full on May 25, 2002. The U.S. revolving credit line bears
interest at the 30-day LIBOR rate plus 2.75% and the Canadian revolving
credit line bears interest at the base rate as announced by the
Toronto-Dominion Bank of Canada each month plus 1.17%. As of September 30,
2000, the LIBOR rate was approximately 6.6% and approximately $33.7 million
was outstanding on the revolving credit line, which is included in long-term
debt.
Term loan A, which was used to pay off State Street Bank and Trust
Company, bears interest at the 30-day LIBOR rate plus 3.5%, is amortized in
quarterly installments over six years and is repayable in full on May 25,
2002. As of September 30, 2000 approximately $17.4 million was outstanding
on this loan.
Term loan B bears interest at the 30-day LIBOR rate plus 1.75% to
1.90%. As of September 30, 2000, approximately $32.6 million was outstanding
on this loan. On October 17, 2000, Term loan B was terminated and the
balance was transferred into the revolving credit line.
Term loan C, which was used by our Canadian subsidiary to pay off
its bank debt, bears interest at the base rate as announced by the
Toronto-Dominion Bank of Canada each month plus 1.17%, is amortized in
quarterly installments over six years and is repayable in full on May 25,
2002. As of September 30, 2000, Toronto-Dominion's rate was approximately
7.5% and approximately $2.1 million was outstanding on this loan.
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The agreement contains debt covenants relating to the financial
position and performance as well as restrictions on the declarations and
payment of dividends. As of September 30, 2000, the Company was in
compliance with all debt covenants.
As of September 30, 2000, there were 82.9 million shares of Common
Stock outstanding. In addition, five hundred shares of Common Stock are
reserved for issuance in exchange for certain exchangeable shares issued by
our Canadian subsidiary. Since January 1, 2000, we have issued an aggregate
of 34.6 million shares of Common Stock, of which 2.4 million shares of
Common Stock were issued as earnout payments and puts in acquisitions, 46
thousand shares were issued in exchange for the exchangeable shares of our
Canadian subsidiary and the exchangeable shares of our former Canadian
subsidiary, TigerTel Services Limited, 28.5 million shares of Common Stock
were issued for acquisitions, 3.1 million shares were issued upon the
exercise of options, 0.3 million shares were issued upon the exercise of
warrants, and 0.2 million shares were issued under our Employee Stock
Purchase Program.
Certain acquisition agreements include additional consideration
contingent on profits of the acquired subsidiary. Upon earning this
additional consideration, the value will be recorded as additional purchase
price. On September 30, 2000, under these agreements, assuming all earnout
profits are achieved, we were contingently liable for additional
consideration of approximately $19.6 million in 2001, $9.1 million in 2002
and $2.0 million in 2004, of which $1.0 million would be payable in cash and
$29.7 million would be payable in stock.
We have entered into put options with the sellers of those
companies in which we acquired less than a 100% interest. These options
require us to purchase the remaining portion we do not own after periods
ranging from four to five years from the dates of acquisition at amounts per
share generally equal to 10% to 20% of the average annual earnings per share
of the acquired company before income taxes for, generally, a two year
period ending on the effective date of the put multiplied by a multiple
ranging from four to five. The purchases under these put options are
recorded as changes in minority interest based upon current operating
results.
In June 2000, we entered into agreements to issue, in the aggregate,
2.3 million shares of our common stock, 1.6 million of which have been issued
through September 30, 2000, to acquire $10.0 million in put options and to
settle earnout payments in certain companies owned by IntelleSale. These
agreements superseded agreements entered into during the second quarter of
1999.
Our sources of liquidity include, but are not limited to, funds
from operations and funds available under the Second IBM Agreement. We may
be able to use additional bank borrowings, proceeds from the sale of
non-core businesses, proceeds from the sale of common and preferred shares,
proceeds from the exercise of stock options and warrants, and the raising of
other forms of debt or equity through private placement or public offerings.
There can be no assurance however, that these options will be available, or
if available, on favorable terms. 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 amounts 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 for at least the next
twelve months.
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. We intend that such forward-looking statements be
subject to the safe harbors created thereby.
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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 achievement 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 complete; 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
You should carefully consider the risk factors listed below. These
risk factors may cause our future earnings to be less or our financial
condition to be less favorable than we expect. You should read this section
together with the other information contained herein.
Forward Looking Statements and Associated Risk. This Form 10-Q
contains "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. All such forward-looking information involves
risks and uncertainties and may be affected by many factors, some of which
are beyond our control. These factors include:
* our growth strategies,
* anticipated trends in our business and demographics,
* our ability to successfully integrate the business operations of
recently acquired companies, and
* regulatory, competitive or other economic influences.
