As Filed with the Securities and Exchange Commission on
October 4, 2007
Registration Statement
No. 333-145970
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 1
TO
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
APPLIED DIGITAL SOLUTIONS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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0-26020
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43-1641533
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(561) 805-8000
(Address, including zip code,
and telephone number, including area code, of registrant’s
principal executive offices)
Michael E. Krawitz
Chief Executive Officer and President
Applied Digital Solutions, Inc.
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Phone:
(561) 805-8000
Fax:
(561) 805-8001
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copy to:
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Tammy L. Knight, Esq.
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Kara L. MacCullough, Esq.
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Patricia M. Petersen, Esq.
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Holland & Knight LLP
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Holland & Knight LLP
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Digital Angel Corporation
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One East Broward Boulevard,
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701 Brickell Avenue,
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1690 S. Congress Avenue,
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Suite 1300
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Suite 3000
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Suite 201
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Fort Lauderdale, Florida 33301
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Miami, Florida 33131
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Delray Beach, Florida 33445
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Phone: (954) 525-1000
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Phone: (305) 374-8500
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Phone: (561) 276-0477
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Fax: (954) 463-2030
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Fax: (305) 789-7799
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Fax: (561) 276-0977
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Approximate date of commencement of proposed sale of the
securities to the public:
As soon as practicable
after the effective time of the merger described herein.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, please
check the following box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the commission,
acting pursuant to said Section 8(a), may determine
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The
information in this joint proxy statement/prospectus is not
complete and may be changed. We may not sell the securities
offered by this joint proxy statement/prospectus until the
registration statement filed with the Securities and Exchange
Commission is effective. This joint proxy statement/prospectus
does not constitute an offer to sell or a solicitation of an
offer to buy any securities in any jurisdiction where an offer,
solicitation or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
OCTOBER 4, 2007
MERGER
PROPOSED — YOUR VOTE IS VERY IMPORTANT
To the stockholders of Applied Digital Solutions, Inc. and
Digital Angel Corporation:
On behalf of the boards of directors of Applied Digital
Solutions, Inc. and Digital Angel Corporation, we are pleased to
deliver our joint proxy statement/prospectus for the proposed
merger involving Applied Digital and Digital Angel. We are
seeking the approval of both Applied Digital and Digital Angel
stockholders with respect to this transaction.
As of September 28, 2007, Applied Digital owned
approximately 55.6% of Digital Angel’s outstanding shares
of common stock. In the proposed merger, Digital Angel will
become a wholly-owned subsidiary of Applied Digital. Upon
completion of the merger, holders of Digital Angel common stock
will be entitled to receive 1.4 shares of Applied Digital
common stock for each share of Digital Angel common stock then
held by them. This amount represents a premium for Digital Angel
common stock of approximately 21% over the average closing price
of Applied Digital and Digital Angel stock as of the previous
twenty trading days ending on August 7, 2007. For purposes
of illustration only, if the merger had been consummated on
August 8, 2007, the last trading day prior to announcement
of the merger, each share of Digital Angel common stock, which
had a closing price of $1.40 per share, would have been
exchanged for 1.4 shares of Applied Digital common stock
with a value of $1.54 (based on Applied Digital’s common
stock closing price of $1.10 per share on that same date). By
comparison, if the merger had been consummated on
October 3, 2007, the latest practicable date before the
printing of this joint proxy statement/prospectus, each share of
Digital Angel common stock, which had a closing price of
$1.44 per share, would have been exchanged for
1.4 shares of Applied Digital common stock with a value of
$1.47 (based on the closing price of Applied Digital’s
common stock of $1.05 per share on that same date). Because
Applied Digital stock represents 100% of the merger
consideration, the value of the overall merger consideration to
Digital Angel stockholders on those dates, respectively, was
$1.54 per share and $1.47 per share. Applied Digital and Digital
Angel estimate that Applied Digital will issue approximately
28,524,641 shares of Applied Digital common stock in the
merger based on the number of shares of Digital Angel common
stock outstanding on September 28, 2007, and will reserve
an additional approximately 18,194,700 shares of Applied
Digital common stock for issuance in connection with Applied
Digital’s assumption of Digital Angel’s outstanding
options, warrants and restricted stock.
The shares of Applied Digital common stock issued to Digital
Angel stockholders in connection with the merger are expected to
represent approximately 28.7% of the outstanding shares of
Applied Digital common stock immediately following the
consummation of the merger, based on the number of shares of
Applied Digital common stock and Digital Angel common stock
outstanding on September 28, 2007. Applied Digital common
stock is traded on the Nasdaq Capital Market under the trading
symbol “ADSX,” and Digital Angel common stock is
traded on the American Stock Exchange under the trading symbol
“DOC.” On October 3, 2007, the latest practicable
date before the printing of this joint proxy
statement/prospectus, the closing sale price of Applied Digital
common stock was $1.05 as reported on the Nasdaq Capital Market,
and the closing sale price of Digital Angel common stock was
$1.44 as reported on the American Stock Exchange.
For Applied Digital and Digital Angel to complete the merger,
Applied Digital stockholders must vote to approve the issuance
of shares of Applied Digital common stock in connection with the
merger and to approve and adopt the amendment to Applied
Digital’s certificate of incorporation to increase the
total number of authorized shares of Applied Digital capital
stock from 130 million shares, of which 125 million
are common stock, to 170 million shares, of which
165 million will be common stock. In addition, the holders
of a majority of the outstanding shares of Digital Angel common
stock and the holders of a majority of the outstanding shares of
Digital Angel common stock not held by Applied Digital or its
affiliates must vote to approve and adopt the merger agreement.
Applied Digital will hold a special meeting and Digital Angel
will hold a special and annual meeting of stockholders to obtain
these approvals.
The boards of directors of Applied Digital and Digital Angel,
based on the recommendation of the special committee of
independent directors of the applicable company, unanimously
recommend the merger and believe that the combination of the two
companies is advisable and in the best interest of their
respective stockholders based upon the analysis, investigation
and deliberation conducted by both Applied Digital and Digital
Angel.
We encourage you to read this joint proxy statement/prospectus
for important information about the merger, the special meeting
of Applied Digital and the special and annual meeting of Digital
Angel.
In particular, you should carefully consider the
discussion in the section of this joint proxy
statement/prospectus entitled “Risk Factors” beginning
on page 24.
Your vote is very important, regardless of the number of shares
you own. Whether or not you plan to attend the special meeting
of stockholders of Applied Digital or the special and annual
meeting of stockholders of Digital Angel, please take the time
to vote by completing and mailing the enclosed proxy card and
returning it in the preaddressed envelope provided as soon as
possible.
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Sincerely,
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Sincerely,
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DANIEL E. PENNI
Chairman of the Board of Directors of
Applied Digital Solutions, Inc.
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SCOTT R. SILVERMAN
Chairman of the Board of Directors of
Digital Angel Corporation
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This joint proxy statement/prospectus is dated
October • , 2007, and is first being mailed to
the stockholders of Applied Digital and Digital Angel on or
about October 5, 2007.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this joint
proxy statement/prospectus. Any representation to the contrary
is a criminal offense.
SOURCES
OF ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important
business and financial information from other documents filed by
Applied Digital with the Securities and Exchange Commission, or
SEC. Those documents include important information about Applied
Digital that is not included in or delivered with this joint
proxy statement/prospectus. You can obtain any of the documents
filed with the SEC from Applied Digital and Digital Angel, as
the case may be, or through the SEC or the SEC’s website.
The address of that site is
http://www.sec.gov.
Stockholders of Applied Digital and Digital Angel may obtain
documents filed with the SEC or documents incorporated by
reference in this joint proxy statement/prospectus, when
available, free of cost, by directing a written or oral request
to the appropriate company at:
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Applied Digital Solutions, Inc.
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Digital Angel Corporation
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1690 South Congress Avenue, Suite 200
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490 Villaume Avenue
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Delray Beach, Florida 33445
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South St. Paul, Minnesota 55075
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Telephone:
(561) 805-8000
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Telephone: (651) 455-1621
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Attention: Investor Relations
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Attention: Investor Relations
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In addition, if you have questions about the merger, Applied
Digital’s special meeting, or Digital Angel’s special
and annual meeting, or if you need to obtain copies of this
joint proxy statement/prospectus, proxy cards, or other
documents incorporated by reference into this joint proxy
statement/prospectus, you may contact D.F. King & Co.,
Inc., Applied Digital’s and Digital Angel’s proxy
solicitor, at the address and telephone number listed below. You
will not be charged for any of the documents you request.
D.F. King
& Co., Inc.
48 Wall Street
New York, New York 10005
Telephone: (800) 967-7635
If you would like to request documents, in order to ensure
timely delivery, you must do so at least five business days
before the date of the special meeting of Applied Digital and
the special and annual meeting of Digital Angel. This means you
must request this information no later than November 19,
2007.
Applied Digital and Digital Angel, as the case may be,
will mail properly requested documents to requesting
stockholders by first class mail, or another equally prompt
means, within one business day after receipt of such requests.
See “Where You Can Find More Information.”
All information contained in this joint proxy
statement/prospectus reflects reclassified financial information
to reflect Digital Angel’s former OuterLink Corporation
subsidiary as discontinued operations and to reflect Applied
Digital’s InfoTech USA, Inc. subsidiary as discontinued
operations. In addition, the sections entitled “Unaudited
Pro Forma Condensed Financial Data Reflecting the
Reclassification of Applied Digital’s Subsidiaries,
Computer Equity Corporation and Perimeter Acquisition Corp., as
Discontinued Operations” and “Unaudited Pro Forma
Condensed Combined Financial Data Reflecting the Merger,”
which sections begin on page 111, reflect Applied
Digital’s subsidiaries, Computer Equity Corporation and
Perimeter Acquisition Corp., as discontinued operations.
APPLIED
DIGITAL SOLUTIONS, INC.
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD NOVEMBER 27,
2007
To the stockholders of Applied Digital Solutions, Inc.:
You are cordially invited to attend the special meeting of
stockholders of Applied Digital Solutions, Inc., which will be
held on November 27, 2007, at 9:00 a.m., Eastern
Standard Time, at the Renaissance Boca Raton Hotel, 2000 N.W.
19th Street, Boca Raton, Florida 33431. If you owned common
stock at the close of business on September 28, 2007, you
may vote at this meeting or any adjournments or postponements
thereof.
The enclosed notice of meeting identifies each business proposal
for your action. The board of directors unanimously recommends
the following proposals:
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Recommended
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Proposal
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Vote
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1.
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To approve the issuance of shares of Applied Digital common
stock to Digital Angel stockholders pursuant to the agreement
and plan of reorganization, dated as of August 8, 2007,
among Applied Digital, Digital Angel Acquisition Corp., a
wholly-owned subsidiary of Applied Digital, and Digital Angel;
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FOR
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2.
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To approve and adopt an amendment to Applied Digital’s
certificate of incorporation to increase the total number of
authorized shares of Applied Digital capital stock from
130 million shares, of which 125 million shares are
common stock, to 170 million shares, of which
165 million shares will be common stock;
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FOR
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3.
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To ratify the appointment of Michael E. Krawitz as a member of
Applied Digital’s board of directors to hold office until
the 2010 Annual Meeting of Stockholders or until his successor
has been duly elected and qualified;
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FOR
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4.
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To approve the issuance of shares of Applied Digital common
stock in lieu of cash to five officers of Applied Digital,
including its president and chief executive officer, should
severance payments be triggered and should Applied Digital
desire or be obligated to issue common stock instead of cash;
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FOR
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5.
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If submitted to a vote of the Applied Digital stockholders, to
approve an adjournment or postponement of the special meeting,
including, if necessary, to solicit additional proxies in favor
of the merger proposals if there are not sufficient votes for
these proposals; and
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FOR
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6.
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To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
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Proposals 1 and 2 are referred to as the merger proposals.
Approval of the matters to be voted on at the special meeting,
other than the merger proposals, are not a condition to the
merger.
The board of directors is not aware of any other proposals for
the special meeting.
A joint proxy statement/prospectus containing information about
the matters to be acted on at the special meeting and a form of
proxy are enclosed with this notice of special meeting.
If you plan to attend the special meeting, please mark the
appropriate box on your proxy card to help us plan for the
special meeting. You will need an admission card to attend the
special meeting. If your shares are registered in your name, you
are a stockholder of record. Your admission card is attached to
your proxy card, and you will need to bring it with you to the
special meeting. If your shares are in the name of your broker
or bank, your shares are held in “street name.” Ask
your broker or bank for an admission card in the form of a legal
proxy to bring with you to the special meeting. If you do not
receive the legal proxy in time, bring your brokerage statement
with you to the special meeting so that we can verify your
ownership of our stock on the record date and admit you to the
special meeting. However, you will not be able to vote your
shares at the special meeting without a legal proxy.
Your vote is important regardless of the number of shares you
own. We encourage you to vote by proxy so that your shares will
be represented and voted at the special meeting even if you
cannot attend. All
stockholders can vote by written proxy card. Many stockholders
also can vote by proxy via a touch-tone telephone from the
U.S. and Canada, using the toll-free number on your proxy
card or via the internet using the instructions on your proxy
card. In addition, stockholders may vote in person at the
special meeting, as described above.
Each stockholder is urged to vote promptly by signing and
returning the enclosed proxy card, using the telephone voting
system, or accessing the world wide website indicated on your
proxy card to vote via the internet. If a stockholder decides to
attend the special meeting, he or she may revoke their proxy and
vote the shares in person.
Sincerely,
MICHAEL E. KRAWITZ
President and Chief Executive Officer
Delray Beach, Florida
October • , 2007
DIGITAL
ANGEL CORPORATION
NOTICE OF SPECIAL AND ANNUAL
MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 27,
2007
To the stockholders of Digital Angel Corporation:
You are cordially invited to attend the special and annual
meeting of stockholders of Digital Angel Corporation, which will
be held on November 27, 2007, at 10:00 a.m., Eastern
Standard Time, at the Renaissance Boca Raton Hotel, 2000 N.W.
19th Street, Boca Raton, Florida, 33431. If you owned common
stock at the close of business on September 28, 2007, you
may vote at this meeting or any adjournments or postponements
thereof.
The enclosed notice of meeting identifies each business proposal
for your action. The board of directors unanimously recommends
the following proposals:
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Recommended
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Proposal
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Vote
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1.
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To approve and adopt the agreement and plan of reorganization,
dated as of August 8, 2007, among Digital Angel, Applied
Digital and Digital Angel Acquisition Corp, a wholly-owned
subsidiary of Applied Digital;
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FOR
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2.
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To elect five directors, each to serve until the next
annual meeting of stockholders, in each case, until their
successors are duly elected and qualified;
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FOR
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3.
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To approve and adopt an amendment to Digital Angel’s
restated certificate of incorporation to remove the requirement
that holders of 66.6% of the issued and outstanding shares of
Digital Angel common stock approve the issuance of common stock
(including options or warrants) for non-cash consideration or
for less than fair market value;
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FOR
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4.
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If submitted to a vote of the Digital Angel stockholders, to
approve an adjournment or postponement of the special and annual
meeting, including, if necessary, to solicit additional proxies
in favor of the approval and adoption of the agreement and plan
of reorganization, if there are not sufficient votes to approve
and adopt the agreement and plan or reorganization by a majority
of those shares not held by Applied Digital and its affiliates;
and
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FOR
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5.
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To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
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As Digital Angel has not yet held its 2007 annual meeting, the
special and annual meeting of stockholders will present to the
stockholders, for their vote, proposals relating to corporate
governance, such as those presented in proposals 2 and 3,
as well as the proposal relating to the merger
(proposal 1). Approval of the matters to be voted on at the
special and annual meeting, other than approval of the merger
proposal, is not a condition to the merger.
The board of directors is not aware of any other proposals for
the special and annual meeting.
A joint proxy statement/prospectus containing information about
the matters to be acted on at the special and annual meeting and
a form of proxy are enclosed with this notice of special and
annual meeting.
If you plan to attend the special and annual meeting, please
mark the appropriate box on your proxy card to help us plan for
the special and annual meeting. You will need an admission card
to attend the special and annual meeting. If your shares are
registered in your name, you are a stockholder of record. Your
admission card is attached to your proxy card, and you will need
to bring it with you to the special and annual meeting. If your
shares are in the name of your broker or bank, your shares are
held in “street name.” Ask your broker or bank for an
admission card in the form of a legal proxy to bring with you to
the special and annual meeting. If you do not receive the legal
proxy in time, bring your brokerage statement with you to the
special and annual meeting so that we can verify your ownership
of our stock on the record date and admit you to the special and
annual meeting. However, you will not be able to vote your
shares at the special and annual meeting without a legal proxy.
Your vote is important regardless of the number of shares you
own. We encourage you to vote by proxy so that your shares will
be represented and voted at the special and annual meeting even
if you cannot attend. All stockholders can vote by written proxy
card. Many stockholders also can vote by proxy via a touch-tone
telephone from the U.S. and Canada, using the toll-free
number on your proxy card or via the internet using the
instructions on your proxy card. In addition, stockholders may
vote in person at the special and annual meeting as described
above.
Each stockholder is urged to vote promptly by signing and
returning the enclosed proxy card, using the telephone voting
system, or accessing the world wide website indicated on your
proxy card to vote via the internet. If a stockholder decides to
attend the special and annual meeting, he or she may revoke
their proxy and vote the shares in person.
Sincerely,
SCOTT R. SILVERMAN
Chairman of the Board of Directors
South St. Paul, Minnesota
October • , 2007
TABLE OF
CONTENTS
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iii
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Page
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106
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106
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106
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109
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109
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110
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UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA REFLECTING THE
RECLASSIFICATION OF APPLIED DIGITAL’S SUBSIDIARIES,
COMPUTER EQUITY CORPORATION AND PERIMETER ACQUISITION CORP., AS
DISCONTINUED OPERATIONS
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FS-1
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PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
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II-1
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SIGNATURES
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II-5
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EXHIBIT INDEX
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II-6
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List of Annexes
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iv
The following questions and answers are intended to briefly
address some commonly asked questions regarding the Applied
Digital special meeting and the Digital Angel special and annual
meeting, and in particular, the merger. These questions and
answers may not address all questions that may be important to
you as an Applied Digital or Digital Angel stockholder. Please
refer to the more detailed information contained elsewhere in
this joint proxy statement/prospectus and the annexes attached
to this joint proxy statement/prospectus.
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Q:
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Why am I receiving these materials?
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A:
|
|
Applied Digital and Digital Angel are sending you these
materials to help you decide how to vote your shares of Applied
Digital or Digital Angel stock with respect to the proposed
merger. A copy of the merger agreement is attached as
Annex A to this joint proxy statement/prospectus.
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The merger cannot be completed unless a majority of Digital
Angel stockholders, and a majority of Digital Angel stockholders
other than Applied Digital and its affiliates, approve and adopt
the merger agreement and Applied Digital stockholders approve
the issuance of Applied Digital common stock in the merger and
approve and adopt an amendment to Applied Digital’s
certificate of incorporation. Applied Digital is holding its
special meeting of stockholders and Digital Angel is holding its
special and annual meeting of stockholders to vote on the
proposals necessary to complete the merger. Information about
these meetings, the merger and the other business to be
considered by stockholders is contained in this joint proxy
statement/prospectus.
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Applied Digital and Digital Angel are delivering this joint
proxy statement/prospectus to you as both a joint proxy
statement of Applied Digital and Digital Angel and a prospectus
of Applied Digital. It is a joint proxy statement because the
boards of directors of Applied Digital and Digital Angel are
soliciting proxies from their respective stockholders. It is a
prospectus because Applied Digital will issue shares of its
common stock in exchange for shares of Digital Angel common
stock in the merger.
|
GENERAL
QUESTIONS AND ANSWERS ABOUT THE MERGER
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Q:
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|
What is the proposed transaction?
|
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A:
|
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Applied Digital, Digital Angel Acquisition Corp., a wholly-owned
subsidiary of Applied Digital, and Digital Angel have entered
into a merger agreement pursuant to which Digital Angel
Acquisition Corp. will merge with and into Digital Angel. As of
September 28, 2007, Applied Digital owned approximately
55.6% of Digital Angel’s outstanding shares of common
stock. In connection with the merger, Applied Digital will
acquire all of the outstanding shares of common stock of Digital
Angel that it does not currently own (approximately
20.4 million, or 44.4%, of the outstanding shares of
Digital Angel as of September 28, 2007). After the merger,
Digital Angel will be a wholly-owned subsidiary of Applied
Digital and each share of Digital Angel common stock then
outstanding, other than shares owned by Applied Digital or its
affiliates, will be canceled and automatically converted into
the right to receive 1.4 shares of Applied Digital common
stock. The total number of shares of Applied Digital common
stock issuable as merger consideration is subject to adjustment,
as is more fully described under “The Merger
Agreement — Exchange of Shares.” Applied Digital
stockholders will continue to own their existing shares in
Applied Digital.
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|
Q:
|
|
Why are Applied Digital and Digital Angel proposing the
merger?
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|
A:
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|
The boards of directors of Applied Digital and Digital Angel
believe that the combination of Applied Digital and Digital
Angel will benefit the stockholders of both companies by
eliminating redundant management and other expenses and creating
a combined company that will have a stronger capital base and
improved operating efficiencies. To review the reasons for the
merger in greater detail, see “The Merger —
Applied Digital’s Reasons for the Merger” and
“The Merger — Digital Angel’s Reasons for
the Merger.”
|
v
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|
Q:
|
|
When do Applied Digital and Digital Angel expect to complete
the merger?
|
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|
A:
|
|
Applied Digital and Digital Angel expect to complete the merger
after all conditions to the merger in the merger agreement are
satisfied or waived. Applied Digital and Digital Angel currently
expect to complete the merger by the end of 2007. However, it is
possible that factors outside of either company’s control
could require Applied Digital or Digital Angel to complete the
merger at a later time or not to complete it at all.
|
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|
Q:
|
|
What conditions are required to be satisfied to complete the
merger?
|
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|
A:
|
|
Applied Digital and Digital Angel are not required to complete
the merger unless certain specified conditions are satisfied or
waived. These conditions include, but are not limited to:
|
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|
•
|
approval of the issuance of shares of Applied Digital common
stock in the merger by the Applied Digital stockholders;
|
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•
|
approval and adoption of an amendment to Applied Digital’s
certificate of incorporation by the Applied Digital stockholders;
|
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|
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|
•
|
approval and adoption of the merger agreement by the holders of
a majority of the outstanding shares of Digital Angel common
stock and the holders of a majority of the outstanding shares of
Digital Angel common stock not held by Applied Digital or its
affiliates; and
|
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|
•
|
effectiveness of the Registration Statement on Form
S-4,
of
which this joint proxy statement/prospectus is a part.
|
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There can be no assurance that these conditions to complete the
merger will be satisfied. For a more complete summary of the
conditions that must be satisfied or waived prior to the
effective time of the merger, see “The Merger
Agreement — Conditions to Completion of the
Merger.”
|
|
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|
Q:
|
|
When will I be able to sell my shares?
|
|
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|
|
|
A:
|
|
Upon completion of the merger, all shares of Applied Digital
common stock received by Digital Angel stockholders in
connection with the merger will be tradable on the Nasdaq
Capital Market. If a Digital Angel stockholder is considered an
affiliate of Applied Digital or Digital Angel under the
Securities Act, in order to sell shares of Applied Digital
common stock received in connection with the merger, that
stockholder must comply with the resale provisions of
Rule 145 or Rule 144, as applicable, under the
Securities Act or sell the shares as otherwise permitted under
the Securities Act. For a more complete description of these
restrictions, see “The Merger — Restriction on
Resales of Applied Digital Common Stock by Affiliates.”
|
|
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|
|
|
Q:
|
|
Are there risks associated with the merger that I should
consider in deciding how to vote?
|
|
|
|
A:
|
|
Yes. There are a number of risks related to the merger that are
discussed in this joint proxy statement/prospectus and in other
documents incorporated by reference. You should read carefully
the detailed description of the risks associated with the merger
and industry and business risks related to Applied Digital,
Digital Angel and their respective businesses, as described in
“Risk Factors.”
|
|
|
|
Q:
|
|
What are the tax consequences of the merger?
|
|
|
|
A:
|
|
Assuming the merger is consummated, as described in the merger
agreement and this joint proxy statement/prospectus, it is the
opinion of Holland & Knight LLP that the merger will
be treated as a “reorganization” under
Section 368(a) of the Internal Revenue Code and that
Digital Angel stockholders will not recognize any gain or loss
by reason of the merger, subject to the limitations described
under “Material United States Federal Income Tax
Consequences.”
|
|
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|
|
Please review carefully the information under “Material
United States Federal Income Tax Consequences” for a
description of the material United States federal income tax
consequences of the merger. The tax consequences to you will
depend on your own situation. Please consult your tax advisors
for a full understanding of the tax consequences of the merger
to you.
|
vi
|
|
|
|
|
Q:
|
|
Are Applied Digital stockholders or Digital Angel
stockholders entitled to dissent and require appraisal of their
shares?
|
|
|
|
A:
|
|
No. Neither Applied Digital stockholders nor Digital Angel
stockholders have dissenters’ rights of appraisal under
Delaware law in connection with the merger or any other
proposals to be voted upon at the meetings. For a more complete
description, see “The Merger — Appraisal
Rights.”
|
|
|
|
Q:
|
|
What do I need to do now?
|
|
|
|
A:
|
|
After carefully reading and considering the information
contained in this joint proxy statement/prospectus, please vote
your shares as soon as possible so that your shares will be
represented at your respective company’s meeting. Please
follow the instructions set forth on the proxy card, or on the
voting instruction form provided by the record holder if your
shares are held in the name of your broker or other nominee.
|
|
|
|
Q:
|
|
How do I vote?
|
|
|
|
A:
|
|
You may vote before the Applied Digital special meeting or the
Digital Angel special and annual meeting in one of the following
ways:
|
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|
|
|
|
•
|
use the toll-free number shown on your proxy card;
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|
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|
•
|
visit the website shown on your proxy card to vote via the
internet; or
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|
|
•
|
complete, sign, date and return the enclosed proxy card in the
enclosed postage-paid envelope.
|
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|
|
You may also cast your vote in person at your respective
company’s meeting.
|
|
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|
|
|
If your shares are held in “street name,” through a
broker, bank or other nominee, that institution will send you
separate instructions describing the procedure for voting your
shares. “Street name” stockholders who wish to vote at
the meeting will need to obtain a proxy form from the
institution that holds their shares.
|
|
|
|
Q:
|
|
Can I revoke or change my vote after I have delivered my
proxy?
|
|
|
|
A:
|
|
Yes. You may revoke or change your vote at any time before your
proxy is voted at the Applied Digital special meeting or the
Digital Angel special and annual meeting, as applicable. You can
do this in any of the three following ways:
|
|
|
|
|
|
|
•
|
by sending a written notice to the Secretary of Applied Digital
or the Secretary of Digital Angel, as applicable, in time to be
received before the Applied Digital special meeting or the
Digital Angel special and annual meeting, as applicable, stating
that you would like to revoke your proxy;
|
|
|
|
|
•
|
by completing, signing and dating another proxy card and
returning it by mail in time to be received before the Applied
Digital special meeting or the Digital Angel special and annual
meeting, as applicable, or, if you submitted your proxy through
the internet or by telephone, by submitting a proxy card at a
later date, in which case your later-submitted proxy will be
recorded and your earlier proxy revoked; or
|
|
|
|
|
•
|
if you are a holder of record, by attending the meeting and
voting in person. Simply attending the Applied Digital special
meeting or Digital Angel special and annual meeting without
voting will not revoke your proxy or change your vote.
|
|
|
|
|
|
|
|
If your shares of Applied Digital common stock or Digital Angel
common stock are held in an account at a broker or other nominee
and you desire to change your vote, you should contact your
broker or other nominee for instructions on how to do so.
|
|
|
|
Q:
|
|
What should I do if I receive more than one set of voting
materials for the Applied Digital special meeting or the Digital
Angel special and annual meeting?
|
|
|
|
A:
|
|
You may receive more than one set of voting materials for the
Applied Digital special meeting or the Digital Angel special and
annual meeting, including multiple copies of this joint proxy
statement/prospectus and multiple proxy cards or voting
instruction cards. For example, if you hold your shares of
Applied Digital common stock or Digital Angel common stock in
more than one brokerage account, you will receive a
|
vii
|
|
|
|
|
|
|
separate voting instruction card for each brokerage account in
which you hold shares of Applied Digital common stock or Digital
Angel common stock. If you are a holder of record and your
shares of Applied Digital common stock or Digital Angel common
stock are registered in more than one name, you will receive
more than one proxy card. Please complete, sign, date and return
each proxy card and voting instruction card that you receive.
|
|
|
|
Q:
|
|
What happens if I am a stockholder of both Applied Digital
and Digital Angel?
|
|
|
|
|
|
A:
|
|
If you are a stockholder of both Applied Digital and Digital
Angel, you will receive two separate packages of proxy
materials. A vote as a Digital Angel stockholder for the
proposal to approve and adopt the merger agreement will not
constitute a vote as an Applied Digital stockholder for the
proposal to approve and adopt an amendment to the certificate of
incorporation or the proposal to issue Applied Digital common
stock pursuant to the merger agreement, or vice versa.
