<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 000-26020
APPLIED DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1641533
(State or other jurisdiction of (I.R.S. 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 24, 2000, the aggregate market value of the voting and
non-voting stock held by non-affiliates of the registrant was approximately
$523,124,000.
At March 24, 2000, 49,942,930 shares of Common Stock were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the Securities
and Exchange Commission, are incorporated by reference to Part III of this
annual report on Form 10-K (the "Annual Report").
<PAGE>
<PAGE>
TABLE OF CONTENTS
Item Description Page
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7A. Quantitative and Qualitative Disclosures About Market Risk 29
8. Financial Statements and Supplementary Data 29
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 29
PART III
10. Directors and Executive Officers of the Registrant 30
11. Executive Compensation 30
12. Security Ownership of Certain Beneficial Owners and Management 30
13. Certain Relationships and Related Transactions 30
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 31
Signatures 67
2
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Applied Digital Solutions is an emerging leader in the implementation of
e-business solutions for the Internet through Computer Telephony Internet
Integration (CTII) (the integration of computer, telecom and the Internet). Our
goal is to be a single source e-business provider that mid-size companies can
turn to for intelligently connecting their business processes via telephone or
computer, with their customers, suppliers and partners to deliver the results
expected from the emerging e-business market. Our services integrate Web
front-end applications with back-end enterprise resources either by
telephone, computer/software or both. We provide end to end solutions that
enable e-business optimization while powering e-business initiatives through
intelligent collaboration and customer interaction.
We optimize and integrate key e-business processes through collaboration
with our four technology groups, Telecommunications, Network, Internet and
Applications. Our goal is to meet the challenge of the fundamental way
businesses view the use of technology. Instead of looking at each of our four
business groups as distinct and separate, we regard them as seamless and
interrelated. The ubiquitous Internet Protocol is replacing the Circuit Switched
network, resulting in a shift from traditional use of telephones, computers
and the Internet into one dynamic network empowering the enterprise and
eliminating all limitations, physical, structural or geographic.
We currently operate in the United States, Canada and the United Kingdom.
We are a Missouri corporation and were incorporated on May 11, 1993. Our
principal office is located at 400 Royal Palm Way, Suite 410, Palm Beach,
Florida 33480, and our phone number is (561) 366-4800.
The majority of our current operations are the result of acquisitions
completed during the last five years. Our net operating revenues were $336.7
million, $207.1 million, $103.2 million, $19.9 million and $2.3 million
respectively, in 1999, 1998, 1997, 1996 and 1995. Since 1995 we have completed
41 acquisitions. Management analyzes each acquisition opportunity using criteria
including profitability over a two to three year period, the strength of the
acquiree's balance sheet, the strength of its customer base and the experience
of its management team. Since January 1, 1999, we have completed six
acquisitions.
BUSINESS DIVISIONS
Prior to March 1999, our business was organized into three, and then
eventually, four business groups, or industry segments: the Services and
Solutions Group (formerly the Retail Group), the Computer Group, the
Manufacturing Group and the International Group. Each operating business was
conducted through a separate subsidiary company directed by its own management
team, and each subsidiary company had its own marketing and operations support
personnel. Each management team originally reported to our President, who was
responsible for overall corporate control and coordination, as well as financial
planning. Later, a Group Vice President was added and the management teams
reported to the Group Vice President, who ultimately reported to our President.
The Chairman was responsible for our overall business and strategic planning.
In March 1999, we announced a corporate reorganization at which time we
named five new divisions. Each division is managed by a division president who
reports to the President. Each division either has in place or is in the process
of hiring a vice president of marketing and a financial controller. We believe
we will attain increased operating efficiencies through this reorganization and
believe this structure will facilitate the cross marketing of our products and
services. In October 1999, we disposed of the main business units comprising our
Communications Infrastructure division and dissolved this group. In December
1999, our subsidiary, Digital Angel.net, Inc., acquired the patent rights to a
miniature digital transceiver, which we named "Digital Angel(TM)." While still
in the development stage, we believe that this technology may be available for a
variety of purposes, such as providing a tamper-proof means of
3
<PAGE>
<PAGE>
identification for enhanced e-business security, locating lost or missing
individuals, tracking the location of valuable property and monitoring the
medical conditions of at-risk patients.
Our primary businesses, other than IntelleSale.com, the Non-Core Business
Group and Digital Angel, are now organized into four business divisions:
o Telecommunications -- implements telecommunications and Computer
Telephony 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 on-going support for the customers we
support. On December 30, 1999, we sold our interest in our Canadian
subsidiary, TigerTel, Inc. to concentrate our efforts on our domestic
CTI solutions.
o 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.
o 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.
o Applications -- provides software applications for large retail
application environments, including point of sale, data acquisition,
asset management and decision support systems and develops programs for
portable data collection equipment, including wireless hand-held
devices. It is also involved in the design, manufacture and support of
satellite communication technology including satellite modems, data
broadcast receivers and wireless global positioning systems for
commercial and military applications.
As of December 31, 1999, 1998 and 1997, revenues from these four divisions
together accounted for 38.2%, 35.9% and 40.5%, respectively, of our total
revenues.
IntelleSale.com
IntelleSale.com, Inc. sells refurbished and new computer equipment and
related components online, through its website at www.IntelleSale.com, and
through other Internet companies, as well as through traditional channels, which
includes sales made by IntelleSale.com's sales force.
As of December 31, 1999, 1998 and 1997, revenues from IntelleSale.com
accounted for 42.5%, 30.3% and 40.3%, respectively, of our total revenues.
On September 14, 1999, IntelleSale.com filed a registration statement with
the Securities and Exchange Commission in connection with its proposed initial
public offering. In addition to IntelleSale.com selling primary shares, we
expected to sell shares of IntelleSale.com stock as a selling shareholder. On
January 31, 2000, we announced that we were postponing the proposed initial
public offering of IntelleSale.com stock due to market conditions.
The Non-Core Business Group
This group is comprised of seven individually managed companies whose
businesses are as follows:
o Gavin-Graham Electrical Products is a custom manufacturer of electrical
products, specializing in digital and analog panelboards, switchboards,
motor controls and general control panels. The company also provides
custom manufacturing processes such as shearing, punching, forming,
welding, grinding, painting and assembly of various component
structures.
o 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
4
<PAGE>
<PAGE>
exports over 80% of the products it produces to the United States,
Mexico, South America, the Far East and the Middle East.
o Hopper Manufacturing Co., Inc. re-manufactures and distributes
automotive parts. This primarily includes alternators, starters, water
pumps, distributors and smog pumps.
o Innovative Vacuum Solutions, Inc. designs, installs and re-manufactures
vacuum systems used in industry.
o Americom, STC Netcom and ACT Leasing are all involved in the
fabrication, installation and maintenance of microwave, cellular and
digital personal communication services towers.
As of December 31, 1999, 1998 and 1997, revenues from this business group,
as well as the four disposed entities within our Communications Infrastructure
group, accounted for 19.2%, 34.7% and 21.3%, respectively, of our total
revenues.
We announced our intention to divest, in the ordinary course of business,
these non-core businesses at such time and on such terms as our Board of
Directors determines advisable. There can be no assurance that we will divest of
any or all of these businesses or as to the terms of any divestiture
transaction.
GROWTH STRATEGY
Our growth strategy is focused on internal expansion and growth through
acquisitions. The following are the key elements of our strategy:
o Become a Single Source e-Business Solutions Provider. We believe that
our expertise in all four areas of our core competency will enable us
to capitalize on the interest of businesses in fulfilling their
e-business solutions through one provider.
o Leverage of Existing Customer Relationships. We believe there are
significant opportunities within and between each of our operating
divisions to cross market our services to our existing client base.
o Profit Center Management. While our corporate management team provides
overall guidance, strategic direction and administrative support, our
division presidents have responsibility for the day-to-day operations
of their respective groups. We operate each business division as a
largely autonomous profit center, which is held accountable for
achieving its financial goals. This approach to management increases
our responsiveness to changes in the marketplace and to our customers'
requirements and contributes to our ability to grow profitably.
o Acquisitions. Since 1995 we have completed 41 acquisitions. Management
analyzes each acquisition opportunity using criteria including
profitability over a two to three year period, the strength of the
acquiree's balance sheet, the strength of its customer base and the
experience of its management team.
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.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Annual Report, 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. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: our continued
ability to sustain our growth through product development and business
acquisitions; the successful completion and integration of future acquisitions;
the ability to hire and retain key personnel; the continued development of our
technical, manufacturing, sales, marketing and management capabilities;
relationships with and dependence on
5
<PAGE>
<PAGE>
third-party suppliers; anticipated competition; uncertainties relating to
economic conditions where we operate; uncertainties relating to government
and regulatory policies; uncertainties relating to customer plans and
commitments; rapid technological developments and obsolescence in the
industries in which we operate and compete; potential performance issues
with suppliers and customers; governmental export and import policies; global
trade policies; worldwide political stability and economic growth; the
highly competitive environment in which we operate; potential entry of new,
well-capitalized competitors into our markets; changes in our capital
structure and cost of capital; and uncertainties inherent in international
operations and foreign currency fluctuations. The words "believe", "expect",
"anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
RISK FACTORS
In addition to the other information contained herein, the following
factors should be considered in evaluating our Company and our business.
Uncertainty of Future Financial Results
While we have been profitable for the last three fiscal years, future
financial results are uncertain. There can be no assurance that we will continue
to be operated in a profitable manner. Profitability depends upon many factors,
including the success of our various marketing programs, the maintenance or
reduction of expense levels and our ability to successfully coordinate the
efforts of the different segments of our business.
Future Sales of and Market for our Shares of Common Stock
As of March 24, 2000, there were 49,942,930 shares of Common Stock
outstanding. In addition, 503 shares of Common Stock are reserved for issuance
in exchange for certain exchangeable shares issued by our Canadian subsidiary.
Since January 1, 1999, we have issued an aggregate of 17,137,887 shares of
Common Stock, of which 5,928,220 shares of Common Stock were issued as earnout
payments in acquisitions, 3,343,131 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, 641,297 shares were
issued to acquire minority interests in three companies, 3,416,724 shares of
Common Stock were issued for acquisitions (including "price protection" shares),
2,386,790 shares have been issued upon the exercise of options, 1,241,800 shares
have been issued upon the exercise of warrants, 112,761 shares have been
purchased and issued under our Employee Stock Purchase Program, and 67,164
shares of Common Stock were issued for services rendered, including services
under employment agreements and for employee bonuses.
Although we previously announced that we intend to limit the use of stock
in future acquisitions, and to focus on cash transactions, 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 acquisition agreements which may result in additional
shares of common stock being issued to selling shareholders as of the effective
date of the registration of the shares such selling shareholder previously
received as consideration from us. Such issuances of additional securities may
be dilutive of the value of the Common Stock in certain circumstances and may
have an adverse impact on the market price of the Common Stock.
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
6
<PAGE>
<PAGE>
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.
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. Our total assets were
approximately $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 $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.
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. Under these agreements, assuming that all earnouts
are achieved, we are contingently liable for additional consideration amounting
to approximately $2.7 million based on achieved 1999 results, approximately
$12.7 million based on agreements coming due in 2000 and achieved 2000 results,
approximately $7.1 million based on achieved 2001 results, approximately
$1.8 million based on achieved 2002 results and approximately $2 million based
upon achieved 2004 results.
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 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. We have entered into agreements to acquire for
approximately $3.9 million, put options in certain subsidiaries of our
subsidiary, IntelleSale.com. In addition, based upon current earnings, assuming
all other put options were exercised, we are contingently liable for
approximately an additional $6.9 million in the next two years.
Goodwill write-off's will reduce our earnings
As a result of the acquisitions we have done to date, we have approximately
$62.0 million of goodwill which is currently being amortized over 20 years at
the rate of approximately $3.5 million per year, which reduces our net income
and our earnings per share. In addition, future acquisitions may also increase
our existing goodwill and the amount of annual amortization, further reducing
net income and earnings per share. As required by Statement of Financial
Accounting Standards No. 121, we will periodically review our goodwill for
impairment based on expected future discounted cash flows. If we determine that
there is such impairment, we would be required to write down the amount of
goodwill accordingly, which would also reduce our earnings.
Need for Additional Capital
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 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. If
we raise additional
7
<PAGE>
<PAGE>
capital by issuing equity securities, these securities may have rights,
preferences or privileges senior to those of our common stockholders.
Dependence on Key Individuals
Our future success is highly dependent upon our ability to attract and
retain qualified key employees. We are organized with a small senior management
team, with each of our separate operations under the day-to-day control of local
managers. If we were to lose the services of any 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.
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.
Lack of Dividends on Common Stock; Issuance of Preferred Stock
We do not have a history of paying dividends on our Common Stock, and there
can be no assurance that such dividends will be paid in the foreseeable future.
Pursuant to certain restrictions under our Amended and Restated Term and
Revolving Credit Agreement dated as of July 30, 1999 with IBM Credit
Corporation, there are restrictions on the declaration and payment of dividends.
We intend to use any earnings which may be generated to finance the growth of
our businesses. 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 the Common Stock as to payment of
dividends.
Possible Volatility of Stock Price
Our Common Stock is quoted on the Nasdaq Stock Market(R), 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 March 24, 2000, the price per share of our Common Stock has ranged from
a high of $18 to a low of $1 5/8.
Termination Payments
Our employment agreements with three of our executive officers include
"change of control" provisions, under which the employees may terminate their
employment within one year after a change of control, and be entitled to receive
specified severance payments and/or continued compensation payments for sixty
months. The employment agreements also provide that these executive officers are
entitled to supplemental compensation payments for sixty months upon termination
of employment, even if there is no change in control, unless their employment is
terminated due to a material breach of the terms of the
8
<PAGE>
<PAGE>
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 obligations 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.
Year 2000 Compliance
We have not experienced any significant Year 2000 related problems. During
1998 and 1999, we implemented a company wide program to ensure that we would be
compliant prior to the Year 2000 failure dates. We experienced no problems on
either January 1, 2000 or February 29, 2000. However we cannot make any
assurances that unforeseen problems may not arise in the future.
Software Sold to Consumers. 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, management believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting our
software products will be identified or corrected due to the complexity of these
products. In addition, these products interact with other third party vendor
products and operate on computer systems which are not under our control. For
non-compliant products, we 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 could lead to lawsuits
against us. The outcome of any such lawsuits and the impact on us are 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,
vendors' 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.
EMPLOYEES
At December 31, 1999, the Company and its subsidiaries employed
approximately 1,445 employees.
BACKLOG
At December 31, 1999, the Company had a backlog of approximately $7.5
million, all of which is expected to be filled in 2000.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Federal, state, and local laws or regulations which have been enacted or
adopted regulating the discharge of materials into the environment have not had,
and under present conditions we do not foresee that they will have, a material
adverse effect on our capital expenditures, earnings, cash flows or our
competitive position. We will continue to monitor its operations with respect to
potential environmental issues, including changes in legally mandated standards.
9
<PAGE>
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1999, we leased 602,185 square feet of its operating
facilities, of which 216,967 square feet is for office facilities and 385,218
square feet is for factory/warehouse use. These leases expire at various dates
through 2009. In addition, the Company owns office and manufacturing facilities,
comprising 30,000 square feet, of which 27,000 square feet is for manufacturing
and 3,000 square feet is for office space.
The following table sets forth our properties by business divisions:
<TABLE>
<CAPTION>
Square Feet
----------------------------------------
Factory /
---------
Office Warehouse Total
------ --------- -----
<S> <C> <C> <C>
Telecommunications 41,133 10,874 52,007
Network 25,270 1,800 27,070
Internet 17,051 - 17,051
Applications 81,903 40,000 121,903
IntelleSale 20,865 223,450 244,315
Non-Core 26,709 136,094 162,803
Corporate 7,036 - 7,036
----------------------------------------
219,967 412,218 632,185
========================================
</TABLE>
The following table sets forth the principal locations of our properties:
<TABLE>
<CAPTION>
Square Feet
----------------------------------------
Factory /
---------
Office Warehouse Total
------ --------- -----
<S> <C> <C> <C>
Arizona 7,628 - 7,628
California 26,155 54,000 80,155
Canada 10,000 89,926 99,926
Florida 26,349 550 26,899
Georgia 1,500 - 1,500
Illinois 19,486 5,400 24,886
Louisiana 1,500 - 1,500
Maryland 8,422 1,924 10,346
Massachusetts 2,281 4,641 6,922
Minnesota 2,000 - 2,000
Missouri 3,500 - 3,500
New Hampshire 2,688 2,000 4,688
New Jersey 35,820 184,250 220,070
New York 3,240 21,000 24,240
Ohio 21,900 - 21,900
Pennsylvania 13,948 8,527 22,475
Texas 1,400 - 1,400
United Kingdom 32,150 40,000 72,150
----------------------------------------
219,967 412,218 632,185
========================================
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
We and certain of our subsidiaries are parties to various legal actions
as either plaintiff or defendant. In the opinion of management, these
proceedings will not have a material adverse affect on our financial position,
our cash flows or our overall trends in results. The estimate of the potential
impact on our financial position, our overall results of operations or our cash
flows for these proceedings could change in the future. We are not subject to
any environmental or governmental proceedings.
10
<PAGE>
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
11
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our Common Stock trades on the Nasdaq Stock Market(R) under the symbol
"ADSX." The following table sets forth the high and low sale prices of our
Common Stock as reported by the Nasdaq for each of the quarters during our last
two fiscal years.
High Low
---- ---
1998
----
First Quarter............... 5 1/2 4 1/32
Second Quarter.............. 4 7/8 3 1/8
Third Quarter .............. 3 1/2 1 9/16
Fourth Quarter ............. 5 1/2 1 17/32
1999
----
First Quarter............... 4 3/16 2
Second Quarter.............. 3 1/2 2
Third Quarter............... 3 3/8 1 11/16
Fourth Quarter.............. 16 1 5/8
Holders
As of March 24, 2000, there were 1,356 holders of record of our Common
Stock.
Dividends
Holders of our Common Stock are entitled to receive such dividends as may
be declared by our Board of Directors. Other than the distribution of warrants
pursuant to the Joint Actions by Unanimous Consent of the Board of Directors and
Shareholders dated March 25, 1994, since our inception, no dividends on our
Common Stock have ever been paid, and we do not anticipate that dividends will
be paid on our Common Stock in the foreseeable future. Under our Amended and
Restated Term and Revolving Credit Agreement dated as of July 30, 1999 with IBM
Credit Corporation, there are restrictions on the declaration and payment of
dividends. In addition, we may only declare or pay dividends on our Common Stock
if our subsidiary ACT-GFX Canada, Inc. is able to, and simultaneously does,
declare or pay an equivalent dividend on its exchangeable shares. Our Board of
Directors has the right to authorize the issuance of preferred stock, without
further stockholder approval, the holders of which may have preferences as to
payment of dividends.
12
<PAGE>
<PAGE>
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
in 1999. These shares were issued without registration in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D promulgated thereunder.
<TABLE>
<CAPTION>
Number of
Issued Date Common
Name/Entity/Nature Note For Issued Shares
<S> <C> <C> <C> <C>
The Americom Group, Inc. 1 Acquisition March, 1999 106,581
The Americom Group, Inc. 8 Acquisition September, 1999 45,319
Advanced Telecommunications, Inc. 1 Acquisition April, 1999 550,000
Atlantic Systems, Inc. 5 Acquisition November, 1999 119,832
Aurora Electric, Inc. 8 Acquisition September, 1999 7,224
Consolidated Micro Components 1,2 Acquisition June, 1999 649,696
Cra-Tek Company 5 Acquisition June, 1999 121,465
Cybertech Station, Inc. 1 Acquisition March, 1999 49,806
Cybertech Station, Inc. 8 Acquisition September, 1999 17,629
Data Path Technologies, Inc. 1,2 Acquisition June, 1999 1,393,230
GDB Software Services, Inc. 1,2 Acquisition June, 1999 627,879
Hornbuckle Engineering, Inc. 7 Acquisition July, 1999 554,563
Information Products Center, Inc. 1 Acquisition March, 1999 662,252
Information Products Center, Inc. 8 Acquisition September, 1999 514,880
Innovative Vacuum Solutions, Inc. 1 Acquisition June, 1999 426,213
Innovative Vacuum Solutions, Inc. 8 Acquisition September, 1999 1,461
Lynch, Marks & Associates, Inc. 6 Acquisition July, 1999 773,142
PPL, Ltd. 1 Acquisition June, 1999 929,230
PPL, Ltd. 8 Acquisition September, 1999 305,024
STC Netcom, Inc. 5 Acquisition December, 1999 400,000
STR, Inc. 6 Acquisition July, 1999 932,039
TigerTel Services Limited 2 Acquisition February, 1999 43,877
Winward Electric Service Inc. 1 Acquisition March, 1999 533,333
Winward Electric Service Inc. 8 Acquisition September, 1999 188,667
Charles Phillips 3 Asset Acquisition March, 1999 7,018
January - December,
Services 4 Services 1999 67,164
Option and November - December,
Option and Warrant Exercises 9 Warrants Exercised 1999 2,129,850
-----------
Total 12,157,374
===========
- ----------------------
<FN>
1. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
2. Represents shares issued as a finders fee in connection with the
acquisition of the company.
3. Represents shares issued in connection with the acquisition of certain
assets by one of the Company's subsidiaries, IntelleSale.com.
4. Represents shares issued for professional services or under employment or
other such agreements.
5. Represents shares issued to selling shareholder(s) to acquire such
shareholder(s) minority interest.
6. Represents shares issued to the selling shareholders to acquire such
shareholders 100% interest in such company.
7. Represents shares issued to the selling shareholders, as partial
consideration, to acquire such shareholders 100% interest in such company.