We Cannot Be Certain of Future Financial Results. While we have
been profitable for the last three fiscal years, future financial results
are uncertain. During both the three and nine month periods ended September
30, 2000, we incurred net losses. There can be no assurance that we will
return to profitability which 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 business.
Future Sales of Shares of our Common Stock Could Adversely Affect
the Market Price of Our Common Stock. As of September 30, 2000, there were
82.9 million shares of our common stock outstanding. In addition, five
hundred shares of Common Stock are reserved for issuance in exchange for
certain exchangeable shares issued by our Canadian subsidiary. Since January
1, 2000, we have issued an aggregate of 34.6 million shares of common stock,
of which 2.4 million shares of common stock were
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issued as earnout payments and puts in acquisitions, 46 thousand shares were
issued in exchange for the exchangeable shares of our Canadian subsidiary
and the exchangeable shares of our former Canadian subsidiary, TigerTel
Services Limited, 28.5 million shares of common stock were issued for
acquisitions, 3.1 million shares were issued upon the exercise of options,
0.3 million shares were issued upon the exercise of warrants, and 0.2
million shares were issued under our Employee Stock Purchase Program. In
addition, we have entered into additional acquisition agreements which, when
completed, will result in the issuance of approximately 11.8 million
additional shares of our common stock.
We have effected, and will continue to effect, acquisitions or
contract for certain services through the issuance of common stock or our
other equity securities, as we have typically done in the past. In addition,
we have agreed to certain "price protection" provisions in prior acquisition
agreements which may result in additional shares of common stock being
issued. Such issuances of additional securities may be dilutive of the value
of our common stock in certain circumstances and may have an adverse impact
on the market price of our common stock.
Our Series C Convertible Preferred Stock. You should be aware of
the following matters relating to our Series C Convertible Preferred Stock
which is described under "Recent Developments":
* The conversion of the Series C Preferred Stock and the exercise of
the related warrants could result in a substantial number of
additional shares being issued if the market price of our common
stock declines. At the earlier of 90 days after the issuance of the
Series C Preferred Stock or upon the effective date of our
registration statement relating to the common stock issuable on the
conversion of preferred stock, the holders of the Series C
Preferred Stock have the option to convert the Series C Preferred
at a floating rate based on the market price of our common stock,
but the conversion price may not exceed $7.56 per share, subject to
adjustment. As a result, the lower the price of our common stock at
the time of conversion, the greater the number of shares the
holders of the Series C Preferred Stock will receive.
* To the extent that shares of the Series C Preferred Stock are
converted, a significant number of shares of common stock may be
sold into the market, which could decrease the price of our common
stock. In that case, we could be required to issue an increasingly
greater number of shares of our common stock upon future
conversions of the Series C Preferred Stock, sales of which could
further depress the price of our common stock.
* Upon the occurrence of certain triggering events set forth in the
certificate of designation relating to our Series C Preferred
Stock, we may be required to redeem the preferred stock at a
redemption price equal to 130% of the stated value (or $33.8
million) plus accrued dividends, if such redemption is not
prohibited by our credit agreement. In addition, under certain
circumstances during the occurrence of a triggering event, the
conversion price of the preferred stock may be reduced to 50% of
the lowest closing price of our common stock during such period. We
may also be required to redeem the preferred stock at a redemption
price equal to 130% of the stated value upon a change of control or
other major transactions. If we become obligated to effect such
redemption, it could adversely affect our financial condition. If
such reduction in the conversion price occurs, it would double the
number of shares of common stock issuable on conversion.
* We may be required to delist our shares of common stock from the
Nasdaq National Market if specific events occur. In accordance with
Nasdaq Rule 4460, which generally requires shareholder approval for
the issuance of securities representing 20% or more of an issuer's
outstanding listed securities, and under the terms of the agreement
pursuant to which we sold the Series C Preferred
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Stock and related warrants, we must solicit shareholder approval of
the issuance of the common stock issuable upon the conversion of
the Series C Preferred Stock and the exercise of the related
warrants, at a meeting of our shareholders which shall occur on or
before June 30, 2001. If we obtain shareholder approval, the number
of shares that could be issued upon the conversion of the Series C
Preferred Stock would not be limited by the Nasdaq 20% limitation.
If we do not obtain shareholder approval and are not obligated to
issue shares because of restrictions relating to Nasdaq Rule 4460,
we may be required to pay a substantial penalty and may be required
to voluntarily delist our shares of common stock from the Nasdaq
National Market. In that event, trading in our shares of common
stock could decrease substantially, and the price of our shares of
common stock may decline.