Therefore, please sign, date and return all proxy cards that you
receive, whether from Applied Digital or Digital Angel, or vote
as both an Applied Digital stockholder and Digital Angel
stockholder by internet or telephone.
|
QUESTIONS
AND ANSWERS FOR APPLIED DIGITAL STOCKHOLDERS
|
|
|
|
|
Q:
|
|
When and where is the special meeting of Applied Digital
stockholders?
|
|
|
|
|
|
A:
|
|
Applied Digital will hold a special meeting of its stockholders
on November 27, 2007, at 9:00 a.m., Eastern Standard
Time, at the Renaissance Boca Raton Hotel, 2000 N.W. 19th
Street, Boca Raton, Florida 33431.
|
|
|
|
|
|
Q:
|
|
Who can vote at the Applied Digital special meeting?
|
|
|
|
|
|
A:
|
|
All Applied Digital stockholders of record as of the close of
business on September 28, 2007, the record date for the
Applied Digital special meeting, are entitled to receive notice
of and to vote at the Applied Digital special meeting.
|
|
|
|
|
|
Q:
|
|
How can I obtain admission to the Applied Digital special
meeting?
|
|
|
|
A:
|
|
You will need an admission card to attend the Applied Digital
special meeting. If your shares are registered in your name, you
are a stockholder of record. Your admission card is attached to
your proxy card, and you will need to bring it with you to the
Applied Digital special meeting. If your shares are in the name
of your broker or bank, your shares are held in “street
name.” Ask your broker or bank for an admission card in the
form of a legal proxy to bring with you to the Applied Digital
special meeting. If you do not receive the legal proxy in time,
bring your brokerage statement with you to the Applied Digital
special meeting so that Applied Digital can verify your
ownership of Applied Digital stock on the record date and admit
you to the Applied Digital special meeting. However, you will
not be able to vote your shares at the Applied Digital special
meeting without a legal proxy.
|
|
|
|
Q:
|
|
Will there be any other business conducted at the Applied
Digital special meeting?
|
|
|
|
A:
|
|
The other items of business to be conducted at the Applied
Digital special meeting are to:
|
|
|
|
|
|
|
•
|
ratify the appointment of Michael E. Krawitz as a member of
Applied Digital’s board of directors, as described in
proposal 3;
|
|
|
|
|
|
|
•
|
approve the issuance of shares of Applied Digital common stock
in lieu of cash to five officers of Applied Digital, including
its president and chief executive officer, should severance
payments be triggered and should Applied Digital desire or be
obligated to issue common stock instead of cash, as described in
proposal 4; and
|
|
|
|
|
|
|
•
|
if submitted to Applied Digital’s stockholders, approve an
adjournment or postponement of the special meeting, including,
if necessary, to solicit additional proxies in favor of the
merger proposals if there are not sufficient votes for these
proposals, as described in proposal 5.
|
viii
|
|
|
|
|
Q:
|
|
What vote is required to approve the proposals at the Applied
Digital special meeting?
|
|
|
|
A:
|
|
To approve the issuance of shares of Applied Digital common
stock to Digital Angel stockholders pursuant to the merger
agreement
: The affirmative vote of a majority of
the total votes cast at the special meeting by holders of
Applied Digital common stock outstanding as of the record date.
|
|
|
|
|
|
To approve and adopt an amendment to Applied Digital’s
certificate of incorporation
: The affirmative
vote of the holders of a majority of the outstanding shares of
Applied Digital common stock entitled to vote at the special
meeting.
|
|
|
|
|
|
To ratify the appointment of Michael E. Krawitz as a member
of Applied Digital’s board of directors to hold office
until the 2010 Annual Meeting of Stockholders or until his
successor has been duly elected and
qualified
: The affirmative vote of a majority of
the votes represented at the special meeting.
|
|
|
|
|
|
To approve the issuance of shares of Applied Digital common
stock in lieu of cash to five officers of Applied Digital,
including its president and chief executive officer, should
severance payments be triggered and should Applied Digital
desire or be obligated to issue common stock instead of
cash:
The affirmative vote of a majority of the
total votes cast at the special meeting by holders of Applied
Digital common stock outstanding as of the record date.
|
|
|
|
|
|
If submitted to Applied Digital stockholders, to approve an
adjournment or postponement of the special meeting, including,
if necessary, to solicit additional proxies in favor of the
merger proposals if there are not sufficient votes for these
proposals
: A majority of the stockholders
entitled to vote at the special meeting, present in person or by
proxy, have the power to adjourn the meeting to such time and
place at they may determine.
|
Your vote is very important. You are encouraged to submit a
proxy as soon as possible.
|
|
|
|
|
Q:
|
|
What constitutes a quorum?
|
|
|
|
A:
|
|
Applied Digital’s amended and restated bylaws provide that
the holders of a majority of the outstanding shares entitled to
vote at the special meeting, represented in person or by proxy,
shall be requisite and shall constitute a quorum at the special
meeting except as otherwise provided by law.
|
|
|
|
Q:
|
|
How will Applied Digital stockholders be affected by the
merger and share issuance?
|
|
|
|
A:
|
|
After the merger, each Applied Digital stockholder will have the
same number of shares of Applied Digital common stock that the
stockholder held immediately prior to the merger. However,
because Applied Digital will be issuing new shares of Applied
Digital common stock to Digital Angel stockholders in the
merger, each outstanding share of Applied Digital common stock
immediately prior to the merger will represent a smaller
percentage of the aggregate number of shares of Applied Digital
common stock outstanding after the merger. As a result of the
merger, each Applied Digital stockholder will own shares in a
larger company with more net assets.
|
|
|
|
Q:
|
|
What if I do not vote on the proposals?
|
|
|
|
|
|
A:
|
|
If you are an Applied Digital stockholder and you fail to vote,
or fail to instruct your broker or other nominee how to vote, on
the proposal to:
|
|
|
|
|
|
|
•
|
approve the issuance of Applied Digital common stock pursuant to
the merger agreement, as described in proposal 1, it will
have no effect on the outcome of the vote for the proposal.
Similarly, if you respond with an “abstain” vote, your
proxy will have no effect on the outcome of the vote for the
proposal.
|
|
|
|
|
•
|
approve and adopt an amendment to Applied Digital’s
certificate of incorporation, as described in proposal 2,
it will have the same effect as a vote against the proposal. If
you respond with an “abstain” vote, your proxy will
have the same effect as a vote against the proposal.
|
|
|
|
|
•
|
to ratify the appointment of Mr. Krawitz as a member of
Applied Digital’s board of directors, as described in
proposal 3, it will have no effect on the outcome of the
vote for the proposal. Similarly, if
|
ix
|
|
|
|
|
|
|
you respond with an “abstain” vote, your proxy will
have no effect on the outcome of the vote for the proposal.
|
|
|
|
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•
|
to approve the issuance of shares of Applied Digital common
stock in lieu of cash to five officers of Applied Digital,
including its president and chief executive officer, should
severance payments be triggered and should Applied Digital
desire or be obligated to issue common stock instead of cash, as
described in proposal 4, it will have no effect on the
outcome of the vote for the proposal. Similarly, if you respond
with an “abstain” vote, your proxy will have no effect
on the outcome of the vote for the proposal.
|
|
|
|
|
•
|
to approve an adjournment or postponement of the special
meeting, including, if necessary, to solicit additional proxies
in favor of the merger proposals, if there are not sufficient
votes for these proposals, as described in proposal 5, an
abstention will have the same effect as a vote against the
proposal. A broker non-vote will have no effect on the outcome
of the vote for the proposal.
|
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|
The approval of the issuance of Applied Digital common stock
pursuant to the merger agreement and the approval and adoption
of an amendment to Applied Digital’s certificate of
incorporation are conditioned on each other, and approval of
each is required for completion of the merger.
|
|
|
|
Q:
|
|
How will my proxy be voted?
|
|
|
|
|
|
A:
|
|
All shares of Applied Digital common stock entitled to vote and
represented by properly completed proxies received prior to the
Applied Digital special meeting, and not revoked, will be voted
at the Applied Digital special meeting, as instructed on the
proxies. If you properly complete, sign and return a proxy card,
but do not indicate how your shares of Applied Digital common
stock should be voted on a matter, the shares of Applied Digital
common stock represented by your proxy will be voted as the
Applied Digital board of directors recommends and therefore:
|
|
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|
|
|
|
•
|
“FOR” the proposal to approve the issuance of shares
of Applied Digital common stock to Digital Angel stockholders in
the merger;
|
|
|
|
|
•
|
“FOR” the proposal to approve and adopt an amendment
to Applied Digital’s certificate of incorporation to
increase the authorized number of shares of Applied Digital
common stock from 125 million shares to 165 million
shares;
|
|
|
|
|
•
|
“FOR” the proposal to ratify the appointment of
Mr. Krawitz as a member of Applied Digital’s board of
directors;
|
|
|
|
|
•
|
“FOR” the proposal to approve the issuance of shares
of Applied Digital common stock in lieu of cash to five officers
of Applied Digital, including its president and chief executive
officer, should severance payments be triggered and should
Applied Digital desire or be obligated to issue common stock
instead of cash; and
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“FOR” the adjournment or postponement of the special
meeting, if there are not sufficient votes for the merger
proposals.
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Q:
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If my shares of Applied Digital common stock are held in
“street name” by my broker or other nominee, will my
broker or other nominee vote my shares of Applied Digital common
stock for me?
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A:
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Unless you instruct your broker how to vote your shares of
Applied Digital common stock on the proposal to approve the
issuance of Applied Digital common stock to the Digital Angel
stockholders pursuant to the merger agreement, as described in
proposal 1, the proposal to approve and adopt an amendment
to Applied Digital’s certificate of incorporation, as
described in proposal 2, and the proposal to approve the
issuance of shares of Applied Digital common stock in lieu of
cash to five officers of Applied Digital, including its
president and chief executive officer, should severance payments
be triggered and should Applied Digital desire or be obligated
to issue common stock instead of cash, as described in
proposal 4, your shares will NOT be voted. Brokers that do
not receive instructions are entitled to vote those shares on
the proposal to ratify the appointment of Mr. Krawitz as a
member of Applied Digital’s board of directors, as
described in proposal 3. If submitted to a vote of
stockholders, to approve an adjournment or postponement of the
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special meeting, including, if necessary, to solicit additional
proxies in favor of the merger proposals, if there are not
sufficient votes for these proposals, as described in
proposal 5, a broker non-vote will have no effect on the
vote of this proposal.
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Q:
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What if I hold Applied Digital stock options or other Applied
Digital equity-based awards?
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A:
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Applied Digital stock options and other Applied Digital
equity-based awards, including restricted stock, will remain
outstanding and will not be affected by the merger.
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Q:
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How does the Applied Digital board of directors recommend
that Applied Digital stockholders vote?
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A:
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The Applied Digital board of directors unanimously recommends
that the holders of Applied Digital common stock vote:
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“FOR” the proposal to approve the issuance of Applied
Digital common stock in the merger;
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“FOR” the proposal to approve and adopt an amendment
to Applied Digital’s certificate of incorporation;
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“FOR” the proposal to ratify the appointment of
Mr. Krawitz as a member of Applied Digital’s board of
directors;
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“FOR” the proposal to approve the issuance of shares
of Applied Digital common stock in lieu of cash to five officers
of Applied Digital, including its president and chief executive
officer, should severance payments be triggered and should
Applied Digital desire or be obligated to issue common stock
instead of cash; and
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“FOR” the proposal to approve, if necessary, any
adjournment or postponement of the special meeting, including,
if necessary, to solicit additional proxies in favor of the
merger proposals if there are not sufficient votes for these
proposals.
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Q:
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Who can answer my questions?
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A:
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If you have any questions about the merger or how to submit your
proxy, or if you need additional copies of this joint proxy
statement/prospectus, the enclosed proxy card or voting
instructions, you should contact:
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Applied
Digital Solutions, Inc.
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Telephone:
(561) 805-8000
Attention: Investor Relations
or
D.F. King & Co., Inc.
48 Wall Street
New York, New York 10005
Telephone: (800) 967-7635
QUESTIONS
AND ANSWERS FOR DIGITAL ANGEL STOCKHOLDERS
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Q:
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When and where is the special and annual meeting of Digital
Angel stockholders?
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A:
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Digital Angel will hold a special and annual meeting of its
stockholders on November 27, 2007, at 10:00 a.m.,
Eastern Standard Time, at the Renaissance Boca Raton Hotel, 2000
N.W. 19th Street, Boca Raton, Florida 33431.
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Q:
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Who can vote at the Digital Angel special and annual
meeting?
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A:
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All Digital Angel stockholders of record as of the close of
business on September 28, 2007, the record date for the
Digital Angel special and annual meeting, are entitled to
receive notice of, and to vote at, the Digital Angel special and
annual meeting.
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Q:
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How can I obtain admission to the Digital Angel special and
annual meeting?
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A:
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You will need an admission card to attend the Digital Angel
special and annual meeting. If your shares are registered in
your name, you are a stockholder of record. Your admission card
is attached to your proxy card, and you will need to bring it
with you to the Digital Angel special and annual meeting. If
your shares are in the name of your broker or bank, your shares
are held in “street name.” Ask your broker or bank for
an admission card in the form of a legal proxy to bring with you
to the Digital Angel special and annual meeting. If you do not
receive the legal proxy in time, bring your brokerage statement
with you to the Digital Angel special and annual meeting so that
Digital Angel can verify your ownership of Digital Angel stock
on the record date and admit you to the Digital Angel special
and annual meeting. However, you will not be able to vote your
shares at the Digital Angel special and annual meeting without a
legal proxy.
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Q:
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Will there be any other business conducted at the Digital
Angel special and annual meeting?
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A:
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The other items of business to be considered at Digital
Angel’s special and annual meeting are:
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to elect five directors;
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to approve and adopt an amendment to Digital Angel’s
restated certificate of incorporation; and
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to approve an adjournment or postponement of the special and
annual meeting, including, if necessary, to solicit additional
proxies in favor of the approval and adoption of the merger
agreement, if there are not sufficient votes to approve the
merger agreement by a majority of those shares not held by
Applied Digital and its affiliates.
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Q:
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What vote is required to approve the proposals at the Digital
Angel special and annual meeting?
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A:
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To approve and adopt the merger agreement:
The
affirmative vote of holders of a majority of the outstanding
shares of Digital Angel’s common stock entitled to vote at
the special and annual meeting. Additionally, it is a condition
to Digital Angel’s obligation to consummate the merger that
the holders of a majority of the outstanding shares of Digital
Angel common stock not held by Applied Digital or its affiliates
vote to approve and adopt the merger agreement.
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To elect five directors:
The affirmative vote
of a plurality of the votes cast by holders of the outstanding
shares of Digital Angel’s common stock entitled to vote at
the special and annual meeting.
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To approve and adopt an amendment to Digital Angel’s
restated certificate of incorporation:
The
affirmative vote of the holders of 66.6% of the outstanding
shares of Digital Angel’s common stock.
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If submitted to Digital Angel’s stockholders, to approve
an adjournment or postponement of the special and annual
meeting, including, if necessary, to solicit additional proxies
in favor of the approval and adoption of the merger agreement,
if there are not sufficient votes to approve and adopt the
merger agreement by a majority of those shares not held by
Applied Digital and its affiliates:
A majority of
the stockholders entitled to vote at the special and annual
meeting, present in person or by proxy, have the power to
adjourn the meeting to such time and place at they may determine.
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Your vote is very important. You are encouraged to submit a
proxy as soon as possible.
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Q:
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What constitutes a quorum?
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A:
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Digital Angel’s bylaws provide that the holders of a
majority of the outstanding shares of common stock entitled to
vote at the special and annual meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or
except to the extent that the presence of a larger number may be
required by law.
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Q:
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What if I do not vote on the proposals presented?
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A:
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If you are a Digital Angel stockholder and you fail to vote, or
fail to instruct your broker or other nominee how to vote, on
the proposal to:
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approve and adopt the merger agreement, as described in
proposal 1, it will have the same effect as a vote against
the proposal. If you respond with an “abstain” vote,
your proxy will have the same effect as a vote against the
proposal.
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elect five directors, as described in proposal 2, brokers
will be entitled to vote those shares with respect to the
election of directors. Votes that are withheld with respect to
this matter will be excluded entirely from the vote and will
have no effect, other than for purposes of determining the
presence of a quorum.
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approve and adopt an amendment to Digital Angel’s restated
certificate of incorporation, as described in proposal 3,
it will have the same effect as a vote against the proposal. If
you respond with an “abstain” vote on the proposal,
your proxy will have the same effect as a vote against the
proposal.
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to approve an adjournment or postponement of the special and
annual meeting, including, if necessary, to solicit additional
proxies in favor of the approval and adoption of the merger
agreement, if there are not sufficient votes to approve the
merger agreement by a majority of those shares not held by
Applied Digital and its affiliates, as described in
proposal 4, an abstention will have the same effect as a
vote against the proposal. A broker non-vote will have no effect
on the outcome of the vote for the proposal.
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Q:
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How will my proxy be voted?
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A:
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All shares of Digital Angel common stock entitled to vote and
represented by properly completed proxies received prior to the
Digital Angel special and annual meeting, and not revoked, will
be voted at the Digital Angel special and annual meeting as
instructed on the proxies. If you properly complete, sign and
return a proxy card, but do not indicate how your shares of
Digital Angel common stock should be voted on a matter, the
shares of Digital Angel common stock represented by your proxy
will be voted as the Digital Angel board of directors recommends
and therefore:
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“FOR” the proposal to approve and adopt the merger
agreement;
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“FOR” the proposal to elect each of the five director
nominees;
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“FOR” the proposal to approve and adopt an amendment
to Digital Angel’s restated certificate of
incorporation; and
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“FOR” the proposal to approve, if necessary, any
adjournment or postponement of the special and annual meeting,
including, if necessary, to solicit additional proxies if there
are not sufficient votes to approve and adopt the merger
agreement by a majority of those shares not held by Applied
Digital and its affiliates.
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Q:
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If I am a Digital Angel stockholder, should I send in my
stock certificates with my proxy card?
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A:
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NO. Please DO NOT send your Digital Angel stock
certificates with your proxy card. If the merger is approved,
you will be sent written instructions for exchanging your stock
certificates.
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Q:
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If my shares of Digital Angel common stock are held in
“street name” by my broker or other nominee, will my
broker or other nominee vote my shares of Digital Angel common
stock for me?
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A:
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Brokers that hold shares of Digital Angel common stock in
“street name” will vote your shares in accordance with
your instructions. However, if you do not provide your broker
instructions on how to vote on the proposals, your broker is
only entitled to vote on the proposal regarding the election of
directors, as described in proposal 2. Shares for which
brokers do not receive instructions will NOT be voted on
(i) proposal 1, the merger proposal,
(ii) proposal 3, the amendment to the certificate of
incorporation, or (iii) proposal 4, the approval of an
adjournment or postponement of the meeting. The effect of such
“broker non-votes” will be the equivalent of a vote
AGAINST both proposal 1 and proposal 3. The
“broker non-votes” will have no effect on the approval
of proposal 4.
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You should follow the directions your broker or other nominee
provides.
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xiii
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Q:
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What if I hold Digital Angel stock options or other Digital
Angel equity-based awards?
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A:
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Upon completion of the merger, each of the then-outstanding
stock options or warrants to purchase shares of Digital Angel
common stock will be converted into an option or warrant, as
applicable, to purchase the number of whole shares of Applied
Digital common stock determined by multiplying the number of
shares of Digital Angel common stock subject to such Digital
Angel stock option or warrant by the common stock exchange
ratio, at an exercise price per share of Applied Digital common
stock equal to the exercise price per share of such Digital
Angel stock option or warrant immediately prior to the effective
time of the merger divided by the common stock exchange ratio,
rounded up to the nearest whole cent. All unvested Digital Angel
stock options will automatically vest upon consummation of the
merger.
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Upon completion of the merger, each of the then-outstanding
shares of Digital Angel restricted stock, if any, will be
converted into a right to receive that number of shares of
Applied Digital restricted stock determined by multiplying the
number of shares of Digital Angel restricted stock by the common
stock exchange ratio.
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The “common stock exchange ratio” will equal 1.4,
unless, after the date of the merger agreement, but prior to the
effective time of the merger, through a reorganization,
recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in the
capitalization of Applied Digital, the shares of issued and
outstanding Applied Digital common stock increase or decrease in
number, or are changed into or exchanged for a different kind or
number of securities. Under such circumstances, appropriate
adjustments will be made to provide the holders of Digital Angel
common stock the same economic effect as contemplated by the
merger agreement.
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Q:
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How does the Digital Angel board of directors recommend that
Digital Angel stockholders vote?
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A:
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The Digital Angel board of directors unanimously recommends that
Digital Angel stockholders vote:
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“FOR” the approval and adoption of the merger
agreement;
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“FOR” each of the five nominees for the election of
directors;
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“FOR” the approval and adoption of an amendment to
Digital Angel’s restated certificate of
incorporation; and
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“FOR” the adjournment or postponement of the special
and annual meeting, if there are not sufficient votes to approve
and adopt the merger agreement by a majority of those shares not
held by Applied Digital and its affiliates.
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Q:
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Who can answer my questions?
|
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A:
|
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If you have any questions about the merger or how to submit your
proxy, or if you need additional copies of this joint proxy
statement/prospectus, the enclosed proxy card or voting
instructions, you should contact:
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Digital
Angel Corporation
490 Villaume Avenue
South St. Paul, Minnesota 55075
Telephone:
(651) 455-1621
Attention: Investor Relations
or
D.F. King & Co., Inc.
48 Wall Street
New York, New York 10005
Telephone: (800) 967-7635
xiv
This summary, together with the preceding Questions and Answers
section, summarizes the material features of the proposed merger
and may not contain all of the information about the merger that
is important to you. To understand the merger fully and for a
more complete description of the terms of the merger, you should
read carefully this entire document and the documents to which
Applied Digital and Digital Angel have referred you. See
“Where You Can Find More Information” on page 206.
APPLIED DIGITAL SOLUTIONS, INC.
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(561) 805-8000
Applied Digital was incorporated in Missouri in May 1993 and
reincorporated in Delaware in April 2007. Applied Digital and
its subsidiaries (either wholly- or majority-owned) develop
innovative identification and security products for consumer,
commercial and government sectors worldwide. Applied
Digital’s unique and often proprietary products provide
identification and security for people, animals, food chains,
government/military assets, and commercial assets. Included in
this diverse product line are applications for radio frequency
identification systems, commonly known as RFID, end-to-end food
safety systems, global positioning systems, referred to as GPS,
satellite communications, and secure telecommunications
infrastructure.
Applied Digital and its subsidiaries currently engage in the
following principal business activities:
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developing, marketing and selling RFID systems used to identify,
locate and protect people and their assets in a variety of
healthcare, security, and identification applications;
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marketing visual identification tags and implantable RFID
microchips, primarily for identification, tracking and location
of pets, livestock and other animals, and, more recently, for
animal bio-sensing applications, such as temperature reading for
companion pet and livestock (e.g., cattle) applications;
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developing and marketing GPS-enabled products used for location
tracking and message monitoring of vehicles, pilots and aircraft
in remote locations;
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marketing secure voice, data and video telecommunications
networks, primarily to several agencies of the
U.S. government;
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developing and marketing call center and customer relationship
management software and services; and
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selling vibration monitoring systems.
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As of June 30, 2007, Applied Digital’s business
operations consisted of the operations of four wholly-owned
subsidiaries, Pacific Decision Sciences Corporation, Computer
Equity Corporation, Perimeter Acquisition Corp. and Thermo Life
Energy Corp., which Applied Digital collectively refers to as
its Advanced Technology segment, and three majority-owned
subsidiaries: VeriChip Corporation, referred to as VeriChip
(NASDAQ: CHIP), Digital Angel (AMEX: DOC), and InfoTech USA,
Inc., referred to as InfoTech (OTC: IFTH). As of
September 28, 2007, Applied Digital owned approximately
52.0% of VeriChip, approximately 55.6% of Digital Angel and
approximately 50.9% of InfoTech. During the quarter ended
June 30, 2007, Applied Digital’s board of directors
decided to sell InfoTech and, accordingly, InfoTech is now
classified as discontinued operations. On September 30,
2007, Applied Digital’s board of directors decided to sell
Computer Equity Corporation and Perimeter Acquisition Corp.
Accordingly, these businesses will be classified as discontinued
operations in Applied Digital’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007. In addition, at
that time, the results for these businesses for all prior
periods will be reclassified. See “Unaudited Pro Forma
Condensed Financial Data Reflecting the Reclassification of
Applied Digital’s Subsidiaries, Computer Equity Corporation
and Perimeter Acquisition Corp., as Discontinued
Operations” and “Unaudited Pro Forma Condensed
Combined Financial Data
1
Reflecting the Merger,” beginning on page 111 of this
joint proxy statement/prospectus, which present the operations
of Computer Equity Corporation and Perimeter Acquisition Corp.
as discontinued operations.
Applied Digital operates in five business
segments: Healthcare, Security and Industrial, Animal
Applications, GPS and Radio Communications and Advanced
Technology.
DIGITAL ANGEL ACQUISITION CORP.
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(561) 805-8000
Digital Angel Acquisition Corp. was incorporated in
Delaware on July 3, 2007 and is a wholly-owned subsidiary
of Applied Digital, which was formed solely to effect the merger
with Digital Angel and has not conducted any business. Pursuant
to the merger agreement, Digital Angel Acquisition Corp. will
merge with and into Digital Angel, and Digital Angel will
continue as the surviving corporation.
DIGITAL ANGEL CORPORATION
490 Villaume Avenue
South St. Paul, Minnesota 55075
(651) 455-1621
Digital Angel was incorporated in Delaware on December 1,
1981. Digital Angel and its subsidiaries (either wholly- or
majority-owned) currently engage in the following principal
business activities:
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the development, manufacture and marketing of visual and
electronic identification tags and implantable RFID microchips,
primarily for identification, tracking and location of companion
pets, horses, livestock (e.g., cattle and hogs), fish and
wildlife worldwide, and, more recently, for animal bio-sensing
applications, such as temperature reading for companion pet,
horse and livestock applications; and
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the design, manufacture, and marketing of GPS-enabled equipment
used for location tracking and message monitoring of people in
remote locations.
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Digital Angel presently operates in two business segments:
Animal Applications and GPS and Radio Communications.
As of September 28, 2007, Applied Digital owned
25,495,190 shares (or 55.6%) of Digital Angel’s
outstanding shares of common stock.
As of September 28, 2007, Applied Digital owned
approximately 55.6% of Digital Angel’s outstanding shares
of common stock. In the merger, Digital Angel Acquisition Corp.,
a wholly-owned subsidiary of Applied Digital, will merge with
and into Digital Angel. Digital Angel will be the surviving
corporation of the merger and will become a wholly-owned
subsidiary of Applied Digital. If the merger becomes effective,
each share of Digital Angel common stock then outstanding, which
is not owned or controlled by Digital Angel, Applied Digital or
any of Applied Digital’s subsidiaries, will be converted
into the right to receive 1.4 shares of Applied Digital
common stock. The total number of shares of Applied Digital
common stock issuable as merger consideration is subject to
adjustment if, after the date of the merger agreement, but prior
to the effective time of the merger, through a reorganization,
recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in the
capitalization of Applied Digital, the shares of issued and
outstanding Applied Digital common stock increase or decrease in
number, or are changed into or exchanged for a different kind or
number of securities. Under such circumstances, appropriate
adjustments will be made to provide the holders of Digital Angel
common stock the same economic effect as contemplated by the
merger agreement.
Digital Angel stock options, warrants, restricted stock and
other convertible securities.
Upon completion of
the merger, each of the then-outstanding stock options or
warrants to purchase shares of Digital Angel common stock will
be converted into an option or warrant, as applicable, to
purchase the number of whole
2
shares of Applied Digital common stock determined by multiplying
the number of shares of Digital Angel common stock subject to
such Digital Angel stock option or warrant by the common stock
exchange ratio, at an exercise price per share of Applied
Digital common stock equal to the exercise price per share of
such Digital Angel stock option or warrant immediately prior to
the effective time of the merger divided by the common stock
exchange ratio, rounded up to the nearest whole cent. Any
fractional shares will be rounded up to the nearest whole number
of shares. The terms and conditions of each converted Digital
Angel stock option or warrant will otherwise remain as
applicable to the Digital Angel stock option or warrant
converted.
Upon completion of the merger, each of the then-outstanding
shares of Digital Angel restricted stock, if any, will be
converted into a right to receive that number of shares of
Applied Digital restricted stock determined by multiplying the
number of shares of Digital Angel restricted stock by 1.4.
Ownership of Applied Digital After the
Merger.
Upon completion of the merger, Digital
Angel’s outstanding stock, options, warrants and unvested
restricted stock are expected to be converted into Applied
Digital common stock, representing approximately 36.6% of the
shares of Applied Digital after the merger on a fully-converted
basis, and the current holders of Applied Digital’s
outstanding stock, options, warrants and unvested restricted
stock will retain approximately 63.4% of Applied Digital.
The Agreement and Plan of Reorganization, or merger agreement,
is attached to this joint proxy statement/prospectus as
Annex A. Applied Digital and Digital Angel encourage you to
read the merger agreement carefully.
Applied
Digital
In reaching its determination to recommend that the Applied
Digital board approve the merger agreement, the Applied Digital
special committee considered numerous factors in consultation
with its outside legal and financial advisors and Applied
Digital’s senior management, including the following
material factors and benefits of the merger, each of which the
Applied Digital special committee believed supported its
determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the Applied Digital
special committee and the Digital Angel special committee and
their respective legal and financial advisors.
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•
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The opinion received by the Applied Digital special committee
and later confirmed in writing, dated August 8, 2007, of
Duff & Phelps, LLC, which we refer to as Duff &
Phelps, to the effect that, as of that date and subject to the
various assumptions, limitations and qualifications set forth in
its opinion, the common stock exchange ratio in the merger was
fair, from a financial point of view, to the public stockholders
of Applied Digital. The full text of Duff &
Phelps’s written opinion, dated August 8, 2007, which
describes the assumptions made, matters considered and
limitations on the review undertaken, is attached to this joint
proxy statement/prospectus as Annex B.
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The merger is expected to result in an estimated cost savings of
approximately $2.0 million in general and administrative
expense annually.
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The merger is expected to streamline operations and eliminate
inefficiencies resulting from operating two separate public
companies.
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The merger will simplify the corporate ownership structure and
increase transparency for investors.
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The merger will eliminate management and board of directors
inefficiencies associated with managing current intercompany
issues.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company, higher
share price and potential to improve analyst coverage.
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The merger will allow Applied Digital stockholders to
participate more fully in any potential growth of Digital Angel
as a result of their increased ownership percentage in Digital
Angel.