8. Represents shares issued in connection with the "price protection"
provision of the Agreement of Sale.
9. Represents shares issued upon the exercise of 1,205,550 options and
924,300 warrants.
</FN>
</TABLE>
13
<PAGE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
other financial information appearing elsewhere in this Annual Report. The
Summary of Operations data set forth below for each of the years in the
three-year period ended December 31, 1999 and the Balance Sheet Data as of
December 31, 1999 and 1998 are derived from, and qualified by reference to, our
audited consolidated financial statements appearing elsewhere in this Annual
Report. The Summary of Operations data for the years ended December 31, 1996 and
1995 and the Balance Sheet Data as of December 31, 1997, 1996 and 1995 are
derived from audited consolidated financial statements not included herein.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS DATA Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net operating revenue $ 336,741 $ 207,081 $ 103,159 $ 19,883 $ 2,336
Cost of goods sold 241,790 142,893 69,408 10,524 1,186
- ---------------------------------------- ---------- ---------- ---------- --------- --------
Gross profit 94,951 64,188 33,751 9,359 1,150
Selling, general and administrative
expenses (90,416) (51,485) (26,431) (7,393) (970)
Depreciation and amortization (9,687) (4,501) (1,874) (712) (11)
Restructuring and unusual costs (2,550) -- (1,681) -- --
Gain on sale of subsidiary 20,075 733 1,827 -- --
Interest income 616 420 192 126 75
Interest expense (3,842) (1,653) (978) (200) (15)
- ---------------------------------------- ---------- ---------- ---------- --------- --------
Income from continuing operations before
provision for income taxes, minority
interest and extraordinary loss 9,147 7,702 4,806 1,180 229
Provision for income taxes 3,160 2,588 1,769 362 --
- ---------------------------------------- ---------- ---------- ---------- --------- --------
Income before minority interest and
extraordinary loss 5,987 5,114 3,037 818 229
Minority interest 395 424 697 132 49
- ---------------------------------------- ---------- ---------- ---------- --------- --------
Income before extraordinary loss 5,592 4,690 2,340 686 180
Extraordinary loss (net of taxes of $89) 160 -- -- -- --
- ---------------------------------------- ---------- ---------- ---------- --------- --------
Net income 5,432 4,690 2,340 686 180
Preferred stock dividends -- 44 72 60 --
- ---------------------------------------- ---------- ---------- ========== ========= ========
Net income available to common
stockholders $ 5,432 $ 4,646 $ 2,268 $ 626 $ 180
======================================== ========== ========== ========== ========= ========
Average common shares outstanding 46,814 32,318 12,632 3,329 1,792
Average common shares outstanding
assuming dilution 50,086 34,800 15,245 4,641 1,967
PER COMMON SHARE DATA
Basic $ 0.12 $ 0.14 $ 0.18 $ 0.19 $ 0.10
Diluted $ 0.11 $ 0.13 $ 0.15 $ 0.15 $ 0.09
Cash Dividends $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
</TABLE>
14
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA As of December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 5,138 $ 4,555 $ 7,657 $ 810 $ 125
Due from buyers of divested subsidiary 31,302 -- -- -- --
Property and equipment 13,886 15,627 5,339 2,915 138
Goodwill 62,000 33,430 12,787 14,528 907
Total assets 228,976 124,116 61,282 33,208 4,131
Long-term debt 35,317 2,838 2,199 1,386 19
Total debt 68,566 27,213 7,825 5,799 352
Minority interest 2,558 2,961 1,785 456 57
Redeemable preferred stock -- -- 900 10,900 --
Stockholders' equity 92,936 67,560 36,285 8,252 3,052
</TABLE>
15
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the accompanying
consolidated financial statements and related notes included in this Annual
Report. Certain statements contained herein may contain forward-looking
statements - see "Forward Looking Statements and Associated Risks" in
Item 1.
OUTLOOK
Our objective is to continue to grow each of our operating divisions
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.
1999 AND RECENT DEVELOPMENTS
During the second quarter of 1999, we made several acquisitions. 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, approximately 75% of the total outstanding shares of Contour's
common stock.
In June 1999, our subsidiary IntelleSale.com, Inc., purchased all of
the shares of Bostek, Inc. and Micro Components International, Incorporated
(collectively, "Bostek"). Bostek is engaged in the business of acquiring
open-box and off-specification computer equipment and selling such
equipment, using the internet and other selling channels.
All acquisitions were accounted for using the purchase method of
accounting. Total assets acquired, including goodwill, during the second
quarter of 1999, are summarized as follows:
Purchase price $40,759
Net assets acquired (5,650)
-------
Goodwill $35,109
=======
As part of our reorganization of our core business into five 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 Telecommunications and Application Technology business
groups, and the associated write-off of assets. In the first quarter of
1999, we incurred a restructuring charge of $2,236 that includes asset
impairments, primarily software and other intangible assets, of $1,522,
lease terminations of $541, and employee separations of $173. In addition,
during the first
16
<PAGE>
<PAGE>
quarter of 1999, as part of our core business reorganization, we realigned
certain operations within our Telecommunications division and recognized
impairment charges and other related costs of $314.
In May 1999, we negotiated the early retirement of our line of credit
with State Street Bank and Trust Company ("State Street Debt") and its
simultaneous refinancing with IBM Credit Corporation. The IBM Agreement,
as amended and restated, provides for a revolving credit line of up to
$36.1 million, and term loans of up to $58.9 million. Deferred financing
fees associated with the State Street Debt were written off during the
second quarter of 1999. The total amount of the write-off recorded as an
extraordinary loss was $160, net of income taxes.
On September 14, 1999, our subsidiary, IntelleSale.com, Inc., filed a
registration statement with the Securities and Exchange Commission in
connection with its proposed initial public offering. In addition to
IntelleSale.com selling primary shares, we expected to sell shares of
IntelleSale's common stock as a selling shareholder. On January 31, 2000,
we announced that we were postponing the proposed initial public offering
of IntelleSale's common stock due to market conditions.
In October 1999, we disposed of the main business units comprising our
Communications Infrastructure division and dissolved this group. We had
concluded that the business units within this segment were no longer core to
our operations and we anticipate that we will dispose of the remaining three
business units that were within this segment during 2000. 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 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. The treasury stock
was recorded at $2.54 per share. At December 31, 1999 and March 24, 2000,
each such share had a market value of $7.50 and $10.75, respectively.
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 took up 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 December 1999, our subsidiary, Digital Angel.net, Inc., acquired
the patent rights to a miniature digital transceiver, which we named "Digital
Angel(TM)". While still in the development stage, we believe that this
technology may be available for a variety of purposes, such as providing a
tamper-proof means of identification for enhanced e-business security,
locating lost or missing individuals, tracking the location of valuable
property and monitoring the medical conditions of at-risk patients.
On March 3, 2000, we announced that we had signed a letter of intent
to acquire Destron Fearing Corporation, a Nasdaq listed company trading under
the stock symbol "DFCO". Destron Fearing is a leading developer,
manufacturer and marketer of a broad line of electronic and visual
identification devices for companion animals, livestock, laboratory animals
and wildlife. In this proposed transaction, we will issue shares of our
Common Stock in exchange for shares of common stock of Destron Fearing.
The approximately $130 million transaction is expected to close by mid-
June, 2000, subject to a number of conditions, including the execution of a
definitive acquisition agreement, completion of due diligence, approval of
both our and Destron Fearing's boards of directors and shareholders, and
approval of relevant government agencies. Under the agreement, Destron
Fearing would be merged into Digital Angel.net Inc.
On March 22, 2000, we filed a shelf registration statement to sell,
from time to time, up to 3 million shares of our common stock. Proceeds
from the sale will be used for general corporate purposes, including the
funding of future acquisitions.
17
<PAGE>
<PAGE>
OUR BUSINESS
Beginning in the fourth quarter of 1998 and continuing through 1999, we
reorganized into seven operating segments to more effectively and
efficiently provide integrated communications products and services to a
broad base of customers. In October 1999, we disposed of the main business
units comprising our Communications Infrastructure division and dissolved
this group.
CORE BUSINESS
Our primary businesses, other than IntelleSale.com, the Non-Core
Business Group, and Digital Angel, are now organized into four business
divisions:
* TELECOMMUNICATIONS -- implements telecommunications and Computer
Telephony 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
on-going 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.
* 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.
As of December 31, 1999, 1998 and 1997, revenues from these four
divisions together accounted for 38.2%, 35.9% and 40.5%, respectively, of
our total revenues.
INTELLESALE.COM
IntelleSale.com, Inc. sells refurbished and new computer equipment and
related components online, through its website at www.IntelleSale.com, and
through other Internet companies, as well as through traditional channels,
which includes sales made by IntelleSale.com's sales force.
As of December 31, 1999, 1998 and 1997, revenues from IntelleSale.com
accounted for 42.5%, 30.3% and 40.3%, respectively, of our total revenues.
THE NON-CORE BUSINESS GROUP
This group is comprised of seven individually managed companies whose
businesses are as follows:
* Gavin-Graham Electrical Products is a custom manufacturer of
electrical products, specializing in digital and analog
panelboards, switchboards, motor controls and general control
panels. The company also provides custom manufacturing processes
such as shearing, punching, forming, welding, grinding, painting
and assembly of various component structures.
* Ground Effects, Ltd., based in Windsor, Canada, is a certified
manufacturer and tier one supplier of standard and specialized
vehicle accessory products to the automotive industry. The
company
18
<PAGE>
<PAGE>
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, STC Netcom and ACT Leasing are all involved in the
fabrication, installation and maintenance of microwave, cellular
and digital personal communication services towers.
As of December 31, 1999, 1998 and 1997, revenues from this business
group, as well as the four disposed entities within our Communications
Infrastructure group, accounted for 19.2%, 34.7% and 21.3%, respectively,
of our total revenues.
We have previously announced our intention to divest, in the ordinary
course of business, these non-core businesses at such time and on such
terms as the Board of Directors determines advisable. There can be no
assurance that we will divest of any or all of these 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 last three years:
<TABLE>
<CAPTION>
RELATIONSHIP TO NET OPERATING REVENUE
-------------------------------------
1999 1998 1997
% % %
-------------------------------------
<S> <C> <C> <C>
Net operating revenue 100.0 100.0 100.0
Cost of goods sold 71.8 69.0 67.3
Gross margin 28.2 31.0 32.7
Selling, general and administrative expenses (26.9) (24.9) (25.6)
Depreciation and amortization (2.9) (2.2) (1.8)
Restructuring and unusual costs (0.8) -- (1.6)
Gain on sale of subsidiary 6.0 0.4 1.8
Interest income 0.2 0.2 0.1
Interest expense (1.1) (0.8) (1.0)
-------------------------------------
Income before provision for income taxes, minority
interest and extraordinary loss 2.7 3.7 4.6
Provision for income taxes 0.9 1.2 1.7
-------------------------------------
Income before minority interest and extraordinary loss 1.8 2.5 2.9
Minority interest 0.1 0.2 0.6
-------------------------------------
Income before extraordinary loss 1.7 2.3 2.3
Extraordinary loss 0.1 -- --
-------------------------------------
Net income 1.6 2.3 2.3
Preferred stock dividends -- -- 0.1
-------------------------------------
Net income available to common stockholders 1.6 2.3 2.2
=====================================
</TABLE>
COMPANY OVERVIEW
REVENUE
Revenue for 1999 was $336.7 million, an increase of $129.6 million or
62.6% from $207.1 million in 1998. Revenue for 1998 represents an increase
of $103.9 million, or 100.7%, from $103.2 million in 1997. These
significant increases are attributable to the growth of existing businesses
as well as to growth through acquisitions.
19
<PAGE>
<PAGE>
Revenue for each of the operating segments was:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Telecommunications<F1> $ 59,225 $ 33,270 $ 32,208
Network 27,190 21,282 --
Internet 6,607 -- --
Applications 35,780 19,859 9,574
IntelleSale 142,987 60,877 39,445
Non-Core<F2> 64,689 71,793 21,932
Corporate 263 -- --
--------------------------------------
Consolidated $336,741 $207,081 $103,159
======================================
<FN>
----------
<F1> Includes TigerTel's revenue of $39.2 million and $11.6
million in 1999 and 1998.
<F2> Includes revenue from the Communications Infrastructure
group of companies, the majority of which were disposed of in
the 4th quarter of 1999. Revenues for these disposed entities,
included above amounted to $21.0 million, $32.1 million and $4.3
million in 1999, 1998 and 1997.
</TABLE>
Changes during the years were:
* Telecommunications revenue increased $26.0 million or
78.3% from 1998 to 1999 as a result of TigerTel's acquisition of
Contour in May 1999. TigerTel's revenue was $39.3 million or
66.4% of 1999 revenue and $11.6 million or 34.9% of 1998's
revenue. Revenue did not increase significantly from 1997 to
1998.
* Network revenue increased $5.9 million or 27.8% from
1998 to 1999. Hornbuckle Engineering, Inc. and Lynch Marks &
Associates, both acquired in the second quarter of 1999,
contributed $9.2 million of revenue in 1999, representing 43.4%
of 1999's revenue increase over 1998. The 15.5% decline in
existing business revenue reflects the transition from lower
margin product business to a higher margin service business in
1999 compared to 1998. This division was formed with the purchase
of one company in 1998 and had no operations prior to that.
* Internet revenue increased by 100.0% for the year as a
result of our acquisition of Port Consulting in the second
quarter of 1999. Prior to 1999 we had no significant Internet
operations and those operations reported as Internet in 1998 have
been classified with Telecommunications in 1999.
* Applications revenue increased $15.9 million or 80.2%
from 1998 to 1999. In 1999, this division includes the results of
STR, an acquisition completed during the second quarter of 1999,
whose revenue of $9.9 million represents 49.9% of the increase,
while existing businesses contributed 30.3% of the increase, a
small, but undetermined, portion of which we believe was due to
Y2K remediation. Revenue increased $10.3 million or 108.4% from
1997 to 1998, primarily from the acquisition of Signature
Industries in 1998, whose 1998 revenue was $9.6 million or 101.1%
of the increase.
* IntelleSale.com's revenue increased $82.1 million or
134.9% from 1998 to 1999. Bostek, which was acquired in June
1999, contributed $74.6 million or 122.5% of the increase for the
year, while existing businesses contributed 12.4% of the
increase. Revenue increased $21.4 million or 54.3% from 1997 to
1998, primarily as a result of IntelleSale's 1998 acquisitions
which contributed $17.4 million or 44.2% of the increase.
* Non-core revenue, which includes revenue from the former
Communications Infrastructure group, decreased $7.1 million or
9.9% from 1998 to 1999. Four entities in this segment were sold
at the beginning of the 4th quarter of 1999 and their revenues
are not included for the 4th quarter of 1999. Certain lines of
business within this segment continue to suffer from competition
and lost market share. Revenue increased $49.8 million or 227.4%
from 1997 to 1998 primarily as a result of acquisitions in 1998
which contributed $35.3 million or 89.6% of 1998's revenue.
20
<PAGE>
<PAGE>
GROSS PROFIT AND GROSS MARGIN PERCENTAGE
Gross profit for 1999 was $94.9 million, an increase of $30.8 million,
or 48.0%, from $64.1 million in 1998. Gross profit for 1998 represents a
$30.4 million increase, or a 90.2% increase over 1997. As a percentage of
revenue, the gross margin was 28.2%, 31.0% and 32.7% for the years ended
December 31, 1999, 1998 and 1997, respectively.
Gross profit for each of the operating segments was:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Telecommunications<F1> $22,384 $19,071 $16,215
Network 8,635 3,863 --
Internet 4,985 -- --
Applications 18,641 11,613 5,846
IntelleSale 26,383 12,871 6,243
Non-Core<F2> 13,660 16,770 5,447
Corporate (including amounts incurred during
consolidation) 263 -- --
---------------------------------------
Consolidated $94,951 $64,188 $33,751
=======================================
<FN>
-------------
<F1> Includes TigerTel's gross profit of $14.9 million and $7.7
million in 1999 and 1998.
<F2> Includes gross profit from the Communications Infrastructure
group of companies, the majority of which were disposed of in the
4th quarter of 1999. Gross profit for these disposed entities,
included above amounted to $4.3 million, $7.4 million and $1.0
million in 1999, 1998 and 1997.
</TABLE>
Gross margin percentage for each of the operating segments was:
<TABLE>
<CAPTION>
1999 1998 1997
% % %
---------------------------------------
<S> <C> <C> <C>
Telecommunications<F1> 37.8 57.3 50.3
Network 31.8 18.2 --
Internet 75.5 -- --
Applications 52.1 58.5 61.1
IntelleSale 18.5 21.1 15.8
Non-Core<F2> 21.1 23.4 24.8
Corporate (including amounts incurred during
consolidation) -- -- --
---------------------------------------
Consolidated 28.2 31.0 32.7
=======================================
<FN>
------------
<F1> Includes TigerTel's gross profit margin of 38.0% and 66.4% in
1999 and 1998.
<F2> Includes gross profit margin from the Communications
Infrastructure group of companies, the majority of which were
disposed of in the 4th quarter of 1999. Gross profit margin for
these disposed entities, included above amounted to of 20.5%,
23.1% and 23.3% in 1999, 1998 and 1997.
</TABLE>
Changes during the years were:
* Telecommunications gross profits increased by $3.3 million or
17.4% for 1999, but margins declined to 37.8% in 1999 from 57.3%
in 1998. The increase in absolute dollars was as a result of the
acquisition of Contour, but this acquisition also contributed
significantly lower overall gross margin. Contour's margins were
historically lower than those of the other entities within this
division. Gross profits increased $2.8 million or 17.3% from 1997
to 1998 as a result of the acquisition of TigerTel in 1998.
* Network's gross profit increased by $4.8 million or 123.5% for
1999. This improvement is attributable to the acquisitions
during the second quarter of 1999, and a small improvement in
existing business margin resulting from the shift from product
sales to services. The companies acquired are service oriented
companies with most expenses being classified as selling, general
and administrative. This division was established in 1998.
21
<PAGE>
<PAGE>
* Internet was established in 1999. Gross profits and margins are
higher in this division as it is service oriented and most of its
operating costs are recorded in selling, general and administrative
expense.
* Applications gross profit increased $7.0 million or 60.3% for
1999, primarily due to the acquisition of STR, but margins
declined as we implemented our planned exit from a once highly
profitable but declining modem and communications market in the
United Kingdom. Gross profit increased $5.8 million or 98.6%
from 1997 to 1998, primarily as a result of the acquisition of
Signature in 1998.
* IntelleSale.com's gross profit increased $13.5 million or 104.7%
in 1999 as a result of increased revenue from Bostek and internal
growth, but our margins declined to 18.5% in 1999 from 21.1% in
1998 as we continued our expansion and focused our business on
Internet and business to business e-commerce. We anticipate
margins stabilizing in the future. Gross profit increased $6.6
million or 106.5% from 1997 to 1998 as a result of 1998
acquisitions.
* Non-core's gross profit and margin declined due to the sale of
one business at the beginning of 1999 and the overall poor
performance of the units within this division. Gross profit
declined by $3.1 million or 18.6% in 1999. Gross profit
increased $11.3 million or 209.3% from 1997 to 1998, as a result
of acquisitions in 1998 which contributed $8.9 million or 164.8%
of the increase.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $90.4 million in
1999, an increase of $38.9 million or 75.5% over 1998. The 1998 expense
represents an increase of $25.0 million or 94.7% over the $26.4 million
reported in 1997. As a percentage of revenue, selling, general and
administrative expenses have increased slightly to 26.9% in 1999 from 24.9%
in 1998 and 25.6% in 1997.
Selling, general and administrative expense for each of the operating
segments was:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Telecommunications<F1> $20,122 $17,572 $14,438
Network 6,953 2,261 --
Internet 4,270 --
Applications<F1> 16,901 8,975 3,244
IntelleSale 19,120 8,111 3,779
Non-Core<F2> 12,546 11,167 4,350
Corporate (including amounts incurred during
consolidation)<F1>,<F3> 10,504 3,399 620
---------------------------------------
Consolidated $90,416 $51,485 $26,431
=======================================
<FN>
-------------
<F1> Includes (a) TigerTel's SG&A of $11.4 million and $5.5 million in
1999 and 1998, (b) in 1999, restructuring and unusual charges of
$511 in Telecommunications, $400 in Applications and $1,639 in
corporate overhead, and (c) in restructuring charges of $1,681 in
Telecommunications in 1997.
<F2> Includes SG&A from the Communications Infrastructure group of
companies, the majority of which were disposed of in the 4th
quarter of 1999. SG&A for these disposed entities, included above
amounted to $4.8 million, $4.7 million and $0.7 million in 1999,
1998 and 1997.
<F3> Corporate overhead includes an asset impairment reserve of $1,000
in 1999.
</TABLE>
22
<PAGE>
<PAGE>
Selling, general and administrative expense as a percentage of revenue
for each of the operating segments was:
<TABLE>
<CAPTION>
1999 1998 1997
% % %
-------------------------------------
<S> <C> <C> <C>
Telecommunications<F1> 34.0 52.8 44.8
Network 25.6 10.6 --
Internet 64.6 31.2 --
Applications<F1> 47.2 45.2 33.9
IntelleSale 13.4 13.3 9.6
Non-Core<F2> 19.4 15.6 19.8
Corporate<F1><F3> 399.4 -- --
------------------------------------
Consolidated 26.9 24.9 25.6
====================================
<FN>
------------
<F1> Includes, as a percentage of revenue, (a) TigerTel's SG&A of
29.3% and 47.4% in 1999 and 1998, (b) restructuring and unusual
charges in 1999 of 0.2% in Telecommunications, 0.1% in
Applications, and 0.5% in corporate overhead, and (c)
restructuring and unusual charges of 1.6% in Telecommunications
in 1997.