* We will be required to accrete the discount on the preferred stock
through equity. However, the accretion will reduce the income
available to common stockholders and earnings per shares. The value
assigned to the warrants will increase the discount on the
preferred stock.
* We may not pay dividends on our common stock without the consent of
the holders of a majority of the shares of preferred stock.
* The holders of the preferred stock have the right to require us to
issue up to an additional $26 million in stated value of the
preferred stock for an aggregate purchase price of $20 million, at
any time until ten months from the effective date of the
registration statement relating to the common stock issuable on
conversion of the initial series of the preferred stock. The
additional preferred stock will have the same preferences,
qualifications and rights as the initial preferred stock. The
additional preferred stock would be accompanied by warrants to
purchase up to 0.8 million shares of our common stock.
We Face Significant Competition. Each segment of our business is
highly competitive, and we expect that competitive pressures will continue.
Many of our competitors have far greater financial, technological,
marketing, personnel and other resources than us. The areas which 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.
We Face 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 we
anticipate that such acquisitions will continue to occur. Since January 1,
1995 we have made 49 acquisitions and since January 1, 2000 we have made
seven acquisitions. Our total assets were approximately $341.6 million as of
September 30, 2000 and $229 million, $124 million, $61 million, $33 million
and $4 million as of December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. Net operating revenue was approximately $73.8 million and
$107.3 million for the three months ended September 30, 2000 and 1999,
respectively, $222.9 million and $231.8 million for the nine months ended
September 30, 2000 and 1999, respectively, and $337 million, $207 million,
$103 million, $20 million and $2 million for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively. Managing these dramatic
changes in the scope of our 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.
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It is our policy to retain existing management of acquired
companies, under the overall supervision of our 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.
We have entered into earnout arrangements with certain sellers
under which they are entitled to additional consideration for their
interests in the companies they sold to us. At September 30, 2000, under
these agreements, assuming that all earnout profits are achieved, we are
contingently liable for additional consideration of approximately $19.6
million in 2001, $9.1 million in 2002 and $2.0 million in 2004, of which
$1.0 million would be payable in cash and $29.7 million would be payable in
stock.
We have entered into put options with the sellers of those
companies in which we acquired less than a 100% interest. These options
require us to purchase the remaining portion we do not own after periods
ranging from four to five years from the dates of acquisition at amounts per
share generally equal to 10% to 20% of the average annual earnings per share
of the acquired company before income taxes for, generally, a two year
period ending on the effective date of the put multiplied by a multiple
ranging from four to five. The purchases under these put options are
recorded as changes in minority interest based upon current operating
results.
In June 2000, we entered into agreements to issue, in the aggregate,
2.3 million shares of our common stock, 1.6 million of which have been issued,
to acquire $10.0 million in put options and to settle earnout payments in
certain companies owned by our subsidiary, IntelleSale. These agreements
superseded agreements entered into during the second quarter of 1999.
Goodwill Amortization will Reduce Our Earnings. As a result of the
acquisitions we have completed through September 30, 2000, we have
approximately $175.6 million of goodwill, approximately $23.3 million of
which is deductible for tax purposes, which is currently being amortized
over 20 years at the rate of approximately $8.8 million per year, which
reduces our net income and earnings per share. In addition, future
acquisitions may also increase the existing goodwill and the amount of
annual amortization, further reducing net income and earnings per share.
Goodwill associated with the Pacific Decision Sciences Corporation, ATEC and
Connect Intelligence acquisitions recently completed amounted to
approximately $38.4 million and will be amortized over 20 years at the rate
of approximately $2.0 million per year. As required by Statement of
Financial Accounting Standards No. 121, we will periodically review our
goodwill for impairment, based on expected discounted cash flows. If we
determine that there is such impairment, we would be required to write down
the amount of goodwill accordingly, which would also reduce our earnings.
Our Need for Additional Capital Could Adversely Affect Earnings and
Shareholder Rights. We may require additional capital to fund growth of our
current business as well as to make future acquisitions. However, we may not
be able to obtain capital from outside sources. Even if we do obtain capital
from outside sources, it may not be on terms favorable to us. Our current
credit agreement with IBM Credit Corporation may hinder our ability to raise
additional debt capital. In addition, the terms of the Series C Preferred
Stock and the sale of substantial amounts of our common stock upon the
conversion of the Series C Preferred may make it more difficult for us to
raise capital through the sale of equity or equity-related securities. If we
raise additional capital by issuing equity securities, these securities may
have rights, preferences or privileges senior to those of our common
shareholders.
Covenants Under Credit Agreement. We entered into an amended and
restated credit agreement with IBM Credit Corporation on October 17, 2000,
which contains various covenants relating to our financial position and
performance as well as restrictions on declaration and payment of dividends.