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The merger is expected to enable the combined company to be a
stronger
U.S.-based
global competitor.
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The merger will create a larger public company.
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Digital Angel is obligated to reimburse Applied Digital for
expenses in connection with the transaction, up to a maximum of
$750,000, if Applied Digital terminates the merger agreement
because:
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Digital Angel breaches a representation, warranty or covenant in
the merger agreement that is reasonably likely to have a
material adverse effect on Digital Angel;
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Digital Angel’s board of directors changes its
recommendation in favor of the issuance of shares of Applied
Digital common stock in the merger; or
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A willful and material breach by Digital Angel causes the making
of a superior proposal by a third party.
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The Applied Digital special committee believes that the above
factors generally supported its determination. The Applied
Digital special committee did, however, consider the potential
adverse effects of other factors in connection with the merger.
The material negative factors considered were:
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The cost savings anticipated for Applied Digital and Digital
Angel as a combined company may not be achieved;
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Digital Angel’s growth prospects may be less than currently
anticipated and not as great as the growth experienced by
Applied Digital alone, or by Applied Digital’s other
affiliates, including VeriChip;
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The value of the shares to be received by Digital Angel public
stockholders may vary based upon the nature of the fixed
exchange ratio; and
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The Applied Digital stockholders will suffer dilution if the
merger is consummated.
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In reaching its determination to recommend that Applied
Digital’s stockholders vote for the approval of the
issuance of Applied Digital common stock pursuant to the merger
agreement, Applied Digital’s board of directors considered
numerous factors, including the recommendation of the Applied
Digital special committee, as well as the above factors,
benefits and adverse effects of the merger considered by the
Applied Digital special committee, which the board of directors
believed supported its determinations.
Digital
Angel
In reaching its determination to recommend that the Digital
Angel board of directors approve the merger agreement, the
Digital Angel special committee considered numerous factors in
consultation with its outside legal and financial advisors and
Digital Angel’s senior management, including the following
material factors and benefits of the merger, each of which the
Digital Angel special committee believed supported its
determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the Digital Angel special
committee and the Applied Digital special committee and their
respective legal and financial advisors.
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It is a condition to closing that the merger agreement be
approved by a majority of Digital Angel disinterested
stockholders, which excludes Applied Digital and each person
that is an affiliate of Applied Digital, at the special and
annual meeting. Directors and officers of Digital Angel who are
not affiliates of Applied Digital are considered disinterested
stockholders for purposes of voting on the merger agreement. As
of September 28, 2007, these directors and officers
collectively, together with their associates and affiliates,
beneficially own approximately 2.1 million shares, or 4.5%
of Digital Angel common stock. These directors and officers have
indicated that they plan to vote their shares in
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favor of the merger agreement, and their votes will count in
determining whether a majority of Digital Angel disinterested
stockholders has approved and adopted the merger agreement.
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The opinion of Seven Hills Partners LLC received by the Digital
Angel special committee on August 8, 2007 (later confirmed
in writing) stating that, as of that date and subject to the
various assumptions and qualifications set forth in its opinion,
the common stock exchange ratio was fair, from a financial point
of view, to the holders of Digital Angel common stock, other
than Applied Digital and its affiliates. The full text of Seven
Hills’ written opinion, dated August 8, 2007, which
describes the assumptions made, matters considered and
limitations on the review undertaken, is attached to this joint
proxy statement/prospectus as Annex C.
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The expectation that the merger will qualify as a transaction of
a type that is generally tax-free for United States federal
income tax purposes.
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The consideration offered represents a premium for Digital Angel
common stock of approximately 21% over the average closing price
of Applied Digital’s and Digital Angel’s stock as of
the previous twenty trading days ending on August 7, 2007,
the day immediately prior to the signing of the merger agreement.
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The merger is expected to result in an estimated cost savings of
approximately $2.0 million annually.
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The merger will eliminate certain duplicate costs related to
operating two separate public companies.
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The merger eliminates Applied Digital’s majority ownership
position in Digital Angel that may have discouraged some
investors from buying Digital Angel stock due to uncertainty
concerning Applied Digital’s intentions regarding such
stock.
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The merger will give Digital Angel stockholders ownership in
Applied Digital which owns interests in other companies,
including VeriChip.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company and
potential to improve analyst coverage.
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The merger will allow stockholders to continue to participate in
any potential growth of the combined company.
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The merger agreement provides that Digital Angel has the right
to terminate the merger agreement if, among other reasons, the
board of directors changes its recommendation in favor of the
merger agreement under limited circumstances.
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Applied Digital is obligated to reimburse Digital Angel for
expenses in connection with the transaction, up to a maximum of
$750,000, if Digital Angel terminates the merger agreement
because:
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Applied Digital breaches a representation, warranty or covenant
in the merger agreement that is reasonably likely to have a
material adverse effect on Applied Digital or the surviving
corporation;
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Applied Digital’s board changes its recommendation in favor
of the issuance of shares of Applied Digital common stock in the
merger; or
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Applied Digital agrees to be acquired by a third party.
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The Digital Angel special committee believes that the above
factors generally supported its determination. The Digital Angel
special committee did, however, consider the potential adverse
effects of other factors in connection with the merger. The
material negative factors considered were:
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The common stock exchange ratio is fixed and Digital Angel
stockholders cannot be certain of the dollar value of the merger
consideration to be received in the merger, which may be less
than the 21% premium discussed above.
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The cost savings anticipated for Applied Digital and Digital
Angel as a combined company may not be achieved, or delays or
difficulties in eliminating certain redundant costs of the two
companies could delay or prevent the realization of the
anticipated cost savings.
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Applied Digital will have a significant amount of outstanding
indebtedness, and may require additional financing. Applied
Digital’s inability to obtain new financing may require it
to reduce funds available for investment in research and
development and capital expenditures.
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Digital Angel stockholders will be subject to risks relating to
Applied Digital’s other businesses, including VeriChip and
InfoTech.
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•
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Digital Angel stockholders will be subject to risks relating to
any litigation pending against Applied Digital or its other
subsidiaries.
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•
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The risk that after the merger the combined company may lose key
personnel.
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The possibility that the merger may not be completed, or that
completion of the merger may be delayed.
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Digital Angel is required to pay the expenses of Applied
Digital, up to a maximum of $750,000, upon the occurrence of the
termination of the merger under certain circumstances.
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In reaching its determination to recommend that Digital
Angel’s stockholders vote for approval and adoption of the
merger agreement, Digital Angel’s board considered numerous
factors, including the following material factors and benefits
of the merger, each of which the board believed supported its
determinations:
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The recommendation of the Digital Angel special committee,
including the above factors, benefits and adverse effects of the
merger considered by the Digital Angel special
committee; and
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The opinion of Seven Hills Partners LLC received by the Digital
Angel special committee on August 8, 2007, that, as of that
date and subject to the various assumptions and limitations set
forth in its opinion, the common stock exchange ratio was fair,
from a financial point of view, to the holders of Digital Angel
common stock (other than to Applied Digital and its affiliates).
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Despite the foregoing, the potential benefits of the merger
may not be achieved. See the sections entitled “Risk
Factors” on page 24, “The Merger —
Applied Digital’s Reasons for the Merger” on
page 77, “The Merger — Digital Angel’s
Reasons for the Merger” on page 79.
The “Risk Factors” should be considered carefully by
Applied Digital stockholders in evaluating whether to vote for
the proposal to approve the issuance of Applied Digital common
stock pursuant to the merger agreement, the proposal to approve
and adopt an amendment to Applied Digital’s certificate of
incorporation, and by Digital Angel stockholders in evaluating
whether to approve and adopt the merger agreement. These risk
factors should be considered, along with any additional risk
factors in the periodic reports of Applied Digital and Digital
Angel filed with the SEC and any other information included in
this joint proxy statement/prospectus. See “Risk
Factors” beginning on page 24.
Recommendations
of the Applied Digital Special Committee and Board of
Directors
The board of directors of Applied Digital established a special
committee composed of independent members of Applied
Digital’s board of directors to review and evaluate the
terms and conditions, and determine the advisability, of the
proposed merger. The members of the special committee were
Michael Norris, Constance Weaver, Daniel Penni, and Dennis
Rawan, all of whom are independent under the applicable
standards of the Nasdaq Capital Market. The special committee
negotiated the terms and conditions of the merger agreement on
behalf of Applied Digital and, after careful consideration,
determined that the merger is advisable, fair to and in the best
interests of Applied Digital and its public stockholders and
recommended that the Applied Digital board of directors approve
(i) the merger agreement and (ii) an amendment to
Applied
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Digital’s certificate of incorporation to increase the
number of authorized shares of Applied Digital common stock.
After careful consideration, the Applied Digital board of
directors, based on the recommendation of the Applied Digital
special committee, determined that the merger is advisable, fair
to, and in the best interests of Applied Digital and its public
stockholders, and approved the merger agreement and an amendment
to Applied Digital’s certificate of incorporation to
increase the number of authorized shares of Applied Digital
common stock and unanimously recommends that Applied Digital
stockholders vote “FOR” the proposal to issue Applied
Digital common stock pursuant to the merger agreement and
“FOR” the proposal to amend Applied Digital’s
certificate of incorporation to increase the total number of
authorized shares of Applied Digital capital stock from
130 million shares, of which 125 million are common
stock, to 170 million shares, of which 165 million
will be common stock.
Recommendations
of the Digital Angel Special Committee and Board of
Directors
The board of directors of Digital Angel established a special
committee composed of independent members of Digital
Angel’s board of directors to review and evaluate the terms
and conditions, and determine the advisability, of the proposed
merger. The members of the special committee were Michael
Zarriello, Barry Edelstein (who resigned on July 13, 2007),
John Block, and Harry Weintraub, all of whom were independent
under the applicable standards of the American Stock Exchange,
or AMEX. The special committee negotiated the terms and
conditions of the merger agreement on behalf of Digital Angel
and, after careful consideration, determined that the merger is
advisable, fair to and in the best interests of Digital Angel
and its stockholders (other than Applied Digital and its
affiliates) and recommended that Digital Angel’s board of
directors approve the merger agreement.
After careful consideration, Digital Angel’s board of
directors, based on the recommendation of the Digital Angel
special committee, determined that the merger is advisable, fair
to, and in the best interests of Digital Angel and its
stockholders (other than Applied Digital and its affiliates),
approved and adopted the merger agreement and declared its
advisability, approved the merger and other transactions
contemplated by the merger agreement and unanimously recommends
that Digital Angel stockholders vote “FOR” the
proposal to approve and adopt the merger agreement.
Special
Meeting of Applied Digital Stockholders
You can vote at the Applied Digital special meeting if you owned
Applied Digital common stock at the close of business on
September 28, 2007, the record date for the Applied Digital
special meeting. On that date, there were 70,870,866 shares
of Applied Digital common stock outstanding and entitled to
vote. You can cast one vote for each share of Applied Digital
common stock that you owned on that date. Approval of the
proposal to issue shares of Applied Digital common stock to
Digital Angel stockholders pursuant to the merger agreement
requires the affirmative vote of a majority of the total votes
cast at the special meeting by holders of Applied Digital common
stock outstanding as of the record date. Approval of the
proposal to approve and adopt an amendment to Applied
Digital’s certificate of incorporation to increase the
total number of authorized shares of Applied Digital capital
stock from 130 million shares, of which 125 million
are common stock, to 170 million shares, of which
165 million will be common stock, requires the affirmative
vote of the holders of a majority of the outstanding shares of
Applied Digital common stock entitled to vote at the special
meeting. Approval of the proposal to ratify the appointment of
Mr. Krawitz as a member of Applied Digital’s board of
directors to hold office until the 2010 Annual Meeting of
Stockholders or until his successor has been duly elected and
qualified requires the affirmative vote of a majority of the
votes represented at the special meeting. Approval of the
proposal to issue shares of Applied Digital common stock in lieu
of cash to five officers of Applied Digital, including its
president and chief executive officer, should severance payments
be triggered and should Applied Digital desire or be obligated
to issue common stock instead of cash, requires the affirmative
vote of a majority of the total votes cast at the special
meeting by holders of Applied Digital’s common stock
outstanding as of the record date, provided that a quorum is
present. A majority of the stockholders entitled to vote at the
special meeting, present in person or by proxy,
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has the power to approve an adjournment or postponement of the
special meeting, including, if necessary, to solicit additional
proxies in favor of the merger proposals if there are not
sufficient votes for these proposals.
As of the Applied Digital record date, Applied Digital’s
named executive officers, directors and entities affiliated with
them owned, in the aggregate, approximately 1.0% of Applied
Digital’s outstanding common stock.
Special
and Annual Meeting of Digital Angel Stockholders
You can vote at the Digital Angel special and annual meeting if
you owned Digital Angel common stock at the close of business on
September 28, 2007, the record date for the Digital Angel
special and annual meeting. On that date, there were
45,869,933 shares of Digital Angel common stock outstanding
and entitled to vote. Approval of the proposal to approve and
adopt the merger agreement, which is sometimes referred to as
the merger proposal, requires the affirmative vote of holders of
a majority of the outstanding shares of Digital Angel’s
common stock entitled to vote at the special and annual meeting.
Additionally, it is a condition to Digital Angel’s
obligation to consummate the merger that the holders of a
majority of the outstanding shares of Digital Angel common stock
not held by Applied Digital or its affiliates vote to approve
the merger agreement. The election of directors requires the
affirmative vote of a plurality of the votes cast by holders of
the outstanding shares of Digital Angel’s common stock
entitled to vote at the special and annual meeting. The approval
and adoption of an amendment to Digital Angel’s restated
certificate of incorporation requires the affirmative vote of
the holders of 66.6% of the issued and outstanding shares of
Digital Angel’s common stock. A majority of the
stockholders entitled to vote at the special and annual meeting,
present in person or by proxy, have the power to approve an
adjournment or postponement of the special and annual meeting,
including, if necessary, to solicit additional proxies in favor
of the merger proposal if there are not sufficient votes to
approve the merger agreement by a majority of those shares not
held by Applied Digital and its affiliates.
As of the Digital Angel record date, Digital Angel’s named
executive officers, directors and entities affiliated with them
owned, in the aggregate, approximately 63.5% of Digital
Angel’s outstanding common stock.
Opinion
of Financial Advisor to the Applied Digital Special
Committee
On August 8, 2007, Duff & Phelps rendered its
oral opinion, subsequently confirmed in writing, to the Applied
Digital special committee to the effect that, as of such date
and based upon and subject to the various assumptions,
qualifications and limitations set forth in its opinion, the
common stock exchange ratio in the merger was fair, from a
financial point of view, to the public stockholders of Applied
Digital.
The summary of Duff & Phelps’s opinion in this
joint proxy statement/prospectus is qualified in its entirety by
reference to the full text of its written opinion, which is
included as Annex B to this joint proxy
statement/prospectus and sets forth the procedures followed,
assumptions made, qualifications and limitations on the review
undertaken and other matters considered by Duff &
Phelps in preparing its opinion. We encourage you to carefully
read the full text of Duff & Phelps’s written
opinion. However, neither Duff & Phelps’s written
opinion nor the summary of its opinion and the related analyses
set forth in this joint proxy statement/prospectus are intended
to be, and do not constitute, advice or a recommendation to any
stockholder as to how such stockholder should act or vote with
respect to the merger. See “The Merger — Opinion
of Financial Advisor to the Applied Digital Special
Committee.”
Opinion
of Financial Advisor to the Digital Angel Special
Committee
On August 8, 2007, Seven Hills Partners LLC delivered its
oral opinion, and subsequently confirmed in writing, to the
Digital Angel special committee that, as of that date and
subject to the various assumptions and limitations set forth in
its opinion, the common stock exchange ratio was fair, from a
financial point of view, to the holders of Digital Angel common
stock (other than to Applied Digital and its affiliates). The
full text of this opinion is attached to this joint proxy
statement/prospectus as Annex C. Holders of Digital Angel
common stock are urged to read the opinion carefully in its
entirety to understand the procedures followed, assumptions
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made, matters considered and limitations on the review
undertaken by Seven Hills Partners LLC in providing its opinion.
The opinion of Seven Hills Partners LLC is directed to the
Digital Angel special committee and does not constitute a
recommendation as to how any Digital Angel stockholder should
vote with respect to the approval and adoption of the merger
agreement.
Interests
of Certain Persons in the Merger
In considering the recommendations of Applied Digital’s and
Digital Angel’s respective boards of directors, you should
be aware that certain directors and officers of Applied Digital
and Digital Angel may have interests in the merger that may be
different from, or in addition to, your interests as a
stockholder generally and may create potential and actual
conflicts of interest. The boards of directors of each of
Applied Digital and Digital Angel were aware of these interests
and considered them when they approved and adopted the merger
agreement and the merger.
The interests of the directors and executive officers include,
among others:
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several of Applied Digital’s former directors and executive
officers serve as directors and officers of Digital Angel (for
more information, see “The Merger — Description
of Contracts and Other Arrangements between Applied Digital and
Digital Angel”);
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the appointment of four individuals designated by Applied
Digital and the appointment of three individuals designated by
Digital Angel to serve on the board of directors of Applied
Digital upon completion of the merger;
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significant cash or stock payment that may be payable to
Mr. Krawitz, Applied Digital’s chief executive officer
and president, if his employment is terminated following the
merger;
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the employment of certain officers of Digital Angel by Applied
Digital upon completion of the merger;
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the potential receipt of severance payments, payable to certain
Digital Angel officers, if such persons were to be terminated
following the merger;
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the acceleration of the vesting of certain Digital Angel equity
awards, including certain Digital Angel equity awards held by
current or former directors and executive officers of Applied
Digital, in connection with the completion of the merger or upon
certain terminations of employment following the merger;
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the payment of $12,000 to each member of the Digital Angel
special committee and an additional $12,000 fee to the chairman
of the Digital Angel special committee for serving on the
Digital Angel special committee;
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the payment of $14,000 to each member of the Applied Digital
special committee and an additional $10,000 fee to the chairman
of the Applied Digital special committee for serving on the
Applied Digital special committee;
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the continued indemnification of, and provision for
directors’ and officers’ liability insurance coverage
to, current directors and officers of Digital Angel following
the merger; and
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the ownership of Digital Angel stock and options by officers and
directors of Applied Digital.
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For additional information regarding the interests of the
executive officers and directors of Applied Digital and Digital
Angel, see “The Merger — Interests of Certain
Persons in the Merger” beginning on page 95.
Conditions
to Completion of the Merger
The completion of the merger is subject to the prior
satisfaction or waiver of a number of conditions, including the
following:
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no governmental entity will have issued a temporary restraining
order, preliminary or permanent injunction or other order
preventing the merger;
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no governmental entity will have enacted or issued any law,
regulation or order that is in effect and has the effect of
making the merger illegal or otherwise prohibiting the closing;
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Applied Digital’s registration statement, of which this
joint proxy statement/prospectus is a part, must be effective,
no stop order suspending its effectiveness may be in effect and
no proceeding for that purpose shall have been initiated or
threatened in writing by the SEC;
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the shares of Applied Digital common stock to be issued in the
merger must be approved for listing on the Nasdaq Capital
Market, subject to official notice of issuance;
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the merger agreement must be approved and adopted by the holders
of a majority of the outstanding shares of Digital Angel common
stock entitled to vote at the special and annual meeting, as
well as the holders of a majority of the outstanding shares of
Digital Angel common stock not held by Applied Digital or its
affiliates;
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the issuance of the shares of Applied Digital common stock to be
issued in connection with the merger and an amendment to Applied
Digital’s certificate of incorporation must be approved by
Applied Digital’s stockholders;
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Applied Digital and Digital Angel must receive a tax opinion
substantially to the effect that the transactions contemplated
by the merger agreement should qualify as a
“reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code;
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all required consents and approvals must be obtained, unless the
failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a material
adverse effect on Applied Digital or Digital Angel or to
materially adversely affect the consummation of the merger;
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Applied Digital must file a certificate of amendment with the
Secretary of State of the State of Delaware to increase the
number of authorized shares of Applied Digital common stock;
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the representations and warranties of each party in the merger
agreement must be true and correct, subject to various
qualifications;
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the parties must have complied in all material respects with
their respective agreements and covenants in the merger
agreement;
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the parties must each receive a written fairness opinion from
their respective investment banking firms; and
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Applied Digital must receive letters of resignation necessary to
cause the Applied Digital board of directors to be constituted
as provided in the merger agreement, and Digital Angel must
provide to Applied Digital the names of the three individuals
designated by Digital Angel to serve on the board of directors
of Applied Digital.
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Termination
of the Merger Agreement
Before completion of the merger, and subject to certain
qualifications, the merger agreement may be terminated under any
of the following circumstances:
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by the mutual consent of Applied Digital and Digital Angel
authorized by their respective boards of directors;
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by Applied Digital or Digital Angel in the event of either:
(1) a breach by the other party of any representation or
warranty contained in the merger agreement, which breach cannot
be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach, or
(2) a breach by the other party of any of the covenants or
agreements in the merger agreement, which breach cannot be or
has not been cured within 30 days after the giving of
written notice to the breaching party of such breach and which
breach, in each case, is reasonably likely, individually or in
the aggregate, to have a material adverse effect on the
breaching party or the surviving corporation;
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at any time prior to the effective time of the merger, by
Applied Digital or Digital Angel in the event that the merger is
not consummated by March 31, 2008 or such later date as
Digital Angel and Applied Digital may mutually agree, except to
the extent that the failure of the merger then to be consummated
arises out of, or results from, the knowing action or inaction
of the party seeking to terminate under the circumstances set
forth in this bullet point;
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by Digital Angel or Applied Digital in the event (1) the
approval of any governmental authority required for consummation
of the merger and the other transactions contemplated by the
merger agreement shall have been denied by final nonappealable
action of such governmental authority, or such governmental
authority shall have requested the permanent withdrawal of any
application therefor, provided, however, that the party seeking
to terminate the merger agreement pursuant to the circumstances
outlined in this bullet point shall have used commercially
reasonable efforts to prevent the entry of, and to remove, such
restraint, or (2) the requisite stockholder approval is not
obtained at the Digital Angel special and annual meeting or at
any adjournment or postponement thereof, or (3) the
requisite stockholder approval is not obtained at the Applied
Digital special meeting or at any adjournment or postponement
thereof;
|
|
|
|
|
•
|
by Digital Angel prior to obtaining the requisite stockholder
vote in the event that Digital Angel receives and accepts a
superior proposal;
|
|
|
|
|
|
|
•
|
by Applied Digital in the event that an adverse recommendation
change by Digital Angel has occurred (other than an adverse
recommendation change by Digital Angel occurring as a result of
an Applied Digital material adverse effect);
|
|
|
|
|
|
|
•
|
by Digital Angel in the event that an adverse recommendation
change by Applied Digital has occurred (other than an adverse
recommendation change by Applied Digital occurring as a result
of a Digital Angel material adverse effect);
|
|
|
|
|
|
|
•
|
by Applied Digital in the event that a willful and material
breach by Digital Angel of its non-solicitation obligations
under the merger agreement has occurred, and such breach leads
to the making of a superior proposal; and
|
|
|
|
|
|
|
•
|
by Digital Angel in the event that Applied Digital receives and
accepts an acquisition proposal with respect to Applied Digital.
|
Expenses
and Termination Fees
All fees and expenses incurred in connection with the merger
agreement shall be paid by the party incurring such expenses
whether or not the merger is consummated. However, Applied
Digital shall pay (i) all fees and expenses, other than
attorneys’, accountants’, financial advisors’,
and consultants’ fees and expenses, incurred in relation to
the printing and filing with the SEC of this joint proxy
statement/prospectus (including any preliminary materials
related thereto) and this registration statement (including
financial statements and exhibits) and any amendments or
supplements thereto and (ii) the filing fee(s) for this
registration statement; but, if the merger agreement is
terminated for any reason, Digital Angel will repay Applied
Digital one-half of all the expenses in clauses (i) and
(ii) actually paid by Applied Digital.
In addition, each of Applied Digital and Digital Angel has
agreed to immediately reimburse the other party for all the
transaction expenses incurred by such other party, up to a
maximum of $750,000, if the merger agreement is terminated upon
certain events.
Solicitation
of Other Offers
Until the merger is completed or the merger agreement is
terminated, Digital Angel has agreed not to take any action with
regard to an acquisition proposal, as described on page 105
of this joint proxy statement/prospectus, unless it receives an
unsolicited acquisition proposal prior to its special and annual
meeting and its board of directors concludes in good faith that
such acquisition proposal is reasonably likely to result in a
superior proposal, as described on page 105 of this joint
proxy statement/prospectus. If Digital Angel receives
11
an acquisition proposal that its board of directors considers
to be a superior proposal, Digital Angel may, subject to the
conditions specified on page 104 of this joint proxy
statement/prospectus, furnish non-public information regarding
itself and its subsidiaries and may enter into discussions with
the person who, or entity that, made the acquisition proposal.
Digital Angel has agreed to inform Applied Digital promptly as
to any acquisition proposals or any inquiries that it reasonably
believes would lead to an acquisition proposal, including the
material terms, conditions and developments of any acquisition
proposals received. Digital Angel has agreed to provide to
Applied Digital any non-public information that Digital Angel
provides to a person or entity making an acquisition proposal,
subject to certain exceptions.
Accounting
Treatment of the Merger
Applied Digital intends to account for the merger using the
purchase method of accounting for business combinations, with
Applied Digital being considered the acquiror of Digital Angel,
in conformity with accounting principles generally accepted in
the United States of America. This means that Applied Digital
will allocate the purchase price to the increased fair value of
assets, including identifiable intangible assets acquired and
liabilities assumed from the current minority owners of Digital
Angel at the effective time of the merger, with the excess
purchase price, if any, being recorded as goodwill. Under the
purchase method of accounting, goodwill is not amortized but is
tested for impairment at the time of the acquisition and at
least annually thereafter.
Board
of Directors of Applied Digital Following the Merger
Immediately following the effective time of the merger, Applied
Digital’s board of directors will consist of four
individuals designated by Applied Digital and three individuals
designated by Digital Angel. At the effective time of the
merger, Scott R. Silverman, the current chairman of the board of
directors of Digital Angel, intends to resign from the board of
directors of Digital Angel. Michael E. Krawitz will remain on
the Applied Digital board of directors.
Governmental
and Regulatory Matters
Neither Applied Digital nor Digital Angel is aware of any
material governmental or regulatory approval required for
completion of the merger, other than the effectiveness of the
registration statement of which this joint proxy
statement/prospectus is a part, compliance with applicable
corporate law of Delaware, and compliance with applicable state
“blue sky” laws.
In accordance with Section 262 of the Delaware General
Corporation Law, or DGCL, no appraisal rights will be available
to holders of shares of the Digital Angel common stock. For a
more complete description, see “The Merger —
Appraisal Rights.”
Comparison
of Stockholder Rights
The rights of stockholders of Digital Angel as stockholders of
Applied Digital after the merger will be governed by Applied
Digital’s existing certificate of incorporation and its
existing amended and restated bylaws, as such documents may be
amended in the future. For a more complete description, see
“Comparison of the Rights of Stockholders of Applied
Digital and Digital Angel.”
Shares of Applied Digital common stock are listed on the Nasdaq
Capital Market under the trading symbol “ADSX.” On
August 8, 2007, the last full trading day prior to the
public announcement of the proposed merger, Applied Digital
common stock closed at $1.10 per share. On October 3, 2007,
the latest practicable date before the printing of this joint
proxy statement/prospectus, Applied Digital common stock closed
at $1.05 per share.
12
The common stock of Digital Angel is traded on the AMEX under
the trading symbol “DOC.” On August 8, 2007, the
last full trading day prior to the public announcement of the
proposed merger, Digital Angel common stock closed at $1.40 per
share. On October 3, 2007, the latest practicable date
before the printing of this joint proxy statement/prospectus,
Digital Angel common stock closed at $1.44 per share. The
companies urge you to obtain current market quotations for
Applied Digital and Digital Angel common stock.
Listing
of Applied Digital Common Stock and Deregistration of Digital
Angel Common Stock
Applied Digital common stock is currently traded on the Nasdaq
Capital Market under the symbol “ADSX.” The Applied
Digital common stock to be issued in the merger will be listed
for trading on the Nasdaq Capital Market.
If the merger is completed, Digital Angel common stock will
cease to be traded on the AMEX and will be deregistered under
the Securities and Exchange Act of 1934, or the Exchange Act,
and Digital Angel will no longer file periodic reports with the
SEC.
Material
United States Federal Income Tax Consequences
The merger generally is intended to qualify as a tax-free
transaction and it is a condition to the merger that Applied
Digital and Digital Angel each receive a legal opinion from
Holland & Knight LLP to the effect that the merger
will constitute a reorganization within the meaning of 368(a) of
the Internal Revenue Code. Assuming the merger qualifies as a
reorganization, Digital Angel stockholders who realize a loss as
a result of the merger will not be allowed to recognize such
loss for U.S. federal income tax purposes, and Digital
Angel stockholders who realize a gain as a result of the
exchange of Digital Angel common stock for shares of Applied
Digital common stock will not be required to recognize such gain
for U.S. federal income tax purposes. Please review
carefully the information under “Material United States
Federal Income Tax Consequences” for a description of the
material United States federal income tax consequences of the
merger beginning on page 203.
This summary may not contain all of the information that is
important to you. You should carefully read this entire document
and the other documents included elsewhere in this joint proxy
statement/prospectus for a more complete understanding of the
merger. In particular, you should read the documents attached to
this joint proxy statement/prospectus, including the merger
agreement, which is attached to this joint proxy
statement/prospectus as Annex A.