<F2> Includes SG&A from the Communications Infrastructure group of
companies, the majority of which were disposed of in the 4th
quarter of 1999. SG&A as a percentage of revenue for these
disposed entities, included above, amounted to of 22.9%, 14.6%
and 16.3% in 1999, 1998 and 1997.
<F3> Corporate overhead includes an asset impairment reserve of $1,000
in 1999.
</TABLE>
Changes during the years were:
* Telecommunications increased $2.6 million or 14.9% in 1999, but
as a percentage of revenue, declined 18.8 percentage points from
52.8% in 1998 to 34.0% in 1999. The decline reflects economies in
scale achieved through the merger of TigerTel and Contour and the
continued improvement of our domestic telecommunications
businesses. SG&A increased $3.1 million or 21.5% in 1998,
primarily as a result of the acquisition of one of the TigerTel
entities.
* Network increased $4.7 million or 204.3%, a significant increase
over 1998 as a result of acquisitions made in the second quarter
of 1999. These companies are more service oriented and have a
higher SG&A expenses. There were no Network operations in 1997.
* Internet commenced operations in 1999. As a service provider,
this division has a lower cost of goods sold but higher SG&A
expense.
* Applications increased $7.9 million or 87.8% in 1999 due to an
acquisition in the second quarter of 1999, and increased $5.7
million or 178.1% in 1998 as a result of the acquisition of
Signature. As a percentage of revenue, SG&A expense in this
division has not increased significantly over prior periods.
* IntelleSale's SG&A increased $11.0 million or 135.8% in 1999,
primarily as a result of the acquisition of Bostek in June 1999
and the increase of Internet related business and the
consolidation of operations into one facility. SG&A increased
$4.3 million or 113.2% in 1998 due to acquisitions in 1998. As a
percentage of sales, SG&A expense in 1999 and 1998 are almost the
level.
* Non-core SG&A did not increase significantly in dollar terms in
1999 but increased as a percentage of sales as sales continue to
decline at certain units within this division. In 1998, SG&A
increased $6.8 million or 154.5% as a result of acquisitions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for 1999 was $9.7 million, an
increase of $5.2 million, or 115.6%, from $4.5 million in 1998. The 1998
expense represents an increase of $2.6 million or 136.8% over the $1.9
million reported in 1997. As a percentage of revenue, depreciation and
amortization expense increased to 2.9% in 1999 from 2.2% in 1998 and 1.8%
in 1997. The increase, despite substantially higher revenues, is due to
significantly higher goodwill resulting from acquisitions, as well as
increased depreciation expense in 1999 resulting from higher capital
expenditures in 1999 compared to 1998 and 1997.
23
<PAGE>
<PAGE>
Depreciation and amortization expense for each of the operating
segments was:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Telecommunications<F1> $1,547 $ 677 $ 300
Network 132 39 --
Internet 69 -- --
Applications 2,366 1,241 459
IntelleSale 529 251 108
Non-Core<F2> 1,153 935 277
Corporate (including amounts incurred during
consolidation<F2> 3,891 1,358 730
--------------------------------------
Consolidated $9,687 $4,501 $1,874
======================================
<FN>
--------------
<F1> Includes TigerTel's depreciation and amortization of $1.2
million and $0.5 million in 1999 and 1998.
<F2> Includes depreciation and amortization from the
Communications Infrastructure group of companies, the
majority of which were disposed of in the 4th quarter of
1999. Depreciation and amortization for these disposed
entities, included above amounted to $4.8 million, $4.7
million and $0.7 million in 1999, 1998 and 1997
<F3> Includes consolidation adjustments of $2,911, $1,221 and
$713, in 1999, 1998 and 1997, respectively.
</TABLE>
Changes during the years were:
* Telecommunications increased in 1999 due to TigerTel's
acquisition of Contour in May 1999 as well as amortization of
goodwill of companies acquired by TigerTel at the beginning of
1999.
* Network infrastructure increased in 1999 due to the two
acquisitions completed in the second quarter of 1999.
* Application technology increased in 1999 by $1.1 million or 91.7%
due to the acquisition completed in the second quarter of 1999
and increases in depreciable assets in 1999. 1998's increase was
due to the acquisition of Signature.
* IntelleSale.com increased in 1999 due to the acquisition of
Bostek and the increase in depreciable assets in 1999. 1998's
increase over 1997 was due to the increase in depreciable assets.
* Non-core both increased in 1999 due to the acquisition of
depreciable assets, primarily by Ground Effects, as part of its
ongoing automotive manufacturing programs.
On an annual basis, goodwill amortization will be approximately $3.5
million.
RESTRUCTURING AND UNUSUAL CHARGES
As part of the reorganization of our core business in the first quarter
of 1999, we implemented a restructuring plan. The restructuring plan
includes the exiting of selected lines of business within our
Telecommunications and Applications business groups, and the associated
write-off of assets. The restructuring charge of $2,236 includes asset
impairments, primarily software and other intangible assets, of $1,522,
lease terminations of $541, and employee separations of $173. In addition,
during the first quarter of 1999, as part of our core businesses
reorganization, we realigned certain operations within the
Telecommunications division and recognized impairment charges and other
related costs of $314.
In 1997, as part of the disposition of certain assets within the
Telecommunications group, we incurred asset impairment and lease
termination and employee separation costs of $1,681.
GAIN ON SALE OF SUBSIDIARY
In November 1999, TigerTel received an all cash bid for all of its
outstanding common shares from AT&T Canada, Inc. We entered into a lock-
up agreement with AT&T to tender the approximately 65% of the outstanding
shares we owned, tendered our shares 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.
24
<PAGE>
<PAGE>
INTEREST INCOME AND EXPENSE
Interest income was $0.6 million, $0.4 million and $0.2 million, for
1999, 1998 and 1997, respectively. Interest income is earned primarily
from short-term investments and notes receivable.
Interest expense was $3.8 million, $1.7 million and $1.0 million for
1999, 1998 and 1997, respectively. Interest expense is a function of the
level of outstanding debt and is principally associated with revolving
credit lines, notes payable and term loans.
INCOME TAXES
We had effective income tax rates of 34.5%, 33.6% and 36.8% in 1999,
1998 and 1997, respectively. Differences in the effective income tax rate
from the statutory federal income tax rate arise from non-deductible
goodwill amortization associated with acquisitions, state taxes net of
federal benefits and the reduction of valuation allowances related to net
operating loss carryforwards.
EXTRAORDINARY LOSS
In 1999 we retired our line of credit with State Street Bank and Trust
Company and refinanced it with IBM Credit Corporation. Deferred financing
fees associated with the State Street Bank and Trust agreement were written
off during the second quarter of 1999. The total amount of the write-off
recorded as an extraordinary loss was $160, net of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, cash and cash equivalents totaled $5.1
million, an increase of $0.6 million, or 13.3% from $4.5 million at
December 31, 1998. We utilize a cash management system to apply excess cash
on hand against our revolving credit facility for which we had availability
of $11.8 million at December 31, 1999, up from $3.8 million at December 31,
1998. Cash used in operating activities totaled $14.3 million, $2.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In all
three years, excluding assets and liabilities acquired or assumed in
connection with acquisitions, cash used was due to increases in accounts
and unbilled receivables, inventories, prepaid assets and accounts payable
and accrued expenses, after adjusting for the net income and for non-cash
expenses.
"Due from buyer of divested subsidiary" 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.
Accounts and unbilled receivables, net of allowance for doubtful
accounts, increased by $17.7 million or 51.5% to $52.1 million in 1999 from
$34.4 million in 1998. This increase was primarily attributable to the
increased volume of business in 1999 over 1998, particularly in our
IntelleSale division, as well as the increases as a result of businesses
acquired in 1999. As a percentage of 1999 and 1998 net operating revenue,
accounts and unbilled receivable were 15.5% and 16.6%, respectively.
Inventories increased by $19.8 million or 96.1% to $40.4 million in
1999 from $20.6 million in 1998. This increase was primarily attributable
to the increased volume of business at IntelleSale in 1999 over 1998, as
well as the increases as a result of businesses acquired in 1999. As a
percentage of 1999 and 1998 cost of goods sold, inventories were 16.7% and
14.4%, respectively.
Prepaid expenses and other current assets increased by 200.0% or $4.0
million to $6.0 million in 1999 from $2.0 million in 1998. This increase is
attributable to the overall increase in size of the Company in 1999.
Accounts payable increased by $15.7 million or 113.8% to $29.5 million
in 1999 from $13.8 million in 1998. This increase was primarily
attributable to the increased volume of business in 1999 over 1998, as well
as the increases as a result of businesses acquired in 1999. As a
percentage of 1999 and 1998 cost of goods sold, accounts payable and
accrued expenses were 12.2% and 9.7%, respectively.
25
<PAGE>
<PAGE>
Accrued expenses increased by $8.4 million or 91.3% to $17.6 million in
1999 from $9.2 million in 1998. Accrued expenses include estimated earnout
and deferred purchase price payments earned at December 31, 1999.
"Due to shareholders of acquired subsidiary" represents the deferred
purchase price due to the Bostek sellers. $5.0 million of this amount was
paid in January 2000. Other current liabilities decreased by $0.6 million
or 18.2% to $2.7 million in 1999 from $3.3 million in 1998.
Investing activities used cash of $27.2 million in 1999 and $6.8
million in 1998 and provided cash of $4.2 million in 1997. In 1999, cash of
$17.9 million was used to acquire businesses and $7.0 million was spent to
acquire property and equipment. $3.0 million was used principally to
increase assets such as notes receivable and other assets, while $0.7
million was received from the sale of property and equipment. In 1998, $7.4
million was used principally to increase assets such as notes receivable,
property and equipment and other assets, while $0.5 million was received
from the sale of assets. In 1997, sources of cash primarily included $4.0
million of cash acquired in acquisitions and $2.3 million in proceeds from
the sale of assets. These amounts were partially offset by payments of $2.2
million for property and equipment and other assets.
Cash of $42.2 million, $6.4 million and $6.0 million was provided by
financing activities in 1999, 1998 and 1997, respectively. In 1999, $54
million was obtained through long-term debt and $5.2 million was obtained
through the issuance of common shares. Uses of cash in 1999 included net
repayments of $10.9 million and $3.4 million against long-term debt and
notes payable, respectively, and $2.8 million for other financing costs.
In 1998, $13.2 million was obtained through borrowings under notes payable
and long-term debt and $1.4 million was obtained through the issuance of
common shares. Uses of cash in 1998 included repayments of $6.9 million on
long term debt, $0.9 million for the redemption of preferred stock and $0.3
million for the repurchase of common stock. In 1997, $9.4 million of cash
was provided primarily though the issuance of common stock and from long-
term debt proceeds. In 1997, $3.3 million of cash was used to pay down
notes payable and long term-debt.
One of our stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength.
However, due to our significant growth rate, our investment needs have
increased. Consequently, we may continue, in the future, to use cash from
operations and may continue to finance this use of cash through financing
activities such as the sale of common stock and/or bank borrowing, if
available.
In August, 1998, we entered into a $20 million line of credit with
State Street Bank and Trust Company secured by all of our domestic assets
at the prime lending rate or at the London Interbank Offered Rate, at our
discretion. In February 1999, the amount of the credit available under the
facility was increased to $23 million. On May 25, 1999, we entered into a
Term and Revolving Credit Agreement with IBM Credit Corporation (the "IBM
Agreement") 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. The IBM Agreement, as amended, provides for: (a) a revolving
credit line of up to $36.150 million, designated as follows: (i) a U.S.
revolving credit line of up to $27 million, (ii) a Canadian revolving
credit line of up to $6.150 million, and (iii) a United Kingdom revolving
credit line of up to $3 million; (b) a term loan A of up $22 million, (c) a
term loan B of up to $25 million, (d) a Canadian term loan C of up to $6.85
million, and (e) a Canadian term loan D of up to $5.0 million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes.
The USA revolving credit line bears interest at the 30-day LIBOR rate plus
1.75% to 1.90% depending on our leverage ratio; the Canadian revolving
credit line bears interest at the base rate as announced by the Toronto-
Dominion Bank of Canada each month (6.5% at December 31, 1999) plus 0.1707%
to 0.3207%, depending on our leverage ratio; the UK revolving credit line
bears interest at the base rate as announced by the National Westminster
Bank PLC of England each month plus 1.4207% to 0.5707%, depending upon
our leverage ratio. As of December 31, 1999, the LIBOR rate was
approximately 5.5798% and approximately $24.3 million was outstanding on
the revolving credit line. In
26
<PAGE>
<PAGE>
January 2000, we applied the proceeds from the sale of our investment in
TigerTel towards the U.S. revolving credit line and paid it down. As
of March 27, 2000, approximately $5.8 million was outstanding under the U.S.
revolving credit line and approximately $3.2 million under the Canadian
revolving credit line.
Term loan A, which was used to pay off State Street Bank and Trust
Company, bears interest at the 30-day LIBOR rate plus 1.75% to 1.90%, is
amortized in quarterly installments over six years and is repayable in full
on the third anniversary of the closing date of the loan. As of December
31, 1999 and March 27, 2000, approximately $20.2 million and $19.2 million,
respectively, was outstanding on this loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75% to 1.90%, is amortized in quarterly
installments over six years and is repayable in full on the third
anniversary of the closing date of the loan. As of December 31, 1999 and
March 27, 2000, approximately $19.5 million and $23.3 million,
respectively, was outstanding on this loan.
Term loan C, which was used by our Canadian subsidiaries to pay off
their bank debt, bears interest at the base rate as announced by the
Toronto-Dominion Bank of Canada each month plus 0.1707%, to 0.3207%, is
amortized in quarterly installments over six years and is repayable in full
on the third anniversary of the closing date of the loan. As of December
31, 1999, Toronto-Dominion's rate was approximately 6.5%. As of December
31, 1999 and March 27, 2000 approximately $2.5 million was outstanding on
this loan.
Term loan D, which may be used by one of our Canadian subsidiaries for
acquisitions, bears interest at the base rate as announced by the Toronto-
Dominion Bank of Canada each month plus 0.1707%, to 0.3207%, is amortized
in quarterly installments over six years and is repayable in full on the
third anniversary of the closing date of the loan. As of December 31, 1999
no advances have been made under this facility. In February 2000, it was
reallocated to Term Loan B.
The agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the
declarations and payment of dividends. As of December 31, 1999, the
Company was in compliance with, or had received waivers for compliance
with, all debt covenants.
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. Under these agreements, assuming that
all earnouts are achieved, we are contingently liable for additional
consideration amounting to approximately $2.7 million based on achieved
1999 results, approximately $12.7 million based on agreements coming due
in 2000 and achieved 2000 results, approximately $7.1 million based on
achieved 2001 results, approximately $1.8 million based on achieved 2002
results and approximately $2 million based upon achieved 2004 results.
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 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. We have
entered into agreements to acquire for approximately $3.9 million, put
options in certain subsidiaries of our subsidiary, IntelleSale.com. In
addition, based upon current earnings, assuming all other put options were
exercised, we are contingently liable for approximately an additional $6.9
million in the next two years.
Our sources of liquidity include, but are not limited to, funds from
operations and funds available under the IBM Agreement. We may be able to
use additional bank borrowings, proceeds form 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
27
<PAGE>
<PAGE>
or public offerings. There can be no assurance however, that these options
will be available, or if available, on favorable terms. We believe that our
current cash position, augmented by financing activities, if available,
will provide us with sufficient resources to finance our working capital
requirements for the foreseeable future. Our capital requirements depend on
a variety of factors, including but not limited to, the rate of increase or
decrease in our existing business base; the success, timing, and amount of
investment required to bring new products on-line; revenue growth or
decline; and potential acquisitions. We believe that we have the financial
resources to meet our future business requirements for at least the next
twelve months.
OUTLOOK
Our objective is to continue to grow each of our operating segments
internally and through acquisitions, both domestically and abroad. Our
strategy has been, and continues to be, to invest in and acquire businesses
that complement and add to its existing business base. We have expanded
significantly through acquisitions in the last twelve months and continue
to do so. Our financial results and cash flows are substantially dependent
on not only our ability to sustain and grow our 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 our management will be able to continue to find, acquire,
finance and integrate high quality companies at attractive prices.
We are constantly looking for ways to maximize stockholder value. As
such, we are continually seeking operational efficiencies and synergies
within each of our operating segments as well as evaluating acquisitions of
businesses and customer bases which complement our operations. These
strategic initiatives may include acquisitions, raising additional funds
through debt or equity offerings, or the divestiture of non-core business
units that are not critical to our long term strategy or other
restructuring or rationalization of existing operations. We will continue
to review all alternatives to ensure maximum appreciation of our
shareholders' investments. There can be no assurance however that any
initiatives will be found, or if found, that they will be on terms
favorable to us.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, we adopted Statement of Financial Accounting Standards (FAS)
131, Disclosures about Segments of an Enterprise and Related Information.
FAS 131 supersedes FAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization
that is used by management for making operating decisions and assessing
performance as the source of our reportable segments. FAS 131 also
requires disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information (see Note 21 to our consolidated financial statements).
In 1998, we adopted FAS 130, Reporting Comprehensive Income, which
establishes standards for reporting and disclosure of comprehensive income
and its components. Our comprehensive income consists of foreign currency
translation adjustments and is reported in the consolidated statements of
stockholders' equity.
In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement is
effective for fiscal years commencing after June 15, 2000. 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 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. We
will be required to adopt this statement no later than the second quarter
of 2000. We have not completed the
28
<PAGE>
<PAGE>
analysis to determine the impact of this statement on our consolidated
financial statements; however the impact is not expected to be material.
ITEM 7A. 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in
this Annual Report are listed in Item 14 and begin immediately after Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be included in our Proxy
Statement for our 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in our Proxy
Statement for our 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be included in our Proxy
Statement for our 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be included in our Proxy
Statement for our 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
30
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The financial statements and financial statement schedule listed
below are included in this report
Report of Management
Reports of Independent Accountants
Financial Statements
Consolidated Balance Sheets
Consolidated Statements Of Operations
Consolidated Statements Of Stockholders' Equity
Consolidated Statements Of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule of Valuation and Qualifying Accounts
(a)(2) Financial statement schedules have been included in Item 14(a)(1)
above.
(a)(3) Exhibits
See Index to Exhibits filed as part of this annual report on Form
10-K.
(b) Reports on Form 8-K
On October 5, 1999 we filed a Current Report on Form 8-K/A
reporting an amendment to the IBM Agreement.
On December 13, 1999 we filed a Current Report on Form 8-K
reporting AT&T Canada's bid for our subsidiary, TigerTel, Inc.
On December 22, 1999 we filed a Current Report on Form 8-K/A
which included a copy of the AT&T Agreement. On January 11, 2000
we filed a Current Report on Form 8-K/A reporting the completion
of the transaction.
(c) Exhibits - Included in Item 14(a)(3) above.
31
<PAGE>
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
Consolidated Financial Statements appearing in our Annual Report. The
financial statements were prepared in conformity with United States
generally accepted accounting principles appropriate in the circumstances
and, accordingly, include certain amounts based on our best judgments and
estimates. Financial information in this Annual Report is consistent with
that in the financial statements.
Management is responsible for maintaining a system of internal accounting
controls and procedures to provide reasonable assurance, at an appropriate
cost/benefit relationship, assets are safeguarded and transactions are
authorized, recorded and reported properly. The internal accounting
control system is augmented by a program of internal audits and appropriate
reviews by management, written policies and guidelines, careful selection
and training of qualified personnel and a written Code of Business Conduct
adopted by the Company's Board of Directors, applicable to all employees of
the Company and its subsidiaries. In our opinion, the Company's internal
accounting controls provide reasonable assurance that assets are
safeguarded against material loss from unauthorized use or disposition and
that the financial records are reliable for preparing financial statements
and other data and for maintaining accountability of assets.
The Audit Committee of the Company's Board of Directors, composed entirely
of independent Directors who are not officers of the Company, meets with
the independent accountants, management and internal auditors periodically
to discuss internal accounting controls and auditing and financial
reporting matters. The Committee reviews with the independent accountants,
the scope and results of the audit effort. The Committee also meets
periodically with the independent accountants and the director of internal
audit without management present to ensure that the independent accountants
and the director of internal audit have free access to the Committee.
- ---------------------------------------------------------------------------
Page 32
<PAGE>
<PAGE>
Report of Management (Continued)
- ---------------------------------------------------------------------------
The independent accountants, PricewaterhouseCoopers LLP, are recommended by
the Audit Committee of the Board of Directors, selected by the Board of
Directors and ratified by the Company's shareholders. PricewaterhouseCoopers
LLP is engaged to audit the Consolidated Financial Statements of Applied
Digital Solutions, Inc. and subsidiaries and conduct such tests and related
procedures as it deems necessary in conformity with auditing standards
generally accepted in the United States. The opinion of the independent
accountants, based upon their audits of the Consolidated Financial
Statements, is contained in this Annual Report.