As of June 30, 2000, we were out of compliance with three of four financial
debt covenants in our prior agreement with IBM Credit, and we received
waivers of compliance from IBM. As of September 30, 2000 we were in
compliance with the terms of the new agreement, but we cannot assure you
that we will be
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able to maintain compliance with our covenants in the future. If we fail to
comply with such covenants, IBM Credit would have the right to accelerate
the maturity of our loans.
We Depend 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 members of our central management team, our overall
operations could be adversely affected, and the operations of any of our
individual facilities could be adversely affected if the services of the
local managers should be unavailable. We have entered into employment
contracts with our key officers and employees and certain subsidiaries. The
agreements are for periods of one to ten years through June 2009. Some of
the employment contracts also call for bonus arrangements based on earnings.
We Face Risks that the Value of our Inventory May Decline. We
purchase and warehouse inventory, much of which is refurbished or excess
inventory of personal computer equipment. As a result, we assume inventory
risks and price erosion risks for these products. These risks are especially
significant because personal computer equipment generally is characterized
by rapid technological change and obsolescence. These changes affect the
market for refurbished or excess inventory equipment. Our success will
depend on our ability to purchase inventory at attractive prices relative to
its resale value and our ability to turn our inventory rapidly through
sales. If we pay too much or hold inventory too long, we may be forced to
sell our inventory at a discount or at a loss or write down its value, and
our business could be materially adversely affected.
We Do Not Pay Dividends on Our Common Stock. We do not have a
history of paying dividends on our common stock, and we cannot assure you
that any dividends will be paid in the foreseeable future. The Second IBM
Agreement places restrictions on the declaration and payment of dividends.
In addition, we may not pay dividends on our common stock without the
consent of the holders of a majority of the shares of the preferred stock.
We intend to use any earnings which may be generated to finance the growth
of our businesses.
We May Issue Preferred Stock. Our Board of Directors has the right
to authorize the issuance of preferred stock, without further shareholder
approval, the holders of which may have preferences over the holders of our
common stock as to payments of dividends, liquidation and other matters. As
described under "Recent Developments," we issued a series of convertible
preferred stock in October 2000, and have granted the purchasers the right
to require us to issue additional shares of convertible preferred stock in
the future.
Our Stock Price May Continue to be Volatile. Our common stock is
listed on The Nasdaq National Market, which has experienced and is likely to
experience in the future significant price and volume fluctuations which
could adversely affect the market price of our common stock without regard
to our operating performance. In addition, we believe that factors such as
the significant changes to our business resulting from continued
acquisitions and expansions, quarterly fluctuations in our financial results
or cash flows, shortfalls in earnings or sales below expectations, changes
in the performance of other companies in our 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. During the 12 month
period prior to September 30, 2000, the price per share of our common stock
has ranged from a high of $18.00 to a low of $1.63.
We are Obligated to Make Termination Payments Upon a Change of
Control. Our employment agreements with Richard Sullivan, Garrett Sullivan
and David Loppert include change of control
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provisions under which the employees may terminate their employment within
one year after a change of control and are entitled to receive specified
severance payments and/or continued compensation payments for sixty months.
The employment agreements also provide that these executive officers are
entitled to supplemental compensation payments for sixty months upon
termination of employment, even if there is no change in control, unless
their employment is terminated due to a material breach of the terms of the
employment agreement. Also, the agreements for both Richard Sullivan and
Garrett Sullivan provide for certain "triggering events," which include a
change in control, the termination of Richard Sullivan's employment other
than for cause, or if Richard Sullivan ceases to hold his current positions
with us for any reason other than a material breach of the terms of his
employment agreement. In that case, we would be obligated to pay, in cash
and/or in stock, $12.1 million and $3.5 million, respectively, to Richard
Sullivan and to Garrett Sullivan, in addition to certain other compensation.
Finally, the employment agreements provide for a gross up for excise taxes
which are payable by these executive officers if any payments upon a change
of control are subject to such taxes as excess parachute payments.
Our obligation to make the payments described in this section could
adversely affect our financial condition or could discourage other parties
from entering into transactions with us which might be treated as a change
in control or triggering event for purposes of these agreements.
We are Involved in Litigation. We, and certain of our subsidiaries,
are parties to various legal actions as either plaintiff or defendant in the
ordinary course of business.
On April 7, 2000, we and IntelleSale filed a counterclaim against
David Romano and Eric Limont, the former owners of Bostek, Inc. and Micro
Components International Incorporated, two companies acquired by IntelleSale
in June 1999, in the U.S. District Court for the District of Delaware for,
generally, breach of contract, breach of fiduciary duty and fraud. Messrs.