13
APPLIED
DIGITAL SUMMARY HISTORICAL FINANCIAL DATA
(In thousands, except per share data)
The following summary historical financial data reflects the
account balances and activities of InfoTech and OuterLink
Corporation as discontinued operations. The summary historical
data as of and for the three-year period ended December 31,
2006 is derived from Applied Digital’s audited consolidated
financial statements included in its Current Report on
Form 8-K
filed with the SEC on September 10, 2007. The summary
historical financial data as of June 30, 2007 and for the
six months ended June 30, 2007 and June 30, 2006 is
derived from the unaudited consolidated financial statements
included in Applied Digital’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 and, in the opinion of
Applied Digital’s management, includes all normal and
recurring adjustments that are considered necessary for the fair
presentation of the results for the interim period. The
operating results for the six months ended June 30, 2007
are not necessarily indicative of the results to be expected for
the full year or any other interim period.
The summary historical financial data is only a summary, and
should be read in conjunction with “
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”,
the consolidated financial statements and
the related notes contained in Applied Digital’s Current
Report on
Form 8-K
filed with the SEC on September 10, 2007, and the Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2007, all of which have been
filed with the SEC and are incorporated by reference into this
joint proxy statement/prospectus.
On September 30, 2007, Applied Digital’s board of
directors decided to sell Computer Equity Corporation and
Perimeter Acquisition Corp., as more fully discussed below.
Applied Digital’s summary historical financial data may not
be indicative of the results of operations or financial position
to be expected in the future. In addition, Applied
Digital’s summary historical financial data does not
reflect the reclassification of the results of operations and
balance sheet data of Computer Equity Corporation and Perimeter
Acquisition Corp. as discontinued operations. On
September 30, 2007, Applied Digital’s board of
directors decided to sell Computer Equity Corporation and
Perimeter Acquisition Corp. Accordingly, these businesses will
be classified as discontinued operations in Applied
Digital’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007, and their results
for all periods will be reclassified. See “Unaudited Pro
Forma Condensed Financial Data Reflecting the Reclassification
of Applied Digital’s Subsidiaries, Computer Equity
Corporation and Perimeter Acquisition Corp., as Discontinued
Operations” and “Unaudited Pro Forma Condensed
Combined Financial Data Reflecting the Merger,” beginning
on page 111 of this joint proxy statement/prospectus, which
present the operations of Computer Equity Corporation and
Perimeter Acquisition Corp. as discontinued operations.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six-Months
|
|
|
|
|
|
|
|
Ended June 30,
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
62,995
|
|
|
$
|
53,687
|
|
|
$
|
105,019
|
|
|
$
|
94,822
|
|
|
$
|
92,245
|
|
|
$
|
78,531
|
|
|
$
|
75,765
|
|
|
Cost of products and services sold
|
|
|
35,320
|
|
|
|
29,459
|
|
|
|
57,824
|
|
|
|
53,792
|
|
|
|
63,093
|
|
|
|
52,946
|
|
|
|
48,898
|
|
|
Gross profit
|
|
|
27,675
|
|
|
|
24,228
|
|
|
|
47,195
|
|
|
|
41,030
|
|
|
|
29,152
|
|
|
|
25,585
|
|
|
|
26,867
|
|
|
Selling, general and administrative expense
|
|
|
23,016
|
|
|
|
25,921
|
|
|
|
58,030
|
|
|
|
45,821
|
|
|
|
32,962
|
|
|
|
53,658
|
|
|
|
64,769
|
|
|
Research and development
|
|
|
5,351
|
|
|
|
3,532
|
|
|
|
7,572
|
|
|
|
5,871
|
|
|
|
3,068
|
|
|
|
6,255
|
|
|
|
4,130
|
|
|
Goodwill and asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
6,629
|
|
|
|
—
|
|
|
|
—
|
|
|
|
302
|
|
|
|
38,657
|
|
|
Operating Loss
|
|
|
(9,692
|
)
|
|
|
(5,225
|
)
|
|
|
(25,036
|
)
|
|
|
(10,662
|
)
|
|
|
(6,878
|
)
|
|
|
(34,630
|
)
|
|
|
(80,689
|
)
|
|
(Loss) gain on sales of subsidiaries and assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(330
|
)
|
|
|
132
|
|
|
Gain on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,064
|
|
|
|
—
|
|
|
Interest and other income
|
|
|
2,015
|
|
|
|
480
|
|
|
|
1,347
|
|
|
|
2,664
|
|
|
|
1,892
|
|
|
|
908
|
|
|
|
2,400
|
|
|
Interest (expense) recovery
|
|
|
(2,167
|
)
|
|
|
(1,258
|
)
|
|
|
(3,219
|
)
|
|
|
1,935
|
|
|
|
(2,738
|
)
|
|
|
(22,569
|
)
|
|
|
(17,451
|
)
|
|
(Loss) income from continuing operations before benefit
(provision) for taxes, minority interest, losses attributable to
capital transactions of subsidiaries and equity in net loss of
affiliate
|
|
|
(9,844
|
)
|
|
|
(6,083
|
)
|
|
|
(26,908
|
)
|
|
|
(6,063
|
)
|
|
|
(7,724
|
)
|
|
|
13,443
|
|
|
|
(95,608
|
)
|
|
(Provision) benefit for income taxes
|
|
|
(460
|
)
|
|
|
(5
|
)
|
|
|
(62
|
)
|
|
|
434
|
|
|
|
(66
|
)
|
|
|
(463
|
)
|
|
|
(397
|
)
|
|
(Loss) income from continuing operations before minority
interest, losses attributable to capital transactions of
subsidiaries and equity in net loss of affiliate
|
|
|
(10,304
|
)
|
|
|
(6,008
|
)
|
|
|
(26,970
|
)
|
|
|
(5,629
|
)
|
|
|
(7,790
|
)
|
|
|
12,980
|
|
|
|
(96,005
|
)
|
|
Minority interest
|
|
|
4,207
|
|
|
|
728
|
|
|
|
2,510
|
|
|
|
(73
|
)
|
|
|
(415
|
)
|
|
|
2,094
|
|
|
|
11,412
|
|
|
Net gain (loss) on capital transactions of subsidiaries
|
|
|
4,750
|
|
|
|
322
|
|
|
|
(1,632
|
)
|
|
|
411
|
|
|
|
11,090
|
|
|
|
(244
|
)
|
|
|
(2,437
|
)
|
|
(Loss) gain attributable to changes in minority interest as a
result of capital transactions of subsidiaries
|
|
|
(5,860
|
)
|
|
|
(183
|
)
|
|
|
503
|
|
|
|
598
|
|
|
|
(20,203
|
)
|
|
|
(6,535
|
)
|
|
|
(2,048
|
)
|
|
Equity in net loss of affiliate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(291
|
)
|
|
(Loss) income from continuing operations
|
|
|
(7,207
|
)
|
|
|
(5,141
|
)
|
|
|
(25,589
|
)
|
|
|
(4,693
|
)
|
|
|
(17,318
|
)
|
|
|
8,295
|
|
|
|
(89,369
|
)
|
|
(Loss) income from discontinued operations, net of income taxes
|
|
|
(664
|
)
|
|
|
(1,067
|
)
|
|
|
(1,620
|
)
|
|
|
(5,556
|
)
|
|
|
(2,166
|
)
|
|
|
(4,770
|
)
|
|
|
(24,536
|
)
|
|
Income (loss) on disposal of discontinued operations, including
provision for operating losses during the phase-out period, net
of income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84
|
|
|
|
2,185
|
|
|
|
(382
|
)
|
|
|
1,420
|
|
|
(Loss) income from discontinued operations
|
|
|
(664
|
)
|
|
|
(1,067
|
)
|
|
|
(1,620
|
)
|
|
|
(5,472
|
)
|
|
|
19
|
|
|
|
(5,152
|
)
|
|
|
(23,116
|
)
|
|
Net (loss) income
|
|
|
(7,871
|
)
|
|
|
(6,208
|
)
|
|
|
(27,209
|
)
|
|
|
(10,165
|
)
|
|
|
(17,299
|
)
|
|
|
3,143
|
|
|
|
(112,485
|
)
|
|
Preferred stock dividends and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,573
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Accretion of beneficial conversion feature of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(474
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(7,871
|
)
|
|
$
|
(6,208
|
)
|
|
$
|
(27,209
|
)
|
|
$
|
(12,212
|
)
|
|
$
|
(17,299
|
)
|
|
$
|
3,143
|
|
|
$
|
(112,485
|
)
|
15
APPLIED
DIGITAL SUMMARY HISTORICAL FINANCIAL DATA (continued)
(In thousands, except per share data)
(Loss)
Earnings Per Share Adjusted For the Reverse Stock
Split
On March 12, 2004, Applied Digital’s board of
directors authorized a
1-for-10
reverse stock split which was effectuated on April 5, 2004.
The reverse stock split had the effect of reducing the number of
issued and outstanding shares of Applied Digital’s common
stock and, accordingly, (loss) earnings per share increased as a
result of the decrease in the weighted average number of shares
outstanding. The following presents Applied Digital’s basic
and diluted (loss) earnings per share, giving retroactive effect
to the reverse stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six-Months Ended June 30,
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Net (loss) income per common share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.23
|
|
|
$
|
(3.32
|
)
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.08
|
)
|
|
|
—
|
|
|
|
(0.14
|
)
|
|
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shares — basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.09
|
|
|
$
|
(4.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.22
|
|
|
$
|
(3.32
|
)
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.08
|
)
|
|
|
—
|
|
|
|
(0.14
|
)
|
|
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shares —
diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.08
|
|
|
$
|
(4.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,353
|
|
|
|
67,197
|
|
|
|
67,338
|
|
|
|
62,900
|
|
|
|
51,291
|
|
|
|
36,178
|
|
|
|
26,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
67,353
|
|
|
|
67,197
|
|
|
|
67,338
|
|
|
|
62,900
|
|
|
|
51,291
|
|
|
|
37,299
|
|
|
|
26,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,515
|
|
|
$
|
7,271
|
|
|
$
|
22,062
|
|
|
$
|
30,603
|
|
|
$
|
9,510
|
|
|
$
|
3,208
|
|
|
Restricted cash
|
|
|
127
|
|
|
|
81
|
|
|
|
310
|
|
|
|
327
|
|
|
|
765
|
|
|
|
—
|
|
|
Property and equipment
|
|
|
12,620
|
|
|
|
11,751
|
|
|
|
10,849
|
|
|
|
7,646
|
|
|
|
7,931
|
|
|
|
7,958
|
|
|
Goodwill
|
|
|
84,417
|
|
|
|
82,385
|
|
|
|
86,231
|
|
|
|
60,329
|
|
|
|
63,331
|
|
|
|
63,297
|
|
|
Total assets
|
|
|
181,993
|
|
|
|
171,350
|
|
|
|
185,958
|
|
|
|
140,188
|
|
|
|
111,931
|
|
|
|
111,156
|
|
|
Long-term debt
|
|
|
12,708
|
|
|
|
14,211
|
|
|
|
15,692
|
|
|
|
2,288
|
|
|
|
2,860
|
|
|
|
2,436
|
|
|
Total debt
|
|
|
26,179
|
|
|
|
21,473
|
|
|
|
18,511
|
|
|
|
2,485
|
|
|
|
8,071
|
|
|
|
84,228
|
|
|
Minority interest
|
|
|
56,859
|
|
|
|
47,984
|
|
|
|
48,325
|
|
|
|
52,644
|
|
|
|
21,259
|
|
|
|
14,613
|
|
|
Stockholders’ equity (deficit)
|
|
|
43,113
|
|
|
|
43,864
|
|
|
|
66,546
|
|
|
|
40,844
|
|
|
|
32,736
|
|
|
|
(36,092
|
)
|
16
DIGITAL
ANGEL SUMMARY HISTORICAL FINANCIAL DATA
(In thousands, except per share data)
The following summary historical financial data reflects the
account balances and activities of OuterLink Corporation as
discontinued operations. The summary historical financial data
as of and for the three-year period ended December 31, 2006
is derived from Digital Angel’s audited consolidated
financial statements beginning on page FS-23. The summary
historical financial data as of June 30, 2007 and for the
six months ended June 30, 2007 and June 30, 2006 is
derived from the unaudited consolidated financial statements
beginning on page FS-2 and, in the opinion of Digital
Angel’s management, includes all normal and recurring
adjustments that are considered necessary for the fair
presentation of the results for the interim period. The
operating results for the six months ended June 30, 2007
are not necessarily indicative of the results to be expected for
the full year or any other interim period.
The summary historical financial data is only a summary, and
should be read in conjunction with
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations of Digital Angel”
beginning on page 129
and the consolidated financial statements and the related notes
beginning on
page FS-23.
Digital Angel’s summary historical financial data may not
be indicative of the results of operations or financial position
to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six-Months Ended June 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
34,831
|
|
|
$
|
27,747
|
|
|
$
|
53,710
|
|
|
$
|
53,241
|
|
|
$
|
43,628
|
|
|
Service revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
1,309
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
34,831
|
|
|
|
27,747
|
|
|
|
54,410
|
|
|
|
54,550
|
|
|
|
44,549
|
|
|
Cost of products sold
|
|
|
21,509
|
|
|
|
16,275
|
|
|
|
31,919
|
|
|
|
29,930
|
|
|
|
24,872
|
|
|
Cost of services sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,322
|
|
|
|
11,472
|
|
|
|
22,491
|
|
|
|
24,620
|
|
|
|
19,677
|
|
|
Selling, general and administrative expense
|
|
|
15,277
|
|
|
|
11,631
|
|
|
|
24,228
|
|
|
|
21,217
|
|
|
|
16,712
|
|
|
Research and development expense
|
|
|
2,804
|
|
|
|
1,522
|
|
|
|
3,442
|
|
|
|
3,343
|
|
|
|
2,033
|
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,759
|
)
|
|
|
(1,681
|
)
|
|
|
(5,179
|
)
|
|
|
60
|
|
|
|
932
|
|
|
Interest income
|
|
|
46
|
|
|
|
174
|
|
|
|
270
|
|
|
|
347
|
|
|
|
32
|
|
|
Interest (expense)-Applied Digital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Interest (expense)-others
|
|
|
(998
|
)
|
|
|
(206
|
)
|
|
|
(465
|
)
|
|
|
(364
|
)
|
|
|
(1,337
|
)
|
|
Realized losses on Applied Digital common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,231
|
)
|
|
Change in derivative warranty liability
|
|
|
296
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other income
|
|
|
62
|
|
|
|
45
|
|
|
|
97
|
|
|
|
63
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for taxes,
minority interest and equity in net loss of affiliate
|
|
|
(5,353
|
)
|
|
|
(1,668
|
)
|
|
|
(5,277
|
)
|
|
|
106
|
|
|
|
(1,492
|
)
|
|
Income tax (provision) benefit
|
|
|
(38
|
)
|
|
|
72
|
|
|
|
72
|
|
|
|
41
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before minority interest and
equity in net loss of affiliate
|
|
|
(5,391
|
)
|
|
|
(1,596
|
)
|
|
|
(5,205
|
)
|
|
|
147
|
|
|
|
(1,492
|
)
|
|
Minority interest share of (losses) income
|
|
|
15
|
|
|
|
(58
|
)
|
|
|
5
|
|
|
|
351
|
|
|
|
249
|
|
|
Equity in net loss of affiliate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before discontinued operations
|
|
|
(5,376
|
)
|
|
|
(1,654
|
)
|
|
|
(5,210
|
)
|
|
|
(204
|
)
|
|
|
(1,741
|
)
|
|
Net income (loss) from discontinued operations
|
|
|
(833
|
)
|
|
|
(1,056
|
)
|
|
|
(1,593
|
)
|
|
|
(9,272
|
)
|
|
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,209
|
)
|
|
$
|
(2,710
|
)
|
|
$
|
(6,803
|
)
|
|
$
|
(9,476
|
)
|
|
$
|
(4,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
Loss from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.21
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic and diluted
|
|
|
44,539
|
|
|
|
44,097
|
|
|
|
44,308
|
|
|
|
43,820
|
|
|
|
33,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,004
|
|
|
$
|
1,521
|
|
|
$
|
9,949
|
|
|
$
|
17,468
|
|
|
Property and equipment, net
|
|
|
11,040
|
|
|
|
9,985
|
|
|
|
8,444
|
|
|
|
5,892
|
|
|
Goodwill and other intangibles, net
|
|
|
54,865
|
|
|
|
52,877
|
|
|
|
50,304
|
|
|
|
45,144
|
|
|
Total assets
|
|
|
97,981
|
|
|
|
89,896
|
|
|
|
90,207
|
|
|
|
92,673
|
|
|
Long-term debt and notes payable
|
|
|
3,790
|
|
|
|
4,036
|
|
|
|
3,656
|
|
|
|
2,285
|
|
|
Total debt
|
|
|
13,084
|
|
|
|
8,163
|
|
|
|
6,036
|
|
|
|
2,362
|
|
|
Minority interest
|
|
|
409
|
|
|
|
465
|
|
|
|
618
|
|
|
|
249
|
|
|
Total stockholders’ equity
|
|
|
62,964
|
|
|
|
68,546
|
|
|
|
72,446
|
|
|
|
79,761
|
|
18
SUMMARY
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
DATA
The following tables present information regarding the unaudited
pro forma financial condition and results of operations after
giving effect to the reclassification of Applied Digital’s
subsidiaries, Computer Equity Corporation and Perimeter
Acquisition Corp., as discontinued operations and to the merger.
See “Unaudited Pro Forma Condensed Financial Data
Reflecting the Reclassification of Applied Digital’s
Subsidiaries, Computer Equity Corporation and Perimeter
Acquisition Corp., as Discontinued Operations” and
“Unaudited Pro Forma Condensed Combined Financial Data
Reflecting the Merger,” which sections begin on
page 111 of this joint proxy statement/prospectus. These
tables set forth selected unaudited pro forma condensed combined
statement of operations data of Applied Digital and Digital
Angel for the six months ended June 30, 2007 and for the
year ended December 31, 2006, as if the reclassification of
Applied Digital’s subsidiaries, Computer Equity Corporation
and Perimeter Acquisition Corp., as discontinued operations and
the merger had become effective on January 1, 2007 and
2006, respectively. These tables also set forth selected
unaudited pro forma condensed combined balance sheet data of
Applied Digital as of June 30, 2007, as if the
reclassification of Applied Digital’s subsidiaries,
Computer Equity Corporation and Perimeter Acquisition Corp., as
discontinued operations and the merger had become effective on
that date.
The unaudited pro forma condensed combined financial data in the
table below is provided for illustrative purposes only and does
not purport to represent what the actual consolidated results of
operations or the consolidated financial position of Applied
Digital would have been had the reclassification of Applied
Digital’s subsidiaries, Computer Equity Corporation and
Perimeter Acquisition Corp., as discontinued operations and the
merger occurred on the date assumed, nor is it necessarily
indicative of future consolidated results of operations or
financial position.
The unaudited pro forma condensed combined financial data in the
table below does not include the realization of cost savings
from operating efficiencies, revenue synergies or restructuring
costs resulting from the merger. You should read this
information in conjunction with the separate historical
consolidated financial statements and accompanying notes of
Applied Digital, which are incorporated by reference into this
joint proxy statement/prospectus, and of Digital Angel, which
are included in this joint proxy statement/prospectus beginning
on page FS-1.
The following pro forma condensed combined financial information
has been derived from, and should be read in conjunction with,
the unaudited pro forma condensed combined financial data and
notes thereto included in this joint proxy statement/prospectus
beginning on page 116.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
53,966
|
|
|
$
|
87,428
|
|
|
Loss from continuing operations
|
|
$
|
(10,111
|
)
|
|
$
|
(21,343
|
)
|
|
Basic loss per share from continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
Diluted loss per share from continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Balance Sheet Data:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,267
|
|
|
Total assets
|
|
$
|
180,462
|
|
|
Short-term debt
|
|
$
|
13,428
|
|
|
Long-term debt
|
|
$
|
12,705
|
|
|
Total stockholders’ equity
|
|
$
|
84,754
|
|
19
COMPARATIVE
PER SHARE DATA (UNAUDITED)
The following table summarizes unaudited per share information
for Applied Digital and Digital Angel on a historical basis, for
Applied Digital on a pro forma basis to reflect the
reclassification of its subsidiaries, Computer Equity
Corporation and Perimeter Acquisition Corp., as discontinued
operations, on a pro forma combined basis for Applied Digital,
and an equivalent pro forma combined basis for Digital Angel. It
has been assumed for purposes of the unaudited pro forma
condensed combined financial data provided below that the merger
was completed as of the beginning of the periods presented,
January 1, 2007 and 2006. The following information should
be read in conjunction with:
|
|
|
|
|
|
•
|
the historical audited financial statements of Applied Digital
as of and for the year ended December 31, 2006 included in
Applied Digital’s Current Report on
Form 8-K
filed with the SEC on September 10, 2007, and the unaudited
historical financial statements as of and for the six months
ended June 30, 2007, included in Applied Digital’s
Quarterly Report on
Form 10-Q
filed with the SEC on August 9, 2007, which are
incorporated by reference into this joint proxy
statement/prospectus;
|
|
|
|
|
|
|
•
|
the historical audited financial statements of Digital Angel as
of and for the year ended December 31, 2006 beginning on
page FS-23 and the unaudited historical financial statements as
of and for the six months ended June 30, 2007 beginning on
page FS-2;
|
|
|
|
|
|
|
•
|
the unaudited pro forma condensed financial data reflecting the
reclassification of Applied Digital’s subsidiaries,
Computer Equity Corporation and Perimeter Acquisition Corp., as
discontinued operations beginning on page 111; and
|
|
|
|
|
|
|
•
|
the unaudited pro forma condensed combined financial data
beginning on page 116.
|
The pro forma information below is presented for illustrative
purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the
reclassification of Applied Digital’s subsidiaries,
Computer Equity Corporation and Perimeter Acquisition Corp., as
discontinued operations and the merger had been completed as of
the beginning of the period presented, nor is it necessarily
indicative of the future operating results or financial position
of the combined company. The historical book value per share and
the unaudited Applied Digital pro forma book value per share
were computed by dividing total stockholders’ equity by the
number of shares of common stock outstanding at the end of the
period. The pro forma income (loss) from continuing operations
per share of common stock of the combined company is computed by
dividing the pro forma income (loss) from continuing operations
available to holders of shares of the combined company’s
common stock by the pro forma weighted average number of shares
outstanding over the period. The pro forma combined book value
per share is computed by dividing total pro forma
stockholders’ equity by the pro forma number of shares of
common stock outstanding at the end of the period.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
As of/for the
|
|
|
As of/for the
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
|
June 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied Digital Historical:
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income from continuing operations per
common share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.38
|
)
|
|
Dividends declared per share(3)
|
|
|
—
|
|
|
|
—
|
|
|
Book value per share
|
|
$
|
0.64
|
|
|
$
|
0.65
|
|
|
Digital Angel Historical:
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income from continuing operations per
common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
Dividends declared per share(3)
|
|
|
—
|
|
|
|
—
|
|
|
Book value per share
|
|
$
|
1.41
|
|
|
$
|
1.54
|
|
|
Unaudited Applied Digital Pro Forma(1):
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income from continuing operations per
common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.28
|
)
|
|
Dividends declared per share(3)
|
|
|
—
|
|
|
|
—
|
|
|
Book value per share
|
|
$
|
(0.64
|
)
|
|
$
|
(0.65
|
)
|
|
Unaudited Pro Forma Combined(2):
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income from continuing operations per
common share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
Dividends declared per share(3)
|
|
|
—
|
|
|
|
—
|
|
|
Book value per share
|
|
$
|
0.89
|
|
|
$
|
0.90
|
|
|
Unaudited Digital Angel Pro Forma Equivalent(4):
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income from continuing operations per
common share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
Dividends declared per share(3)
|
|
|
—
|
|
|
|
—
|
|
|
Book value per share
|
|
$
|
1.01
|
|
|
$
|
1.10
|
|
|
|
|
|
|
(1)
|
|
The unaudited Applied Digital pro forma information reflects the
reclassification of Computer Equity Corporation and Perimeter
Acquisition Corp. as discontinued operations.
|
|
|
|
|
|
(2)
|
|
The unaudited pro forma combined information includes the
consolidation of the majority interest in Digital Angel.
|
|
|
|
|
|
(3)
|
|
Applied Digital and Digital Angel have not declared any
dividends on their common stock.
|
|
|
|
|
|
(4)
|
|
Digital Angel’s equivalent per share data amounts are
calculated by dividing Digital Angel’s historical per share
amounts by the common stock exchange ratio of 1.4.
|
21
COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Applied Digital’s common stock is traded on the Nasdaq
Capital Market under the symbol “ADSX,” and Digital
Angel’s common stock is traded on the AMEX under the symbol
“DOC.” The following table sets forth the respective
closing prices of Applied Digital’s and Digital
Angel’s common stock, and the equivalent per share value of
Digital Angel’s common stock giving effect to the merger,
as of August 8, 2007, the date immediately prior to public
announcement of the execution of the merger agreement, and
October 3, 2007, the latest practicable trading day before
the date of the printing of this joint proxy
statement/prospectus. The equivalent per share value of Digital
Angel’s common stock shown below assumes that the weighted
average closing price of Applied Digital’s common stock for
the twenty days ended August 7, 2007, which was used to
determine the common stock exchange ratio, is equal to the
closing price of Applied Digital’s common stock on
August 8, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Price per
|
|
Closing Price per
|
|
|
|
|
|
Share of
|
|
Share of
|
|
Digital Angel
|
|
|
|
Applied Digital
|
|
Digital Angel
|
|
Equivalent
|
|
|
|
Common Stock
|
|
Common Stock
|
|
per Share Value
|
|
|
|
August 8, 2007
|
|
$
|
1.10
|
|
|
$
|
1.40
|
|
|
$
|
1.54
|
|
|
October 3, 2007
|
|
$
|
1.05
|
|
|
$
|
1.44
|
|
|
$
|
1.47
|
|
For the periods indicated, the following table sets forth the
respective
intra-day
high and low sales prices per share of Applied Digital’s
and Digital Angel’s common stock as reported on their
respective markets. Neither Applied Digital nor Digital Angel
has declared or paid any cash dividends on its common stock. The
per share prices do not include adjustment for markups,
markdowns or commission.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied Digital Common Stock
|
|
|
Digital Angel Common Stock
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.24
|
|
|
$
|
3.41
|
|
|
$
|
8.55
|
|
|
$
|
3.80
|
|
|
Second Quarter
|
|
|
3.98
|
|
|
|
2.55
|
|
|
|
5.49
|
|
|
|
3.66
|
|
|
Third Quarter
|
|
|
3.69
|
|
|
|
2.77
|
|
|
|
4.52
|
|
|
|
2.87
|
|
|
Fourth Quarter
|
|
|
3.38
|
|
|
|
2.40
|
|
|
|
3.65
|
|
|
|
2.31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.06
|
|
|
$
|
2.50
|
|
|
$
|
4.33
|
|
|
$
|
2.95
|
|
|
Second Quarter
|
|
|
2.91
|
|
|
|
1.60
|
|
|
|
4.49
|
|
|
|
3.09
|
|
|
Third Quarter
|
|
|
1.95
|
|
|
|
1.34
|
|
|
|
3.70
|
|
|
|
2.45
|
|
|
Fourth Quarter
|
|
|
2.82
|
|
|
|
1.56
|
|
|
|
3.67
|
|
|
|
2.45
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.33
|
|
|
$
|
1.45
|
|
|
$
|
2.84
|
|
|
$
|
1.83
|
|
|
Second Quarter
|
|
|
1.62
|
|
|
|
1.16
|
|
|
|
2.31
|
|
|
|
1.55
|
|
|
Third Quarter
|
|
|
1.40
|
|
|
|
0.85
|
|
|
|
1.63
|
|
|
|
1.14
|
|
|
Fourth Quarter (through October 3, 2007)
|
|
|
1.14
|
|
|
|
0.92
|
|
|
|
1.47
|
|
|
|
1.27
|
|
22
You are advised to obtain current market quotations for Applied
Digital and Digital Angel common stock before making any
decision regarding the merger. The market price of the common
stock of both companies is subject to fluctuation. The dollar
value of the shares of Applied Digital common stock that holders
of Digital Angel will receive in the proposed merger and the
dollar value of the Digital Angel common stock they surrender
may increase or decrease.
As of September 28, 2007, Digital Angel had
45,869,933 shares of common stock issued and outstanding
and approximately 273 stockholders of record.
Digital
Angel Dividend Policy
Digital Angel has never paid dividends on its common stock and
does not anticipate paying dividends in the foreseeable future.
Digital Angel is restricted under its credit facility from
paying dividends on its common stock. In addition, Digital
Angel’s domestic subsidiaries are restricted from
transferring funds in the form of dividends, loans or advances
to Digital Angel.
23
In addition to the risks described in each company’s
reports on
Forms 10-K
and
10-Q
relating to each company as an independent business, you should
carefully consider the following matters in deciding whether to
vote in favor of the merger, which include all known material
risks related to the merger. These matters have been grouped
under three separate headings: “Risks Related to the
Merger,” which discusses the risks of combining Applied
Digital’s and Digital Angel’s companies, risks under
the merger agreement and potential and actual conflicts of
interest, among other things, “Industry and Business Risks
Related to Applied Digital and Its Businesses,” which
discusses the risks of Applied Digital’s industry and
Applied Digital’s businesses other than those risks related
solely to Digital Angel’s businesses and “Industry and
Business Risks Related to Digital Angel and Its
Businesses,” which discusses the risks of Digital
Angel’s industry and Digital Angel’s businesses. If
any of these risks actually materialize, the business, financial
condition or prospects of Applied Digital and Digital Angel may
be seriously harmed. In such case, the market price of Applied
Digital common stock may decline and you may lose all or part of
your investment. See “Cautionary Statement Concerning
Forward-Looking Statements” on page 46.
Risks
Related to the Merger
Applied
Digital and Digital Angel may be unable to obtain the
stockholder approvals required to complete the
merger.