Richard J. Sullivan
Chairman, Board of Directors and
Chief Executive Officer
Garrett A. Sullivan
President and Chief Operating Officer
David A. Loppert
Vice President, and
Chief Financial Officer
March 3, 2000
- ---------------------------------------------------------------------------
Page 33
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Applied Digital Solutions, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1), present fairly, in all material respects,
the financial position of Applied Digital Solutions, Inc. and its
subsidiaries (formerly Applied Cellular Technology, Inc.) at December
31, 1999 and December 31, 1998, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998 in
conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(1), presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 3, 2000
- ---------------------------------------------------------------------------
Page 34
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Applied Digital Solutions, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Applied Digital Solutions, Inc. and
subsidiaries (formerly Applied Cellular Technology, Inc.) for the year
ended December 31, 1997. We have also audited the financial statement
schedule listed in the accompanying index as of December 31, 1997, and
for the year then ended. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of Applied Digital Solutions, Inc. and subsidiaries for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
- ---------------------------------------------------------------------------
Page 35
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<CAPTION>
ASSETS
DECEMBER 31,
------------------------
1999 1998
------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,138 $ 4,555
Due from buyer of divested subsidiary 31,302 --
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $1,698 in 1999 and $990 in 1998) 52,170 34,390
Inventories 40,448 20,657
Notes receivable 3,822 3,600
Prepaid expenses and other current assets 6,001 2,042
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 138,881 65,244
PROPERTY AND EQUIPMENT, NET 13,886 15,627
NOTES RECEIVABLE 3,297 1,445
GOODWILL, NET 62,000 33,430
OTHER ASSETS 10,912 8,370
- -------------------------------------------------------------------------------------------------------------
$228,976 $124,116
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 25,211 $ 23,217
Current maturities of long-term debt 8,038 1,158
Due to shareholders of acquired subsidiary 15,000 --
Accounts payable 29,499 13,819
Accrued expenses 17,672 9,251
Other current liabilities 2,745 3,312
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 98,165 50,757
LONG-TERM DEBT 35,317 2,838
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 133,482 53,595
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES 2, 15, AND 19)
- -------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 2,558 2,961
- -------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred shares:
Authorized 5,000 shares in 1999 and 1998 of $10 par value; special voting,
issued and outstanding 1 share in 1999 and 1998, Class B voting, issued
and outstanding 1 share in 1999 and 1998 -- --
Common shares:
Authorized 80,000 shares in 1999 and 1998,
of $.001 par value; 51,116 shares issued and
48,260 shares outstanding in 1999 and 35,683 shares issued
and 35,577 shares outstanding in 1998 48 36
Common and preferred additional paid-in capital 87,470 60,517
Retained earnings 12,664 7,232
Treasury stock (carried at cost, 2,856 shares in 1999, 106 shares in 1998) (7,310) (337)
Accumulated other comprehensive income 64 112
- -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 92,936 67,560
- -------------------------------------------------------------------------------------------------------------
$228,976 $124,116
=============================================================================================================
</TABLE>
- ---------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 36
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
NET OPERATING REVENUE $336,741 $207,081 $103,159
COSTS OF GOODS SOLD 241,790 142,893 69,408
- ----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 94,951 64,188 33,751
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (90,416) (51,485) (26,431)
DEPRECIATION AND AMORTIZATION (9,687) (4,501) (1,874)
RESTRUCTURING AND UNUSUAL COSTS (2,550) -- (1,681)
GAIN ON SALE OF SUBSIDIARY 20,075 733 1,827
INTEREST INCOME 616 420 192
INTEREST EXPENSE (3,842) (1,653) (978)
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY LOSS 9,147 7,702 4,806
PROVISION FOR INCOME TAXES 3,160 2,588 1,769
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 5,987 5,114 3,037
MINORITY INTEREST 395 424 697
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 5,592 4,690 2,340
EXTRAORDINARY LOSS (NET OF TAXES OF $89) 160 -- --
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME 5,432 4,690 2,340
PREFERRED STOCK DIVIDENDS -- 44 72
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 5,432 $ 4,646 $ 2,268
============================================================================================================================
EARNINGS PER COMMON SHARE - BASIC
INCOME BEFORE EXTRAORDINARY LOSS $ .12 $ .14 $ .18
EXTRAORDINARY LOSS -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE - BASIC $ .12 $ .14 $ .18
============================================================================================================================
EARNINGS PER SHARE - DILUTED
INCOME BEFORE EXTRAORDINARY LOSS $ .11 $ .13 $ .15
EXTRAORDINARY LOSS -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE - DILUTED $ .11 $ .13 $ .15
============================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 46,814 32,318 12,632
============================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 50,086 34,800 15,245
============================================================================================================================
</TABLE>
- ---------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 37
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<CAPTION>
ACCUMULATED
OTHER TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED COMPRE- STOCK-
--------------- --------------- PAID-IN EARNINGS TREASURY HENSIVE HOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL (DEFICIT) STOCK INCOME EQUITY
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 -- $ -- 5,799 $ 6 $ 7,928 $ 318 $ -- $ -- $ 8,252
Net income -- -- -- -- -- 2,340 -- --
Comprehensive income -
foreign currency translation -- -- -- -- -- -- -- (2)
Total comprehensive income -- -- -- -- -- 2,340 -- (2) 2,338
Issuance of common shares -- -- 1,572 2 5,534 -- -- -- 5,536
Issuance of common shares to redeem -- --
preferred stock -- -- 1,354 1 2,499 -- -- -- 2,500
Issuance of common shares for
acquisitions -- -- 9,624 10 10,263 -- -- -- 10,273
Warrants redeemed for common shares -- -- 2,323 2 7,456 -- -- -- 7,458
Preferred stock dividends paid -- -- -- -- -- (72) -- -- (72)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 -- -- 20,672 21 33,680 2,586 -- (2) 36,285
Net income -- -- -- -- -- 4,690 -- --
Comprehensive income - foreign
currency translation -- -- -- -- -- -- -- 114
Total comprehensive income -- -- -- -- -- 4,690 -- 114 4,804
Issuance of common shares -- -- 50 -- 100 -- -- -- 100
Issuance of common shares for
acquisitions -- -- 12,511 12 18,770 -- -- -- 18,782
Issuance of preferred shares -- -- -- -- 6,020 -- -- -- 6,020
Conversion of preferred shares to
common shares -- -- 1,600 2 (2) -- -- -- --
Warrants redeemed for common shares -- -- 850 1 1,949 -- -- -- 1,950
Preferred dividends paid -- -- -- -- -- (44) -- -- (44)
Common shares repurchased -- -- (106) -- -- -- (337) -- (337)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 -- -- 35,577 36 60,517 7,232 (337) 112 67,560
Net income -- -- -- -- -- 5,432 -- --
Comprehensive income
Foreign currency translation -- -- -- -- -- -- -- (36)
Unrealized gain on securities -- -- -- -- -- -- -- (12)
Total comprehensive income -- -- -- -- -- 5,432 -- (48) 5,384
Issuance of common shares -- -- 2,808 3 5,508 -- -- -- 5,511
Issuance of common shares for
acquisitions -- -- 11,701 11 19,016 -- -- -- 19,027
Warrants redeemed for common shares -- -- 924 1 2,429 -- -- -- 2,430
Common shares repurchased -- -- (2,750) (3) -- -- (6,973) -- (6,976)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 -- $ -- 48,260 $48 $87,470 $12,664 $(7,310) $ 64 $92,936
==================================================================================================================================
</TABLE>
- ---------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 38
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,432 $ 4,690 $ 2,340
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 9,687 4,501 1,874
Minority interest 395 424 697
Gain on sale of subsidiary (20,075) (733) (1,827)
(Gain) loss on sale of assets 143 (140) 148
Reserve on investments 1,000 -- --
Non-cash portion of restructuring cost 1,522 -- --
Net change in operating assets and liabilities (12,483) (11,352) (6,549)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (14,379) (2,610) (3,317)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable (413) (2,338) 122
Proceeds from sale of assets 758 507 2,296
Payments for property and equipment (7,024) (1,950) (916)
(Payments for) proceeds from asset and business acquisitions
(net of cash balances acquired) (17,903) 57 3,983
Increase in other assets (2,675) (3,118) (1,327)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (27,257) (6,842) 4,158
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on notes payable (3,358) 12,202 (2,847)
Proceeds on long-term debt 54,114 1,011 335
Payments for long-term debt (10,911) (6,936) (494)
Other financing costs (2,863) -- --
Issuance of common shares 5,237 1,354 9,084
Repurchase of common stock -- (337) --
Redemption of preferred shares -- (900) --
Preferred stock dividends paid -- (44) (72)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,219 6,350 6,006
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 583 (3,102) 6,847
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,555 7,657 810
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 5,138 $ 4,555 $ 7,657
============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 1,334 $ 2,430 $ 964
Interest paid 3,541 1,534 1,012
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 39
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Applied Digital Solutions, Inc. and subsidiaries (the Company) is an
emerging leader in the implementation of e-business solutions for the
Internet through Computer Telephony Internet Integration (the
integration of computer telecom and the Internet). The Company's
goal is to be a single source e-business provider that mid-size
companies can turn to for intelligently connecting their business
processes via telephone or computer, with their customers, suppliers
and partners to deliver the results expected from the emerging
e-business market. The Company currently operates in six segments as
follows:
TELECOMMUNICATIONS - This segment is an implementer of
telecommunications and Computer Telephony Integration (CTI)
solutions for e-business.
NETWORK - This segment provides e-business infrastructure
design and deployment, personal computer network infrastructure
for the development of local and wide area networks as well as
site analysis, configuration, training and customer support
services.
INTERNET - This segment equips customers with the necessary
tools and support services to enable them to make a successful
transition to becoming or implementing e-business practices,
ERP and CRM solutions, website design and application and
internet access services.
APPLICATIONS - This segment provides software applications
primarily for large retail environments, including point of
sale, data acquisition, asset management and decision support
systems; and develops programs for portable data collection
equipment, including wireless hand-held devices.
INTELLESALE.COM - This segment sells refurbished and new
computer equipment and related components online, through its
website at www.Intellesale.com, and through other Internet
companies, as well as through traditional channels, which
includes sales made by Intellesale.com's sales force.
NON-CORE - This segment is comprised of seven individually
managed companies engaged in various business enterprises
including the manufacturing of electronic and automotive
components, and the fabrication, installation and maintenance
of microwave, cellular and digital personal communication
service towers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Applied
Digital Solutions, Inc. and its wholly owned and majority owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
As further discussed in Note 2, the Company acquired businesses
during 1999 and 1998 all of which have been accounted for under the
purchase method of accounting.
USE OF ESTIMATES
The preparation of the financial statements requires management to
make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Although these estimates are based on the knowledge of current events
and actions the Company may undertake in the future, they may
ultimately differ from actual results.
FOREIGN CURRENCIES
The Company's foreign subsidiaries use their local currency as their
functional currency. Results of operations and cash flow are
translated at average exchange rates during the period, and assets and
liabilities are translated at end of period exchange rates.
Translation adjustments resulting from this process are included in
accumulated other comprehensive income in stockholders' equity.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the
functional currency, are included in the results of operations as
incurred.
- ---------------------------------------------------------------------------
Page 40
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
UNBILLED RECEIVABLES
Unbilled receivables consist of certain direct costs and profits
recorded in excess of amounts billable pursuant to contract
provisions in connection with system installation projects and
software licensing. Unbilled receivables included in accounts
receivable was $0.5 million in 1999 and $1.6 million in 1998.
INVENTORIES
Inventories consist of raw materials, work in process and finished
goods. Inventory is valued at the lower of cost or market,
determined by the first-in, first-out method. The Company closely
monitors and analyzes inventory for potential obsolescence and slow-
moving items based upon the aging of the inventory and the inventory
turns by product. Inventory items designated as obsolete or slow-
moving are reduced to net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation and amortization computed using straight-line and
accelerated methods. Building and leasehold improvements are
depreciated and amortized over periods ranging from 10 to 40 years
and equipment is depreciated over periods ranging from 3 to 10 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated on the cost basis and
are amortized, principally on a straight-line basis, over the
estimated future periods to be benefitted (not exceeding 20 years).
Goodwill and other intangible assets are periodically reviewed for
impairment based on expected future undiscounted cash flows to ensure
that they are appropriately valued.
PROPRIETARY SOFTWARE IN DEVELOPMENT
In accordance with Statement of Financial Accounting Standards (FAS)
86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed, the Company has capitalized certain computer
software development costs upon the establishment of technological
feasibility. Technological feasibility is considered to have
occurred upon completion of a detailed program design which has been
confirmed by documenting and tracing the detail program design to
product specifications and has been reviewed for high-risk
development issues, or to the extent a detailed program design is not
pursued, upon completion of a working model that has been confirmed
by testing to be consistent with the product design. Amortization is
provided based on the greater of the ratios that current gross
revenues for a product bear to the total of current and anticipated
future gross revenues for that product, or the straight-line method
over the estimated useful life of the product. The straight-line
life is determined to be 2 to 5 years.
ADVERTISING COSTS
The Company generally expenses production costs of print
advertisements the first date the advertisements take place.
Advertising expense, included in selling, general and administrative
expenses, was $2.9 million in 1999, $0.7 million in 1998 and $0.9
million in 1997.
- --------------------------------------------------------------------------
Page 41
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
REVENUE RECOGNITION
For programming, consulting and software licensing services and
construction contracts, the Company recognizes revenue based on the
percent complete for fixed fee contracts, with the percent complete
being calculated as either the number of direct labor hours in the
project to date divided by the estimated total direct labor hours or
based upon the completion of specific task orders. It is the
Company's policy to record contract losses in their entirety in the
period in which such losses are foreseeable. For non fixed fee jobs,
revenue is recognized based on the actual direct labor hours in the
job times the standard billing rate and adjusted to realizable value,
if necessary. For product sales, the Company recognizes revenue
upon shipment. Revenue from royalties is recognized when licensed
products are shipped. There are no significant post contract support
obligations at the time of revenue recognition. The Company's
accounting policy regarding vendor and post-contract support
obligations is based on the terms of the customers' contract,
billable upon the occurrence of the post-sale support. Costs of
goods sold are recorded as the related revenue is recognized.
The Company does not experience significant product returns, and
therefore, management is of the opinion that no allowance for sales
returns is necessary. The Company has no obligation for warranties
on new hardware sales, because the warranty is provided by the
manufacturer. However, the Company provides a minimum six month
warranty and offers the opportunity to purchase an extended warranty
for most refurbished hardware sales not covered by manufacturer
warranties. The Company has recorded a warranty reserve of $0.3
million at December 31, 1999 based upon prior history. The Company
does not offer a warranty policy for services to customers.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (FAS) 109, Accounting for Income
Taxes, which requires the asset and liability approach for the
financial accounting and reporting for income taxes. Income taxes
include U.S. and international taxes. The Company and its U.S.
subsidiaries file a consolidated federal income tax return.
EARNINGS PER COMMON AND COMMON SHARE EQUIVALENT
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed giving effect to
all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental
shares issuable upon exercise of stock options and warrants,
conversion of preferred stock outstanding and contingently issuable
shares.
COMPREHENSIVE INCOME
The Company's comprehensive income consists of foreign currency
translation adjustments and unrealized gains on securities, and is
reported in the consolidated statements of stockholders' equity.
- ---------------------------------------------------------------------------
Page 42
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
2. ACQUISITIONS AND DISPOSITIONS
The following represents acquisitions which occurred in 1999 and 1998:
<TABLE>
<CAPTION>
COMMON/
DATE OF PERCENT ACQUISITION PREFERRED
ACQUISITION ACQUIRED PRICE SHARES ISSUED BUSINESS DESCRIPTION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 ACQUISITIONS
Port Consulting, Inc. 04/01/99 100% $ 1,292 -- Integrator of information technology
application systems
Hornbuckle Engineering 04/01/99 100% 3,680 555 Integrated voice and data solutions
provider
Lynch Marks & Associates, Inc. 04/01/99 100% 2,526 773 Network integration company
STR, Inc. 04/01/99 100% 3,050 932 Software solutions provider for retailers
Contour Telecom Management, Inc.
(Divested effective 12/31/99) 06/25/99 75% 5,627 -- Provider of outsourced
telecommunications management services
Bostek, Inc. & affiliate 06/01/99 100% 26,966 -- Seller of computer systems and
peripherals
1998 ACQUISITIONS
Information Products Center, Inc. 01/01/98 100% $ 2,797 1,766 Network Infrastructure services
provider
Winward Electric (Divested effective
10/1/99) 01/01/98 100% 4,556 2,307 Full service electrical and
communications systems contractor
Americom Group 04/01/98 80% 956 227 Provider of communications
infrastructure construction,
maintenance, installation and training
services
Aurora Electric, Inc. (Divested
effective 10/1/99) 04/01/98 100% 1,897 1,098 Full service electrical and
communications system contractor
Blue Star Electronics 04/01/98 80% 431 203 Cable assembly manufacturer
Consolidated Micro Components 04/01/98 100% 1,948 1,042 Reseller of memory, processors and mass
storage devices
Data Path Technologies 04/01/98 100% 3,421 1,778 Seller of computer systems,
peripherals, components and software
GDB Software Services 04/01/98 100% 1,931 1,013 Provider of data processing consulting
services
Ground Effects, Ltd. 04/01/98 85% 2,049 1,106 Manufacturer of aluminum and steel
tubes
Innovative Vacuum Solutions, Inc. 04/01/98 80% 1,361 729 Re-manufacturer of high-end vacuum
pumps
Service Transport Company 04/01/98 80% 89 35 Transporter of computer systems and
electronics
Teledata Concepts, Inc. 04/01/98 100% 308 138 Internet and telecommunications
services provider
TigerTel Services, Ltd. (Divested
effective 12/31/99) 05/01/98 100% 6,500 3,418 Call centers, voice messaging and one
number dialing services provider
Signature Industries, Ltd. 06/01/98 85% 4,974 3,571 Manufacturer of high-grade
communications and safety devices
Fiscal Advantage, Inc. 10/01/98 Assets 200 -- Computer leasing services
</TABLE>
- ---------------------------------------------------------------------------
Page 43
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
EARNOUT AND PUT AGREEMENTS
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements
reflect the results of operations of each company from the date of
acquisition. The costs of acquisitions include all payments
according to the acquisition agreements plus costs for investment
banking services, legal services and accounting services, that were
direct costs of acquiring these assets. Goodwill resulting from
these acquisitions is being amortized on a straight-line basis, over
twenty years. Certain acquisition agreements include additional
consideration contingent on profits of the acquired subsidiary. Upon
earning these additional shares, the value will be recorded as
additional goodwill. The acquisitions above include contingent
shares earned upon attainment of certain profits by subsidiaries
through December 31, 1999. Under these agreements, assuming all
earnout profits are achieved, the Company is contingently liable for
additional consideration of approximately $12.7 million in 2000, $7.1
million in 2001, $1.8 million in 2002 and $2 million in 2004, of
which 6.2 million would be payable in cash and 17.4 million would be
payable in stock. See Note 23 for unaudited pro forma information
for the above acquisitions that occurred in 1999 and 1998.
The Company has entered into put options with the selling
shareholders of various companies in which the Company acquired less
than a 100% interest. These options require the Company to purchase
the remaining portion it does not own after periods ranging from four
to five years from the dates of acquisition at amounts per share
generally equal to 10% to 20% of the average annual earnings per
share of the company before income taxes for the two year period
ending the effective date of the put multiplied by a multiple ranging
from four to five. In the second quarter of 1999, the Company
entered into agreements to pay $3.9 million to acquire put options in
certain companies owned by the Company's subsidiary, Intellesale.com.
In addition, based on current earnings, assuming all other put
options are exercised, the Company is contingently liable for an
additional $6.9 million in the next two years. The contingent amounts
for earnouts and put options have not been recorded as liabilities in
the financial statements as it is uncertain whether the contingencies
will be met.
There were 9,441 shares of common stock issued during 1999 related to
agreements with the Company's subsidiaries, primarily for earnouts
and to purchase minority interests.
MAJOR ACQUISITION
Effective June 1, 1999, the Company acquired all of the outstanding
common stock of Bostek, Inc. and affiliate (Bostek) in a transaction
accounted for under the purchase method of accounting. The aggregate
purchase price was approximately $27 million, of which $10.2 million
was paid in cash at closing, $5 million was paid in cash in January
2000, and $1.8 million for the 1999 earnout was paid in cash in
February 2000. The earnout accrual is included in other current
liabilities at December 31, 1999. Upon a successful initial public
offering of Intellesale.com, $10 million will be payable in stock of
Intellesale.com to the former owners of Bostek. In the event that
the initial public offering does not occur, the $10 million will be
payable in cash. An additional $3.2 million is contingent upon
achievement of certain earnings targets. The operating results of
the Company include Bostek from its acquisition date. The total
purchase price of Bostek, including the liabilities assumed, was
allocated to the identifiable assets with the remainder of $24.4
million recorded as goodwill which is being amortized over 20 years.
- ---------------------------------------------------------------------------
Page 44
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
DISPOSITIONS
Effective October 1, 1999, the Company entered into a Stock Purchase
Agreement for the sale of all outstanding shares of common stock of
four non-core subsidiaries. In consideration, the Company received a
note for $2.5 million, and 2.8 million shares of the Company's stock,
recorded as treasury stock in the amount of $7 million. No gain or
loss was recorded on this transaction, because the shareholders of
the purchaser of the divested assets were deemed to be significant
shareholders of the Company. The operating results of these companies
are properly included in the Company's financial statements through
the date of disposition.
Effective December 30, 1999, the Company sold its approximately 4.9
million shares in TigerTel, Inc., its Toronto-based telecommunciations
subsidiary. The total proceeds were $31.3 million in cash, resulting
in a pre-tax gain of $20.1 million. Payment of the proceeds was
received on January 10, 2000. The operating results of TigerTel are
properly included in the Company's financial statements through the
date of disposition.
On December 31, 1998, the Company entered into a Purchase and Sale
Agreement for the sale of certain of its cellular assets. In
consideration, the Company received one thousand shares of 6% first
series preferred stock of the purchaser of the cellular assets in the
face amount and having a liquidation value of $1 million. The first
series preferred stock may be redeemed at any time through December
31, 2004. This sale resulted in a gain of $647.
On December 31, 1998, the Company entered into an Agreement for Sale
of Stock for the sale of its investment in a subsidiary company. In
consideration, the Company received two thousand shares of 6%
preferred stock of the purchaser of the subsidiary in the face amount
and having a liquidation value of $2 million, due December 31, 2003.