Romano and Limont had filed their claim generally alleging that their
earnout payment from IntelleSale was inadequate. In July 2000, we and
IntelleSale amended our counterclaim in the U.S. District Court for the
District of Delaware to seek damages for, among other things, securities law
violations. In addition, on May 19, 2000, IntelleSale and two of its
subsidiaries, Bostek, Inc. and Micro Components International Incorporated,
filed suits against Messrs. Romano and Limont in Superior Court of
Massachusetts to recover damages as a result of fraud, misrepresentations,
and breach of fiduciary duties. In July 2000, Messrs. Romano and Limont
amended their complaint in the U.S. District Court for the District of
Delaware to add a claim for $10 million for the $10 million payment not made
to them. We believe that the claims filed by Messrs. Romano and Limont are
without merit and we intend to vigorously defend against the claims. In
addition, we intend to vigorously pursue our claims against Messrs. Romano
and Limont.
While we believe that the final outcome of these proceedings will
not have a material adverse effect on our financial position, cash flows or
results of operations, we cannot assure the ultimate outcome of these
actions and the estimates of the potential future impact on our financial
position, cash flows or results of operations for these proceedings could
change in the future. In addition, we will continue to incur additional
legal costs in connection with pursuing and defending such actions.
Digital Angel may Not be Able to Develop Products From its Unproven
Technology. In December 1999, Digital Angel acquired the patent rights to a
miniature digital receiver named "Digital Angel(TM)." This technology is
still in the development stage. Digital Angel's ability to develop and
commercialize products based on its proprietary technology will depend on
its ability to develop its products internally on a timely basis or to enter
into arrangements with third parties to provide these functions. If Digital
Angel fails to develop and commercialize products successfully and on a
timely basis,
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it could have a material adverse effect on Digital Angel's business,
operating results and financial condition.
Digital Angel is Subject to Restrictions Imposed by Government
Regulation. Digital Angel is subject to federal, state and local regulation
in the United States and other countries, and it cannot predict the extent
to which it may be affected by future legislative and other regulatory
developments concerning its products and markets. Digital Angel is required
to obtain regulatory approval before marketing most of its products. Digital
Angel's readers must and do comply with the FCC Part 15 Regulations for
Electromagnetic Emissions, and its insecticide products have been approved
by the U.S. Environmental Protection Agency and are produced under EPA
regulations. Sales of insecticide products are incidental to Digital Angel's
primary business and do not represent a material part of its operations.
Digital Angel's products also are subject to compliance with foreign
government agency requirements. Digital Angel's contracts with its
distributors generally require the distributor to obtain all necessary
regulatory approvals from the governments of the countries into which they
sell Digital Angel's products. However, any such approval may be subject to
significant delays. Some regulators also have the authority to revoke
approval of previously approved products for cause, to request recalls of
products and to close manufacturing plants in response to violations. Any
actions by these regulators could materially adversely affect Digital
Angel's business.
Year 2000 Compliance. We have not experienced any significant
internal Year 2000 related problems. During 1998 and 1999, we implemented a
company wide program to ensure that our internal systems would be compliant
prior to the Year 2000 failure dates. We have not experienced any Year 2000
compliance problems. However, we cannot make any assurances that unforeseen
problems may not arise in the future.
Software Sold to Customers. During 1998 and 1999, we identified
what we believe to be all potential Year 2000 problems with any of the
software products we develop and market. However, our management believes
that it is not possible to determine with complete certainty that all Year
2000 problems affecting our software products have been identified or
corrected due to the complexity of these products. In addition, these
products interact with other third party vendor products and operate on
computer systems which are not under our control. For non-compliant
products, we have provided and are continuing to provide recommendations as
to how an organization may address possible Year 2000 issues regarding that
product. Software updates are available for most, but not all, known issues.
Such information is the most currently available concerning the behavior of
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 has led to, and
could lead to further lawsuits against us. The outcome of any such lawsuits
and the impact on us is not estimable at this time.
We do not believe that the Year 2000 problem has had or will
continue to 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. 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, a vendor's ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
review. The discussion of our efforts, and management's expectations,
relating to Year 2000 compliance are forward-looking statements.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB)
issued FAS 133, Accounting for Derivative Instruments and Hedging
Activities, which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The
statement is effective for fiscal years commencing after June 15, 2000. In
June 2000, the FASB issued FAS 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FAS statement
133, which addresses implementation issues experienced by those companies
that adopted FAS 133 early. We will adopt FAS 133, as well as its amendments
and interpretations, in fiscal year 2001. We do not believe that FAS 133
will have a material impact on our results of operations, cash flows and
financial condition.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements. This Staff Accounting
Bulletin summarizes certain of the staff's views on applying Generally
Accepted Accounting Principles to revenue recognition in financial
statements. On June 26, 2000, the SEC staff issued SAB No. 101B, which
delays the implementation date of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. Therefore,
we will adopt this statement no later than the fourth quarter of 2000. We do
not believe that SAB 101 will have a material impact on our results of
operations, cash flows and financial condition.