The closing of the merger is subject to certain approvals by the
stockholders of Digital Angel and Applied Digital, which might
not be obtained. The issuance of shares of Applied Digital
common stock pursuant to the merger agreement requires the
affirmative vote of a majority of the total votes cast at the
special meeting by holders of Applied Digital common stock
outstanding as of the record date, provided that a quorum is
present. The approval and adoption of an amendment to Applied
Digital’s certificate of incorporation requires the
affirmative vote of the holders of a majority of the outstanding
shares of Applied Digital common stock entitled to vote at the
special meeting. Approval and adoption of the merger agreement
by Digital Angel requires the affirmative vote of the holders of
a majority of the outstanding shares of Digital Angel common
stock entitled to vote at the special and annual meeting, as
well as by the holders of a majority of the outstanding shares
of Digital Angel common stock not held by Applied Digital or its
affiliates. If any of these stockholder approvals are not
obtained, the conditions to the completion of the merger will
not be satisfied and the closing of the merger will not occur.
Any
delay in completion of the merger may reduce or delay the
benefits expected to be obtained from the merger.
The merger is subject to a number of conditions beyond the
control of Applied Digital and Digital Angel that may prevent,
delay or otherwise materially adversely affect its completion.
For a more complete summary of the conditions that must be
satisfied or waived prior to the effective time of the merger,
see “The Merger Agreement — Conditions to
Completion of the Merger.” Applied Digital and Digital
Angel cannot predict whether and when these conditions will be
satisfied. Any delay in completing the merger may reduce or
delay the synergies and other benefits that Applied Digital and
Digital Angel expect to achieve if they successfully complete
the merger within the expected timeframe and integrate their
respective businesses.
The
number of shares that Digital Angel stockholders will be
entitled to receive is fixed; if the market price of Applied
Digital’s common stock declines, the value of the Applied
Digital common stock being issued to Digital Angel stockholders
will be reduced.
Upon the closing of the merger, each holder of shares of Digital
Angel stock will be entitled to receive a fixed number of shares
of Applied Digital common stock for each share of Digital Angel
common stock held by such stockholder at the closing of the
merger. The market value of Applied Digital common stock
fluctuates based upon general market and economic conditions,
Applied Digital’s businesses and prospects and other
factors. Accordingly, even if the market price of Digital Angel
common stock increases prior to the merger, Digital Angel
stockholders will not be entitled to additional consideration.
24
There will be no upward adjustment to the common stock exchange
ratio (except for reclassifications to reflect the effect of any
stock split, reverse stock split, stock dividend,
reorganization, recapitalization, reclassification or other like
change with respect to Applied Digital common stock), and the
parties do not have the right to terminate the merger agreement
based upon changes in the market price of either Applied Digital
common stock or Digital Angel common stock. On August 8,
2007, the last trading day prior to announcement of the merger,
the closing price of Applied Digital’s common stock was
$1.10. As of October 3, 2007, the closing price of Applied
Digital’s common stock was $1.05. Accordingly, if Applied
Digital’s stock price continues to decrease, Digital Angel
stockholders will receive less value for their shares of Digital
Angel common stock.
The
issuance of shares of Applied Digital common stock to Digital
Angel stockholders in the merger will substantially reduce the
percentage interests of Applied Digital
stockholders.
As of September 28, 2007, Applied Digital owned
approximately 55.6% of Digital Angel’s outstanding shares
of common stock. In the proposed merger, Digital Angel will
become a wholly-owned subsidiary of Applied Digital. If the
merger is completed, Applied Digital will issue approximately
46,719,341 shares of Applied Digital common stock in the merger
to Digital Angel stockholders (based on the number of
outstanding shares of Digital Angel common stock on the Digital
Angel record date and assuming exercise of all outstanding
Digital Angel options, warrants and restricted stock). Based on
the number of shares of Applied Digital and Digital Angel common
stock outstanding on the respective record dates of Applied
Digital and Digital Angel, Digital Angel stockholders will own,
in the aggregate, approximately 36.6% of the fully diluted
shares of Applied Digital common stock immediately after the
merger. The issuance of shares of Applied Digital common stock
to Digital Angel stockholders in the merger will cause a
significant reduction in the relative percentage interest of
current Applied Digital stockholders in earnings, voting,
liquidation value, and book and market value.
The
stock prices and businesses of Applied Digital and Digital Angel
may be adversely affected if the merger is not
completed.
If the merger is not completed, the market prices of Applied
Digital common stock and Digital Angel common stock may decline.
In addition, Applied Digital’s and Digital Angel’s
businesses and operations may be harmed to the extent that
customers, suppliers, and others believe that the companies
cannot effectively compete in the marketplace without the
transaction, or that there is customer or employee uncertainty
surrounding the future direction of the product and service
offerings and strategy of Applied Digital or Digital Angel on a
stand-alone basis. Completion of the merger is subject to
several closing conditions, including obtaining requisite
stockholder approvals, and Applied Digital and Digital Angel may
be unable to obtain such approvals on a timely basis or at all.
If the transaction is not completed, Applied Digital would not
derive the benefits expected to result from the transaction.
Additionally, if the transaction is not completed, Applied
Digital and Digital Angel will still be required to pay
significant costs incurred in connection with the transaction,
including legal, accounting, and financial advisory fees.
The
significant costs associated with the merger may not prove to be
justified in light of the benefits ultimately realized and could
adversely affect future liquidity and operating
results.
Applied Digital estimates that it will incur direct transaction
costs of approximately $1.0 million associated with the merger,
which will be included as a part of the total purchase cost for
accounting purposes. In addition, Digital Angel estimates that
it will incur direct transaction costs estimated to be $1.0
million, which will be expensed as incurred for accounting
purposes. These numbers are estimates that are subject to
increase. Applied Digital and Digital Angel believe the combined
company may incur charges to operations, which are not currently
reasonably estimable, in the quarter in which the merger is
completed or the following quarters, to reflect costs associated
with integrating certain operations of the two companies. The
combined company may incur additional material charges in
subsequent quarters to reflect additional costs associated with
the merger.
25
Charges
to earnings may adversely affect the market value of the
combined company’s common stock following the
merger.
In accordance with accounting principles generally accepted in
the United States, the combined company will account for the
merger using the purchase method of accounting, which will
result in charges to earnings that could have a material adverse
effect on the market value of Applied Digital common stock
following the closing of the merger. Under the purchase method
of accounting, the combined company will allocate 44% of the
estimated purchase price (representing the minority interest in
assets purchased) to Digital Angel’s net tangible assets,
amortizable intangible assets, and intangible assets with
indefinite lives based on their fair values as of the date of
the closing of the merger, and will record the excess as
goodwill. Applied Digital will incur additional depreciation and
amortization expense over the useful lives of certain of the net
tangible and intangible assets acquired in connection with the
merger. In addition, to the extent the value of goodwill or
intangible assets with indefinite lives becomes impaired,
Applied Digital may be required to incur material charges
relating to the impairment of those assets. These depreciation,
amortization and potential impairment charges could have a
material adverse effect on Applied Digital’s results of
operations.
The
combined company may be unable to successfully integrate Digital
Angel’s and Applied Digital’s operations or to realize
the anticipated benefits of the merger. As a result, the value
of Applied Digital common stock may be adversely
affected.
Applied Digital and Digital Angel entered into the merger
agreement because each company believes that the merger will be
beneficial to each of Applied Digital, Digital Angel, and their
respective stockholders. Currently, each company operates as an
independent public company. Achieving the anticipated synergies,
growth opportunities and cost savings from the merger will
depend in part upon whether the two companies integrate their
businesses in an efficient and effective manner. The companies
may not be able to accomplish this integration process smoothly
or successfully. The necessity of coordinating separate
organizations, facilities and systems and addressing possible
differences in corporate cultures and management philosophies
may increase the difficulties of integration. The companies
operate numerous systems, including those involving accounting
and finance, employee benefits, payroll, management information,
purchasing and regulatory compliance. The integration of certain
operations following the merger will require the dedication of
significant management resources, which may distract
management’s attention from the day-to-day business of the
combined company. The companies may not be able to achieve the
anticipated operating and cost synergies or long-term strategic
benefits of the merger. An inability to realize the full extent
of, or any of, the anticipated benefits of the merger, as well
as any delays encountered in the integration process, could have
an adverse effect on the business and results of operations of
the combined company, which may affect the value of the shares
of Applied Digital common stock after the completion of the
merger.
In
order to be successful, the combined company must retain and
motivate key employees, and failure to do so could seriously
harm the combined company.
In order to be successful, the combined company must retain and
motivate executives and other key employees, including those in
managerial, sales and technical positions. Employees of Applied
Digital or Digital Angel may experience uncertainty about their
future roles in the combined company until or after strategies
with regard to the combined company are announced or executed.
These circumstances may adversely affect the combined
company’s ability to attract and retain key management,
sales and technical personnel. The combined company also must
continue to motivate employees and keep them focused on the
strategies and goals of the combined company, which may be
particularly difficult because of the potential distractions of
the merger.
Resales
of Applied Digital common stock following the merger may cause
the market price of Applied Digital common stock to
decrease.
As of September 28, 2007, Applied Digital had
70,870,866 shares of common stock outstanding, and an
aggregate of 11,419,126 shares of Applied Digital common stock
were issuable upon the exercise of Applied Digital warrants and
the exercise of outstanding employee or director stock options
and unvested restricted stock. Applied Digital expects that it
will issue approximately 28,524,641 shares of Applied Digital
common stock in
26
the merger based on the number of shares of Digital Angel
common stock outstanding on September 28, 2007, and will
reserve an additional approximately 18,194,700 shares of Applied
Digital common stock for issuance in connection with Applied
Digital’s assumption of Digital Angel’s outstanding
options, warrants and restricted stock. The issuance of these
new shares of Applied Digital common stock and the sale of
additional shares of Applied Digital common stock that may
become eligible for sale in the public market from time to time
upon exercise of options or other rights will increase the total
number of shares of Applied Digital common stock outstanding.
This increase will be substantial. Sales of a significant number
of shares of Applied Digital common stock could have the effect
of depressing the market price for Applied Digital common stock.
The
unaudited pro forma financial statements are not an indicator of
the combined company’s financial condition or results of
operations following the merger.
The unaudited pro forma financial statements contained in this
joint proxy statement/prospectus are not an indicator of the
combined company’s financial condition or results of
operations following the merger for several reasons. The
unaudited pro forma financial statements have been derived from
the historical financial statements of Applied Digital and
Digital Angel, and many adjustments and assumptions have been
made regarding the combined company after giving effect to the
merger. The information upon which these adjustments and
assumptions have been made is preliminary, and these kinds of
adjustments and assumptions are difficult to make with complete
accuracy. As a result, the actual financial condition and
results of operations of the combined company following the
merger may not be consistent with, or evident from, these
unaudited pro forma financial statements.
In addition, the actual earnings per share of the combined
company following the merger may decrease below that reflected
in the pro forma financial information, which is lower than
historical results of Applied Digital, for several reasons. The
assumptions used in preparing the pro forma financial
information may not prove to be accurate and other factors may
affect the combined company’s actual earnings per share
following the merger. See the section entitled “Unaudited
Pro Forma Condensed Combined Financial Data Reflecting the
Merger” beginning on page 116. Any potential decline
in Applied Digital’s earnings per share may cause
significant variations in the stock price of the combined
company.
Directors
and officers of Applied Digital and Digital Angel may have
conflicts of interest that may influence them to support or
approve the merger.
In considering the recommendations of Applied Digital’s and
Digital Angel’s respective boards of directors, you should
be aware that certain directors and officers of Applied Digital
and Digital Angel may have interests in the merger that may be
different from, or in addition to, your interests as a
stockholder generally and may create potential and actual
conflicts of interest. These interests on the part of certain
directors and officers of Applied Digital and Digital Angel may
arise as a result of cross directorships, stock ownership,
intercompany transactions, intercompany agreements and potential
bonus payments. The boards of directors of each of Applied
Digital and Digital Angel were aware of these interests and
considered them when they approved and adopted the merger
agreement and the merger. For a detailed discussion of the
interests of the directors and executive officers of Applied
Digital and Digital Angel, see the section entitled “The
Merger — Interests of Certain Persons in the
Merger.”
The
fairness opinions obtained by Applied Digital and Digital Angel
from their respective special committees’ financial
advisors will not reflect changes in circumstances between
signing the merger agreement and the completion of the
merger.
Neither Applied Digital nor Digital Angel has obtained updated
opinions as of the date of this joint proxy statement/prospectus
from Duff & Phelps or Seven Hills Partners LLC,
respectively. Changes in the operations and prospects of Applied
Digital or Digital Angel, general market and economic
conditions, and other factors that may be beyond the control of
Applied Digital or Digital Angel, and on which the fairness
opinions were based, may alter the value of Applied Digital or
Digital Angel or the prices of their common stock by the time
the merger is completed. Each fairness opinion is based on the
information in existence on the date of the opinion and will not
be updated as of the time the merger is to be completed. Because
Applied Digital and
27
Digital Angel currently do not anticipate asking their
respective financial advisors to update their opinions, the
written opinions dated August 8, 2007 do not address the
fairness of the common stock exchange ratio, from a financial
point of view, at the time the Applied Digital special meeting
and the Digital Angel special and annual meeting are to be held
or at the time the merger is to be completed. For a description
of the opinions that Applied Digital and Digital Angel received
from their respective financial advisors, please refer to
“The Merger — Opinion of Financial Advisor to the
Applied Digital Special Committee” and “The
Merger — Opinion of Financial Advisor to the Digital
Angel Special Committee.”
Industry
and Business Risks Related To Applied Digital and Its
Businesses
Applied
Digital has a history of operating losses and negative cash
flows and Applied Digital may not become profitable in the
future, which could ultimately result in Applied Digital’s
inability to continue operations in the normal course of
business.
Historically, Applied Digital has incurred losses and has not
generated positive cash flows from operations. Applied Digital
incurred a consolidated loss from continuing operations of
$7.2 million, $25.6 million, $4.7 million, and
$17.3 million in the six-months ended June 30, 2007
and the years ended December 31, 2006, 2005, and 2004,
respectively. Applied Digital’s consolidated operating
activities used cash of $5.4 million, $7.7 million,
$11.5 million, and $13.5 million during the six-months
ended June 30, 2007 and the years ended December 31,
2006, 2005, and 2004, respectively. During these periods,
Applied Digital has funded its operating cash requirements, as
well as its capital needs, with the proceeds from investing
and/or
financing activities.
Applied Digital’s ability in the future to achieve or
sustain profitability is based on a number of factors, many of
which are beyond its control, including the future demand for
its RFID and GPS and satellite-based systems. If demand for such
systems does not reach anticipated levels, or if Applied Digital
fails to manage its cost structure, Applied Digital may not
achieve or be able to sustain profitability.
As of June 30, 2007, Applied Digital and its subsidiaries,
including VeriChip, had cash and cash equivalents aggregating
approximately $15.5 million. Applied Digital believes that
it will have sufficient funds to operate its businesses over the
next twelve months. However, its goal is to achieve
profitability and to generate positive cash flows from
operations. Applied Digital’s profitability and cash flows
from operations depends on many factors, including the success
of its marketing programs, the maintenance and reduction of
expenses, and its ability to successfully develop and bring to
market its new products and technologies. If, in the future,
Applied Digital is not successful in managing these factors and
achieving its goal of profitability and positive cash flows from
operations, it may not have sufficient funds to operate its
businesses, which could ultimately result in its inability to
continue operations in the normal course.
Applied
Digital’s stock price has reflected a great deal of
volatility, including a significant decrease over the past few
years. The volatility may mean that, at times, its stockholders
may be unable to resell their shares at or above the price at
which they acquired them.
From January 1, 2004 to October 3, 2007, the price per
share of Applied Digital common stock has ranged from a high of
$8.55 to a low of $0.85. The price of Applied Digital common
stock has been, and may continue to be, highly volatile and
subject to wide fluctuations. The market value of its common
stock has declined in the past, in part, due to its operating
performance. In the future, broad market and industry factors
may decrease the market price of its common stock, regardless of
its actual operating performance. This is even more of an issue
as Applied Digital increases its focus on developing and
marketing new, unproven products, for which there is
considerable resistance due to privacy and other concerns.
Declines in the market price of Applied Digital common stock
could affect its access to capital, which may, in the future,
impact its ability to continue as a going concern. In addition,
declines in the price of Applied Digital common stock may harm
employee morale and retention, curtail investment opportunities
presented to it, and negatively impact other aspects of its
businesses. As a result of any such declines, stockholders may
be unable to resell their shares at or above the price at which
they acquired them.
28
If
Applied Digital fails to continue to meet all applicable Nasdaq
Capital Market requirements, its stock could be delisted by the
Nasdaq Capital Market. If delisting occurs, it would adversely
affect the market liquidity of Applied Digital’s common
stock and harm its businesses.
Applied Digital common stock is currently traded on the Nasdaq
Capital Market under the symbol “ADSX.” If Applied
Digital fails to meet any of the continued listing standards of
the Nasdaq Capital Market, its common stock could be delisted
from the Nasdaq Capital Market. These continued listing
standards include specifically enumerated criteria, such as:
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a $1.00 minimum closing bid price;
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shareholders’ equity of $2.5 million, market value of
publicly-held shares of $35 million, or net income from
continuing operations of $500,000 in the most recently completed
fiscal year or in two of the last three most recently completed
fiscal years;
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500,000 shares of publicly-held common stock with a market
value of at least $1 million;
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300 round-lot stockholders; and
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compliance with Nasdaq’s corporate governance requirements,
as well as additional or more stringent criteria that may be
applied in the exercise of Nasdaq’s discretionary authority.
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On October 3, 2007, Applied Digital met all of the
continued listing standards. However, for the 16 trading
days prior to October 3, 2007, Applied Digital’s common
stock was below $1.00. For continued listing of Applied Digital
common stock on the Nasdaq, Nasdaq Marketplace
Rule 4310(c)(4) requires that the minimum bid price of a
share of Applied Digital common stock be at least $1.00. If the
closing bid price of Applied Digital common stock does not
remain at $1.00 or more for 30 consecutive business days, the
Nasdaq will promptly notify Applied Digital and it will have a
period of 180 calendar days from such notification to achieve
compliance. To regain compliance, the closing bid price of
Applied Digital common stock would have to remain at $1.00 or
more for a minimum of ten consecutive trading days. If Applied
Digital does not regain compliance during this first
180-day
period, Nasdaq will determine whether Applied Digital meets the
Nasdaq Capital Market initial listing criteria set out in
Marketplace Rule 4310(c), except for the minimum bid price
requirement. If at that time Applied Digital meets the initial
listing criteria (currently it does meet the initial listing
criteria, except for the minimum bid price requirement), it will
be eligible for an additional
180-day
cure
period. If Applied Digital is not eligible for the additional
cure period, Nasdaq will provide Applied Digital with written
notification that its common stock will be delisted. In such
case, it will have the right to appeal Nasdaq’s delisting
determination to a Listing Qualifications Panel. The
180-day
cure
period described above relates exclusively to Applied
Digital’s minimum bid price deficiency. Applied Digital may
be delisted during the
180-day
period for failure to maintain compliance with any other
continued listing requirements that occur during this period.
Even if Applied Digital is successful in curing a
non-compliance, Nasdaq may seek to delist it for Applied
Digital’s failure to meet enumerated conditions for
continued listing.
If Applied Digital common stock is delisted from the Nasdaq
Capital Market, trading of its common stock most likely will be
conducted in the over-the-counter market on an electronic
bulletin board established for unlisted securities, such as the
Pink Sheets or the OTC Bulletin Board. Such delisting could
also adversely affect Applied Digital’s ability to obtain
financing for the continuation of Applied Digital’s
operations and could result in the loss of confidence by
investors, suppliers and employees.
Applied
Digital has effected or entered into (and will likely continue
to effect or enter into) capital-raising transactions,
acquisitions, legal settlements and contracts for services that
involve the issuance of shares of its common stock (or
securities convertible into or exchangeable for such shares)
and, as a result, the value of its common stock may be further
diluted.
Applied Digital has effected and entered into (and will likely
continue to effect and enter into) capital-raising transactions,
acquisitions, legal settlements and contracts for services that
involve the issuance of shares of its common stock or securities
convertible into or exchangeable for such shares. These share
issuances may be dilutive to the value of its common stock and
may result in a decrease in the market price of its common stock.
29
On September 28, 2007, Applied Digital entered into a
memorandum of settlement with Hark M. Vasa and his family
partnerships. Under the parties’ agreement, Applied Digital
agreed to issue an aggregate amount of shares of its common
stock to Mr. Vasa valued at $2.1 million and to file
one or more registration statements registering the resale of
such shares. Mr. Vasa will receive stock valued at $500,000
in each of the years 2007 and 2008, stock valued at $400,000 in
each of the years 2009 and 2010, and stock valued at $300,000 in
year 2011. Annual payments will be due on or about
October 15th of each year. The amount of shares to be
issued will be calculated based on the average closing price per
share of Applied Digital common stock reported on the Nasdaq for
the 10 consecutive
trading-day
period preceding the date of issuance. Applied Digital is
required to have the shares registered for resale 180 days
from the date of each issuance. If the number of shares issued
on any specific issuance date does not have the values set forth
above on the date the shares are required to be registered,
Applied Digital will be required to issue additional shares to
Mr. Vasa to cover the difference or pay the difference in
cash.
Applied
Digital has issued and outstanding a significant number of
derivative securities (e.g., options and warrants) and the
conversion or exercise of such securities may adversely affect
the market price of its common stock.
As of June 30, 2007, there were outstanding warrants and
options to acquire up to 10.3 million additional shares of
Applied Digital common stock, and Applied Digital had
0.8 million additional shares of its common stock available
to be issued in the future under its flexible stock plans and
employee stock purchase plan. The exercise of outstanding
options and warrants, and the sale in the public market of the
shares purchased upon exercise, may have a dilutive effect on
its common stock and may result in a decrease in the market
price of its common stock.
Applied
Digital relies heavily on revenues derived from sales to various
governmental agencies, and the loss of, or a significant
reduction in, orders from government agencies could result in
significant losses and deficits in cash flows from
operations.
Over 98%, 96%, and 96% of Applied Digital’s revenue from
sales of voice, data and video telecommunications networks for
each of the years ended December 31, 2006, 2005, and 2004,
respectively, were generated through sales to various agencies
of the U.S. government. In addition, its principal
customers for electronic identification devices for fish are
Pacific States Marine, a government contractor that relies on
funding from the U.S. government, and the U.S. Army
Corps of Engineers. Applied Digital’s GPS and Radio
Communications segment is heavily dependent on contracts with
domestic government agencies and foreign governments, including
the United Kingdom, primarily relating to military applications.
Under certain contracts, a government agency is permitted to
terminate its contract for convenience, including in cases when
funds are no longer appropriated. In January 2005, the United
States Postal Service terminated for convenience the mail
processing infrastructure contract that accounted for 52% (or
$21.5 million) of Government Telecommunications,
Inc.’s consolidated revenues in 2004. Because Applied
Digital relies on revenues and cash flows generated from
contracts, directly or indirectly, with governmental agencies,
the loss of any such contract would result in a decrease in
revenues and cash flows, and such a decrease may be significant
and thereby have a material adverse effect on its financial
condition and results of operations.
Applied
Digital has substantial debt and debt service.
As of June 30, 2007, Applied Digital had indebtedness under
a $12.7 million, non-convertible term note with Laurus
Master Fund, Ltd., or Laurus, and, as a result, it incurs
significant interest expense. The note accrues interest at a
rate of 12% per annum, payable monthly, and has a maturity date
of August 24, 2009. Applied Digital became obligated on
April 1, 2007 to begin making monthly principal payments
ranging from $200,000 to $300,000. Effective as of
August 31, 2007, Applied Digital closed a
$7.0 million, non-convertible debt financing transaction
with Kallina Corporation, or Kallina, which is a wholly-owned
subsidiary of Laurus. The note accrues interest at a rate per
annum equal to the “prime rate” published in The Wall
Street Journal from time to time, plus 3.0% (but the rate will
not be less than 11.0% at any time), and matures on
August 31, 2009. Applied Digital must make monthly
principal payments of $166,667.67, plus interest, beginning
March 1, 2008. The note allows for an optional redemption
by paying 103% of the principal amount. Under each note,
30
in the event of default, Laurus or Kallina, as applicable, is
entitled to additional interest on the outstanding principal
balance of the applicable note and on all outstanding
obligations under the applicable note and the related agreements
entered into in conjunction with the applicable note in an
amount equal to 1% per month.
The notes contain certain events of default, including, among
other things, failure to pay, violation of covenants, and
certain other expressly enumerated events. Additionally, Applied
Digital has granted Laurus a first priority security interest
and granted Kallina a security interest in substantially all of
its assets, and Applied Digital has pledged all of the issued
and outstanding capital stock it owns in InfoTech and certain of
its other wholly-owned subsidiaries and a portion of the issued
and outstanding stock it owns in VeriChip and Digital Angel.
Applied Digital has also agreed to guarantee the obligations of
Digital Angel under a $6.0 million, revolving asset-based
debt financing transaction, or the financing transaction, with
Kallina pursuant to the terms of a security agreement, dated
August 31, 2007, among Digital Angel, certain of Digital
Angel’s subsidiaries and Kallina.
The degree to which Applied Digital is leveraged could have
important consequences, including the following:
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its ability to obtain additional financing in the future for
capital expenditures, potential acquisitions, and other purposes
may be limited, or financing may not be available on terms
favorable to Applied Digital or at all; and
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a substantial portion of its cash flows from operations must be
used to pay its interest expense and repay its debt, which
reduces the funds that would otherwise be available to it for
its operations and future business opportunities.
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A default under either note by Applied Digital or a default
under the financing transaction by Digital Angel could result in
acceleration of indebtedness and permit Laurus or Kallina to
foreclose on Applied Digital’s assets and the stock it has
pledged in its subsidiaries.
Applied
Digital’s Advanced Technology segment relies heavily on
revenues from one customer, and the loss of revenue from this
customer could result in significant losses and deficits in cash
flows from operations.
During the year ended December 31, 2006, approximately
$5.9 million, or 25%, of Applied Digital’s Advanced
Technology segment’s revenue was derived from sales to
International Business Machines Corporation, or IBM, under the
terms of two statements of work that Pacific Decision Sciences
Corporation entered into with IBM in May 2006. The loss of this
customer, or the loss of significant business from this
customer, could have a material adverse effect on its results of
operations and cash flows.
Over
the past few years, Applied Digital has made significant changes
in the nature and scope of its businesses, and Applied Digital
has expanded into different product lines, including new,
unproven technologies.
Over the past few years, Applied Digital has made significant
changes in the nature and scope of its business operations and
Applied Digital has expanded into different product lines,
including new, unproven products such as VeriMed and Bio-Thermo.
If Applied Digital is not successful in implementing its
business model and developing and marketing these products, or
if these products do not gain sufficient market acceptance,
Applied Digital may not be able to achieve or sustain profitable
operations. In that case, the market price of its common stock
would likely decrease.
Applied
Digital may be subject to costly product liability claims from
the use of its systems, which could damage its reputation,
impair the marketability of its systems and force Applied
Digital to pay costs and damages that may not be covered by
adequate insurance.
Manufacturing, marketing, selling, testing and operation of
Applied Digital’s systems entail a risk of product
liability. Applied Digital could be subject to product liability
claims in the event its systems fail to
31
perform as intended. Even unsuccessful claims against Applied
Digital could result in the expenditure of funds in litigation,
the diversion of management time and resources, damage to its
reputation, and impairment in the marketability of its systems.
While Applied Digital maintains liability insurance, it is
possible that a successful claim could be made against Applied
Digital, that the amount of its insurance coverage would not be
adequate to cover the costs of defending against or paying such
a claim, or that damages payable by Applied Digital would harm
its businesses.
Applied
Digital’s majority-owned subsidiary, VeriChip, is
endeavoring to create a market for its VeriMed system. VeriChip
may never achieve market acceptance or significant sales of this
system.
VeriChip has been in the process of endeavoring to create a
market for its VeriMed system since the Food and Drug
Administration, or FDA, cleared the VeriMed system for use for
patient identification and health information purposes in
October 2004. Through June 30, 2007, VeriChip has generated
only de minimis revenue from sales of the microchip inserter
kits, significantly less than it had projected at the beginning
of 2006. VeriChip may never achieve market acceptance or more
than nominal or modest sales of this system.
VeriChip attributes the modest number of people who, through the
date of this joint proxy statement/prospectus, have undergone
the microchip implant procedure to the following factors:
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Many people who fit the profile for which the VeriMed system was
designed may not be willing to have a microchip implanted in
their upper right arm.
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Physicians may be reluctant to discuss the implant procedure
with their patients until a greater number of hospital emergency
rooms have adopted the VeriMed system as part of their standard
protocol.
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The media has from time to time reported, and may continue to
report, on the VeriMed system in an unfavorable and, on
occasion, an inaccurate manner. For example, there have been
articles published asserting, despite at least one study to the
contrary, that the implanted microchip is not magnetic resonance
imaging, or MRI, compatible.
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Privacy concerns may influence individuals to refrain from
undergoing the implant procedure or dissuade physicians from
recommending the VeriMed system to their patients.
Misperceptions that a microchip-implanted person can be
“tracked” and that the microchip itself contains a
person’s basic information, such as name, contact
information, and personal health records, may contribute to such
concerns.
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Misperceptions
and/or
negative publicity may prompt legislative or administrative
efforts by politicians or groups opposed to the development and
use of human-implantable RFID microchips. In 2006, a number of
states introduced, and at least one state, Wisconsin, enacted,
legislation that would prohibit any requirement that an
individual undergo a microchip-implant procedure. While VeriChip
supports all pending and enacted legislation that would preclude
anything other than voluntary implantation, legislative bodies
or government agencies may determine to go further, and their
actions may have the effect, directly or indirectly, of
delaying, limiting or preventing the use of human-implantable
RFID microchips or the sale, manufacture or use of RFID systems
utilizing such microchips.
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At present, the cost of the microchip implant procedure is not
covered by Medicare, Medicaid or private health insurance.
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At present, no clinical studies to assess the impact of the
VeriMed system on the quality of emergency department care have
been completed.