This sale resulted in a gain of $86.
- ---------------------------------------------------------------------------
Page 45
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
3. RESTRUCTURING AND UNUSUAL CHARGES
In the first quarter of 1999, a pre-tax charge of $2,550 was recorded
to cover restructuring costs of $2,236 and unusual charges of $314.
RESTRUCTURING CHARGE
As part of the Company's reorganization of its core business into
five reportable business groups, the Company has implemented a
restructuring plan. The restructuring plan includes the exiting of
selected lines of business within the Company's Telecommunications
and Applications business groups, and the associated write-off of
assets. The restructuring charge of $2,236 includes asset
impairments, primarily software and other intangible assets, of
$1,522, lease terminations of $541, and employee separations of $173.
The total charge reduced net income by $1,588.
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through December 31,
1999:
<TABLE>
<CAPTION>
BALANCE BALANCE
JANUARY 1, DECEMBER 31,
TYPE OF COST 1999 ADDITIONS DEDUCTIONS 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset impairment $-- $1,522 $1,522 $ --
Lease terminations -- 541 342 199
Employee separations -- 173 123 50
----------------------------------------------------------------------------------
Total $-- $2,236 $1,987 $249
==================================================================================
</TABLE>
Towards the end of the third quarter of 1997, the Company made a
decision to exit its retail cellular operations. During the fourth
quarter of 1997, the Company completed its exit strategy and incurred
costs related to the restructuring of these operations, including
provisions for terminations of leases and employees and writedown of
the carrying values of inventory and other assets. Costs totaling
$1,681 were charged to expense in 1997 and no material costs were
incurred in future periods. All amounts were paid in 1997.
UNUSUAL ITEMS
During the first quarter of 1999, as part of the Company's core
business reorganization, the Company realigned certain operations
within its telecommunications division and has recognized impairment
charges and other related costs of $314. The total charge reduced
net income by $223.
4. EXTRAORDINARY LOSS
In connection with the early retirement of the Company's line of
credit with State Street Bank and Trust Company and its simultaneous
refinancing with IBM Credit Corporation, deferred financing fees
associated with the State Street Bank and Trust agreement were
written off during the second quarter of 1999. The total amount of
the write-off recorded as an extraordinary loss was $160, net of
income taxes of $89.
- ---------------------------------------------------------------------------
Page 46
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
5. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Raw materials $ 4,648 $ 4,437
Work in process 1,195 2,349
Finished goods 35,602 15,246
----------------------------------------------------------------------------------
41,445 22,032
Less: Allowance for excess and obsolescence 997 1,375
----------------------------------------------------------------------------------
$40,448 $20,657
==================================================================================
</TABLE>
6. NOTES RECEIVABLE
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Due from purchaser of four non-core subsidiaries,
bears interest at 5%, interest payable quarterly,
principal due October 2004 $2,531 $ --
Due from purchaser of cellular assets, personally
guaranteed by company owners, bears interest at 6.5%,
$350 due January 1999, remaining payable in monthly
installments of $25 including interest starting July
1999. In 1999, the Company made demand for full
payment due to default on certain terms by the maker
of the note 950 1,300
Due from purchaser of interconnect service business,
forgiven in 1999 in connection with the repurchase
of the business -- 1,350
Due from officers of subsidiaries, unsecured, bear
interest at varying interest rates, due on demand 1,914 1,594
Due from customer, unsecured, bears interest at the
prime rate, due on demand; paid in 1999 -- 226
Due from individuals and corporations, bear interest
at varying rates above prime, secured by business
assets, personal guarantees, and securities, due
various dates through July 2001 1,205 --
Due from purchaser of business assets, secured by
maker's assets, bears interest at 8.7% and provides
for monthly payments of principal and interest equal
to 10% of the maker's net cash revenue for each
preceding month, balance due October 2001 519 575
----------------------------------------------------------------------------------
7,119 5,045
Less: Current portion 3,822 3,600
----------------------------------------------------------------------------------
$3,297 $1,445
==================================================================================
</TABLE>
- ---------------------------------------------------------------------------
Page 47
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Land $ 755 $ 755
Building and leasehold improvements 4,662 4,097
Equipment 19,418 18,021
----------------------------------------------------------------------------
24,835 22,873
Less: Accumulated depreciation and amortization 10,949 7,246
----------------------------------------------------------------------------
$13,886 $15,627
============================================================================
</TABLE>
Included above are vehicles and equipment acquired under capital
lease obligations in the amount of $1,917 and $1,577 at December
31, 1999 and 1998, respectively. Related accumulated depreciation
amounted to $723 and $602 at December 31, 1999 and 1998,
respectively.
Depreciation and amortization charged against income amounted to
$3,703, $2,260 and $846 for the years ended December 31, 1999,
1998 and 1997, respectively.
8. GOODWILL
Goodwill consists of the excess of cost over fair value of
tangible and identifiable intangible assets of companies
purchased. The Company applies the principles of Accounting
Principles Board Opinion No. 16, Business Combinations, and uses
the purchase method of accounting for acquisitions of wholly owned
and majority owned subsidiaries.
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Original balance $67,761 $35,920
Accumulated amortization (5,761) (2,490)
--------------------------------------------------------------------------
Carrying value $62,000 $33,430
==========================================================================
</TABLE>
Amortization expense amounted to $3,258, $1,487 and $670 for the
years ended December 31, 1999, 1998, and 1997, respectively.
The Company has entered into various earnout arrangements with the
selling shareholders of certain acquired subsidiaries. These
arrangements provide for additional consideration to be paid in
future years if certain earnings levels are met. These amounts are
added to goodwill as earned.
- ---------------------------------------------------------------------------
Page 48
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
9. OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Proprietary software $ 7,611 $ 5,979
Loan acquisition costs 2,890 308
Other assets 413 109
----------------------------------------------------------------------------
10,914 6,396
Less: Accumulated amortization (4,456) (1,730)
----------------------------------------------------------------------------
6,458 4,666
Investment in preferred stock (net of reserve
of $1,000 in 1999 and $0 in 1998) 2,000 3,000
Deferred tax asset 1,424 --
Other 1,030 704
----------------------------------------------------------------------------
$10,912 $ 8,370
============================================================================
</TABLE>
The Company has provided a valuation allowance on certain of its
investments in preferred stock to reflect current fair market
values.
Amortization of other assets charged against income amounted to
$2,726, $754 and $358 for the years ended December 31, 1999, 1998
and 1997, respectively.
- ---------------------------------------------------------------------------
Page 49
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
10. NOTES PAYABLE
On May 25, 1999, the Company entered into a Term and Revolving
Credit Agreement with IBM Credit Corporation (the "IBM Agreement").
On May 26, 1999, the Company repaid the amount due on the previous
revolving line of credit. The IBM Agreement, as amended on July
30, 1999 provides for the following: (1) a revolving credit line
of up to $36,150, designated as follows: (i) a USA revolving
credit line of up to $27,000, (ii) a Canadian revolving credit
line of up to $6,150, and (iii) a United Kingdom revolving credit
line of up to $3,000; (2) Term Loan A of up to $22,000; (3) Term
Loan B of up to $25,000; (4) Term Loan C of up to $6,850 and (5)
Term Loan D of up to $5,000.
The IBM Agreement contains standard debt covenants relating to the
financial position and performance as well as restrictions on the
declarations and payment of dividends. As of December 31, 1999,
the outstanding balance was $66,629 and the availability was
$28,371. See Note 11 for long-term debt of the Company under the
IBM Agreement.
The weighted average interest rate was 6.9% and 8.8% for the years
ended December 31, 1999 and 1998, respectively. The London
Interbank Offered Rate and Toronto-Dominion Bank of Canada
interest rates at December 31, 1999 were 5.58% and 6.5%,
respectively.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revolving credit line - IBM Credit Corporation,
collateralized by all domestic assets of the
Company, bearing interest at the 30 day London
Interbank Offered Rate plus 1.75% to 1.9%, due
in May 2002. $21,400 $ --
Revolving credit line - IBM Credit Corporation,
collateralized by all Canadian assets of the
Company, bearing interest at the base rate as
announced by the Toronto-Dominion Bank of Canada
plus .17% to .32%, due May 2002 2,993 --
Notes payable - bank, collateralized by business
assets of certain subsidiaries. Interest is
payable monthly at rates varying from the London
Interbank Offered Rate plus 1.5% to 3.5% in 1999,
and prime plus 0.5% to 2.25% in 1998. The credit
lines are due through December 2000 723 5,974
Revolving credit line - bank, collateralized by
all assets of the Company, bearing interest at the
prime lending rate or the London Interbank Offered
Rate, as elected by the Company, refinanced with
IBM Credit in May 1999 -- 17,193
Notes payable - other, unsecured, due on demand 95 50
----------------------------------------------------------------------------
$25,211 $23,217
============================================================================
</TABLE>
- ---------------------------------------------------------------------------
Page 50
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Term Loan - IBM Credit Corporation, collateralized
by all domestic assets of the Company bearing interest
at the 30 day London Interbank Offered Rate plus 1.75%
to 1.9%, payable in quarterly principal installments
of $1,770 plus interest, due in May 2002 $39,747 $ --
Term Loan - IBM Credit Corporation, collateralized by
all Canadian assets of the Company, bearing interest
at the base rate as announced by the Toronto-Dominion
Bank of Canada plus 0.17% to 0.32%, payable in
quarterly principal installments of $113 plus interest,
due May 2002 2,489 --
Notes payable - bank, collateralized by land, building
and assets, payable in monthly installments of principal
and interest totaling $25, bearing interest at rates
between 8.15% and prime plus 1.5%, refinanced with IBM
Credit Corporation in May 1999 -- 805
Note payable - bank, collateralized by subsidiary's
business assets, payable in monthly principal payments
of $62 plus interest at the prime rate plus 0.5%,
refinanced with IBM Credit Corporation in May 1999 -- 1,402
Mortgage notes payable - bank, collateralized by
buildings, payable in monthly installments of
principal and interest totaling $2, bearing interest
at prime plus 2.0% in 1999, due through April 2028 343 802
Notes payable - finance companies and banks,
collateralized by vehicles, payable in monthly principal
installments of $1, bearing interest at rates ranging
from 9.75% to 10.9% in 1999, due through December 2002 24 132
Notes payable - bank, collateralized by business assets,
payable in monthly installments of principal and interest
totaling $2, bearing interest at rates ranging from 5.61%
to prime plus 2% in 1999, due through June 2003 54 118
Capital lease obligations 698 737
----------------------------------------------------------------------------------
43,355 3,996
Less: Current maturities 8,038 1,158
----------------------------------------------------------------------------------
$35,317 $ 2,838
==================================================================================
</TABLE>
The scheduled maturities of long-term debt at December 31,
1999 are as follows:
YEAR AMOUNT
-------------------------------------------------------------
2000 $ 8,038
2001 7,756
2002 26,117
2003 494
2004 472
Thereafter 478
-------------------------------------------------------------
$43,355
=============================================================
Interest expense on the long and short-term notes payable
(including notes payable in Note 10) amounted to $3,842, $1,653
and $978 for the years ended December 31, 1999, 1998 and 1997,
respectively.
- ---------------------------------------------------------------------------
Page 51
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short
maturity of those instruments.
NOTES RECEIVABLE
The carrying value of the notes approximate fair value because
either the interest rates of the notes approximate the current
rate that the Company could receive on a similar note, or because
of the short-term nature of the notes.
NOTES PAYABLE
The carrying amount approximates fair value because of the short-
term nature of the notes and the current rates approximate market
rates.
LONG-TERM DEBT
The carrying amount approximates fair value because either the
stated interest rates fluctuate with current market rates or the
interest rates approximate the current rates at which the Company
could borrow funds on a similar note.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value.
13. INCOME TAXES
The provision for income taxes, excluding the $89 of tax benefit
related to the extraordinary loss in 1999, consists of:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Current:
United States at statutory rates $ 5,033 $1,747 $1,570
International (198) 930 533
Current taxes covered by net operating
loss -- -- (88)
-----------------------------------------------------------------------------------------
Current income tax provision 4,835 2,677 2,015
-----------------------------------------------------------------------------------------
Deferred:
United States (1,553) 94 (246)
International (122) (183) --
-----------------------------------------------------------------------------------------
Deferred income taxes provision (credit) (1,675) (89) (246)
-----------------------------------------------------------------------------------------
$ 3,160 $2,588 $1,769
=========================================================================================
- ---------------------------------------------------------------------------
Page 52
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The tax effects of temporary differences and carryforwards
that give rise to significant portions of deferred tax
assets and liabilities consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred Tax Assets:
Liabilities and reserves $1,203 $ 557
Net operating loss carryforwards 1,975 3,892
-----------------------------------------------------------------------------------------
Gross deferred tax assets 3,178 4,449
Valuation allowance (15) (2,994)
-----------------------------------------------------------------------------------------
3,163 1,455
-----------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Accounts receivable 118 719
Notes receivable 361 361
Prepaid 418 --
Property and equipment 462 10
Intangible assets 380 365
-----------------------------------------------------------------------------------------
1,739 1,455
-----------------------------------------------------------------------------------------
Net Deferred Tax Asset $1,424 $ --
=========================================================================================
</TABLE>
The valuation allowance for deferred tax asset decreased by
$2,979 in 1999 and $520 in 1998 due to management determining
it was more likely than not the net operating loss carryforwards
will be utilized in future periods.
Approximate domestic and international income before provision
for income taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Domestic $9,599 $5,082 $3,132
International (452) 2,620 1,674
----------------------------------------------------------------------------------------
$9,147 $7,702 $4,806
========================================================================================
</TABLE>
At December 31, 1999, the Company had aggregate net operating loss
carryforwards of approximately $6,300 for income tax purposes
which expire in various amounts through 2011. The net operating
loss carryforwards were acquired in connection with various 1997
acquisitions and are limited as to use in any particular year
based on Internal Revenue Code sections related to separate return
year and change of ownership restrictions. Utilization of the
Company's net operating loss carryforwards are estimated to be
limited to approximately $371 per year. When realized, the tax
benefit of the acquired net operating loss carryforwards will be
recorded to income as there is no remaining goodwill or other long
term assets associated with these acquisitions.
- ---------------------------------------------------------------------------
Page 53
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The reconciliation of the effective tax rate with the statutory
federal income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
% % %
-----------------------------
<S> <C> <C> <C>
Statutory rate 34 34 34
Non-deductible goodwill amortization 6 5 5
State income taxes, net of federal benefits 12 5 7
International tax rates different from the
the statutory US federal rate -- -- (3)
Reduction of deferred tax asset valuation
allowance (16) (6) (5)
Other (1) (4) (1)
--------------------------------------------------------------------------------------
35 34 37
======================================================================================
</TABLE>
14. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of basic
and diluted EPS is provided as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
NUMERATOR:
Net income $ 5,432 $ 4,690 $ 2,340
Preferred stock dividends -- (44) (72)
-----------------------------------------------------------------------------------------
Numerator for basic earnings per share -
net income available to common
stockholders 5,432 4,646 2,268
Effect of dilutive securities:
Preferred stock dividends -- 44 72
-----------------------------------------------------------------------------------------
Numerator for diluted earnings
per share - net income available to
common stockholders $ 5,432 $ 4,690 $ 2,340
=========================================================================================
DENOMINATOR:
Denominator for basic earnings per
share - weighted-average shares outstanding 46,814 32,318 12,632
-----------------------------------------------------------------------------------------
Effect of dilutive securities:
Redeemable preferred stock -- 85 998
Warrants 280 477 779
Employee stock options 2,992 266 451
Contingent stock - acquisitions -- 1,654 385
-----------------------------------------------------------------------------------------
Dilutive potential common shares 3,272 2,482 2,613
-----------------------------------------------------------------------------------------
Denominator For Diluted Earnings
Per Share - adjusted weighted-
average shares and assumed
conversions 50,086 34,800 15,245
=========================================================================================
BASIC EARNINGS PER SHARE $ .12 $ .14 $ .18
=========================================================================================
DILUTED EARNINGS PER SHARE $ .11 $ .13 $ .15
=========================================================================================
</TABLE>
- ---------------------------------------------------------------------------
Page 54
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
15. COMMITMENTS AND CONTINGENCIES
Rentals of space, vehicles, and office equipment under operating
leases amounted to approximately $5.2 million, $3.9 million and
$2.7 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Company has entered into employment contracts with key
officers and employees of the Company. The agreements are for
periods of one to ten years through June 2009. Some of the
employment contracts also call for bonus arrangements based on
earnings of a particular subsidiary.
The approximate minimum payments required under operating leases
and employment contracts that have initial or remaining terms in
excess of one year at December 31, 1999 are:
MINIMUM EMPLOYMENT
YEAR RENTAL PAYMENTS CONTRACTS
-------------------------------------------------------------
2000 $ 4,085 $ 7,500
2001 3,467 6,500
2002 3,032 5,200
2003 2,063 3,100
2004 1,493 1,000
Thereafter 1,659 600
-------------------------------------------------------------
$15,799 $23,900
=============================================================
The employment agreements with three of the executive officers
include "change of control" provisions, under which the employees
may terminate their employment within one year after a change of
control, and be entitled to receive specified severance payments
and/or continued compensation payments for sixty months. The
employment agreements also provide that these executive officers
are entitled to supplemental compensation payments for sixty
months upon termination of employment, even if there is no change
in control, unless their employment is terminated due to a
material breach of the terms of the employment agreement. Also,
the agreements for two officers provide for certain "triggering
events" which include a change in control. Upon the occurrence of
a triggering event, the Company will pay, in cash and/or in stock,
$12.1 million and $3.5 million, respectively, to these two
officers, in addition to certain other compensation. Finally, the
employment agreements provide for a gross up for excise taxes
which are payable by these executive officers if any payments upon
a change of control are subject to such taxes as excess parachute
payments.
16. PROFIT SHARING PLAN
The Company has a 401(k) Plan for the benefit of eligible United
States employees. The Company has made no contributions to the
401(k) Plan.
The Company's International subsidiaries operate certain defined
contribution pension plans. The Company's expense relating to the
plans approximated $286 and $304 for the years ended December 31,
1999 and 1998.
- ---------------------------------------------------------------------------
Page 55
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
17. REDEEMABLE PREFERRED SHARES
In March 1996, the Company issued nine thousand 8% convertible
preferred shares at $100 per share, in exchange for 80% of Burling
Instruments, Inc. If, and to the extent, the preferred shares had
not been converted to common stock by the second anniversary of
the initial issuance of the shares, the Company was required to
redeem the preferred shares by paying $100 per share. Each holder
of the preferred shares had the ability to convert their preferred
shares into common shares by dividing the redemption price ($100)
by $5.75 per common share. The shares were redeemed in 1998.
In October 1996, the Company issued one hundred thousand 8%
redeemable preferred shares at $100 per share as partial
consideration for the 100% purchase of ATI Communications. For
purposes of redemption of the preferred shares, each share of ACT
Communications, Inc.'s common stock was valued at $10,000. During
1997, the one hundred thousand shares of preferred stock were
redeemed for 1.4 million shares of the Company's common stock.
18. STOCKHOLDERS' EQUITY
PREFERRED SHARES
The Company has authorized 5 million shares of preferred stock,
$10.00 par value, to be issued from time to time on such terms as
is specified by the Board of Directors.
In May 1998, in connection with the Company's acquisition of
Commstar Limited, an Ontario corporation ("Commstar"), the Board
of Directors authorized the issuance of one share of the Company's
Preferred Stock ($10.00 par value) designated as the Company's
Special Voting Preferred Stock (the "Special Preferred Share").
The Special Preferred Share is entitled to a number of votes equal
to the number of outstanding shares of Commstar not owned by the
Company that can be exchanged for the Company's common shares.
The holder of the Special Preferred Share is not entitled to
receive any dividends or participate in any distribution of assets
to the stockholders of the Company. When all of Commstar's
exchangeable shares have been exchanged or redeemed for shares of
the Company's Common Stock, the Special Preferred Share will be
cancelled. The Company has the right to call the outstanding
exchangeable shares with the occurrence of various events
including liquidation of Commstar and at the five-year anniversary
date of the acquisition. The Company initially reserved 3.4
million shares of its Common Stock to be exchanged for
exchangeable shares held by the Commstar selling shareholders, 1.4
million of which have been exchanged into shares of Common Stock
and 2.0 million are reserved at December 31, 1998. On July 30,
1998, Commstar acquired certain assets from Western Inbound
Network, Inc., an Ontario corporation, in consideration for 0.4
million exchangeable shares. The Special Preferred Share was
returned to the Company due to the divestiture of TigerTel in
1999.
In June 1998, in connection with the Company's acquisition of
Ground Effects Limited, an Ontario corporation ("Ground Effects"),
the Board of Directors authorized the issuance of one share of the
Company's Preferred Stock ($10.00 par value) designated as the
Company's Class B Voting Preferred Stock (the "Class B Special
Preferred Share"). The Class B Special Preferred Share is
entitled to a number of votes equal to the number of outstanding
shares of Ground Effects not owned by the Company that can be
exchanged for the Company's common shares. The holder of the
Class B Special Preferred Share is not entitled to receive any
dividends or participate in any distribution of assets to the
stockholders of the Company. When all exchangeable shares of
Ground Effects have been exchanged or redeemed for shares of the
Company's Common Stock, the Special Preferred Share will be
cancelled. The Company has the right to call the outstanding
exchangeable shares with the occurrence of various events
including liquidation of Ground Effects and at the five-year
anniversary date of the acquisition. The Company has reserved 1.1
million shares of its Common Stock to be exchanged for
exchangeable shares held by Ground Effects selling shareholders,
1.0 million and 0.2 million of which have been exchanged into
shares of common stock and 0.1 million and 0.9 million are
reserved as of December 31, 1999 and 1998, respectively.