In September 2000, the EITF reached a consensus in EITF Issues
00-10, "Accounting for Shipping and Handling Fees and Costs," agreeing that
shipping and handling fees must be classified as revenues and comparable
prior periods should be restated. Further, they agreed that shipping and
handling costs can be classified anywhere in the statement of earnings,
except they cannot be netted against sales. If shipping and handling costs
are not included in costs of goods sold, the amount and classification of
these expenses must be disclosed in the footnotes to the financial
statements. This consensus must be adopted no later than the fourth quarter
of fiscal years beginning after December 15, 1999. Therefore, we will adopt
EITF Issue 00-10 in the fourth quarter of 2000. We do not anticipate that
the adoption of EITF Issue 00-10 will have a material impact on our results
of operations, cash flows and financial condition.
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.
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 the
Second IBM Agreement are at the London Interbank Offered Rate which is
adjusted monthly. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our
investments are in short-term investments.
Due to the nature of our borrowings and our short-term investments,
we have concluded that there is no material market risk exposure and,
therefore, no quantitative tabular disclosures are required.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 7, 2000, the Company and Intellesale filed a counterclaim
against David Romano and Eric Limont, the former owners of Bostek, in the
U.S. District Court for the District of Delaware for, generally, breach of
contract, breach of fiduciary duty and fraud. Messrs. Romano and Limont, the
former owners of Bostek, had filed their claim generally alleging that their
earnout payment from Intellesale was inadequate. In July 2000, the Company
and Intellesale amended their counterclaim in the U.S. District Court for
the District of Delaware to seek damages for, among other things, securities
law violations. In addition, on May 19, 2000, Intellesale and two of its
subsidiaries, Bostek and Micro Components, filed suit against Messrs. Romano
and Limont in Superior Court of Massachusetts to recover damages as a result
of fraud, misrepresentations, and breach of fiduciary duties. In July 2000,
Messrs. Romano and Limont amended their complaint in the U.S. District Court
for the District of Delaware to add a claim for $10 million for the $10
million payment not made to them. The Company believes that the claims filed
by Messrs. Romano and Limont are without merit and intends to vigorously
defend against the claims. In addition, the Company intends to vigorously
pursue its claims against Messrs. Romano and Limont.
We, and certain of our subsidiaries, are parties to various other
legal actions as either plaintiff or defendant in the ordinary course of
business.
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.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by us
from January 1, 2000 through September 30, 2000. 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>
Issued Number of Common
Name/Entity/Nature Note For Shares
------------------ ---- --- ------
<S> <C> <C> <C>
Various 1 Stock Options Exercised 3,088,090
Various 2 Employee Stock Purchase Plan 187,041
Various 3 Warrants Exercised 320,148
The Americom Group 4 Acquisition 48,333
Computer Equity Corporation 5 Acquisition 4,829,294
Destron Fearing Corporation 9 Acquisition 20,820,852
GDB Software Services, Inc. 4 Acquisition 337,838
Hornbuckle Engineering, Inc. 4 Acquisition 76,104
Independent Business Consultants 5 Acquisition 957,912
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<CAPTION>
Issued Number of Common
Name/Entity/Nature Note For Shares
------------------ ---- --- ------
<S> <C> <C> <C>
Innovative Vacuum Solutions, Inc. 6 Acquisition 25,881
Norcom Resources, Inc. 7 Acquisition 162,162
Pizarro Remarketing, Inc. 7 Acquisition 112,613
Port Consulting, Inc. 4 Acquisition 302,981
PPL, Ltd. 8 Acquisition 900,900
P-Tech, Inc. 5 Acquisition 1,401,180
Service Transport Company 7 Acquisition 101,351
STR, Inc. 4 Acquisition 400,267
Timely Technology Corp. 5 Acquisition 215,075
WebNet Services 5 Acquisition 267,857
----------------------------------------------------------------------------------------------------------------------
Total 34,555,879
======================================================================================================================
<FN>
1. Represents shares issued in connection with the exercise of employee stock options.
2. Represents shares issued in connection with the Company's employee stock purchase plan.
3. Represents shares issued in connection with the exercise of warrants.
4. Represents shares issued in connection with the "earnout" provision of the Agreement of Sale.
5. Represents shares issued to the selling shareholders to acquire such shareholder's 100% interest in the
company.