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In light of these and perhaps other factors, it is difficult to
predict whether the VeriMed system will achieve market
acceptance, how widespread that market acceptance will be, and
the timing of such acceptance. Accordingly, VeriChip is
uncertain as to whether it will generate the level of future
revenue and revenue growth it has forecast from sales of the
VeriMed system.
32
Applied
Digital believes that sales of VeriChip’s implantable
microchip, and the extent to which the VeriMed system achieves
market acceptance, will depend, in part, on the availability of
insurance reimbursement from third-party payers, including
federal and state governments under programs, such as Medicare
and Medicaid, and private insurance plans. Insurers may not
determine to cover the cost of the implant procedure, or it may
take a considerable period of time for this to
occur.
Applied Digital believes that sales of VeriChip’s
implantable microchip, and the extent to which the VeriMed
system achieves market acceptance, will depend, in part, on the
availability of insurance reimbursement from third-party payers,
including federal and state government programs, such as
Medicare and Medicaid, private health insurers, managed care
organizations, and other healthcare providers. Both governmental
and private third-party payers are increasingly challenging the
coverage and prices of medical products and services, and
require proven efficacy and cost effectiveness for
reimbursement. If patients undergoing the microchip implant
procedure, or health institutions and doctors using the VeriMed
system, are not able to obtain adequate reimbursement for the
cost of using these products and services, they may forego or
reduce their use. While VeriChip is in the process of
facilitating and, in one case, funding clinical studies that may
demonstrate the efficacy of the VeriMed system, which it
believes will make it more likely that government and private
insurers will cover the cost of the microchip implant process,
it may take a considerable period of time for this to occur, if,
in fact, it does occur. If government and private insurers do
not determine to reimburse the cost of the implant process,
VeriChip would not expect to realize the anticipated level of
future sales of its implantable microchip and the database
subscription fees.
Even
if the VeriMed system achieves some level of market acceptance,
the anticipated significant and growing recurrent revenue from
microchip-implanted persons subscribing to its database may not
be realized.
VeriChip’s business model envisions that its VeriMed system
will achieve some level of penetration within its target market
for such system: the approximately 45 million at-risk
people in the United States with cognitive impairment, chronic
diseases and related conditions, or implanted medical devices.
The model also anticipates VeriChip deriving significant and
growing recurrent revenue from subscriptions to its database by
persons implanted with its microchip. However, a person
implanted with the microchip may decide not to subscribe to
VeriChip’s database if, for example, the hospital emergency
room where he or she would most likely be taken in an emergency
maintains its own database. VeriChip does not currently
anticipate that a significant percentage of VeriMed-adopting
hospitals and other healthcare facilities will choose to provide
databases for this purpose. However, future regulatory changes,
such as in connection with the U.S. government’s
efforts to address inefficiencies in the U.S. healthcare
system related to information technology, could spur hospitals
and other healthcare facilities to establish systems to maintain
electronic health records. This might have the effect of
reducing the number of people implanted with the microchip who
might otherwise subscribe to VeriChip’s database which
could, in turn, negatively affect the future revenue that
VeriChip anticipates it will derive from the VeriMed system.
VeriChip may offer varying types of subscription levels to its
database. One type of subscription level may allow an individual
to include personal identification and contact information,
physician and emergency contact information, blood type and
advance directives, and another type may allow an individual to
include all of the previous information, as well as personal
health records. Initially, VeriChip anticipates that individuals
implanted with its microchip will take responsibility for
inputting all of their information into VeriChip’s
database, including personal health records, as physicians
currently have little interest in being involved in this
process — primarily because of liability concerns and
because they are generally not paid for this service. Over time,
VeriChip envisions that persons implanted with its microchip may
prevail upon their physicians to assist them with the inputting
of information for which, by virtue of their medical training,
physicians are better equipped to handle. If this does not
occur, emergency room personnel and emergency medical
technicians may lack confidence in the accuracy and completeness
of implanted persons’ personal health records in the
database. This could negatively affect the revenue VeriChip
anticipates it will derive in the future from the VeriMed system.
33
If
others assert that Applied Digital’s or its
subsidiaries’ products infringe such third parties’
intellectual property rights, including rights to the patent
covering VeriChip’s implantable microchip for human
applications, Applied Digital or its subsidiaries may be drawn
into costly disputes and risk paying substantial damages or
losing the right to sell their products.
Applied Digital and its subsidiaries face the risk of adverse
claims and litigation alleging infringement of the intellectual
property rights of others. If infringement claims are brought
against Applied Digital, its subsidiaries, or suppliers, these
assertions could distract management and necessitate the
expenditure of potentially significant funds and resources to
defend or settle such claims. Applied Digital and its
subsidiaries cannot be certain that they will have the financial
resources to defend themselves against any patent or other
intellectual property litigation.
If Applied Digital, its subsidiaries or suppliers are
unsuccessful in any challenge to their rights to market and sell
their products, Applied Digital or its subsidiaries may, among
other things, be required to:
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pay actual damages, royalties, lost profits
and/or
increased damages and the third party’s attorneys’
fees, which may be substantial;
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cease the development, manufacture, use
and/or
sale
of products that use the intellectual property in question
through a court-imposed sanction called an injunction;
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expend significant resources to modify or redesign their
products, manufacturing processes or other technology so that
they do not infringe others’ intellectual property rights,
or to develop or acquire non-infringing technology, which may
not be possible; or
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obtain licenses to the disputed rights, which could require
Applied Digital or its subsidiaries to pay substantial up-front
fees and future royalty payments and may not be available to
Applied Digital or its subsidiaries on acceptable terms, if at
all, or to cease marketing the challenged products.
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Ultimately, Applied Digital or its subsidiaries could be
prevented from selling a product or otherwise be forced to cease
some aspect of their business operations as a result of any
intellectual property litigation. Even if Applied Digital, its
subsidiaries or its suppliers are successful in defending an
infringement claim, the expense, time delay, and burden on
management of litigation and negative publicity could have a
material adverse effect on their businesses.
VeriChip
obtains the implantable microchip used in its VeriMed and
Evitrace systems from a single supplier, making it vulnerable to
supply disruptions that could constrain its sales of such
systems and/or increase its
per-unit
cost of production of the microchip.
At present, Digital Angel is VeriChip’s sole supplier of
VeriChip’s implantable microchip under the terms of an
agreement VeriChip entered into with Digital Angel in December
2005. Digital Angel, in turn, sources the microchip from
Raytheon Microelectronics España S.A., or RME, the actual
manufacturer, under a supply agreement between Digital Angel and
RME. The term of that agreement expires on June 30, 2010,
subject to earlier termination by either party if, among other
things, the other party breaches the agreement and does not
remedy the breach within 30 days of receiving notice.
Digital Angel and RME each own certain of the automated
equipment and tooling used in the manufacture of the microchip.
Accordingly, it would be difficult for Digital Angel to arrange
for a third party other than RME to manufacture the implantable
microchip if, for any reason, RME was unable to manufacture the
implantable microchip or RME did not manufacture sufficient
implantable microchips for Digital Angel to satisfy its
requirements. Even if Digital Angel were able to arrange to have
the implantable microchip manufactured in another facility,
Applied Digital and VeriChip currently believe that making such
arrangements and commencement of production could take at least
three to six months. A supply disruption of this length could
cause customers to cancel orders, negatively affect future sales
and damage VeriChip’s business reputation. In addition, the
per-unit
cost of production at another facility could be more than the
price per unit VeriChip pays to Digital Angel.
34
VeriChip’s
sales of systems that incorporate its implantable microchip for
human use may be enjoined by third parties who have rights to
the intellectual property used in these systems, and VeriChip
may be required to pay damages that would have an adverse effect
on its business.
VeriChip may face a claim that it is violating the intellectual
property rights of one or more third parties with respect to
U.S. Patent No. 5,211,129, “Syringe-Implantable
Identification Transponders.” If such a claim is
successful, VeriChip could be required to cease engaging in
activities to market its systems that utilize the implantable
microchip and to pay damages, which may be substantial.
VeriChip obtains the implantable microchip used in
VeriChip’s VeriMed and Evitrace systems from Digital Angel,
under the terms of a supply agreement. Digital Angel, in turn,
obtains the implantable microchip from RME, under a separate
supply agreement. The technology underlying VeriChip’s
VeriMed and Evitrace systems is covered, in part, by
U.S. Patent No. 5,211,129. In 1994, Destron/IDI, Inc.,
a predecessor company to Digital Angel, granted a co-exclusive
license under this patent, other than for certain specified
fields of use retained by the predecessor company, to Hughes
Aircraft Company, or Hughes, and its then wholly-owned
subsidiary, Hughes Identification Devices, or HID. The specified
fields of use retained by the predecessor company do not include
human identification and security applications. The rights
licensed in 1994 to Hughes and HID were freely assignable, and
VeriChip does not know which party or parties currently have
these rights or whether these rights have been assigned,
transferred or conveyed to any third party. VeriChip sources the
implantable microchip indirectly from a subsidiary of Raytheon
Company, with which Hughes, then known as HE Holdings, Inc., was
merged in 1997. However, VeriChip has no documentation that
establishes its right to use the patented technology for human
identification and security applications. Hughes, HID, any of
their respective successors in interest, or any party to whom
any of the foregoing parties may have assigned its rights under
the 1994 license agreement may commence a claim against VeriChip
asserting that VeriChip is violating its rights. Applied Digital
is aware that Digital Angel and the successor to HID are in the
process of finalizing a cross-license that includes Digital
Angel obtaining a royalty-free, non-exclusive license to the
successor’s rights to the implantable human applications of
the ’129 patent, to which it claims certain ownership
rights. That agreement is anticipated to have no cost to Applied
Digital or VeriChip. If such a claim is successful, sales of the
VeriMed or Evitrace systems could be enjoined, and VeriChip
could be required to cease its efforts to create a market for
these systems until the patent expires in April 2008. In
addition, VeriChip could be required to pay damages, which may
be substantial. Regardless of whether any claimant is
successful, VeriChip would face the prospect of the expenditure
of funds in litigation, the diversion of management time and
resources, damage to its reputation, and the potential
impairment in the marketability of its systems even after the
expiration of the patent, which could harm its business and
negatively affect its prospects.
Applied
Digital’s inability to safeguard its intellectual property
may adversely affect its businesses by causing Applied Digital
to lose a competitive advantage or by forcing Applied Digital to
engage in costly and time-consuming litigation to defend or
enforce its rights.
Applied Digital relies on copyrights, trademarks, trade secret
protections, know-how, and contractual safeguards to protect its
non-patented intellectual property, including its software
technologies. Applied Digital’s employees, consultants and
advisors are required to enter into confidentiality agreements
that prohibit the disclosure or use of its confidential
information. Applied Digital also has entered into
confidentiality agreements to protect its confidential
information delivered to third parties for research and other
purposes. There can be no assurance that Applied Digital will be
able to effectively enforce these agreements, the confidential
information will not be disclosed, others will not independently
develop substantially equivalent confidential information and
techniques or otherwise gain access to its confidential
information, or that Applied Digital can meaningfully protect
its confidential information. Costly and time-consuming
litigation could be necessary to enforce and determine the scope
of its confidential information, and failure to maintain the
confidentiality of its confidential information could adversely
affect its businesses by causing Applied Digital to lose a
competitive advantage maintained through such confidential
information.
Disputes may arise in the future with respect to the ownership
of rights to any technology developed with third parties. These
and other possible disagreements could lead to delays in the
collaborative research,
35
development or commercialization of its systems, or could
require or result in costly and time-consuming litigation that
may not be decided in its favor. Any such event could have a
material adverse effect on its businesses, financial condition
and results of operations by delaying its ability to
commercialize innovations or by diverting its resources away
from revenue-generating projects.
Applied
Digital’s efforts to protect its intellectual property may
be less effective in some foreign countries where intellectual
property rights are not as well protected as in the United
States.
The laws of some foreign countries do not protect intellectual
property to as great an extent as do the laws of the United
States. Policing unauthorized use of the intellectual property
utilized in Applied Digital’s systems and system components
is difficult, and there is a risk that its means of protecting
its intellectual property may prove inadequate in these
countries. Applied Digital’s competitors in these countries
may independently develop similar technology or duplicate its
systems, which would likely reduce its sales in these countries.
Furthermore, some of Applied Digital’s patent rights may be
limited in enforceability to the United States or certain other
select countries, which may limit its intellectual property
rights abroad.
VeriChip
may not be successful in its efforts to obtain federal
registration of its trademarks containing the “Veri”
prefix with the U.S. Patent and Trademark Office.
In June 2004, VeriSign, Inc., or VeriSign, filed oppositions
with the U.S. Patent and Trademark Office, objecting to the
registration of the VeriChip trade name and trademarks that
begin with the “Veri” prefix. If VeriSign is
successful in the opposition proceedings, the applications to
register VeriChip’s other “Veri-” marks will be
refused. It is also possible that VeriSign could bring a court
action seeking to enjoin VeriChip’s use of VeriChip and the
other “Veri-” marks
and/or
seek
monetary damages from its use of these marks. If VeriSign were
to bring a court action and prevail in that action, VeriChip may
be required to re-name and re-brand some of its products, such
as VeriMed and VeriChip. In addition, Applied Digital and
VeriChip could be required to pay damages to VeriSign for
Applied Digital’s prior use and VeriChip’s current use
of any trademarks found to have been confusingly similar to
those of VeriSign.
Implantation
of VeriChip’s human implantable microchip may be found to
cause risks to a person’s health, which could adversely
affect sales of its systems that incorporate the implantable
microchip.
The implantation of VeriChip’s implantable microchip may be
found, or be perceived, to cause risks to a person’s
health. Potential or perceived risks include adverse tissue
reactions, migration of the microchip and infection from
implantation. As more people are implanted with the implantable
microchip, it is possible that these and other risks to health
will manifest themselves. Actual or perceived risks to a
person’s health associated with the microchip implantation
process could constrain VeriChip’s sales of the VeriMed
system or result in costly and expensive litigation. Further,
the potential resultant negative publicity could damage
VeriChip’s business reputation, leading to loss in sales of
its other systems targeted at the healthcare market, which would
harm its business and negatively affect its prospects.
If
VeriChip is required to effect a recall of its implantable
microchip, its reputation could be materially and adversely
affected and the cost of any such recall could be substantial,
which could adversely affect its results of operations and
financial condition.
From time to time, implanted devices have become subject to
recall due to safety, efficacy, product failures or other
concerns. To date, VeriChip has not had to recall any of its
implantable microchips. However, if, in the future, VeriChip is
required to effect such a recall, the cost of the recall, and
the likely related loss of system sales, could be substantial
and could materially and adversely affect its results of
operations and financial condition. In addition, any such recall
could materially adversely affect its reputation and its ability
to sell its systems that make use of the implantable microchip,
which would harm its business.
36
Interruptions
in access to, or the hacking into, VeriChip’s VeriMed
patient information database may have a negative impact on its
revenue, damage its reputation and expose it to
litigation.
Reliable access to the VeriMed patient information database is a
key component of the functionality of the VeriMed system.
VeriChip’s ability to provide uninterrupted access to the
database, whether operated by VeriChip or one or more third
parties with whom it contracts, will depend on the efficient and
uninterrupted operation of the computer and communications
systems involved. Although certain elements of technological,
power, communications, personnel and site redundancy are
maintained, the database may not be fully redundant. Further,
the database may not function properly if certain necessary
third-party systems fail, or if some other unforeseen act or
natural disaster should occur. In the past, VeriChip has
experienced short periods during which the database was
inaccessible as a result of development work, system maintenance
and power outages. Any disruption of the database services,
computer systems or communications networks, or those of third
parties that VeriChip relies on, could result in the inability
of users to access the database for an indeterminate period of
time. This, in turn, could cause VeriChip to lose the confidence
of the healthcare community and persons who have undergone the
microchip implant procedure, resulting in a loss of revenue and
possible litigation.
In addition, if the firewall software protecting the information
contained in VeriChip’s database fails or someone is
successful in hacking into the database, VeriChip could face
damage to its business reputation and litigation.
Regulation
of products and services that collect personally-identifiable
information or otherwise monitor an individual’s activities
may make the provision of VeriChip’s services more
difficult or expensive and could jeopardize its growth
prospects.
Certain technologies that VeriChip currently supports, or may in
the future support, are capable of collecting
personally-identifiable information. A growing body of laws
designed to protect the privacy of personally- identifiable
information, as well as to protect against its misuse, and the
judicial interpretations of such laws, may adversely affect the
growth of its business. In the United States, these laws include
the Health Insurance Portability and Accountability Act, or
HIPAA, the Federal Trade Commission Act, the Electronic
Communications Privacy Act, the Fair Credit Reporting Act, and
the Gramm-Leach-Bliley Act, as well as various state laws and
related regulations. Although VeriChip is not a covered entity
under HIPAA, it has entered into agreements with certain covered
entities in which it is considered to be a “business
associate” under HIPAA. As a business associate, VeriChip
is required to implement policies, procedures and reasonable and
appropriate security measures to protect
individually-identifiable health information it receives from
covered entities. VeriChip’s failure to protect health
information received from customers could subject it to
liability and adverse publicity, and could harm its business and
impair its ability to attract new customers.
In addition, certain governmental agencies, like the
U.S. Department of Health and Human Services and the
Federal Trade Commission, have the authority to protect against
the misuse of consumer information by targeting companies that
collect, disseminate or maintain personal information in an
unfair or deceptive manner. VeriChip is also subject to the laws
of those foreign jurisdictions in which it operates, some of
which currently have more protective privacy laws. If VeriChip
fails to comply with applicable regulations in this area, its
business and prospects could be harmed.
Certain regulatory approvals generally must be obtained from the
governments of the countries in which VeriChip’s foreign
distributors sell its systems. However, any such approval may be
subject to significant delays or may not be obtained. Any
actions by regulatory agencies could materially and adversely
affect VeriChip’s growth plans and the success of its
business.
If
VeriChip fails to comply with anti-kickback and false claims
laws, VeriChip could be subject to costly and time-consuming
litigation and possible fines or other penalties.
VeriChip is, or may become subject to, various federal and state
laws designed to address healthcare fraud and abuse, including
anti-kickback laws and false claims laws. The federal
anti-kickback statute prohibits the offer, payment, solicitation
or receipt of any form of remuneration in return for referring
items or services
37
payable by Medicare, Medicaid, or any other federally-funded
healthcare program. This statute also prohibits remuneration in
return for purchasing, leasing, or ordering or arranging, or
recommending the purchasing, leasing, or ordering, of items or
services payable by Medicare, Medicaid, or any other
federally-funded healthcare program. The anti-kickback laws of
various states apply more broadly to prohibit remuneration in
return for referrals of business payable by payers other than
federal healthcare programs.
False claims laws prohibit anyone from knowingly presenting, or
causing to be presented, for payment to third-party payers,
including Medicare and Medicaid, which currently do not provide
reimbursement for VeriChip’s human microchip implant
procedure, claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided
as claimed, or claims for medically unnecessary items or
services. VeriChip’s activities relating to the reporting
of wholesale or estimated retail prices of its VeriMed system,
the reporting of Medicaid rebate information, and other
information affecting federal, state, and third-party payment
for the VeriMed system will be subject to scrutiny under these
laws.
The anti-kickback statute and other fraud and abuse laws are
very broad in scope, and many of their provisions have not been
uniformly or definitively interpreted by existing case law or
regulations. Violations of the anti-kickback statute and other
fraud and abuse laws may be punishable by criminal and civil
sanctions, including fines and civil monetary penalties, as well
as the possibility of exclusion from federal healthcare
programs, including Medicare and Medicaid, which currently do
not provide reimbursement for VeriChip’s microchip implant
procedure. VeriChip has not been challenged by a governmental
authority under any of these laws and believes that its
operations are in compliance with such laws. However, because of
the far-reaching nature of these laws, VeriChip may be required
to alter one or more of its practices to be in compliance with
these laws. Healthcare fraud and abuse regulations are complex,
and even minor, inadvertent irregularities in submissions can
potentially give rise to claims that the statute has been
violated. If VeriChip is found to have violated these laws, or
is charged with violating them, its business, financial
condition, and results of operations could suffer, and its
management team could be required to dedicate significant time
addressing the actual or alleged violations.
Applied
Digital’s consolidated revenues and cash position may
decline if its majority-owned subsidiary, InfoTech, is unable to
comply with its payment and other obligations under its credit
facilities with Wells Fargo Business Credit, Inc. and IBM Credit
LLC.
InfoTech is indebted to Wells Fargo Business Credit, Inc., or
Wells Fargo, and IBM Credit LLC. Unless earlier terminated, the
credit facility with Wells Fargo matures on June 29, 2008,
and automatically renews for successive one-year periods
thereafter unless terminated by Wells Fargo or InfoTech. The
credit facility with IBM Credit LLC will remain in effect until
terminated by either party by providing at least
90 days’ written notice to the other party. InfoTech
may not have the cash resources to repay the indebtedness
outstanding when due. Accordingly, InfoTech may be required to
obtain the funds necessary to repay these obligations either
through refinancing, the issuance of additional InfoTech equity
or debt securities, or the sale of its assets. InfoTech may be
unable to obtain the funds needed to repay the obligations from
any one or more of these other sources on favorable economic
terms or at all.
To secure its debt payment obligations to Wells Fargo, InfoTech
granted to Wells Fargo a security interest in, and lien upon,
substantially all of its property and assets. Currently,
InfoTech is in compliance with the covenants under the loan
agreements; however, in the past, InfoTech has not met certain
financial covenants and has had to obtain waivers from Wells
Fargo. In the event of any additional noncompliance, InfoTech
will again seek to obtain a waiver, for which a waiver fee may
be required, but no assurance can be given that any such
additional waiver will be granted. The occurrence of an unwaived
event of default under the credit facility would subject
InfoTech to foreclosure by Wells Fargo on substantially all of
its assets to the extent necessary to repay any amounts due.
A payment or other default under the credit facility could
result in InfoTech’s inability to continue operations in
the normal course.
38
Applied
Digital’s results of operations may be adversely affected
if it writes off goodwill and other intangible
assets.
As of June 30, 2007, Applied Digital had goodwill and other
intangible assets of approximately $103.7 million. On
January 1, 2002, Applied Digital adopted Financial
Accounting Standards No. 142, or FAS 142, which
requires that goodwill and certain intangibles no longer be
amortized but instead tested for impairment at least annually by
applying a fair value based test. In the fourth quarters of
2006, 2005 and 2004, Applied Digital performed its annual
impairment test for goodwill and certain other intangible assets
using a fair value based approach, primarily discounted cash
flows. Based on its evaluations, goodwill and other intangible
assets were not impaired as of December 31, 2004. However,
during the fourth quarters of 2006 and 2005, Applied Digital
recorded an impairment charge of approximately $6.6 million
and $7.1 million, respectively, for goodwill and other
intangible assets associated with Applied Digital’s
Advanced Technology and GPS and Radio Communications segments,
respectively. In addition, Applied Digital expects to record an
impairment charge of approximately $3.5 million during the
third quarter ended September 30, 2007 for goodwill
associated with Computer Equity Corporation. On
September 30, 2007, Applied Digital’s board of
directors decided to sell Computer Equity Corporation.
Applied Digital assesses the fair value of its goodwill and
other intangible assets annually or earlier if events occur or
circumstances change that would more likely than not reduce the
fair value of these assets below their carrying value. These
events or circumstances would include a significant change in
business climate, including a significant, sustained decline in
an entity’s market value, legal factors, operating
performance indicators, competition, sale or disposition of a
significant portion of the business, or other factors. If
Applied Digital determines that significant impairment has
occurred, Applied Digital would be required to write off the
impaired portion of goodwill and its other intangible assets.
Impairment charges could have a material adverse effect on its
operating results and financial condition.
The
sale of shares of common stock by Applied Digital’s
subsidiaries to third parties at prices below the per share
carrying amount of Applied Digital’s investments has given
(and may, in the future, give) rise to losses in its
consolidated statement of operations and its inability to
consolidate its operations.
As of June 30, 2007, VeriChip and Digital Angel have issued
shares of their common stock to third parties at prices per
share lower than the per share carrying amount of Applied
Digital’s investment in these subsidiaries, triggering
losses in Applied Digital’s consolidated statement of
operations. In addition, the issuances of stock by VeriChip,
Digital Angel and InfoTech have given rise to losses as a result
of the dilution of Applied Digital’s ownership interest in
these subsidiaries. Future stock issuances to third parties by
VeriChip, Digital Angel and InfoTech, including upon the
exercise of stock options and warrants, may give rise to
additional losses. Such losses would reduce Applied
Digital’s net income, perhaps significantly. In addition,
such issuances give rise to a decrease in Applied Digital’s
ownership position. If its equity interest in VeriChip and
Digital Angel (52.0% and 55.6%, respectively, as of
September 28, 2007) were, as a result of future
issuances of VeriChip and Digital Angel shares, to drop below
50%, Applied Digital may not be able to consolidate their
operations in its financial statements. This would also result
in a significant reduction in its consolidated revenues and
assets.
Applied
Digital faces the risk that the value of its inventory may
decline before it is sold or that its inventory may not be able
to be sold at the anticipated prices.
On June 30, 2007, the book value of its inventory was
$16.5 million. Its inventory may decline in value as a
result of technological obsolescence or a change in the product.
During the six-months ended June 30, 2007, and during each
of the years ended December 31, 2006, 2005 and 2004,
Applied Digital recorded approximately $0.4 million,
$0.2 million, $0.6 million and $0.2 million in
inventory reserves, respectively. In addition, in the six-months
ended June 30, 2007, and during the year ended
December 31, 2006, VeriChip wrote off approximately
$0.0 million and $0.4 million, respectively, of
inventory associated with its VeriMed system. Applied
Digital’s success depends in part on its ability to
minimize the cost to purchase/produce inventory and turn that
inventory rapidly through sales. The failure to turn such
inventory may require Applied
39
Digital to sell such inventory at a discount or at a loss or
write down its value, which could result in significant losses
and decreases in its cash flows.
Currency
exchange rate fluctuations could have an adverse effect on
Applied Digital’s sales and financial
results.
During the year ended December 31, 2006, Digital Angel
generated approximately 38% of its sales and incurred a portion
of its expenses in currencies other than U.S. dollars.
Also, VeriChip incurs a significant portion of its payroll in
Canadian dollars. To date, Applied Digital has not incurred
material amounts of foreign currency gains or losses. However,
to the extent that going forward Applied Digital is unable to
match revenues received in foreign currencies with costs paid in
the same currency, exchange rate fluctuations in any such
currency could have an adverse effect on its financial results.
If
Applied Digital fails to maintain proper and effective internal
controls, its ability to produce accurate financial statements
could be impaired, which could adversely affect its operating
results, its ability to operate its businesses and its stock
price.
During the course of its testing of its internal controls,
Applied Digital may identify, and have to disclose, material
weaknesses or significant deficiencies in its internal controls
that will have to be remediated. Implementing any appropriate
changes to Applied Digital’s internal controls may require
specific compliance training of its directors, officers, and
employees, entail substantial costs in order to modify its
existing accounting systems, and take a significant period of
time to complete. Such changes may not, however, be effective in
maintaining the adequacy of its internal controls, and any
failure to maintain that adequacy, or consequent inability to
produce accurate financial statements on a timely basis, could
increase its operating costs and could materially impair its
ability to operate its businesses. In addition, investors’
perceptions that Applied Digital’s internal controls are
inadequate or that Applied Digital is unable to produce accurate
financial statements may negatively affect its stock price.
If
Applied Digital or its subsidiaries are found liable in lawsuits
that have been brought against them or if they are found liable
in other litigation to which they may become subject in the
future, Applied Digital or its subsidiaries may be forced to pay
substantial damages and change their business practices, which
could have a material adverse effect on Applied Digital’s
revenue and profitability.
Applied Digital and its subsidiaries are currently involved in
several legal proceedings. For a discussion of certain of these
legal proceedings, see “Information About Applied
Digital — Legal Proceedings” and
“Description of Digital Angel’s
Business — Legal Proceedings.” Applied
Digital has accrued its estimate of the probable costs for the
resolution of these claims, and, as of June 30, 2007, it
recorded approximately $0.9 million in reserves with
respect to such claims. It is possible, however, that future
results of operations for any particular quarterly or annual
period could be materially affected by changes in these
estimates. If Applied Digital or its subsidiaries are
unsuccessful in their defense against any of the legal
proceedings, Applied Digital may be forced to pay substantial
damages
and/or
change its business practices or pricing structure, any of which
could have a material adverse effect on its revenue, cash flows
and profitability.
Industry
and Business Risks Related to Digital Angel and Its
Businesses
Digital
Angel has a history of operating losses and negative cash flows
and Digital Angel may not become profitable in the future, which
could ultimately result in Digital Angel’s inability to
continue operations in the normal course of
business.
Historically, Digital Angel has incurred losses and has
generated negative cash flows from operations. Digital Angel
incurred a consolidated loss from continuing operations of
$5.4 million, $5.2 million, $0.2 million, and
$1.7 million in the six months ended June 30, 2007 and
the years ended December 31, 2006, 2005, and 2004,
respectively. Digital Angel’s consolidated operating
activities provided/(used) cash of $0.4 million,
$(5.4) million, $(3.3) million and $2.5 million
during the six months ended June 30, 2007 and during the
years ended December 31, 2006, 2005 and 2004, respectively.
During these periods, Digital Angel funded its operating cash
requirements, as well as its capital needs, with the proceeds
from investing and financing activities.
40
Digital Angel expects to continue to incur consolidated
operating losses for the foreseeable future. Digital
Angel’s ability in the future to achieve or sustain
profitability is based on a number of factors, many of which are
beyond its control, including the future demand for its RFID and
GPS systems. If demand for such systems does not reach
anticipated levels, or if Digital Angel fails to manage its cost
structure, Digital Angel may not achieve or be able to sustain
profitability.