- ---------------------------------------------------------------------------
Page 56
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Since the Preferred Shares provide votes for the equivalent number
of common shares that may be exchanged and the common shares may
be exchanged at any time at the holders' option, for purposes of
computing basic and diluted earnings per share (Note 14), the
reserved common shares are considered to be outstanding for all
periods that the Preferred Shares are issued.
WARRANTS
The Company has issued warrants convertible into shares of common
stock for consideration, as follows (in thousands, except exercise
price):
<TABLE>
<CAPTION>
CLASS OF EXERCISE EXERCISABLE
WARRANTS AUTHORIZED ISSUED EXERCISED PRICE DATE OF ISSUE PERIOD
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class K 250 250 -- 5.31 September 1996 5 years
Class L 125 125 123 3.00 October 1996 5 years
Class N 800 800 750 3.00 August 1997 5 years
Class P 520 520 275 3.00 September 1997 5 years
Class R 125 125 63 3.00 October 1997 5 years
Class S 600 600 223 2.00 April 1998 5 years
Class U 250 250 -- 8.38 November 1998 5 years
------------------------------
2,670 2,670 1,434
==============================
</TABLE>
- ---------------------------------------------------------------------------
Page 57
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
STOCK OPTION PLAN
During 1996, the Company adopted a non-qualified stock option plan
(the Option Plan). During 1999, the Company adopted a non-
qualified Flexible Stock Plan (the Flexible Plan). The Company
applies APB Opinion No. 25 and related Interpretations in
accounting for the Option Plan and the Flexible Plan. Under both
Plans, options are granted at an exercise price equal to fair
value on the date of grant. Accordingly, no compensation cost has
been recognized under either Plan. Had compensation cost for
either Plan been determined based on the fair value at the grant
dates for awards under either Plan, consistent with the
alternative method set forth under FAS 123, Accounting for Stock-
Based Compensation, the Company's net income applicable to common
stockholders and earnings per common and common equivalent share
would have been reduced. The pro forma amounts are indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS
As reported $5,432 $4,646 $2,268
Pro forma $2,538 $2,408 $1,614
EARNINGS PER COMMON SHARE - BASIC
As reported $ .12 $ .14 $ .18
Pro forma $ .05 $ .07 $ .13
EARNINGS PER COMMON SHARE - DILUTED
As reported $ .11 $ .13 $ .15
Pro forma $ .05 $ .07 $ .11
</TABLE>
Under the Option Plan, options for ten million common shares were
authorized for issuance to certain officers and employees of the
Company at December 31, 1999, 1998, and 1997 respectively, of
which 9.4 million had been issued through December 31, 1999. The
options may not be exercised until one to three years after the
options have been granted, and are exercisable for a period of
five years.
Under the Flexible Plan, the number of shares which may be issued
or sold, or for which options, Stock Appreciation Rights (SAR's)
or Performance Shares may be granted to certain officers and
employees of the Company is five million at December 31, 1999, of
which 4.6 million options have been issued through December 31,
1999. The options may not be exercised until one to three years
after the options have been granted, and are exercisable over a
period of five years.
- ---------------------------------------------------------------------------
Page 58
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1999,
1998, and 1997: dividend yield of 0% for the three years; expected
volatility of 43.41%, 43.69%, and 44.03%; risk-free interest rate
of 6.36%, 8.5%, and 8.5%; and expected lives of five years for the
three years. The weighted-average fair value of options granted
was $1.17, $1.27, and $1.58 for the years ended December 31, 1999,
1998, and 1997, respectively. A summary of stock option activity
for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding on January 1 9,105 $3.55 3,835 $ 4.39 2,180 $ 4.40
Granted 4,968 2.07 5,367 2.80 2,487 4.62
Exercised (1,000) 2.53 -- -- (650) 4.25
Forfeited (901) 3.26 (97) 4.79 (182) 4.23
----------------------------------------------------------------------------------------------
Outstanding on December 31 12,172 3.01 9,105 3.55 3,835 4.39
----------------------------------------------------------------------------------------------
Exercisable on December 31 6,663 3.56 2,885 4.48 705 4.44
----------------------------------------------------------------------------------------------
Shares available on December 31
for options that may be
granted 1,178 450 1,145
----------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
-------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.01 to $1.00 25 5.00 $0.61 -- $ --
$2.00 to $3.00 6,671 5.37 2.17 1,811 2.17
$3.01 to $4.00 3,200 4.31 3.53 2,727 3.50
$4.01 to $5.00 1,471 3.40 4.40 1,336 4.39
$5.01 to $6.00 805 3.99 5.52 789 5.53
------ ----- -----------------
$0.01 to $6.00 12,172 $3.01 6,663 $3.56
====== ===== =================
</TABLE>
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
During 1999, the Company adopted a qualified Employee Stock
Purchase Plan (the Stock Purchase Plan). Under the Stock Purchase
Plan, options are granted at an exercise price of the lesser of
85% of the fair market value on the date of grant or 85% of the
fair market value on the exercise date. Under the Stock Purchase
Plan, options for 1.5 million common shares were authorized for
issuance to substantially all full-time employees of the Company,
of which none have been issued and exercised through December 31,
1999. Each participant's options to purchase shares will be
automatically exercised for the participant on the exercise dates
determined by the Board of Directors.
- ---------------------------------------------------------------------------
Page 59
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
19. LEGAL PROCEEDINGS
The Company is party to various legal proceedings. In the opinion
of management, these proceedings are not likely to have a material
adverse affect on the financial position or overall trends in
results of the Company. The estimate of potential impact on the
Company's financial position, overall results of operations or
cash flows for the above legal proceedings could change in the
future.
20. SUPPLEMENTAL CASH FLOW INFORMATION
The changes in operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Increase in accounts receivable
and unbilled receivables $(19,835) $ (1,922) $(3,992)
Increase in inventories (15,624) (4,148) (657)
Increase in prepaid expenses (3,452) (422) (676)
Increase in deferred tax asset (1,344) (89) (121)
Increase (decrease) in accounts payable
and accrued expenses 27,772 (4,771) (1,103)
---------------------------------------------------------------------------
$(12,483) $(11,352) $(6,549)
===========================================================================
</TABLE>
In the years ended December 31, 1999, 1998 and 1997, the Company
had the following noncash investing and financing activities:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Assets acquired for common stock $19,027 $25,408 $13,485
Due from buyer of divested subsidiary
(Note 2) 31,302 -- --
Due to shareholders of acquired
subsidiary (Note 2) 15,000 -- --
Tax benefit from stock options 1,825 -- 454
Assets acquired for long-term debt and
capital leases 662 2,635 614
Sale of assets for preferred stock -- 3,000 --
Payment of debt in exchange for common
stock -- -- 521
Other -- 132 --
</TABLE>
- ---------------------------------------------------------------------------
Page 60
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
21. SEGMENT INFORMATION
In 1998, the Company adopted FAS No. 131. Prior years
information has been restated to present the Company's reportable
segments. The Company is organized into six operating segments,
whose principal products and services are as follows:
<TABLE>
<CAPTION>
=====================================================================================
OPERATING SEGMENT PRINCIPAL PRODUCTS AND SERVICES
-------------------------------------------------------------------------------------
<S> <C>
Telecommunications * Telephone services and systems
* Computer telephony integration
* Interactive voice response
* Call centers
* Voice messaging
-------------------------------------------------------------------------------------
Network * Computer systems
* e-Business infrastructure design and deployment
* Local and wide area networks
* Application servers
-------------------------------------------------------------------------------------
Internet * Electronic commerce
* ERP solutions
* Intranet
* Extranet
* Wide area networks
-------------------------------------------------------------------------------------
Applications * Global positioning systems
* Field automation
* Asset management
* Satellite communication technology
* Corporate enterprise access
* Decision support
* Voice/data technology
-------------------------------------------------------------------------------------
Intellesale.com * Sales of new and refurbished computer equipment
* Peripherals
* Components
* Business continuity services
* Consulting
* Systems integration
* Transportation
-------------------------------------------------------------------------------------
Non-Core * Electrical components
* Control panels
* Design engineering
* Manufacturing engineering
* Automation systems
* Vacuum pumps
* Communications towers
=====================================================================================
</TABLE>
- ---------------------------------------------------------------------------
Page 61
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The "Eliminations" category includes all amounts recognized upon
consolidation of the Company's subsidiaries such as the elimination
of intersegment revenues, expenses, assets and liabilities and
goodwill amortization expense. The accounting policies of the
operating segments are the same as those described in the summary of
significant accounting policies, except that intersegment sales and
transfers are generally accounted for as if the sales or transfers
were to third parties at current market prices; segment data includes
an allocated charge for the corporate headquarters costs. It is on
this basis that management utilizes the financial information to
assist in making internal operating decisions. The Company evaluates
performance based on stand alone segment operating income.
<TABLE>
<CAPTION>
1999 (IN THOUSANDS)
---------------------------------------------------------------------------------------------
TELE-
COMMUNI- APPLI- INTELLE- CORPORATE ELIMINI- CONSOLI-
CATIONS NETWORK INTERNET CATIONS SALE.COM NON-CORE OVERHEAD NATIONS DATED
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers $59,225 $27,190 $6,607 $35,780 $142,987 $64,689 $ 263 $ -- $336,741
Intersegment net revenue -- -- -- -- 8,000 -- -- (8,000) --
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 59,225 27,190 6,607 35,780 150,987 64,689 263 (8,000) 336,741
===============================================================================================================================
Depreciation and amortization 1,547 132 69 2,366 529 1,153 980 2,911 9,687
Interest income 144 31 -- 11 154 40 2,957 (2,721) 616
Interest expense 622 126 43 461 1,684 438 3,189 (2,721) 3,842
Income before provision for
income taxes, minority interest
and extraordinary loss 436 1,456 603 (1,475) 5,191 (438) 5,833 (2,459) 9,147
Segment assets 10,237 6,686 2,900 22,475 61,508 24,054 47,863 53,253 228,976
Expenditures for property and
equipment 2,177 179 371 533 1,459 1,789 516 -- 7,024
<CAPTION>
1998 (IN THOUSANDS)
---------------------------------------------------------------------------------------------
TELE-
COMMUNI- APPLI- INTELLE- CORPORATE ELIMINI- CONSOLI-
CATIONS NETWORK INTERNET CATIONS SALE.COM NON-CORE OVERHEAD NATIONS DATED
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers $33,270 $21,282 $ -- $19,859 $ 60,877 $71,793 $ -- $ -- $207,081
Intersegment net revenue -- -- -- -- 1,949 -- -- (1,949) --
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 33,270 21,282 -- 19,859 62,826 71,793 -- (1,949) 207,081
===============================================================================================================================
Depreciation and amortization 677 39 -- 1,241 251 935 137 1,221 4,501
Interest income 129 14 -- 47 45 83 686 (584) 420
Interest expense 531 144 -- 192 340 559 471 (584) 1,653
Income before provision for
income taxes, minority interest
and extraordinary loss 723 1,433 -- 1,279 4,214 4,434 (3,161) (1,220) 7,702
Segment assets 21,989 5,528 -- 22,849 13,595 29,274 147,518 (116,637) 124,116
Expenditures for property
and equipment 231 46 -- 73 138 788 674 -- 1,950
<CAPTION>
- ---------------------------------------------------------------------------
Page 62
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
</TABLE>
<TABLE>
<CAPTION>
1997 (IN THOUSANDS)
---------------------------------------------------------------------------------------------
TELE-
COMMUNI- APPLI- INTELLE- CORPORATE ELIMINI- CONSOLI-
CATIONS NETWORK INTERNET CATIONS SALE.COM NON-CORE OVERHEAD NATIONS DATED
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers $32,208 $-- $-- $ 9,574 $39,445 $21,932 $ -- $ -- $103,159
Intersegment net revenue -- -- -- -- 2,127 -- -- (2,127) --
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 32,208 -- -- 9,574 41,572 21,932 -- (2,127) 103,159
===============================================================================================================================
Depreciation and amortization 300 -- -- 459 108 277 17 713 1,874
Interest income 62 -- -- 26 1 7 130 (34) 192
Interest expense 491 -- -- 103 152 256 9 (33) 978
Income before provision for
income taxes, minority interest
and extraordinary loss 1,048 -- -- 2,082 2,205 725 (544) (710) 4,806
Segment assets 12,559 -- -- 77,886 8,736 12,667 3,523 (54,089) 61,282
Expenditures for property and
equipment 118 -- -- 141 364 278 15 -- 916
</TABLE>
Revenues are attributed to geographic areas based on the location of
the assets producing the revenues. Information concerning principal
geographic areas as of and for the years ended December 31, was as
follows (in thousands):
<TABLE>
<CAPTION>
UNITED
UNITED STATES CANADA KINGDOM CONSOLIDATED
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net revenue $263,074 $55,296 $18,371 $336,741
Total assets 205,883 11,825 11,268 228,976
----------------------------------------------------------------------------------------------
1998
Net revenue $172,369 $22,017 $12,695 $207,081
Total assets 91,458 18,137 14,521 124,116
----------------------------------------------------------------------------------------------
1997
Net revenue $ 96,796 $ 1,381 $ 4,982 $103,159
Total assets 56,177 1,254 3,851 61,282
----------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
Page 63
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
22. RELATED PARTY TRANSACTIONS
In connection with the acquisitions which took place in 1998 and
1997, the Company paid a related party, $0.6 million and $0.5
million, respectively, for investment banking services. These
payments were included in the total cost of assets purchased and are
being amortized over the life of the related assets.
In 1998, the Company sold its investment in a subsidiary company to a
related party for two thousand shares of preferred stock.
23. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma consolidated information of the Company for
the years ended December 31, 1999 and 1998 gives effect to the
acquisitions, disclosed in Note 2, as if they were effective at
January 1, 1998. The statement gives effect to the acquisitions
under the purchase method of accounting.
The pro forma information may not be indicative of the results that
would have actually occurred if the acquisitions had been effective
on the dates indicated or of the results that may be obtained in the
future. The pro forma information should be read in conjunction with
the consolidated financial statements and notes thereto of the
Company.
<TABLE>
<CAPTION>
PRO FORMA
(IN THOUSANDS)
DECEMBER 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Net operating revenue $390,418 $323,891
Net income 5,989 6,677
Net income available to common stockholders 5,989 6,615
Earnings per common share - basic .13 .19
Earnings per common share - diluted .12 .18
</TABLE>
- ---------------------------------------------------------------------------
Page 64
<PAGE>
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
24. SUMMARIZED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
NET OPERATING REVENUE $51,573 $72,955 $107,262 $104,951 $336,741
GROSS PROFIT 18,397 26,283 28,666 21,605 94,951
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS <F1> (1,645) 341 447 6,289 5,432
BASIC NET INCOME (LOSS) PER SHARE <F2> (0.04) 0.01 0.01 0.13 0.12
DILUTED NET INCOME (LOSS) PER SHARE <F2> (0.04) 0.01 0.01 0.12 0.11
-------------------------------------------------------------------------------------------------------------------
1998
Net operating revenue $38,784 $53,680 $ 59,044 $ 55,573 $207,081
Gross profit 10,486 17,608 18,949 17,145 64,188
Net income available to common
stockholders 597 2,351 1,654 44 4,646
Basic net income per share <F2> 0.03 0.07 0.05 -- 0.14
Diluted net income per share <F2> 0.02 0.07 0.05 -- 0.13
-------------------------------------------------------------------------------------------------------------------
1997
Net operating revenue $18,127 $24,743 $ 29,195 $ 31,094 $103,159
Gross profit 6,048 8,309 10,369 9,025 33,751
Net income available to common
stockholders 279 519 1,174 296 2,268
Basic net income per share <F2> 0.05 0.07 0.09 0.02 0.18
Diluted net income per share <F2> 0.04 0.06 0.08 0.01 0.15
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> First quarter net loss includes one time restructuring and
unusual costs of $2,550.
<F2> Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net
earnings per share will not necessarily equal the total for the
year.
</TABLE>
- ---------------------------------------------------------------------------
Page 65
<PAGE>
<PAGE>
<TABLE>
FINANCIAL STATEMENT SCHEDULE
Schedule of Valuation and Qualifying Accounts
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
<CAPTION>
Additions
----------------------
Balance at Charged to Valuation Balance at
beginning cost and accounts end of
Description of period expenses acquired Deductions period
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation reserve deducted in the balance
sheet from the asset to which it applies:
Accounts receivable:
1999 Allowance for doubtful accounts $ 990 $ 718 $ 480 $490 $1,698
1998 Allowance for doubtful accounts 675 1,031 262 978 990
1997 Allowance for doubtful accounts 101 328 270 24 675
Inventory:
1999 Allowance for excess and obsolescence 1,375 220 -- 598 997
1998 Allowance for excess and obsolescence 896 468 11 -- 1,375
1997 Allowance for excess and obsolescence -- -- 1,108 212 896
Investment in preferred stock:
1999 Valuation reserve -- 1,000 -- -- 1,000
1998 Valuation reserve -- -- -- -- --
1997 Valuation reserve -- -- -- -- --
Reserves not deducted from assets:
1999 Warranty reserve -- -- 250 -- 250
1998 Warranty reserve -- -- -- -- --
1997 Warranty reserve -- -- -- -- --
</TABLE>
- ---------------------------------------------------------------------------
Page 66
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the city of Palm
Beach, State of Florida, on March 29, 2000.
APPLIED DIGITAL SOLUTIONS INC
By: /S/ DAVID A. LOPPERT
------------------------------------------
David A. Loppert, Vice President,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board of
Directors, Chief Executive
Officer and Secretary (Principal
/S/ RICHARD J. SULLIVAN (Principal Executive Officer) March 29, 2000
- ------------------------------------------------
(Richard J. Sullivan)
/S/ GARRETT A. SULLIVAN President and Director (Principal
- ------------------------------------------------ (Principal Operating Officer)
(Garrett A. Sullivan) March 29, 2000
Vice President, Treasurer and
Chief Financial Officer
/S/ DAVID A. LOPPERT (Principal Accounting Officer) March 29, 2000
- ------------------------------------------------
(David A. Loppert)
Director March 29, 2000
/S/ RICHARD S. FRIEDLAND
- ------------------------------------------------
(Richard S. Friedland)
/S/ DANIEL E. PENNI Director March 29, 2000
- ------------------------------------------------
(Daniel E. Penni)
/S/ ARTHUR F. NOTERMAN Director March 29, 2000
- ------------------------------------------------
(Arthur F. Noterman)
/S/ ANGELA M. SULLIVAN Director March 29, 2000
- ------------------------------------------------
(Angela M. Sullivan)
/S/ CONSTANCE K. WEAVER Director March 29, 2000
- ------------------------------------------------
(Constance K. Weaver)
</TABLE>
67
<PAGE>
<PAGE>
LIST OF EXHIBITS
(Item 14 (c))
Exhibit
Number Description
- ------- -----------
4.1 Second Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Form S-3 File
No. 333-64605) filed with the Commission on June 23, 1999)
4.2 Amended and Restated Bylaws of the Company dated March 31,
1998 (incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (File No. 333-51067)
filed with the Commission on April 27, 1998)
10.1<F*> 1996 Non-Qualified Stock Option Plan of Applied Cellular
Technology, Inc., as amended through June 13, 1998
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed with the
Commission on December 2, 1999 (Commission File Number 333-91999))
10.2<F*> Applied Digital Solutions, Inc. 1999 Employees Stock
Purchase Plan, as amended through September 23, 1999
(incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (File No. 333-88421)
filed with the Commission on October 4, 1999)
10.3<F*> Applied Digital Solutions, Inc. 1999 Flexible Stock Plan
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (File No. 333-92327)
filed with the Commission on December 8, 1999)
10.4 Credit Agreement between Applied Digital Solutions, Inc. and
State Street Bank and Trust Company dated as of August 25, 1998
(incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on
November 16, 1998 (Commission File Number 000-26020))
10.5 First Amendment to Credit Agreement between Applied Digital
Solutions, Inc. and State Street Bank and Trust Company dated as
of February 4, 1999 (incorporated by reference to Exhibit 10.3 the
Company's Annual Report on Form 10-K filed with the Commission on
March 31, 1999 (Commission File Number 000-26020))
10.6 Amended and Restated Term and Revolving Credit Agreement,
dated July 30, 1999, between the Company and IBM Credit
Corporation (incorporated by reference to Exhibit 99.1 to
the Company's Quarterly Report on Form 10-Q filed with the
Commission on August 16, 1999 (Commission File Number 000-26020))
10.7 Amendment No. 1 to the Amended and Restated Term and
Revolving Credit Agreement dated as of September 29, 1999
among the the Company, and certain of its affiliates, and
IBM Credit Corporation, and certain of its affiliates
(incorporated herein by reference to Exhibit 16 to the
Company's Current Report on Form 8-K/A filed with the
Commission on October 5, 1999 (Commission File Number 000-26020)
10.8<F*> Richard J. Sullivan Employment Agreement (incorporated
herein by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K filed with the Commission on March 31,
1999 (Commission File Number 000-26020))
10.9<F*> Garrett A. Sullivan Employment Agreement (incorporated
herein by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K filed with the Commission on March 31,
1999 (Commission File Number 000-26020))
10.10<F*> David A. Loppert Employment Agreement (incorporated herein
by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K filed with the Commission on March 31, 1999
(Commission File Number 000-26020))
16.1 Letter from Rubin, Brown, Gornstein & Co., LLP ("RBG")
concurring with the statements made by the Company in the
Form 8-K report concerning RBG's resignations as the
Company's principal accountant (incorporated herein by
reference to Exhibit 16 to the Company's Current Report on
Form 8-K filed with the Commission on November 4, 1998
(Commission File Number 000-26020)
21.1 List of Subsidiaries of Applied Digital Solutions, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Rubin, Brown, Gornstein & Co., LLP
27.1 Financial Data Schedule
[FN]
- --------
<F*> Management contract or compensatory plan.