6. Represents additional consideration per the Merger Agreement between IVS and MVAK Technologies, Inc.
7. Represents shares issued to a selling shareholder to acquire such shareholder's minority interest.
8. Represents shares issued to the selling shareholders in consideration for their minority interest and in
settlement of future earnout payments.
9. Represents shares issued in connection with the merger of Digital Angel.net Inc. into Destron Fearing
Corporation.
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held on September 2, 2000, at
which the Company's shareholders were asked to (i) ratify the approval and
adoption of a transaction whereby the Company will issue 23,264,916 shares
of the Company's common stock in exchange for all of the issued and
outstanding shares of common stock of Destron Fearing Corporation, a
Delaware corporation ("Destron"), including shares of Company common stock
to be issued upon exercise of outstanding options and warrants to purchase
Destron common stock pursuant to the Agreement and Plan of Merger dated as
of April 24, 2000, as amended, (the "Merger Agreement") among the Company,
Digital Angel.net Inc. and Destron (the "Merger Proposal"), and (ii) ratify
the approval of the proposed amendment to the Company's Second Restated
Articles of Incorporation to increase the number of authorized shares of
Company common stock from 85,000,000 to 250,000,000, with 245,000,000 of
such shares designated as common stock (the "Amendment Proposal"). The
appropriate motions were made and seconded and the voting was held.
The results of the shareholders' vote showed that the holders of
(i) a majority of the total votes cast on the Merger Proposal had approved
and adopted the Merger Proposal, and (ii) a majority of the outstanding
shares of Company stock entitled to vote had approved and adopted the
Amendment Proposal as follows:
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<TABLE>
<CAPTION>
For Against Abstain
-------------------------------------------------------------
<S> <C> <C> <C>
Merger Proposal 26,126,477 2,882,809 360,949
Amendment Proposal 44,282,213 4,839,830 453,033
</TABLE>
ITEM 5. OTHER INFORMATION
On July 1, 2000 we acquired 100% of the capital stock of WebNet
Services, Inc., an internet service provider, network integrator and website
developer.
On September 8, 2000, we completed our acquisition of Destron
Fearing Corporation, an animal identification and microchip technology
company, through a merger of our wholly-owned subsidiary, Digital Angel.net
Inc., with and into Destron Fearing pursuant to a Agreement and Plan of
Merger dated as of April 24, 2000, as amended. As a result of the merger,
Destron Fearing is now our wholly-owned subsidiary and has been renamed
"Digital Angel.net Inc.
Effective as of October 19, 2000, we entered into transactions with
MCY.com, Inc. (OTC-BB:MCYC) ("MCY") under which we sold to MCY a
non-exclusive perpetual worldwide license to use our recently-acquired Net-Vu
product, an Internet-based Automatic Contact Distributor, for $9.0 million in
cash plus $1.0 million in shares of MCY. In addition, MCY granted to us an
exclusive perpetual license to MCY's digital encryption and distribution
systems, including its NETrax(TM) software for use in various non-entertainment
business-to-business applications, in consideration for 11.8 million shares of
our common stock valued of $40.0 million. These transactions with MCY are
subject to governmental clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
On October 25, 2000, we acquired Pacific Decision Sciences
Corporation, a California corporation ("PDSC"). In the merger transaction,
we issued approximately 8.6 million shares of our common stock. In addition,
for each of the twelve-month periods ending September 30, 2001 and September
30, 2002, the former stockholders of PDSC will be entitled to receive
earnout payments, payable in cash or in shares of our common stock, of $9.7
million plus 4.0 times EBITDA (as defined in the merger agreement) in excess
of $3.7 million, subject to reduction by 4.0 times the shortfall from the
Projected EBITDA Amount (as defined in the merger agreement). Goodwill
associated with the acquisition amounted to approximately $23.5 million and
will be amortized over 20 years at the rate of approximately $1.2 million
per year. Pro forma financial information related to this acquisition will
be included in our Current Report on Form 8-K/A, which will be filed on or
before December 30, 2000. PDSC, based in Santa Ana, California, is a
provider of proprietary web-based customer relationship management software.
It develops, sells and implements software systems that enable automated,
single point of contact delivery of customer service.
On October 27, 2000, we acquired 16% of the capital stock of ATEC
Group, Inc. (AMEX:TEC), in consideration for shares of our common stock
valued at approximately $9.1 million. Goodwill associated with the
acquisition amounted to approximately $7.8 million and will be amortized
over 20 years at the rate of approximately $0.4 million per year. Based in
Commack, New York, ATEC is a leading system integrator and provider of a
full line of information technology products and services.