As of June 30, 2007, Digital Angel and its subsidiaries had
cash and cash equivalents aggregating $1.0 million. Digital
Angel believes that it currently has sufficient funds to operate
its businesses over the next twelve months. However, Digital
Angel’s goal is to achieve profitability and to generate
positive cash flows from operations. Digital Angel’s
profitability and cash flows from operations depend on many
factors, including the success of its marketing programs, the
maintenance and reduction of expenses and its ability to
successfully develop and bring to market its new products and
technologies. If, in the future, it is not successful in
managing these factors and achieving its goal of profitability
and positive cash flows from operations, Digital Angel may not
have sufficient funds to operate its businesses, which could
ultimately result in its inability to continue operations in the
normal course.
Digital
Angel obtains the implantable microchip used in its Animal
Applications segment’s products from a single supplier,
making Digital Angel vulnerable to supply disruptions that could
constrain its sales of such systems and increase its
per-unit
cost of production of the microchip.
Digital Angel obtains the implantable microchip used in its
Animal Applications segment’s products from RME, the actual
manufacturer, under a supply agreement between Digital Angel and
RME. The term of that agreement expires on June 30, 2010,
subject to earlier termination by either party if, among other
things, the other party breaches the agreement and does not
remedy the breach within 30 days of receiving notice.
Digital Angel and RME each own certain of the automated
equipment and tooling used in the manufacture of the microchip.
Accordingly, it would be difficult for Digital Angel to arrange
for a third party, other than RME, to manufacture the
implantable microchip if, for any reason, RME was unable or
unwilling to manufacture the implantable microchip or if RME did
not manufacture sufficient implantable microchips for Digital
Angel to satisfy its requirements. Even if Digital Angel was
able to arrange to have the implantable microchip manufactured
in another facility, Digital Angel currently believes making
such arrangements and commencement of production could take at
least three to six months. A supply disruption of this length
could cause customers to cancel orders, negatively affect future
sales and damage Digital Angel’s business reputation. In
addition, the
per-unit
cost of production at another facility could be more than the
price per unit that Digital Angel currently pays.
Digital
Angel competes with other companies in the visual and electronic
identification and pilot locator beacon markets, and the
products sold by Digital Angel’s competitors could become
more popular than its products or render its products
obsolete.
The markets for visual and electronic identification and pilot
locator beacon products are highly competitive. Digital Angel
believes that its principal competitors in the visual
identification market for livestock are AllFlex USA and Y-Tex
Corporation, that its principal competitors in the electronic
identification market are AllFlex USA, Datamars SA and Avid
Identification Systems, Inc., and that its principal competitors
in the pilot locator beacon market are Boeing North American
Inc., General Dynamics Decision Systems, Tadiran Spectralink
Ltd., Becker Avionic Systems, and ACR Electronics, Inc.
In addition, other companies could enter this line of business
in the future. Many of Digital Angel’s competitors have
substantially greater financial and other resources than Digital
Angel. Digital Angel may not be able to compete successfully
with these competitors, and those competitors may develop or
market technologies and products that are more widely accepted
than Digital Angel’s or that would render Digital
Angel’s products obsolete or noncompetitive.
41
The
expiration of patents in 2008 and 2009 covering the implantable
microchip technology used in Digital Angel’s Animal
Applications segment will expose Digital Angel to potential
competition that may have a material adverse effect on its sales
and results of operations.
Digital Angel relies on patents covering its implantable
microchip technology used in its Animal Applications segment.
For the six-months ended June 30, 2007, and the year ended
December 31, 2006, sales of Digital Angel’s products
relying on this technology were $10.3 million and
$13.8 million, respectively. These patents expire in 2008
and 2009. Without patent protection, Digital Angel’s
competitors may independently develop similar technology or
duplicate its systems, which may have a material adverse effect
on its sales and results of operations.
Infringement
by third parties on Digital Angel’s intellectual property
or development of substantially equivalent proprietary
technology by Digital Angel’s competitors could negatively
affect its businesses.
Digital Angel’s success depends significantly on its
ability to:
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maintain patent and trade secret protection;
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obtain future patents and licenses; and
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operate without infringing on the proprietary rights of third
parties.
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There can be no assurance that the measures Digital Angel has
taken to protect its intellectual property will prevent the
misappropriation or circumvention of its intellectual property.
In addition, there can be no assurance that any patent
application, when filed, will result in an issued patent, or
that Digital Angel’s existing patents, or any patents that
may be issued in the future, will provide Digital Angel with
significant protection against competitors. Moreover, there can
be no assurance that any patents issued to or licensed by
Digital Angel will not be infringed upon or circumvented by
others. Litigation to establish the validity of patents and to
assert infringement claims against others can be expensive and
time-consuming, even if the outcome, which is often uncertain,
is in Digital Angel’s favor. Infringement on Digital
Angel’s intellectual property or the development of
substantially equivalent technology by its competitors could
have a material adverse effect on Digital Angel’s business.
If
others assert that Digital Angel’s products infringe their
intellectual property rights, Digital Angel may be drawn into
costly disputes and risk paying substantial damages or losing
the right to sell its products.
Digital Angel faces the risk of adverse claims and litigation
alleging its infringement of the intellectual property rights of
others. If infringement claims are brought against Digital Angel
or its suppliers, these assertions could distract management and
necessitate Digital Angel expending potentially significant
funds and resources to defend or settle such claims. Digital
Angel cannot be certain that it will have the financial
resources to defend itself against any patent or other
intellectual property litigation.
If Digital Angel or its suppliers are unsuccessful in any
challenge to Digital Angel’s rights to market and sell its
products, Digital Angel may, among other things, be required to:
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pay actual damages, royalties, lost profits, or increased
damages and the third party’s attorneys’ fees, which
may be substantial;
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cease the development, manufacture, use, or sale of products
that use the intellectual property in question through a
court-imposed sanction called an injunction;
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expend significant resources to modify or redesign its products,
manufacturing processes, or other technology so that it does not
infringe others’ intellectual property rights, or to
develop or acquire non-infringing technology, which may not be
possible; and
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obtain licenses to the disputed rights, which could require
Digital Angel to pay substantial up-front fees and future
royalty payments and may not be available to Digital Angel on
acceptable terms, if at all, or to cease marketing the
challenged products.
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Ultimately, Digital Angel could be prevented from selling a
product or otherwise forced to cease some aspect of its business
operations as a result of any intellectual property litigation.
Even if Digital Angel or its suppliers are successful in
defending an infringement claim, the expense, time delay and
burden on management of litigation and negative publicity could
have a material adverse effect on Digital Angel’s
businesses.
Digital
Angel’s inability to safeguard its intellectual property
may adversely affect its businesses by causing Digital Angel to
lose a competitive advantage or by forcing Digital Angel to
engage in costly and
time-consuming
litigation to defend or enforce its rights.
Digital Angel relies on copyrights, trademarks, trade secret
protections, know-how and contractual safeguards to protect its
non-patented intellectual property, including its software
technologies. Digital Angel’s employees, consultants and
advisors are required to enter into confidentiality agreements
that prohibit the disclosure or use of its confidential
information. Digital Angel also has entered into confidentiality
agreements to protect its confidential information delivered to
third parties for research and other purposes. There can be no
assurance that Digital Angel will be able to effectively enforce
these agreements, the confidential information will not be
disclosed, others will not independently develop substantially
equivalent confidential information and techniques or otherwise
gain access to Digital Angel’s confidential information, or
that Digital Angel can meaningfully protect its confidential
information. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of Digital
Angel’s confidential information, and failure to maintain
the confidentiality of Digital Angel’s confidential
information could adversely affect its businesses by causing it
to lose a competitive advantage maintained through such
confidential information.
Disputes may arise in the future with respect to the ownership
of rights to any technology developed with third parties. These
and other possible disagreements could lead to delays in the
collaborative research, development or commercialization of
Digital Angel’s systems, or could require or result in
costly and time-consuming litigation that may not be decided in
Digital Angel’s favor. Any such event could have a material
adverse effect on Digital Angel’s businesses, financial
condition and results of operations by delaying its ability to
commercialize innovations or by diverting its resources away
from revenue-generating projects.
Digital
Angel’s efforts to protect its intellectual property may be
less effective in some foreign countries where intellectual
property rights are not as well protected as in the United
States.
The laws of some foreign countries do not protect intellectual
property to as great an extent as do the laws of the United
States. Policing unauthorized use of the intellectual property
utilized in Digital Angel’s systems and system components
is difficult, and there is a risk that Digital Angel’s
means of protecting its intellectual property may prove
inadequate in these countries. Digital Angel’s competitors
in these countries may independently develop similar technology
or duplicate its systems, which would likely reduce Digital
Angel’s sales in these countries. Furthermore, some of
Digital Angel’s patent rights may be limited in
enforceability to the United States or certain other select
countries, which may limit Digital Angel’s intellectual
property rights abroad.
Domestic
and foreign government regulation and other factors could impair
Digital Angel’s ability to develop and sell its products in
certain markets.
The electronic animal identification market can be negatively
affected by such factors as food safety concerns, price,
consumer perceptions regarding cost and efficacy, international
technology standards, government regulation and slaughterhouse
removal of microchips.
Digital Angel is also subject to federal, state and local
regulation in the United States, including regulation by the
FDA, the Federal Communications Commission, or FCC, and the U.S.
Department of Agriculture, or USDA, and similar regulatory
bodies in other countries. Digital Angel cannot predict the
extent to which it may be affected by further legislative and
regulatory developments concerning its products and markets.
Digital Angel is required to obtain regulatory approval before
marketing most of its products. The regulatory process can be
very time-consuming and costly, and there is no assurance that
Digital Angel will
43
receive the regulatory approvals necessary to sell its products
under development. Regulatory authorities also have the
authority to revoke approval of previously approved products for
cause, to request recalls of products and to close manufacturing
plants in response to violations. Any such regulatory action,
including the failure to obtain such approval, could prevent
Digital Angel from selling, or materially impair Digital
Angel’s ability to sell, its products in certain markets
and could negatively affect its businesses.
Digital
Angel relies heavily on revenues derived from sales to various
governmental agencies of its animal identification and search
and rescue beacon products, and the loss of, or a significant
reduction in, orders from these customers could result in
significant losses and deficits in cash flows from
operations.
Digital Angel’s principal customers for electronic
identification devices for fish are Pacific States Marine, a
government contractor that relies on funding from the
U.S. government, and the U.S. Army Corps of Engineers.
Digital Angel’s GPS and Radio Communications segment is
heavily dependent on contracts with domestic government agencies
and foreign governments, including the United Kingdom, primarily
relating to military applications. Under certain contracts, a
government agency is permitted to terminate its contract for
convenience, including in cases when funds are no longer
appropriated. Because Digital Angel relies on revenues and cash
flows generated from contracts, directly or indirectly, with
governmental agencies, the loss of any such contract would
result in a decrease in revenues and cash flows, and such a
decrease may be significant and thereby have a material adverse
effect on Digital Angel’s financial condition and results
of operations.
Loss
of Digital Angel’s principal distributor or customers could
negatively affect its net revenue.
Digital Angel’s pet identification and location system is
marketed in the U.S. by Schering-Plough Animal Health
Corporation, or Schering-Plough. For the six-months ended
June 30, 2007 and for the year ended December 31,
2006, Schering-Plough accounted for approximately 22% and 15% of
Digital Angel’s revenues. It may be difficult and
time-consuming for Digital Angel to arrange for distribution of
the implantable microchip by a third party. The loss of
Schering-Plough as Digital Angel’s exclusive distributor
may negatively affect future sales.
Digital Angel’s principal customers for electronic
identification devices for fish are Pacific States Marine and
the U.S. Army Corps of Engineers. The loss of, or a
significant reduction in, orders from these customers could have
a material adverse effect on its financial condition and results
of operations.
Technological
change could cause Digital Angel’s products and technology
to become obsolete or require Digital Angel to redesign its
products, which could have a material adverse effect on its
businesses.
Technological changes within the industries that Digital Angel
conducts business may require Digital Angel to expend
substantial resources in an effort to develop new products and
technology. Digital Angel may not be able to anticipate or
respond to technological changes in a timely manner, and Digital
Angel’s response may not result in successful product
development and timely product introductions. If Digital Angel
is unable to anticipate or respond to technological changes, its
businesses could be adversely affected.
Recent
changes in Digital Angel’s senior management could have an
adverse effect on Digital Angel’s financial
results.
Digital Angel has recently experienced numerous changes with
respect to its senior management. Effective January 2,
2007, Mr. Santelli resigned as Digital Angel’s vice
president, finance and chief financial officer after serving in
such position since March 27, 2002. Mr. Santelli
continued his employment with Digital Angel until
January 31, 2007, when he retired, in order to effect a
smooth transition to Mr. Hoyer. Effective January 2,
2007, Mr. Hoyer was appointed chief financial officer, vice
president and treasurer of Digital Angel. However,
Mr. Hoyer resigned from the position effective May 23,
2007. On May 18, 2007, the board of directors appointed
Lorraine Breece as acting chief financial officer, treasurer and
vice president of Digital Angel. Ms. Breece is also acting
chief financial officer, senior vice president, treasurer and
assistant secretary of Applied Digital.
44
Effective August 6, 2007, Kevin McGrath resigned as Digital
Angel’s president, chief executive officer and director
after serving in such position since January 2004. On
August 6, 2007, Digital Angel, with the board of
directors’ approval, appointed Barry Edelstein as interim
president and chief executive officer while an extensive search
for a new chief executive officer is conducted. At the time of
his appointment, Mr. Edelstein had been serving as a
director of Digital Angel since June 2005, and he continues to
serve on the board of directors.
Effective May 30, 2006, James G. Naro resigned as Digital
Angel’s vice president, general counsel and secretary. On
September 15, 2006, Digital Angel appointed Patricia M.
Petersen as vice president and general counsel.
Since Digital Angel depends heavily on the skills of those
persons holding senior management positions, the loss of any
senior executive could materially adversely affect its financial
results. These senior executives, in many cases, have strong
relationships with Digital Angel’s customers and suppliers.
Therefore, the loss of the services of such senior executives or
any general instability in the composition of Digital
Angel’s senior management could have a negative impact on
its relationship with these customers and suppliers. Digital
Angel cannot ensure that it will be able to retain its senior
executives, and this uncertainty could have a material negative
impact on its businesses.
Digital
Angel depends on a small team of senior management, and it may
have difficulty attracting and retaining additional
personnel.
Digital Angel’s future success will depend in large part
upon the continued services and performance of senior management
and other key personnel. If Digital Angel loses the services of
any member of its senior management team, its overall operations
could be materially and adversely affected. In addition, Digital
Angel’s future success will depend on its ability to
identify, attract, hire, train, retain and motivate other highly
skilled technical, managerial, marketing, purchasing and
customer service personnel when they are needed. Competition for
these individuals is intense. Digital Angel cannot ensure that
it will be able to successfully attract, integrate or retain
sufficiently qualified personnel when the need arises. Any
failure to attract and retain the necessary technical,
managerial, marketing, purchasing and customer service personnel
could have a material adverse effect on Digital Angel’s
financial condition and results of operations.
Digital
Angel’s foreign operations pose additional risks to its
businesses.
Digital Angel operates its businesses and markets its products
internationally. During the six-months ended June 30, 2007
and during the year ended December 31, 2006, approximately
53% and 51% of its sales were to foreign countries. Digital
Angel’s foreign operations are subject to the risks
described above, as well as risks related to compliance with
foreign laws and other economic or political uncertainties.
International sales are subject to risks related to general
economic conditions, currency exchange rate fluctuations,
imposition of tariffs, quotas, trade barriers and other
restrictions, enforcement of remedies in foreign jurisdictions
and compliance with applicable foreign laws, and other economic
and political uncertainties. All of these risks could result in
increased costs or decreased revenues, which could have an
adverse effect on Digital Angel’s financial results.
Digital
Angel may be unable to successfully integrate McMurdo
Limited’s operations or to realize the anticipated benefits
of the acquisition.
On April 5, 2007, Digital Angel’s subsidiary,
Signature Industries Limited, acquired certain assets of McMurdo
Limited’s marine electronics business. This acquisition was
made to broaden Digital Angel’s emergency location beacon
product offering to serve the military and commercial maritime
sectors and provide stability to Digital Angel’s revenue
base. Achieving the anticipated benefits of the acquisition will
depend in part upon whether Digital Angel can integrate McMurdo
Limited’s business in an efficient and effective manner.
Digital Angel may not be able to accomplish this integration
process smoothly or successfully. The necessity of coordinating
separate organizations, facilities and systems and addressing
possible differences in corporate cultures and management
philosophies may increase the difficulties of integration.
Digital Angel may not be able to achieve the anticipated
strategic benefits of the acquisition. An inability to realize
the full extent of, or any of, the anticipated benefits of the
acquisition, as well as any delays encountered in the
integration process, could have an adverse effect on the
businesses and results of operations of Digital Angel.
45
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus may contain
“forward-looking statements” about Applied Digital and
Digital Angel and their businesses within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of the management of Applied
Digital and Digital Angel, based on information currently
available to each company’s management. When words such as
“believes,” “expects,”
“anticipates,” “intends,” “plans,”
“estimates,” “should,” “likely” or
similar expressions are used, Applied Digital and Digital Angel
are making forward-looking statements. Forward-looking
statements also include the information concerning possible or
assumed future results of operations of Applied Digital and
Digital Angel set forth under “Summary,” “Risk
Factors,” “The Merger — Background of the
Merger,” “The Merger — Applied
Digital’s Reasons for the Merger,” “The
Merger — Digital Angel’s Reasons for the
Merger,” “The Merger — Recommendations of
the Applied Digital Special Committee and Board of
Directors,” and “The Merger —
Recommendations of the Digital Angel Special Committee and Board
of Directors.” All statements other than statements of
historical fact are statements that could be deemed
forward-looking statements, including any projections of
earnings, revenues, synergies, accretion, margins or other
financial items; any statements of the plans, strategies and
objectives of management for future operations, including the
execution of integration and restructuring plans and the
anticipated timing of filings, approvals and closings relating
to the merger or other planned acquisitions; any statements
regarding the benefits, synergies and costs of the merger; any
statements concerning proposed new products, services,
developments or industry rankings; any statements regarding
future economic conditions or performance; any statements of
belief; and any statements of assumptions underlying any of the
foregoing. Specifically, with respect to Digital Angel, this
joint proxy statement/prospectus contains forward-looking
statements, including, but not limited to:
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Digital Angel’s expectations that orders for its companion
pet implantable microchips will exceed four million chips by
year end;
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Digital Angel’s beliefs regarding the expansion of the pet
identification and safeguarding market;
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Digital Angel’s expectations relating to increased sales to
fish and wildlife customers in the third quarter of 2007;
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Digital Angel’s belief regarding its ability to arrange for
a third party to distribute its implantable microchips in the
U.S. if Schering-Plough no longer distributed them;
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Digital Angel’s belief regarding the growth potential in
each of its markets, and in sales of its military personnel
location beacons, due to recent technology improvements;
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Digital Angel’s belief that McMurdo Limited will provide it
with more predictable revenue in its search and rescue beacon
business going forward and increased sales;
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Digital Angel’s intent to use the remaining proceeds from
the intercompany loan with Applied Digital for working capital
purposes;
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Digital Angel’s expectations regarding the amounts,
taxability and timing of the gain on the sale of OuterLink
Corporation;
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Digital Angel’s expectations regarding the timing of
finalizing the purchase price allocation for the McMurdo Limited
transaction;
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Digital Angel’s expectations regarding the amount and
timing of a write-off of deferred financing costs and debt
discount in connection with the debenture;
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Digital Angel’s expectation that, during 2007 and 2008, its
GPS and Radio Communications segment’s revenue will
increase from the 2006 levels as the market for its beacons
expands;
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Digital Angel’s belief that its PLBs offer the greatest
source of growth for its GPS and Radio Communications segment,
and Digital Angel’s expectation that it will see an
increase in the demand of its beacons over the next two years as
air forces upgrade their gear;
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Digital Angel’s expectations regarding the amount and
timing of revenue to be earned from its contract with the
U.S. Air Force regarding the replacement of the URT33
beacon;
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Digital Angel’s expectations that its legal expenses will
decrease going forward;
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Digital Angel’s expectation that actual and estimated
future results for reporting units will not result in an
impairment charge for any of these reporting units;
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Digital Angel’s expectation regarding the weighted average
period over which the total unrecognized compensation cost
related to non-vested share-based compensation will be
recognized;
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Digital Angel’s belief that a national electronic
identification program will be implemented in the U.S., and its
expectation that the impact on its Animal Applications
segment’s revenue will be favorable;
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Digital Angel’s anticipation that its Animal Applications
segment’s revenue may increase during 2007 through its
renewed agreement with Schering-Plough;
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Digital Angel’s expectations regarding the effect of the
adoption of certain Accounting Standards;
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Digital Angel’s expectation regarding the impact of
SFAS 123R;
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Digital Angel’s intent to classify any future expense for
income tax-related interest and penalties as a component of
income taxes;
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Digital Angel’s expectation regarding future profitability
and liquidity; and
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Digital Angel’s expectations regarding the principal uses
and sources of liquidity and its ability to generate sufficient
cash from operations to fund its business over the next
12 months.
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Forward-looking statements are not guarantees of performance.
They involve risks, uncertainties and assumptions. The future
results and stockholder values of Applied Digital and Digital
Angel may differ materially from those expressed in the
forward-looking statements. Many of the factors that will
determine these results and values are beyond Applied
Digital’s and Digital Angel’s ability to control or
predict. Stockholders are cautioned not to put undue reliance on
any forward-looking statements. For those statements, Applied
Digital and Digital Angel claim the protection of the safe
harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
For a discussion of the most important factors that may cause
actual results to differ materially from those suggested by the
forward-looking statements, please read carefully the
information under “Risk Factors.”
You should read this joint proxy statement/prospectus and the
other documents referred to in this joint proxy
statement/prospectus completely and with the understanding that
actual future results could materially differ from those
anticipated in these forward-looking statements as a result of a
number of factors, including the risk factors described above.
All forward-looking statements attributable to Applied Digital
and Digital Angel are expressly qualified by these cautionary
statements. Applied Digital and Digital Angel disclaim any
obligation to update any forward-looking statements to reflect
events or circumstances after the date of this joint proxy
statement/prospectus except as required by law.
47
THE
SPECIAL MEETING OF APPLIED DIGITAL STOCKHOLDERS
Applied Digital is furnishing this joint proxy
statement/prospectus to holders of Applied Digital common stock
to provide its stockholders with important information in
connection with the solicitation of proxies for use at the
special meeting of Applied Digital stockholders and at any
adjournment or postponement of the special meeting. This
includes information regarding the proposed (i) approval of
the issuance of shares of Applied Digital common stock pursuant
to the merger agreement, (ii) approval and adoption of an
amendment to Applied Digital’s certificate of incorporation
to increase the authorized number of shares of Applied Digital
capital stock from 130 million shares, of which
125 million are common stock, to 170 million shares,
of which 165 million will be common stock,
(iii) approval of the ratification of the appointment of
Michael E. Krawitz as a member of Applied Digital’s board
of directors, (iv) approval of the issuance of shares of
Applied Digital common stock in lieu of cash to five officers of
Applied Digital, including its president and chief executive
officer, should severance payments be triggered and should
Applied Digital desire or be obligated to issue common stock
instead of cash, and (v) approval, if necessary, of an
adjournment or postponement of the special meeting, including if
necessary, to solicit additional proxies in favor of the merger
proposals if there are not sufficient votes for these proposals.
Applied Digital first mailed this joint proxy
statement/prospectus and the accompanying form of proxy to its
stockholders on or about October 5, 2007.
Date,
Time and Place of Applied Digital Special Meeting
Applied Digital will hold a special meeting of its stockholders
on November 27, 2007, at 9:00 a.m., Eastern Standard
Time, at the Renaissance Boca Raton Hotel, 2000 N.W. 19th
Street, Boca Raton, Florida 33431.
Applied
Digital Proposal 1: Approval of the Issuance of Applied
Digital Common Stock Pursuant to the Merger
Agreement
On August 8, 2007, the board of directors of Applied
Digital adopted resolutions approving the issuance of shares of
Applied Digital common stock in connection with the merger with
Digital Angel. These shares will not be issued unless the merger
is completed. As of September 28, 2007, Applied Digital
owned approximately 55.6% of Digital Angel’s outstanding
shares of common stock. In connection with the merger, Applied
Digital will acquire all of the outstanding shares of common
stock of Digital Angel that it does not currently own
(approximately 20.4 million, or 44.4%, of the outstanding
shares of Digital Angel as of September 28, 2007). After
the merger, Digital Angel will be a wholly-owned subsidiary of
Applied Digital. This share issuance proposal is being submitted
for approval by the stockholders of Applied Digital pursuant to
the requirements of the Nasdaq Stock Market, LLC applicable to
companies with securities quoted on the Nasdaq Capital Market.
The affirmative vote of a majority of the total votes cast at
the special meeting by holders of Applied Digital common stock
outstanding as of the record date, provided that a quorum is
present, is required to approve the issuance of shares of
Applied Digital common stock pursuant to the merger. Abstentions
and broker non-votes have no effect on the outcome of this
proposal.
A copy of the merger agreement is attached to this joint proxy
statement/prospectus as Annex A. Applied Digital
stockholders are encouraged to read the merger agreement in its
entirety. For a detailed summary of the merger agreement, please
see the section of this joint proxy statement/prospectus
entitled “The Merger Agreement” beginning on
page 100.
Recommendation
of the Board of Directors
The board of directors of Applied Digital unanimously recommends
a vote
“FOR”
the issuance of Applied Digital
common stock in connection with the merger with Digital Angel.
48
Applied
Digital Proposal 2: Approval and Adoption of an Amendment
to the Certificate of Incorporation of Applied Digital to
Increase Number of Authorized Shares of Applied Digital Capital
Stock
Applied Digital’s certificate of incorporation provides
that the total number of shares of capital stock that Applied
Digital shall have the authority to issue is 130 million
shares of capital stock, of which 125 million are common
stock, par value $0.01 per share. Applied Digital’s board
of directors adopted a resolution recommending that the
stockholders approve and adopt an amendment to Applied
Digital’s certificate of incorporation to increase the
authorized number of shares of Applied Digital common stock from
125 million shares to 165 million shares. A copy of
the proposed amendment to the certificate of incorporation is
attached to this joint proxy statement/prospectus as
Annex D.
On September 28, 2007, the Applied Digital record date,
approximately 70,870,866 shares of Applied Digital common
stock were issued and outstanding (not counting shares held in
Applied Digital’s treasury) and approximately
11,419,126 shares of Applied Digital common stock issuable
based on options and other stock-based awards. To complete the
merger, Applied Digital expects that approximately 46,719,341
shares of Applied Digital common stock will be required to be
issued to holders of shares of Digital Angel common stock based
on the number of outstanding shares of Digital Angel common
stock on the Digital Angel record date and assuming exercise of
all outstanding Digital Angel options, warrants and restricted
stock. Accordingly, the shares of Applied Digital common stock
currently authorized under its certificate of incorporation will
not be sufficient to complete the merger.
To complete the merger, Applied Digital stockholders must
approve and adopt an amendment to Applied Digital’s
certificate of incorporation to increase the number of shares
that Applied Digital is authorized to issue from
130 million shares of capital stock, of which
125 million are common stock, to 170 million shares of
capital stock, of which 165 million will be common stock.
Other than the shares to be issued in connection with the
merger, Applied Digital has no immediate plans, nor are there
any existing or proposed agreements or understandings to issue
any of the additional shares of common stock other than pursuant
to warrants, options, restricted stock, and an employment
agreement with Applied Digital’s chief executive officer
previously authorized by the board of directors. Applied
Digital’s board of directors believes that the increased
number of authorized shares of common stock contemplated by the
proposed amendment is desirable in order that additional shares
be available for issuance from time to time, without further
action or authorization by the stockholders (except as required
by law), if needed for such corporate purposes as may be
determined by the board of directors. Such corporate purposes
might include the acquisition of other businesses in exchange
for shares of Applied Digital stock; facilitating broader
ownership of Applied Digital stock by effecting stock splits or
issuing a stock dividend; flexibility for possible future
financings; and attracting and retaining valuable employees and
directors by the issuance of additional stock options or other
equity awards. The board of directors considers the
authorization of additional shares advisable to ensure prompt
availability of shares for issuance should the occasion arise.
Although an increase in the authorized shares of Applied Digital
common stock could, under certain circumstances, also be
construed as having an anti-takeover effect (for example, by
permitting easier dilution of the stock ownership of a person
seeking to effect a change in the composition of the board of
directors or contemplating a tender offer or other transaction
resulting in the acquisition of Applied Digital by another
company), the proposed increase in shares authorized is not in
response to any effort by any person or group to accumulate
Applied Digital common stock or to obtain control of Applied
Digital by any means. In addition, the proposal is not part of
any plan by the Applied Digital board of directors to recommend
or implement a series of anti-takeover measures.
Approval of this proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Applied
Digital common stock entitled to vote at the special meeting.
Abstentions and broker non-votes have the effect of a vote
against the proposal.
Recommendation
of the Board of Directors
The board of directors of Applied Digital unanimously recommends
a vote
“FOR”
the approval and adoption of an
amendment to Applied Digital’s certificate of incorporation
to increase the number of
49
authorized shares of capital stock from 130 million
shares, of which 125 million are common stock, to
170 million shares of capital stock, of which
165 million will be common stock.
Applied
Digital Proposal 3: Approval of the Ratification of the
Appointment of Michael E. Krawitz as a Member of Applied
Digital’s Board of Directors to Hold Office Until the 2010
Annual Meeting of Stockholders or Until His Successor Has Been
Duly Elected and Qualified
On July 2, 2007, the board of directors of Applied Digital
appointed Mr. Krawitz to fill the vacancy of Scott R.
Silverman and to serve as a member of Applied Digital’s
board of directors effective July 3, 2007. Mr. Krawitz
has not been and is not expected to be named to any committees
of the board of directors and was not granted any award in
connection with his appointment to the board of directors.