Exhibit 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into as of this 1st day
of March, 2000, by and between APPLIED DIGITAL SOLUTIONS, INC., a Missouri
corporation ("Company") and RICHARD J. SULLIVAN ("Employee").
BACKGROUND
Employee has been and presently is employed by Company as its chairman
of the board and chief executive officer. The parties have entered into a formal
employment agreement dated March 23, 1999 covering the terms and conditions of
such employment. The parties desire to amend such agreement and to set forth in
this document such agreement, as hereby amended, in its entirety.
TERMS AND CONDITIONS
1. Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on the terms and conditions set forth below.
2. Capacity. Employee shall serve as Company's chairman of the board
and chief executive officer. Employee shall perform such services for company
and its subsidiaries and affiliates as Company's board of directors shall direct
from time to time. However, no such services shall be of a nature which are not
commensurate with, and/or are beneath the dignity of, Employee's title.
3. Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on March 1, 2000 and ending on
February 28, 2005. The term of Employee's employment under this Agreement shall
<PAGE>
<PAGE>
automatically be renewed for successive additional one year terms on each
anniversary of the commencement of Employee's employment under this Agreement,
beginning with the March 1, 2001 anniversary date, each of which terms shall be
added at the end of the then existing term (taking into account any prior
extensions or failures to extend), unless either party notifies the other at
least 30 days prior to an anniversary date of this Agreement. For example,
unless either party notifies the other to the contrary on or before January 29,
2001, the term of this Agreement shall be extended from March 1, 2005 to
February 28, 2006. For further example, and assuming the term of this Agreement
has been extended to February 28, 2006, if one party notifies the other that it
does not desire to extend the term of this Agreement for an additional year and
such notice is given on or before January 29, 2002, the term of this Agreement
shall not be extended from March 1, 2006 to February 28, 2007. Notwithstanding
the foregoing, the term of this Agreement may end prior to the termination date
determined under this paragraph 3 as provided in paragraphs 9, 10, 11 and 12.
4. Service While Employed. Employee agrees to devote his best efforts,
his full diligence and at least 60% his business time to his duties hereunder
and shall not engage, either directly or indirectly, in any business or other
activity which is competitive with or adverse to the interests or the business
of Company.
5. Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his
consent.
2
<PAGE>
<PAGE>
6. Compensation, Vacations and Reimbursement. As partial compensation
for his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $450,000 and
an annual bonus of not less than $140,000. Employee shall also be entitled to
receive such bonuses (in addition to that required under the preceding
sentence), incentive compensation, and other compensation, if any, as Company's
board of directors, executive committee, compensation committee, or other
designated committee shall award Employee from time to time whether in cash,
Company stock, stock options, other stock based compensation, other form of
remuneration, or any combination of the foregoing. In addition, Company shall
pay Employee monthly payments of $5,000 each as a flexible perquisite allowance
to be used by Employee for such purposes as he shall determine. All such
compensation shall be subject to legally required income and employment tax
withholding. Employee shall be entitled to paid vacations and reimbursement for
all reasonable business expenses in accordance with Company's policies for
executive officers.
7. Other Benefits. In addition to his compensation described in
paragraph 6 above, Employee shall be entitled to participate in such bonus,
profit sharing, deferred compensation and pension plans of Company for which he
is eligible.
8. Welfare and Fringe Benefits. In addition to his compensation
described in paragraph 6 and the benefits described in paragraph 7 above,
Employee shall be entitled to participate in such welfare and fringe benefits
plans and programs of the Company for which he is eligible.
9. Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
personal representative all salary and other compensation due Employee through
3
<PAGE>
<PAGE>
the end of such month. If Employee becomes permanently disabled so that he
cannot perform his duties hereunder, as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
of the last day of the month in which such determination is made, and he will
receive his salary and other compensation through the end of such month. For
purposes of the foregoing computations, Employee shall be deemed to have earned
the same percentage of his minimum annual bonus for such employment year as the
number of days in the employment year through the date his employment is deemed
to terminate is of 365.
10. Retirement. From and after the time Employee attains age 65, he may
retire at any time by notifying Company at least 120 days prior to his
retirement date or be retired by Company upon at least two years notice.
11. Default. In the event that Company fails to perform a material
provision of this Agreement and such failure continues for 30 days after
notification from Employee, the Employee may terminate this Agreement by notice
to the Company. Company may terminate this Agreement upon Employee's material
default. Employee's material default shall mean (a) Employee's willful and
continued failure to perform the requirements of his duties hereunder (other
than as a result of total or partial incapacity due to physical or mental
illness) for 30 days after a written demand is delivered to Employee on behalf
of Company which specifically identifies the manner in which it is alleged that
Employee has not substantially performed his duties, (b) Employee's dishonesty
in the performance of his duties hereunder, (c) an act or acts on Employee's
part involving moral turpitude or constituting a felony under the laws of the
United States or any state thereof, (d) any other act or omission which
materially injures the financial condition or business reputation of Company or
any of its subsidiaries or affiliates, or (e) Employee's material breach of his
4
<PAGE>
<PAGE>
non-compete and confidentiality obligations under paragraphs 4 and/or 13 of this
Agreement, respectively. Any termination shall be without prejudice to any
rights or remedies which Employee or Company may have.
12. Change in Control. Notwithstanding any other provision of this
Agreement, should a Change of Control (as defined below) occur, Employee, at his
sole option and discretion, may terminate his employment under this Agreement at
any time within one year after such change of control upon 15 days notice. In
the event of such termination, Company shall pay to Employee a severance payment
equal to three times the base amount as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended ("Code") minus $1.00 which shall be
payable no later than one month after the effective date of the Employee's
termination of employment. In addition, in the event of a Change of Control, all
outstanding stock options held by Employee (whether issued under Company's 1996
Stock Option Plan, Company's 1999 Flexible Stock Plan, or otherwise) shall
become fully exercisable (to the extent not already exercisable). For purposes
of this Agreement, a Change in Control shall be deemed to occur (a) if any
person, as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934 ("Exchange Act"), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of Company representing 20% or more of the combined
voting power (i) of Company's then outstanding securities or (ii) on a fully
diluted basis, (b) upon the first purchase of the common stock of Company
pursuant to a tender or exchange offer (other than a tender or exchange offer
made by Company), (c) upon the approval by Company's stockholders of a merger or
consolidation, a sale or disposition of all or substantially all of Company's
assets or a plan of liquidation or dissolution of Company, or (d) if, during any
period of 2 consecutive years, individuals who at the beginning of such period
5
<PAGE>
<PAGE>
constitute the board of directors of Company cease for any reason to constitute
at least a majority thereof, unless the election or nomination for the election
by Company's stockholders of each new director was approved by a vote of at
least 2/3 of the directors then still in office who were directors at the
beginning of the period. Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur if Company either merges or consolidates with or
into another company or sells or disposes of all or substantially all of its
assets to another company, if such merger, consolidation, sale or disposition is
in connection with a corporate restructuring wherein the stockholders of Company
immediately before such merger, consolidation, sale or disposition own, directly
or indirectly, immediately following such merger, consolidation, sale or
disposition at least 80% of the combined voting power of all outstanding classes
of securities of the company resulting from such merger or consolidation, or to
which Company sells or disposes of its assets, in substantially the same
proportion as their ownership in Company immediately before such merger,
consolidation, sale or disposition.
13. Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
may come to Employee's knowledge during his employment with the Company. Upon
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
6
<PAGE>
<PAGE>
and/or which relate to Employee's employment or the business activities of
Company.
14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Company and any successors or assigns of Company, and Employee,
his heirs, personal representatives and assigns, except that Employee's
obligations to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
15. Entire Agreement: Modification. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter and
supersedes all prior or contemporaneous agreements not set forth in this
agreement. This Agreement may not be modified other than by an agreement in
writing signed by each of the parties.
16. Waiver. Any failure by either party to enforce any provision of
this Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
17. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
18. Paragraph Headings. Paragraph headings throughout this Agreement
are solely for the convenience of the parties and shall not be construed as a
part of any section or as modifying the contents of any section.
19. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Missouri.
7
<PAGE>
<PAGE>
20. Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
21. Supplemental Compensation. Upon the termination of Employee's
employment with Company for any reason other than Company's termination due to
his material default, as described in paragraph 11, Employee shall be entitled
to receive from Company 60 equal monthly payments, with the first such payment
due on the second first day of the month after termination of employment, of
$37,500 each. If Employee should die before all or any part of the above
described monthly payments have been made, all payments or all remaining
payments shall be made to his designated beneficiary, if any, otherwise to his
estate. Notwithstanding the foregoing, the aggregate amount payable under this
paragraph 21 shall be reduced by the amount, if any, payable under paragraph 12.
22. Non-Competition. During the period that Employee is entitled to
receive payments under paragraph 21, Employee shall not engage, directly or
indirectly, either on his own behalf or on behalf of any other person, firm,
corporation or other entity, in any business competitive with the business of
Company, in the geographic area in which Company is conducting business at the
time of termination of Employee's employment, or own more than 5% of any such
firm, corporation or other entity. In addition, Employee must furnish Company
with such information as Company shall from time to time request in order to
determine that Employee is in compliance with the requirements of the preceding
provisions of this paragraph 22. The payments to be made under paragraph 21 are
conditioned upon Employee's complying with the provisions of this paragraph 22,
and, in the event that such provisions are not complied with, Company may
8
<PAGE>
<PAGE>
suspend such payments for any period of time in which Employee is not in
compliance with the preceding provisions of this paragraph 22.
23. Company. For purposes of paragraphs 4, 13, and 22 of this
Agreement, the Company shall mean Applied Digital Solutions, Inc. and all
subsidiaries and affiliates of it.
24. Salary in Stock or Cash. At least 10 days prior to each March 1
that this Agreement is in effect, Employee shall elect the amount or percentage,
if any, of his salary for the 12 month period beginning on that date which he
desires to be payable in company common stock ("Stock"). To the extent Employee
elects to have all or part of his salary paid in Stock, the per share value of
the Stock, which shall be used to determine the number of shares payable for the
employment year, shall be the average closing price for the last five business
days prior to the applicable March 1. Any election shall be irrevocable. If
Employee fails to make a timely election, his entire salary for the employment
year shall be paid in cash. Any shares of Stock payable to Employee shall be
subject to such transfer restrictions as are required by applicable securities
law and a legend to such effect shall be placed on the certificates. Employee
represents and warrants that any Stock which will be paid to him pursuant to
this paragraph 24 shall be acquired for investment purposes and not for resale
or distribution. Company shall include such Stock in any subsequent registration
to the extent practical. If any portion of Employee's salary is paid in Stock,
Employee shall tender to Company the amount required for income and employment
tax withholding on any such payment. If, and to the extent such amount is not so
tendered, Company may withhold the number of shares of Stock equal to the amount
such required withholding from the shares of Stock issued to Employee.
Notwithstanding the foregoing provisions of this paragraph 24, unless otherwise
elected by Employee on or before March 31, 2000, the election previously made
under the prior employment agreement for the employment year beginning July 1,
9
<PAGE>
<PAGE>
1999 shall apply to the portion of the employment year beginning on March 1,
2000 which occurs after June 30, 2000 (with the election made for that
employment year under the prior agreement remaining in effect until June 30,
2000 in any event). Any such revised election shall apply only to salary payable
after such revised election is made.
25. Other Matters. For purposes of this paragraph 25, the following
words shall have the following respective meanings:
(a) Condominium. The condominium owned by Company known and
numbered as Unit #14, 6110 North Ocean Boulevard, Pelican Cove, Ocean
Ridge, Florida 33480, or any condominium which the Company acquires to
replace it.
(b) Gross Up Payment. A payment that covers all federal and state
income taxes payable by Employee, if any, which would not have been
incurred by Employee if another payment or transfer and the Gross Up
Payment had not been made to Employee.
(c) Change of Control. As defined in paragraph 12 of this
Agreement.
(d) Triggering Event. A Change of Control, termination of
Employee's employment for any reason other than due to his material
default, as described in paragraph 11, if he ceases to be Company's
chairman of the board or chief executive officer for any reason other than
termination due to his material default, as described in paragraph 11, or
the sale by Company of the stock of Company subsidiaries or the sale by
Company subsidiaries of assets, outside the ordinary course of business,
having aggregate proceeds of at least $110 million.
10
<PAGE>
<PAGE>
As soon as practicable following Employee's relocation to Southern Florida,
Company shall promptly transfer ownership of the Condominium free and clear of
all mortgages, deeds of trust, and other encumbrances to Employee and, in
addition, shall pay Employee an amount of cash equal to the Gross Up Payment. In
the event that the Condominium is not owned by Company at such time, Company
shall pay Employee in cash an amount equal to the value of the Condominium free
and clear of all mortgages, deeds of trust and other encumbrances (as determined
by a reputable appraiser selected by Employee whose fee shall be paid one half
by each party) plus the Gross Up Payment. Within 10 days of the occurrence of a
Triggering Event, Company shall also pay to Employee the sum of $12,105,000. If
the Triggering Event is the Employee's death, such amount shall be paid to his
designated beneficiary, if any, otherwise to his estate. Company may pay such
amount in cash or in Company's common stock or in a combination of cash and
common stock. Common Stock used in payment shall be valued at the average
closing price on the Nasdaq National Market over the last 5 business days prior
to the date of the Triggering Event. The allocation of cash and stock for
payments provided pursuant to this paragraph 25 shall include at least
sufficient cash to cover the tax liability associated with such payments, and
shall otherwise be structure to maximize tax efficiency to both Company and
Employee.
26. Excise Gross Up. In the event that any payment or benefit received
or to be received by Employee under this Agreement and/or under another plan of
or agreement with Company is subject to the excise tax ("Excise Tax") under
Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), Company
shall pay Employee an amount ("Excise Gross Up Payment") that covers all Excise
Taxes incurred or to be incurred by Employee because of any such payment or
benefit and all federal and state income taxes and Excise Taxes on the Excise
11
<PAGE>
<PAGE>
Gross Up Payment and which, therefore, will place Employee in the same position
that he would have been in had no such payment or benefit been subject to the
Excise Tax. The Excise Tax Gross Up Payment (or portion thereof) shall be made
upon the earlier of the imposition of any Excise Tax upon Employee or his
payment of any Excise Tax. The Excise Gross Up Payment shall be in addition to
the Gross Up Payment payable under paragraph 25.
27. Effect of Amendment. This Agreement shall supersede all agreements
between the parties relating to Employee's employment by Company.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
APPLIED DIGITAL SOLUTIONS, INC.
By:
----------------------------------------
Title:
--------------------------------------
"Company"
-------------------------------------------
Richard J. Sullivan
"Employee"
12
Exhibit 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into as of this 1st day
of March, 2000, by and between APPLIED DIGITAL SOLUTIONS, INC., a Missouri
corporation ("Company") and GARRETT A. SULLIVAN ("Employee").
BACKGROUND
Employee has been and presently is employed by Company as its president
and chief operating officer. The parties have entered into a formal employment
agreement dated March 23, 1999 covering the terms and conditions of such
employment. The parties desire to amend such agreement and to set forth in this
document such agreement, as hereby amended, in its entirety.
TERMS AND CONDITIONS
1. Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on the terms and conditions set forth below.
2. Capacity. Employee shall serve as Company's president and chief
operating officer. Employee shall perform such services for company and its
subsidiaries and affiliates as Company's board of directors shall direct from
time to time. However, no such services shall be of a nature which are not
commensurate with, and/or are beneath the dignity of, Employee's title.
3. Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on March 1, 2000 and ending on
February 28, 2005. The term of Employee's employment under this Agreement shall
<PAGE>
<PAGE>
automatically be renewed for successive additional one year terms on each
anniversary of the commencement of Employee's employment under this Agreement,
beginning with the March 1, 2001 anniversary date, each of which terms shall be
added at the end of the then existing term (taking into account any prior
extensions or failures to extend), unless either party notifies the other at
least 30 days prior to an anniversary date of this Agreement. For example,
unless either party notifies the other to the contrary on or before January 29,
2001, the term of this Agreement shall be extended from March 1, 2005 to
February 28, 2006. For further example, and assuming the term of this Agreement
has been extended to February 28, 2006, if one party notifies the other that it
does not desire to extend the term of this Agreement for an additional year and
such notice is given on or before January 29, 2002, the term of this Agreement
shall not be extended from March 1, 2006 to February 28, 2007. Notwithstanding
the foregoing, the term of this Agreement may end prior to the termination date
determined under this paragraph 3 as provided in paragraphs 9, 10, 11 and 12.
4. Service While Employed. Employee agrees to devote his best efforts,
his full diligence and all of his business time to his duties hereunder and
shall not engage, either directly or indirectly, in any business or other
activity which is competitive with or adverse to the interests or the business
of Company.
5. Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his
consent. Company shall furnish Employee with an automobile upon the terms and
conditions that were in effect on June 1, 1998.
2
<PAGE>
<PAGE>
6. Compensation, Vacations and Reimbursement. As partial compensation
for his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $165,000.
Employee shall also be entitled to receive such bonuses, incentive compensation,
and other compensation, if any, as Company's board of directors, executive
committee, compensation committee, or other designated committee shall award
Employee from time to time whether in cash, Company stock, stock options, other
stock based compensation, other form of remuneration, or any combination of the
foregoing. In addition, Company shall pay Employee monthly payments of $3,000
each as a flexible perquisite allowance to be used by Employee for such purposes
as he shall determine. All such compensation shall be subject to legally
required income and employment tax withholding. Employee shall be entitled to
paid vacations and reimbursement for all reasonable business expenses in
accordance with Company's policies for operating officers.
7. Other Benefits. In addition to his compensation described in
paragraph 6 above, Employee shall be entitled to participate in such bonus,
profit sharing, deferred compensation and pension plans of Company for which he
is eligible.
8. Welfare and Fringe Benefits. In addition to his compensation
described in paragraph 6 and the benefits described in paragraph 7 above,
Employee shall be entitled to participate in such welfare and fringe benefits
plans and programs of the Company for which he is eligible.
9. Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
3
<PAGE>
<PAGE>
personal representative all salary and other compensation due Employee through
the end of such month. If Employee becomes permanently disabled so that he
cannot perform his duties hereunder, as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
of the last day of the month in which such determination is made, and he will
receive his salary and other compensation through the end of such month. For
purposes of the foregoing computations, Employee shall be deemed to have earned
the same percentage of his minimum annual bonus for such employment year as the
number of days in the employment year through the date his employment is deemed
to terminate is of 365.
10. Retirement. From and after the time Employee attains age 65, he may
retire at any time by notifying Company at least 120 days prior to his
retirement date or be retired by Company upon at least two years notice.
11. Default. In the event that Company fails to perform a material
provision of this Agreement and such failure continues for 30 days after
notification from Employee, the Employee may terminate this Agreement by notice
to the Company. Company may terminate this Agreement upon Employee's material
default. Employee's material default shall mean (a) Employee's willful and
continued failure to perform the requirements of his duties hereunder (other
than as a result of total or partial incapacity due to physical or mental
illness) for 30 days after a written demand is delivered to Employee on behalf
of Company which specifically identifies the manner in which it is alleged that
Employee has not substantially performed his duties, (b) Employee's dishonesty
in the performance of his duties hereunder, (c) an act or acts on Employee's
part involving moral turpitude or constituting a felony under the laws of the
United States or any state thereof, (d) any other act or omission which
materially injures the financial condition or business reputation of Company or
4
<PAGE>
<PAGE>
any of its subsidiaries or affiliates, or (e) Employee's material breach of his
non-compete and confidentiality obligations under paragraphs 4 and/or 13 of this
Agreement, respectively. Any termination shall be without prejudice to any
rights or remedies which Employee or Company may have.
12. Change in Control. Notwithstanding any other provision of this
Agreement, should a Change of Control (as defined below) occur, Employee, at his
sole option and discretion, may terminate his employment under this Agreement at
any time within one year after such change of control upon 15 days notice. In
the event of such termination, Company shall pay to Employee a severance payment
equal to three times the base amount as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended ("Code") minus $1.00 which shall be
payable no later than one month after the effective date of the Employee's
termination of employment. In addition, in the event of a Change of Control, all
outstanding stock options held by Employee (whether issued under Company's 1996
Stock Option Plan, Company's 1999 Flexible Stock Plan, or otherwise) shall
become fully exercisable (to the extent not already exercisable). For purposes
of this Agreement, a Change in Control shall be deemed to occur (a) if any
person, as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934 ("Exchange Act"), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of Company representing 20% or more of the combined
voting power (i) of Company's then outstanding securities or (ii) on a fully
diluted basis, (b) upon the first purchase of the common stock of Company
pursuant to a tender or exchange offer (other than a tender or exchange offer
made by Company), (c) upon the approval by Company's stockholders of a merger or
5
<PAGE>
<PAGE>
consolidation, a sale or disposition of all or substantially all of Company's
assets or a plan of liquidation or dissolution of Company, or (d) if, during any
period of 2 consecutive years, individuals who at the beginning of such period
constitute the board of directors of Company cease for any reason to constitute
at least a majority thereof, unless the election or nomination for the election
by Company's stockholders of each new director was approved by a vote of at
least 2/3 of the directors then still in office who were directors at the
beginning of the period. Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur if Company either merges or consolidates with or
into another company or sells or disposes of all or substantially all of its
assets to another company, if such merger, consolidation, sale or disposition is
in connection with a corporate restructuring wherein the stockholders of Company
immediately before such merger, consolidation, sale or disposition own, directly
or indirectly, immediately following such merger, consolidation, sale or
disposition at least 80% of the combined voting power of all outstanding classes
of securities of the company resulting from such merger or consolidation, or to
which Company sells or disposes of its assets, in substantially the same
proportion as their ownership in Company immediately before such merger,
consolidation, sale or disposition.
13. Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
may come to Employee's knowledge during his employment with the Company. Upon
6
<PAGE>
<PAGE>
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
and/or which relate to Employee's employment or the business activities of
Company.
14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Company and any successors or assigns of Company, and Employee,
his heirs, personal representatives and assigns, except that Employee's
obligations to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
15. Entire Agreement: Modification. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter and
supersedes all prior or contemporaneous agreements not set forth in this
agreement. This Agreement may not be modified other than by an agreement in
writing signed by each of the parties.
16. Waiver. Any failure by either party to enforce any provision of
this Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
17. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
7
<PAGE>
<PAGE>
18. Paragraph Headings. Paragraph headings throughout this Agreement
are solely for the convenience of the parties and shall not be construed as a
part of any section or as modifying the contents of any section.
19. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Missouri.
20. Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
21. Supplemental Compensation. Upon the termination of Employee's
employment with Company for any reason other than Company's termination due to
his material default, as described in paragraph 11, Employee shall be entitled
to receive from Company 60 equal monthly payments, with the first such payment
due on the second first day of the month after termination of employment, of
8.333% of his Compensation (as defined below) from Company over the
12-consecutive month period for which his Compensation was the greatest. If
Employee should die before all or any part of the above described monthly
payments have been made, all payments or all remaining payments shall be made to
his designated beneficiary, if any, otherwise to his estate. Notwithstanding the
foregoing, the aggregate amount payable under this paragraph 21 shall be reduced
by the amount, if any, payable under paragraph 12. For purposes of this
paragraph 21, Compensation shall mean salary, bonuses, incentive compensation,
and other forms of remuneration for services rendered, whether payable in cash
or kind (including Company stock) but shall not include taxable income resulting
from the exercise of a stock option or from the disposition of stock acquired
pursuant to a stock option.
8
<PAGE>
<PAGE>
22. Non-Competition. During the period that Employee is entitled to
receive payments under paragraph 21, Employee shall not engage, directly or
indirectly, either on his own behalf or on behalf of any other person, firm,
corporation or other entity, in any business competitive with the business of
Company, in the geographic area in which Company is conducting business at the
time of termination of Employee's employment, or own more than 5% of any such
firm, corporation or other entity. In addition, Employee must furnish Company
with such information as Company shall from time to time request in order to
determine that Employee is in compliance with the requirements of the preceding
provisions of this paragraph 22. The payments to be made under paragraph 21 are
conditioned upon Employee's complying with the provisions of this paragraph 22,
and, in the event that such provisions are not complied with, Company may
suspend such payments for any period of time in which Employee is not in
compliance with the preceding provisions of this paragraph 22.
23. Company. For purposes of paragraphs 4, 13, and 22 of this
Agreement, the Company shall mean Applied Digital Solutions, Inc. and all
subsidiaries and affiliates of it.
24. Other Matters. For purposes of this paragraph 24, a "Triggering
Event" is a Change of Control (as defined in paragraph 12), the termination of
Richard Sullivan's employment for any reason other than due to his material
default, as described in the present paragraph 11 of Richard Sullivan's
Employment Agreement, if Richard Sullivan ceases to be Company's chairman of the
board or chief executive officer for any reason other than due to his material
default, as described in the present paragraph 11 of Richard Sullivan's
Employment Agreement, or the sale by Company of the stock of Company
subsidiaries or the sale by Company subsidiaries of assets, outside the ordinary
course of business, having aggregate proceeds of at least $110 million. Within
9
<PAGE>
<PAGE>
10 days of the occurrence of a Triggering Event. Company shall pay to Employee
the sum of $3,525,000. Company may pay such amount in cash or in Company's
common stock or in a combination of cash and common stock. Common stock used in
payment shall be valued at the average closing price on the Nasdaq National
Market over the last 5 business days prior to the date of the Triggering Event.
The allocation of cash and stock for payments provided pursuant to this
paragraph 24 shall include at least sufficient cash to cover the tax liability
associated with such payments, and shall otherwise be structure to maximize tax
efficiency to both Company and Employee.
25. Excise Gross Up. In the event that any payment or benefit received
or to be received by Employee under this Agreement and/or under another plan of
or agreement with Company is subject to the excise tax ("Excise Tax") under
Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), Company
shall pay Employee an amount ("Excise Gross Up Payment") that covers all Excise
Taxes incurred or to be incurred by Employee because of any such payment or
benefit and all federal and state income taxes and Excise Taxes on the Excise
Gross Up Payment and which, therefore, will place Employee in the same position
that he would have been in had no such payment or benefit been subject to the
Excise Tax. The Excise Tax Gross Up Payment (or portion thereof) shall be made
upon the earlier of the imposition of any Excise Tax upon Employee or his
payment of any Excise Tax.
26. Effect of Amendment. This Agreement shall supersede all agreements
between the parties relating to Employee's employment by Company.
10
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
APPLIED DIGITAL SOLUTIONS, INC.
By:
----------------------------------------
Title:
--------------------------------------
"Company"
-------------------------------------------
Garrett A. Sullivan
"Employee"
11
Exhibit 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into as of this 1st day
of March, 2000, by and between APPLIED DIGITAL SOLUTIONS, INC., a Missouri
corporation ("Company") and DAVID A. LOPPERT ("Employee").
BACKGROUND
Employee has been and presently is employed by Company as its vice
president and chief financial officer. The parties have entered into a formal
employment agreement dated March 23, 1999 covering the terms and conditions of
such employment. The parties desire to amend such agreement and to set forth in
this document such agreement, as hereby amended, in its entirety.
TERMS AND CONDITIONS
1. Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on the terms and conditions set forth below.
2. Capacity. Employee shall serve as Company's vice president and chief
financial officer. Employee shall perform such services for company and its
subsidiaries and affiliates as Company's board of directors shall direct from
time to time. However, no such services shall be of a nature which are not
commensurate with, and/or are beneath the dignity of, Employee's title.
3. Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on March 1, 2000 and ending on
February 28, 2005. The term of Employee's employment under this Agreement shall
<PAGE>
<PAGE>
automatically be renewed for successive additional one year terms on each
anniversary of the commencement of Employee's employment under this Agreement,
beginning with the March 1, 2001 anniversary date, each of which terms shall be
added at the end of the then existing term (taking into account any prior
extensions or failures to extend), unless either party notifies the other at
least 30 days prior to an anniversary date of this Agreement. For example,
unless either party notifies the other to the contrary on or before January 29,
2001, the term of this Agreement shall be extended from March 1, 2005 to
February 28, 2006. For further example, and assuming the term of this Agreement
has been extended to February 28, 2006, if one party notifies the other that it
does not desire to extend the term of this Agreement for an additional year and
such notice is given on or before January 29, 2002, the term of this Agreement
shall not be extended from March 1, 2006 to February 28, 2007. Notwithstanding
the foregoing, the term of this Agreement may end prior to the termination date
determined under this paragraph 3 as provided in paragraphs 9, 10, 11 and 12.
4. Service While Employed. Employee agrees to devote his best efforts,
his full diligence and all of his business time to his duties hereunder and
shall not engage, either directly or indirectly, in any business or other
activity which is competitive with or adverse to the interests or the business
of Company.
5. Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his
consent.
2
<PAGE>
<PAGE>
6. Compensation, Vacations and Reimbursement. As partial compensation
for his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $150,000.
Employee shall also be entitled to receive such bonuses, incentive compensation,
and other compensation, if any, as Company's board of directors, executive
committee, compensation committee, or other designated committee shall award
Employee from time to time whether in cash, Company stock, stock options, other
stock based compensation, other form of remuneration, or any combination of the
foregoing. In addition, Company shall pay Employee monthly payments of $2,500
each as a flexible perquisite allowance to be used by Employee for such purposes
as he shall determine. All such compensation shall be subject to legally
required income and employment tax withholding. Employee shall be entitled to
paid vacations and reimbursement for all reasonable business expenses in
accordance with Company's policies for operating officers.
7. Other Benefits. In addition to his compensation described in
paragraph 6 above, Employee shall be entitled to participate in such bonus,
profit sharing, deferred compensation and pension plans of Company for which he
is eligible.
8. Welfare and Fringe Benefits. In addition to his compensation
described in paragraph 6 and the benefits described in paragraph 7 above,
Employee shall be entitled to participate in such welfare and fringe benefits
plans and programs of the Company for which he is eligible.
9. Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
personal representative all salary and other compensation due Employee through
3
<PAGE>
<PAGE>
the end of such month. If Employee becomes permanently disabled so that he
cannot perform his duties hereunder, as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
of the last day of the month in which such determination is made, and he will
receive his salary and other compensation through the end of such month. For
purposes of the foregoing computations, Employee shall be deemed to have earned
the same percentage of his minimum annual bonus for such employment year as the
number of days in the employment year through the date his employment is deemed
to terminate is of 365.
10. Retirement. From and after the time Employee attains age 65, he may
retire at any time by notifying Company at least 120 days prior to his
retirement date or be retired by Company upon at least two years notice.
11. Default. In the event that Company fails to perform a material
provision of this Agreement and such failure continues for 30 days after
notification from Employee, the Employee may terminate this Agreement by notice
to the Company. Company may terminate this Agreement upon Employee's material
default. Employee's material default shall mean (a) Employee's willful and
continued failure to perform the requirements of his duties hereunder (other
than as a result of total or partial incapacity due to physical or mental
illness) for 30 days after a written demand is delivered to Employee on behalf
of Company which specifically identifies the manner in which it is alleged that
Employee has not substantially performed his duties, (b) Employee's dishonesty
in the performance of his duties hereunder, (c) an act or acts on Employee's
part involving moral turpitude or constituting a felony under the laws of the
United States or any state thereof, (d) any other act or omission which
4
<PAGE>
<PAGE>
materially injures the financial condition or business reputation of Company or
any of its subsidiaries or affiliates, or (e) Employee's material breach of his
non-compete and confidentiality obligations under paragraphs 4 and/or 13 of this
Agreement, respectively. Any termination shall be without prejudice to any
rights or remedies which Employee or Company may have.
12. Change in Control. Notwithstanding any other provision of this
Agreement, should a Change of Control (as defined below) occur, Employee, at his
sole option and discretion, may terminate his employment under this Agreement at
any time within one year after such change of control upon 15 days notice. In
the event of such termination, Company shall pay to Employee a severance payment
equal to three times the base amount as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended ("Code") minus $1.00 which shall be
payable no later than one month after the effective date of the Employee's
termination of employment. In addition, in the event of a Change of Control, all
outstanding stock options held by Employee (whether issued under Company's 1996
Stock Option Plan, Company's 1999 Flexible Stock Plan, or otherwise) shall
become fully exercisable (to the extent not already exercisable). For purposes
of this Agreement, a Change in Control shall be deemed to occur (a) if any
person, as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934 ("Exchange Act"), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of Company representing 20% or more of the combined
voting power (i) of Company's then outstanding securities or (ii) on a fully
diluted basis, (b) upon the first purchase of the common stock of Company
pursuant to a tender or exchange offer (other than a tender or exchange offer
made by Company), (c) upon the approval by Company's stockholders of a merger or
5
<PAGE>
<PAGE>
consolidation, a sale or disposition of all or substantially all of Company's
assets or a plan of liquidation or dissolution of Company, or (d) if, during any
period of 2 consecutive years, individuals who at the beginning of such period
constitute the board of directors of Company cease for any reason to constitute
at least a majority thereof, unless the election or nomination for the election
by Company's stockholders of each new director was approved by a vote of at
least 2/3 of the directors then still in office who were directors at the
beginning of the period. Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur if Company either merges or consolidates with or
into another company or sells or disposes of all or substantially all of its
assets to another company, if such merger, consolidation, sale or disposition is
in connection with a corporate restructuring wherein the stockholders of Company
immediately before such merger, consolidation, sale or disposition own, directly
or indirectly, immediately following such merger, consolidation, sale or
disposition at least 80% of the combined voting power of all outstanding classes
of securities of the company resulting from such merger or consolidation, or to
which Company sells or disposes of its assets, in substantially the same
proportion as their ownership in Company immediately before such merger,
consolidation, sale or disposition.
13. Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
may come to Employee's knowledge during his employment with the Company. Upon
6
<PAGE>
<PAGE>
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
and/or which relate to Employee's employment or the business activities of
Company.
14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Company and any successors or assigns of Company, and Employee,
his heirs, personal representatives and assigns, except that Employee's
obligations to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
15. Entire Agreement: Modification. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter and
supersedes all prior or contemporaneous agreements not set forth in this
agreement. This Agreement may not be modified other than by an agreement in
writing signed by each of the parties.
16. Waiver. Any failure by either party to enforce any provision of
this Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
17. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
7
<PAGE>
<PAGE>
18. Paragraph Headings. Paragraph headings throughout this Agreement
are solely for the convenience of the parties and shall not be construed as a
part of any section or as modifying the contents of any section.
19. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Missouri.
20. Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
21. Supplemental Compensation. Upon the termination of Employee's
employment with Company for any reason other than Company's termination due to
his material default, as described in paragraph 11, Employee shall be entitled
to receive from Company 60 equal monthly payments, with the first such payment
due on the second first day of the month after termination of employment, of
8.333% of his Compensation (as defined below) from Company over the
12-consecutive month period for which his Compensation was the greatest. If
Employee should die before all or any part of the above described monthly
payments have been made, all payments or all remaining payments shall be made to
his designated beneficiary, if any, otherwise to his estate. Notwithstanding the
foregoing, the aggregate amount payable under this paragraph 21 shall be reduced
by the amount, if any, payable under paragraph 12. For purposes of this
paragraph 21, Compensation shall mean salary, bonuses, incentive compensation,
and other forms of remuneration for services rendered, whether payable in cash
or kind (including Company stock) but shall not include taxable income resulting
from the exercise of a stock option or from the disposition of stock acquired
pursuant to a stock option.
8
<PAGE>
<PAGE>
22. Non-Competition. During the period that Employee is entitled to
receive payments under paragraph 21, Employee shall not engage, directly or
indirectly, either on his own behalf or on behalf of any other person, firm,
corporation or other entity, in any business competitive with the business of
Company, in the geographic area in which Company is conducting business at the
time of termination of Employee's employment, or own more than 5% of any such
firm, corporation or other entity. In addition, Employee must furnish Company
with such information as Company shall from time to time request in order to
determine that Employee is in compliance with the requirements of the preceding
provisions of this paragraph 22. The payments to be made under paragraph 21 are
conditioned upon Employee's complying with the provisions of this paragraph 22,
and, in the event that such provisions are not complied with, Company may
suspend such payments for any period of time in which Employee is not in
compliance with the preceding provisions of this paragraph 22.
23. Company. For purposes of paragraphs 4, 13, and 22 of this
Agreement, the Company shall mean Applied Digital Solutions, Inc. and all
subsidiaries and affiliates of it.
24. Relocation Reimbursement. The Company previously moved its
corporate office to Palm Beach, Florida and requested Employee to relocate to
the Palm Beach, Florida area, which Employee has done. In order to induce
Employee to so relocate, Company agreed to reimburse Employee for certain
additional reasonable costs on a "grossed up" basis. Except for Company's
agreement to reimburse Employee for the cost of private schools for Employee's
children in the Palm Beach area for no more than 3 school years but not in
excess of $15,000 for any school year, Company has reimbursed Employee for all
expenses which it agreed to reimburse Employee. Company reaffirms its agreement
relating to private schools described above. Reimbursement on a grossed up basis
9
<PAGE>
<PAGE>
means reimbursement that covers the federal or state income taxes, if any, which
would not have been incurred by Employee if the expenditure to be reimbursed had
not been made and no reimbursement had been received. For example, if the amount
to be reimbursed is $10,000, and no portion of the expenditure to be reimbursed
is deductible by Employee for federal or state income tax purposes and all of
the reimbursement is includible in Employee's gross income for federal and state
income tax purposes, and Employee's combined federal and state marginal income
tax rate is 40%, the grossed up amount is $16,667 ($16,667 - .4 (16,667) =
$10,000). For further example, if, in the preceding example, all of the
expenditure to be reimbursed is fully deductible by Employee, the grossed up
amount is $10,000.
25. Excise Gross Up. In the event that any payment or benefit received
or to be received by Employee under this Agreement and/or under another plan of
or agreement with Company is subject to the excise tax ("Excise Tax") under
Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), Company
shall pay Employee an amount ("Excise Gross Up Payment") that covers all Excise
Taxes incurred or to be incurred by Employee because of any such payment or
benefit and all federal and state income taxes and Excise Taxes on the Excise
Gross Up Payment and which, therefore, will place Employee in the same position
that he would have been in had no such payment or benefit been subject to the
Excise Tax. The Excise Tax Gross Up Payment (or portion thereof) shall be made
upon the earlier of the imposition of any Excise Tax upon Employee or his
payment of any Excise Tax.
26. Effect of Amendment. This Agreement shall supersede all agreements
between the parties relating to Employee's employment by Company.
10
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
APPLIED DIGITAL SOLUTIONS, INC.
By:
----------------------------------------
Title:
--------------------------------------
"Company"
-------------------------------------------
David A. Loppert
"Employee"
11
Exhibit 21.1
Applied Digital Solutions, Inc.
List of Subsidiary Companies
Country or State
Company Name of Incorporation
- ------------ ----------------
ACT Acquisition Corp. Delaware
ACT Automotive Group, Inc. Delaware
ACT Communications, Inc. Delaware
ACT Financial Corporation Delaware
ACT-GFX Canada, Inc. Ontario, Canada
ACT Houston Leasing Corp. Texas
ACT Leasing Corp. Delaware
ACT Louisiana Leasing, Inc. Louisiana
ADSI Telecom Services, Inc. Pennsylvania
ADSI Telecomm Services of Maryland, Inc. Maryland
Advanced Telecomm of Maryland, Inc. Maryland
Advanced Telecomm of Pittsburgh, a Pennsylvania Business Trust Pennsylvania
Advanced Telecommunications, Inc. Illinois
The Americom Group, Inc. Louisiana
Applied Digital Solutions Financial Corp. New Hampshire
Applied Digital Solutions International, Ltd. United Kingdom
Applied Cellular Technology of Missouri, Inc. Missouri
Atlantic Systems, Inc. New Jersey
Aurora Electric, Inc. Alaska
Blue Star Electronics, Inc. New Jersey
Bostek, Inc. Massachusetts
Consolidated Micro Components, Inc. Pennsylvania
Cybertech Station, Inc. Pennsylvania
Data Path Technologies, Inc. New York
Digital Angel.net, Inc. Delaware
Elite Computer Services, Inc. New Jersey
GDB Software Services, Inc. New York
Ground Effects Ltd. Ontario, Canada
Hopper Manufacturing Co., Inc. California
Hornbuckle Engineering, Inc. California
Information Products Center, Inc. New Jersey
Innovative Vacuum Solutions, Inc. Pennsylvania
IntelleSale.com, Inc. Delaware
Lynch Marks & Associates, Inc. California
Micro Components International, Incorporated Massachusetts
Norcom Resources, Inc. Minnesota
Pizarro Re-Marketing, Inc. Texas
Port Consulting, Inc. Florida
PPL, Ltd. New York
Service Transport Company New Jersey
Signal Processors Limited United Kingdom
Signature Industries Limited United Kingdom
STC Netcom, Inc. California
STR, Inc. Ohio
Teledata Concepts, Inc. Florida
<PAGE>
<PAGE>
Country or State
Company Name of Incorporation
- ------------ ----------------
Universal Commodities Corp. New Jersey
US Electrical Products Corp. New Jersey
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-33000, 333-94723, 333-64755, 333-64605,
333-59523, 333-57613, 333-51067, 333-45139, 333-37713 and 333-25431) and in
the Registration Statements on Forms S-8 (No. 333-31696, 333-93117, 333-92327,
333-91999, 333-88421 and 333-39553) of Applied Digital Solutions, Inc. and
subsidiaries (formerly Applied Cellular Technology, Inc.) of our report dated
March 3, 2000 relating to the financial statements and financial statement
schedule, which appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 30, 2000
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-33000, 333-94723, 333-64755, 333-64605,
333-59523, 333-57613, 333-51067, 333-45139, 333-37713 and 333-25431) and
in the Registration Statements on Forms S-8 (No. 333-31696, 333-93117,
333-92327, 333-91999, 333-88421 and 333-39553) of Applied Digital Solutions,
Inc. and subsidiaries (formerly Applied Cellular Technology, Inc.) of our
report dated February 24, 1998 relating to the financial statements and
financial statement schedule, which appears in this Annual Report on Form 10-K.
Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's audited consolidated financial statements as of and for the twelve
months ended December 31, 1999, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000924642
<NAME> Applied Digital Solutions, Inc.
<S> <C>
<PERIOD-START> Jan-01-1999
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 5138000
<SECURITIES> 0
<RECEIVABLES> 53868000
<ALLOWANCES> 1698000
<INVENTORY> 40448000
<CURRENT-ASSETS> 13881000
<PP&E> 24835000
<DEPRECIATION> 10949000
<TOTAL-ASSETS> 228976000
<CURRENT-LIABILITIES> 98165000
<BONDS> 35317000
0
0
<COMMON> 48000
<OTHER-SE> 92888000
<TOTAL-LIABILITY-AND-EQUITY> 228976000
<SALES> 333190000
<TOTAL-REVENUES> 336741000
<CGS> 221350000
<TOTAL-COSTS> 241790000
<OTHER-EXPENSES> 100103000
<LOSS-PROVISION> 904000
<INTEREST-EXPENSE> 3842000
<INCOME-PRETAX> 9147000
<INCOME-TAX> 3160000
<INCOME-CONTINUING> 5987000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5432000
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.11
</TABLE>