On October 31, 2000, under an agreement dated November 3, 2000, we
sold our wholly-owned subsidiary STC Netcom, Inc.
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On November 2, 2000 we acquired 80% of the capital stock of Connect
Intelligence Limited, in consideration for shares of our common stock valued
at approximately $10.0 million. Goodwill associated with the acquisition
amounted to approximately $7.1 million and will be amortized over 20 years
at the rate of approximately $0.4 million per year. Based in Ireland,
Connect Intelligence has successfully completed a vetting procedure and has
now been formally offered up to 70 high-speed fiber optic circuits from the
Irish government's Department of Enterprise and Employment. The offering,
part of the Irish government's e-commerce infrastructure initiative, grants
Connect Intelligence and its partners exclusive rights to nearly one half of
all circuits to and from the Republic of Ireland.
On November 13, 2000 we entered into an agreement to acquire
approximately 54% of the outstanding capital stock of SysComm International
Corporation (NASDAQ:SYCM) in consideration for a combination of cash and
shares of our common stock valued at $4.5 million. No goodwill was
associated with the acquisition. Concurrently, we agreed to sell our
interest in Information Products Corporation to SysComm. Based in Shirley,
New York, SysComm is a network and systems integrator and reseller of computer
hardware.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
4.1 Second Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 4.1 to the
Registrant's Post-Effective Amendment No. 1 on Form S-1 to
Registration Statement (Form S-3 File No. 333-64605) filed with the
Commission on June 24, 1999)
4.2 Amendment of Articles of Incorporation of the Registrant filed with
the Secretary of State of the State of Missouri on September 5,
2000 (incorporated herein by reference to Exhibit 4.3 to the
Registrant's Post-Effective Amendment No. 3 on Form S-3 to
Registration Statement on Form S-4 (File No. 333-38420-02) filed
with the Commission on September 29, 2000)
4.3 Certificate of Designation of Preferences of Series C Convertible
Preferred Stock (incorporated herein by reference to Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed with the
Commission on October 26, 2000)
4.4 Amended and Restated Bylaws of the Registrant dated March 31, 1998
(incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-3 (File No.
333-51067) filed with the Commission on April 27, 1998)
10.1 Securities Purchase Agreement, dated as of October 24, 2000,
relating to the Registrant's Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the Commission on October 26,
2000)
10.2 Form of warrant to purchase common stock of the Registrant issued
to the holders of the Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed with the Commission on October 26,
2000)
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10.3 Registration Rights Agreement between the Registrant and the
holders of the Series C Convertible Preferred Stock (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed with the Commission on October 26, 2000)
10.4 Agreement and Plan of Merger dated as of October 18, 2000 among the
Registrant, PDS Acquisition Corp., Pacific Decision Sciences
Corporation, H&K Vasa Family 1999 Limited Partnership, H&K Vasa
Family 2000 Limited Partnership, David Dorret and David Englund
(incorporated by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K filed with the Commission on November 1, 2000)
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed by the Company
between July 1, 2000 and the date of this report:
(1) On July 14, 2000, we filed a Current Report on Form 8-K which
included a copy of the Agreement and Plan of Merger, dated as of
June 30, 2000, between the Company and Computer Equity Corporation.
(2) On September 11, 2000, we filed a Current Report on Form 8-K/A
which included the financial statements and pro forma financial
information in connection with the acquisition of Computer Equity
Corporation.
(3) On September 21, 2000, we filed a Current Report on Form 8-K which
included the financial statements and pro forma financial
information in connection with the acquisition of Destron Fearing
Corporation on September 8, 2000.
(4) On October 24, 2000, we filed a Current Report on Form 8-K which
included a copy of the Second Amended and Restated Term and
Revolving Credit Agreement dated October 17, 2000 between IBM
Credit Corporation, the Company, and others.
(5) On October 26, 2000, we filed a Current Report on Form 8-K which
included a copy of the Certificate of Designation of Preferences,
Form of Warrant, Registration Rights Agreement and the Securities
Purchase Agreement in connection with the issuance of 26,000 shares
of our Series C Convertible Preferred Stock and related Warrants to
institutional investors in a private placement.
(6) On November 1, 2000, we filed a Current Report on Form 8-K which
included a copy of the Agreement and Plan of Merger, dated as of
October 18, 2000, between the Company and Pacific Decision Sciences
Corporation.
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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)
Dated: November 13, 2000 By: /S/ DAVID A. LOPPERT
----------------------------------------
David A. Loppert
Vice President, Chief Financial Officer
50
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
51