Applied Digital’s board of directors is divided into three
classes. A class of directors is elected each year to serve for
a three-year term or until the directors’ successors are
duly elected and qualified, which has been Applied
Digital’s practice since 1998. The stockholders elect
approximately one-third of the members of the board of directors
annually. Directors may be removed only for cause. Any director
appointed to Applied Digital’s board of directors to fill a
vacancy on the board serves the balance of the unexpired term of
the class of directors in which the vacancy occurred. Thus,
Mr. Krawitz was appointed to hold office until the 2010
Annual Meeting of Stockholders or until his successor has been
duly elected and qualified.
Following the effective time of the merger, Michael E. Krawitz
will remain on the Applied Digital board of directors.
The following information is required to be included in this
joint proxy statement/prospectus as portions of the information
were not required to be included in Applied Digital’s
Annual Report on
Form 10-K/A
filed with the SEC on April 6, 2007, which
Form 10-K/A
has been incorporated by reference into this joint proxy
statement/prospectus.
Board
Meetings and Committees
Applied Digital’s board of directors held eight meetings
during 2006 and acted by unanimous written consent in lieu of a
meeting five times, as permitted by the applicable state law.
During 2006, all directors attended 75% or more of the meetings
of the board of directors and committees to which they were
assigned. In order to control expenses, and in light of the fact
that very few stockholders attend the annual meeting of
stockholders in person, directors are not required to attend.
Applied Digital’s directors are invited, and frequently one
or more of Applied Digital’s directors is in attendance at
the meeting. At the 2006 Annual Meeting of Stockholders, two
directors were present.
Applied Digital has standing audit, compensation, nominating,
and compliance and governance committees of Applied
Digital’s board of directors, each of which is more fully
discussed below.
Audit
Committee
Applied Digital’s audit committee is comprised of three
members of the board of directors. Currently, the committee
members are Dennis G. Rawan, Daniel E. Penni and J. Michael
Norris. Applied Digital’s board of directors has determined
that it has an audit committee financial expert. Mr. Rawan
serves as the chairman of the committee, and has been designated
as the audit committee financial expert as defined in the
applicable SEC rules. The committee (i) recommends for
approval by Applied Digital’s board of directors an
independent registered public accounting firm to audit Applied
Digital’s consolidated financial statements for the fiscal
year in which they are appointed, and (ii) monitors the
effectiveness of the audit effort, the internal and financial
accounting organization and controls and financial reporting.
The duties of the committee are also to oversee and evaluate the
independent registered public accounting firm, to meet with the
independent registered public accounting firm to review the
scope and results of the audit, to approve non-audit services
provided to Applied Digital by its independent certified public
accountants, and to consider various accounting and auditing
matters related to Applied Digital’s system of internal
controls, financial management practices and other matters. The
committee complies with the provisions of the Sarbanes-Oxley Act
of 2002. All of the
50
committee members are independent as defined in
Rule 4200(a)(15) of the National Association of Securities
Dealers listing standards, as applicable, and as may be modified
or supplemented and as defined by the Sarbanes-Oxley Act of
2002. The committee held four meetings during 2006. A copy of
the audit committee charter was attached to Applied
Digital’s 2006 Proxy Statement as Appendix B.
Compensation
Committee
Applied Digital’s compensation committee consists of Daniel
E. Penni and Constance K. Weaver. Mr. Penni is chairman of
the committee. The committee administers the 1996 Non-Qualified
Stock Option Plan, the 1999 Flexible Stock Plan, the 2003
Flexible Stock Plan, and the 1999 Employees Stock Purchase Plan,
including the review and grant of stock options to officers and
other employees under such plans, and recommends the adoption of
new plans, including the plans of Applied Digital’s
wholly-owned subsidiary, Thermo Life Energy Corp., or Thermo
Life. The committee also reviews and approves various other
compensation policies and matters and reviews and approves
salaries, bonuses, the incentive and recognition policy, and
other matters relating to its senior officers. The committee
reviews all senior corporate employees after the end of each
fiscal year to determine compensation for the subsequent year.
Particular attention is paid to each employee’s
contributions to Applied Digital’s current and future
success, as well as their salary level, in comparison to the
market value of personnel with similar skills and
responsibilities. The committee also looks at accomplishments
that are above and beyond normal expectations for that
management position. The committee held two meetings during 2006
and acted by unanimous written consent six times during 2006. A
copy of the compensation committee charter is available on
Applied Digital’s website at www.adsx.com.
Applied Digital’s compensation committee assists Applied
Digital’s board of directors in the discharge of its
responsibilities relating to compensation of Applied
Digital’s executive officers. Specific responsibilities of
its compensation committee include:
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reviewing and recommending to Applied Digital’s board the
approval of the compensation, benefits, corporate goals and
objectives of its chief executive officer and its other
executive officers;
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evaluating the performance of Applied Digital’s executive
officers; and
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administering Applied Digital’s employee benefit plans and
making recommendations to its board of directors regarding these
matters.
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Applied Digital’s compensation committee has the authority
to delegate any of its responsibilities to one or more
subcommittees, as the committee may from time to time deem
appropriate, and may ask members of management, employees,
outside counsel, or others whose advice and counsel are relevant
to the issues then being considered by the compensation
committee to attend any meetings and to provide such pertinent
information as the compensation committee may request. Applied
Digital expects that the compensation committee will continue to
solicit input from its chief executive officer with respect to
compensation decisions affecting other members of Applied
Digital’s senior management. Applied Digital’s
compensation committee has not engaged compensation consultants
to determine or recommend the amount or form of executive and
director compensation. Members of Applied Digital’s
compensation committee have read consultant reports prepared for
similar companies and have spoken with experts regarding
compensation.
Nominating
Committee
Applied Digital’s nominating committee was formed during
May 2004 to consider and nominate candidates for election to the
board of directors. The committee consists of Dennis G. Rawan,
who serves as its chairman, Daniel E. Penni, J. Michael Norris
and Constance K. Weaver, all of whom are independent members of
Applied Digital’s board of directors. The committee met
once during 2006. A copy of the nominating committee charter was
attached to Applied Digital’s 2004 Proxy Statement as
Appendix A.
Qualifications
of Candidates for Election to the Board
Applied Digital’s board of directors plays a critical role
in guiding its strategic direction, and it oversees the
management of Applied Digital. When candidates for the board of
directors are considered, they are
51
evaluated based upon various criteria. Director candidates for
Applied Digital’s board of directors are considered for
vacant seats if they (i) are independent, in accordance
with applicable law and stock exchange listing standards,
(ii) demonstrate high ethical standards, professionalism,
and integrity in their personal and professional dealings,
(iii) are willing to commit themselves to their duties as
members of Applied Digital’s board of directors and its
various committees and to their responsibilities to Applied
Digital, (iv) possess the appropriate knowledge and
understanding of fundamental financial statements, (v) have
substantial relevant business, technological or government
experience, (vi) provide a diverse set of skills,
backgrounds and experiences to provide varying perspectives,
(vii) have no identified conflicts of interest with Applied
Digital, (viii) have not been convicted in a criminal
proceeding other than traffic violations during the five years
before the date of selection, and (ix) are willing to
comply with Applied Digital’s code of ethics. Applied
Digital retains the right to modify these minimum qualifications
from time to time. Exceptional candidates who do not meet all of
these criteria may still be considered.
Process
for Identifying and Evaluating Candidates for Election to the
Board
The role of the nominating committee of Applied Digital’s
board of directors is to review the qualifications and
backgrounds of any candidates for the board of directors, its
current members, as well as the overall composition of the
board. Prior to the formation of the nominating committee,
Applied Digital’s entire board evaluated candidates based
upon the qualifications outlined above. In the case of any
director candidates, the questions of independence and financial
expertise are important to determine what roles the candidate
can perform, and the nominating committee will consider whether
the candidate meets the applicable independence standards and
the level of the candidate’s financial expertise. Any new
candidates will be interviewed, and the nominating committee
will approve the final nominations. Applied Digital’s
chairman of the board, acting on behalf of the nominating
committee, will extend the formal invitation to the selected
candidate.
Stockholder
Nominations
Stockholders may nominate director candidates for consideration
by the nominating committee by writing to Applied Digital’s
secretary, who will forward the nomination to the chairman of
the nominating committee. The submission must provide the
candidate’s name, biographical data and qualifications,
including a five-year employment history with employer names and
a description of the employers’ businesses; whether such
individual can read and understand fundamental financial
statements; other board memberships (if any); and such other
information as is reasonably available and sufficient to enable
the nominating committee to evaluate the minimum qualifications
stated above under the section of this joint proxy
statement/prospectus entitled “Qualifications of Candidates
for Election to the Board.” The submission must be
accompanied by a written consent of the individual to stand for
election if nominated by the nominating committee and to serve
if elected by the stockholders. If a stockholder nominee is
eligible, and if the nomination is proper, the nominating
committee then will deliberate and make a decision as to whether
the candidate will be appointed and subsequently submitted to
Applied Digital’s stockholders for a vote. The nominating
committee will not change the manner in which it evaluates
candidates, including the applicable minimum criteria set forth
above, on the basis of whether the candidate was recommended by
a stockholder.
Compliance
and Governance Committee
Applied Digital’s compliance and governance committee was
formed to ensure that Applied Digital and its employees maintain
the highest standards of compliance with both external and
internal rules, regulations and good practices. The committee
consists of Constance K. Weaver, who serves as its chairman, and
Daniel E. Penni. The committee met once during 2006.
The affirmative vote of a majority of the votes represented at
the special meeting is required to approve the ratification of
the appointment of Mr. Krawitz as a member of Applied
Digital’s board of directors. Abstentions and broker
non-votes have no effect on the outcome of this proposal.
52
Recommendation
of the Board of Directors
The board of directors of Applied Digital unanimously recommends
a vote
“FOR”
the approval of the ratification
of the appointment of Michael E. Krawitz as a member of Applied
Digital’s board of directors to hold office until the 2010
annual meeting of stockholders or until his successor has been
duly elected and qualified.
Applied
Digital Proposal 4: Approval of the Issuance of Shares of
Applied Digital Common Stock in Lieu of Cash to Five Officers of
Applied Digital, Including its President and Chief Executive
Officer, Should Severance Payments Be Triggered and Should
Applied Digital Desire or Be Obligated to Issue Common Stock
Instead of Cash
Applied Digital’s board of directors believes that it is in
Applied Digital’s best interest and, therefore, the best
interest of its stockholders to approve the issuance of shares
of Applied Digital common stock in lieu of cash to five officers
of Applied Digital, including its president and chief executive
officer, should severance payments be triggered and should
Applied Digital desire or be obligated to issue common stock
instead of cash.
Applied Digital has a possible severance obligation under the
employment and non-compete agreement, dated December 6,
2006, between Applied Digital and Michael E. Krawitz, Applied
Digital’s president and chief executive officer. In
connection with the merger, it is contemplated that a new chief
executive officer will be appointed to lead the combined
company, and it is possible that other management changes will
occur. As such, the termination provisions under
Mr. Krawitz’s employment and non-compete agreement may
be triggered, requiring payment by Applied Digital of severance
to Mr. Krawitz in the amount of $1.48 million, plus an
additional $250,000 as consideration for a covenant not to
compete with Applied Digital for one year following his
termination.
Applied Digital also has possible severance obligations under
its severance policy, dated November 14, 2003, which
applies to senior vice presidents and vice presidents of Applied
Digital. If Applied Digital’s severance obligations are
triggered under its severance policy, as of the date of this
joint proxy statement/prospectus, Applied Digital would have an
additional aggregate cash obligation of $326,600. The terms of
these potential obligations are more fully discussed below, and
a copy of the employment and non-compete agreement and severance
policy are attached to this joint proxy statement/prospectus as
Annex F and Annex G, respectively.
Mr. Krawitz was serving as Applied Digital’s executive
vice president, general counsel and secretary when he was
appointed to president and chief executive officer, effective
December 2, 2006, by Applied Digital’s board of
directors. In connection with his appointment, Applied Digital
and Mr. Krawitz entered into the employment and non-compete
agreement. Pursuant to the employment and non-compete agreement,
Mr. Krawitz is entitled to receive a severance payment in
the amount of $1.48 million if Mr. Krawitz’s
employment with Applied Digital is terminated for a reason other
than his resignation or his termination for cause, as well as a
$250,000 payment as consideration for a covenant not to compete
with Applied Digital for one year following his termination.
Under the terms of the employment and non-compete agreement, the
aggregate severance payment in the amount of $1.73 million
is to be payable in Applied Digital common stock, except for any
taxes and other deductions that are required to be deducted or
withheld under any provision of federal, state, or local law in
effect or that may become effective at any time during the term
of the employment and non-compete agreement, which amounts shall
be payable in cash. If Applied Digital is unable to pay the
severance amount in the form of Applied Digital common stock,
Applied Digital is required to pay the severance amount in cash.
The Applied Digital common stock issuable pursuant to the
employment and non-compete agreement as severance is subject to
registration rights, for which Applied Digital would bear the
cost, and is subject to price-protection provisions.
53
Under the terms of the severance policy, if Applied Digital
terminates an employee without cause, or if the employee resigns
with good reason, then the employee is entitled to severance. In
general, good reason means: (i) assignment of duties
inconsistent with employee’s position (including status,
title and reporting requirements) or reduction of the
employee’s position (including status, title and reporting
requirements), authority, duties or responsibilities, or
(ii) relocation of Applied Digital’s principal place
of business or relocation of employee’s primary workplace
outside of Palm Beach or Broward County. Under this policy, a
senior vice president is entitled to one year of base salary and
a vice president is entitled to six months of salary, each
payable in cash. Applied Digital currently has four officers
covered under the severance policy, Lorraine Breece, Kay
Langsford-Loveland, Ronald Landers and Allison Tomek. The
officers, subject to the severance policy, may resign for good
reason following the merger. If Applied Digital’s severance
obligations are triggered under its severance policy, as of the
date of this joint proxy statement/prospectus, Applied Digital
would have an aggregate cash obligation of $326,600.
New Plan
Benefits
The
Employment and Non-Compete Agreement
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Name and Position(1)
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Dollar Value($)
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Number of Units
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Michael E. Krawitz
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1,730,000
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(2)
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(3
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President, Chief Executive Officer and Director
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(1)
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None of Applied Digital’s other executive officers,
directors or employees are eligible to receive any awards under
the employment and non-compete agreement.
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(2)
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If triggered, the aggregate severance payment in the amount of
$1.73 million would be payable in Applied Digital common
stock, except for any taxes and other deductions that are
required to be deducted or withheld under any provision of
federal, state, or local law in effect or that may become
effective at any time during the term of the employment and
non-compete agreement, which amounts will be payable in cash.
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(3)
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The number of Applied Digital shares of common stock to be
issued under the employment and non-compete agreement to
Mr. Krawitz, if the severance provisions are triggered,
would be determined based on the average closing price of one
share of Applied Digital common stock for the ten trading days
preceding the day on which the Applied Digital common stock is
issued to Mr. Krawitz.
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The
Severance Policy
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Name and Position(4)
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Dollar Value ($)(5)
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Number of Units
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Lorraine M. Breece
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$
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150,000
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(6
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Senior Vice President, Acting Chief
Financial Officer, Chief Accounting Officer,
Treasurer and Assistant Secretary
Executive Group
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150,000
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(6
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Non-Executive Officer Employee Group
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$
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176,600
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(6
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(4)
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Applied Digital currently has four officers covered under the
severance policy, Lorraine Breece, Kay Langsford-Loveland,
Ronald Landers and Allison Tomek.
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(5)
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If triggered, the aggregate severance payment in the amount of
$326,600 may be payable in Applied Digital common stock, except
that any taxes and other deductions that are required to be
deducted or withheld under any provision of federal, state, or
local law will be payable in cash.
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(6)
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The number of shares of Applied Digital common stock that may be
issued under the severance policy to the applicable Applied
Digital officer, if the severance provisions are triggered, may
be determined based on the average closing price of one share of
Applied Digital common stock for the ten trading days preceding
the day on which the Applied Digital common stock is issued to
such officer.
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Consequences
of Stockholders Not Approving the Stock Issuance to Five Applied
Digital Officers
If Applied Digital stockholders do not approve the issuance of
Applied Digital common stock in satisfaction of Applied
Digital’s potential $1.73 million obligation to
Mr. Krawitz, Applied Digital will be required to repay the
obligation in cash. While Applied Digital is required to pay the
potential $326,600 severance obligations in cash, Applied
Digital would like the option of paying these severance
obligations in common stock, assuming the officers agree to
accept common stock in lieu of cash. Applied Digital’s
management believes that it will have the funds necessary to
make these payments in cash if and when due, however, such
payments will significantly reduce Applied Digital’s cash
position and negatively affect its liquidity. Therefore, Applied
Digital’s board of directors believes that it is in Applied
Digital’s and its stockholders’ best interests to
preserve its liquidity and maintain its working capital by
making the potential severance payments in shares of Applied
Digital common stock.
The affirmative vote of a majority of the total votes cast at
the special meeting by holders of Applied Digital common stock
outstanding as of the record date, provided that a quorum is
present, is required to approve the issuance of shares of
Applied Digital common stock in lieu of cash to five officers of
Applied Digital, including its president and chief executive
officer, should severance payments be triggered and should
Applied Digital desire or be obligated to issue common stock
instead of cash. Abstentions and broker non-votes have no effect
on the outcome of this proposal.
Recommendation
of the Board of Directors
The board of directors of Applied Digital unanimously recommends
a vote
“FOR”
the approval of the issuance of
shares of Applied Digital common stock in lieu of cash to five
officers of Applied Digital, including its president and chief
executive officer, should severance payments be triggered and
should Applied Digital desire or be obligated to issue common
stock instead of cash.
Applied
Digital Proposal 5: Approval, if Necessary, of an
Adjournment or Postponement of the Special Meeting, Including,
if Necessary, to Solicit Additional Proxies in Favor of the
Merger Proposals if There are Not Sufficient Votes for
These Proposals
A majority of the stockholders entitled to vote at the special
meeting, present in person or by proxy, have the power to
approve any adjournment or postponement of the special meeting,
including, if necessary, to solicit additional proxies if there
are not sufficient votes for the merger proposals.
An abstention will have the same effect as a vote against the
proposal. A broker non-vote will have no effect on the vote.
Recommendation
of the Board of Directors
The board of directors of Applied Digital unanimously recommends
a vote
“FOR”
the approval, if necessary, of an
adjournment or postponement of the special meeting, including,
if necessary, to solicit additional proxies in favor of the
merger proposals if there are not sufficient votes for these
proposals.
The Applied Digital board of directors has fixed the close of
business on September 28, 2007 as the record date for
determination of Applied Digital stockholders entitled to notice
of, and to vote at, the special meeting. Only holders of record
of Applied Digital common stock as of the close of business on
that date are entitled to vote at the special meeting. As of the
record date, there were 70,870,866 shares of Applied Digital
common stock issued and outstanding, held by approximately 2,181
stockholders of record. As of the record date, the directors and
executive officers of Applied Digital and their affiliates held
691,064 outstanding shares, or approximately 1.0% of the total
outstanding shares, of Applied Digital common stock. Each share
of Applied Digital common stock issued and outstanding as of the
Applied Digital record date entitles its holder to cast one vote
at the special meeting.
55
Voting
of Proxies at the Special Meeting and Revocation of
Proxies
The Applied Digital proxy accompanying this joint proxy
statement/prospectus is solicited on behalf of the board of
directors of Applied Digital for use at the Applied Digital
special meeting.
General.
Shares represented by a properly
signed and dated proxy will be voted at the special meeting in
accordance with the instructions indicated on the proxy. Proxies
that are properly signed and dated, but which do not contain
voting instructions, will be voted:
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“FOR” the proposal to approve the issuance of shares
of Applied Digital common stock to Digital Angel stockholders in
the merger;
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“FOR” the proposal to approve and adopt an amendment
to Applied Digital’s certificate of incorporation to
increase the total number of authorized shares of Applied
Digital capital stock from 130 million shares, of which
125 million are common stock, to 170 million shares,
of which 165 million will be common stock;
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“FOR” the proposal to ratify the appointment of
Mr. Krawitz as a member of Applied Digital’s board of
directors;
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“FOR” the proposal to approve the issuance of shares
of Applied Digital common stock in lieu of cash to five officers
of Applied Digital, including its president and chief executive
officer, should severance payments be triggered and should
Applied Digital desire or be obligated to issue common stock
instead of cash; and
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“FOR” the proposal to approve, if necessary, any
adjournment or postponement of the special meeting, including,
if necessary, to solicit additional proxies if there are not
sufficient votes for the merger proposals.
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The proxy holder may vote the proxy in its discretion as to any
other matter that may properly come before the Applied Digital
special meeting. The affirmative vote of the holders of a
majority of the outstanding shares of Applied Digital common
stock entitled to vote at the special meeting is required to
approve and adopt an amendment to Applied Digital’s
certificate of incorporation. The affirmative vote of a majority
of the total votes cast at the special meeting by holders of
Applied Digital common stock outstanding as of the record date,
provided that a quorum is present, is required to approve the
issuance of shares of Applied Digital common stock pursuant to
the merger and to approve the stock issuance to five officers of
Applied Digital. The affirmative vote of a majority of the votes
represented at the special meeting is required to approve the
ratification of the appointment of Mr. Krawitz as a member
of Applied Digital’s board of directors. A majority of the
stockholders entitled to vote at the special meeting, present in
person or by proxy, has the power to approve any adjournment or
postponement of the special meeting, including, if necessary, to
solicit additional proxies if there are not sufficient votes for
the merger proposals.
Abstentions.
Applied Digital will count a
properly executed proxy marked “ABSTAIN” as present
for purposes of determining whether a quorum is present, but the
shares represented by that proxy will not be voted at the
special meeting. If an Applied Digital stockholder abstains from
voting or does not vote (either in person or by proxy), it will
have the same effect as a vote against the proposal to approve
and adopt an amendment to Applied Digital’s certificate of
incorporation and the proposal to approve any adjournment or
postponement of the special meeting, including, if necessary, to
solicit additional proxies if there are not sufficient votes for
the merger proposals.
Abstentions on all other Applied Digital proposals will be
treated as neither a vote “FOR” nor a vote
“AGAINST” the proposal for purposes of determining
whether the proposal has been approved, and thus will have no
effect on the outcome of the votes for such other proposals.
Broker Non-Votes.
If your shares are held by
your broker, except as to the proposal to ratify the appointment
of Mr. Krawitz as a member of Applied Digital’s board
of directors, your broker will not be able to vote your shares
for you on the proposals without instructions from you on how to
vote your shares. You should follow the directions provided by
your broker regarding how to instruct your broker to vote your
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shares. If an Applied Digital stockholder abstains from voting
or does not vote (either in person or by proxy), it will have
the same effect as a vote against the proposal to approve and
adopt an amendment to Applied Digital’s certificate of
incorporation. Failure to instruct your broker how to vote on
all other Applied Digital proposals will be treated as neither a
vote “FOR” nor a vote “AGAINST” the proposal
for purposes of determining whether the proposal has been
approved, and thus will have no effect on the outcome of the
vote for the proposal.
Voting Shares in Person That are Held Through
Brokers.
If your shares are held by your broker
or another nominee and you wish to vote those shares in person
at the special meeting, you must obtain from the broker or
nominee holding your Applied Digital common stock a properly
executed legal proxy identifying you as an Applied Digital
stockholder, authorizing you to act on behalf of the nominee at
the special meeting, and identifying the number of shares with
respect to which the authorization is granted.
If you submit a proxy, you may revoke it at any time before it
is voted by:
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delivering to the secretary of Applied Digital a written notice,
dated later than the proxy you wish to revoke, stating that the
proxy is revoked;
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submitting to the secretary of Applied Digital a new, signed
proxy with a date later than the proxy you wish to
revoke; or
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attending the special meeting and voting in person.
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Notices to the secretary of Applied Digital should be addressed
to Secretary, Applied Digital Solutions, Inc., 1690 South
Congress Avenue, Suite 200, Delray Beach, Florida 33445.
To conduct business at the special meeting, a quorum must be
present. Applied Digital’s amended and restated bylaws
provide that the holders of a majority of the outstanding shares
entitled to vote at the special meeting, represented in person
or by proxy, shall be requisite and shall constitute a quorum at
the special meeting, except as otherwise provided by law.
Applied Digital will treat shares of common stock represented by
a properly signed and returned proxy, including abstentions and
broker non-votes, as present at the meeting for purposes of
determining the existence of a quorum. If sufficient votes to
constitute a quorum are not received by the date of the special
meeting, the persons named as proxies may propose one or more
adjournments of the meeting to permit further solicitation of
proxies. The inspector of elections appointed for the Applied
Digital special meeting will tabulate the votes. The persons
named as proxies would generally exercise their authority to
vote in favor of adjournment.
Solicitation
of Proxies and Expenses
Applied Digital and Digital Angel will equally share the costs
of soliciting proxies for their respective meetings. Certain
directors, officers and employees of Applied Digital may solicit
proxies, without additional remuneration, by telephone,
facsimile, electronic mail, telegraph and in person. Following
the mailing of this joint proxy statement/prospectus, Applied
Digital will request brokers, custodians, nominees and other
record holders to forward copies of this joint proxy
statement/prospectus to persons for whom they hold shares of
common stock and to request authority for the exercise of
proxies. In such cases, Applied Digital, upon the request of the
record holder, will reimburse such holders for their reasonable
expenses.
Applied Digital and Digital Angel have retained D.F. King &
Co., Inc. to assist them in the solicitation of proxies. Applied
Digital and Digital Angel estimate that their proxy solicitor
fees will be approximately $7,500, plus out-of-pocket expenses.
If your shares are registered in the name of a bank or brokerage
firm, you may be eligible to vote your shares by telephone or
internet. A large number of banks and brokerage firms are
participating in the Broadridge Investor Communication Services
telephone or internet voting program. This program provides
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eligible stockholders the opportunity to vote by telephone or
internet. If your bank or brokerage firm is participating in
Broadridge’s program, your voting form will provide
instructions. If your voting form does not reference telephone
or internet information, please complete and return the paper
proxy card in the self-addressed, postage-paid envelope
provided. If you have any questions about executing your proxy
or require assistance, please contact: Kay Langsford-Loveland at
(561) 805-8000.
Contact
for Questions and Assistance in Voting
If you have a question about the merger, or how to vote or
revoke a proxy, or you wish to obtain additional copies of this
joint proxy statement/prospectus, please contact:
D.F. King
& Co., Inc.
48 Wall Street
New York, New York 10005
Telephone: (800) 967-7635
Board
of Directors Recommendations
After careful consideration, the board of directors of Applied
Digital believes that the merger is consistent with, and in
furtherance of, Applied Digital’s long-term business
strategy and the merger is advisable, fair to, and in the best
interests of Applied Digital and its stockholders. The Applied
Digital board of directors unanimously recommends that its
stockholders vote “FOR” the proposal to approve the
issuance of shares of Applied Digital common stock pursuant to
the merger agreement, and “FOR” the proposal to
approve and adopt an amendment to Applied Digital’s
certificate of incorporation to increase the total number of
authorized shares of Applied Digital capital stock from
130 million shares, of which 125 million are common
stock, to 170 million shares, of which 165 million
will be common stock. In addition, the Applied Digital board of
directors unanimously recommends that its stockholders vote
“FOR” the proposal to ratify the appointment of
Mr. Krawitz as a member of Applied Digital’s board of
directors, “FOR” the proposal to approve the issuance
of shares of Applied Digital common stock in lieu of cash to
five officers of Applied Digital, including its president and
chief executive officer, should severance payments be triggered
and should Applied Digital desire or be obligated to issue
common stock instead of cash, and “FOR” the proposal
to approve, if necessary, any adjournment or postponement of the
special meeting, including, if necessary, to solicit additional
proxies if there are not sufficient votes for the merger
proposals.
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THE
SPECIAL AND ANNUAL MEETING OF DIGITAL ANGEL
STOCKHOLDERS
Digital Angel is furnishing this joint proxy
statement/prospectus to holders of Digital Angel’s common
stock to provide its stockholders with important information in
connection with the solicitation of proxies for use at the
special and annual meeting of Digital Angel stockholders and at
any adjournment or postponement of the special and annual
meeting. This includes information regarding the proposed
(i) approval and adoption of the merger agreement,
(ii) election of five directors, (iii) approval and
adoption of an amendment to Digital Angel’s restated
certificate of incorporation, and (iv) approval, if
necessary, of any adjournment or postponement of the special and
annual meeting, including if necessary, to solicit additional
proxies in favor of the approval and adoption of the merger
agreement, if there are not sufficient votes to approve and
adopt the merger agreement by a majority of those shares not
held by Applied Digital and its affiliates.
Digital Angel first mailed this joint proxy statement/prospectus
and the accompanying form of proxy to its stockholders on or
about October 5, 2007.
Date,
Time and Place of Digital Angel Special and Annual
Meeting
Digital Angel will hold a special and annual meeting of its
stockholders on November 27, 2007, at 10:00 a.m.,
Eastern Standard Time, at the Renaissance Boca Raton Hotel, 2000
N.W. 19th Street, Boca Raton, Florida 33431.
Digital
Angel Proposal 1: The Approval and Adoption of the Merger
Agreement
You are being asked to vote on the approval and adoption of the
merger agreement. In the proposed merger, Digital Angel
Acquisition Corp. will merge with and into Digital Angel. As a
result of the merger, Digital Angel will become a wholly-owned
subsidiary of Applied Digital, and each share of Digital Angel
common stock then outstanding, other than shares owned by
Applied Digital or its affiliates, will be canceled and
automatically converted into the right to receive
1.4 shares of Applied Digital common stock. The total
number of shares of Applied Digital common stock issuable as
merger consideration is subject to adjustment, as is more fully
described under “The Merger Agreement — Exchange
of Shares.”
The affirmative vote of holders of a majority of the outstanding
shares of Digital Angel’s common stock entitled to vote at
the special and annual meeting is required to approve and adopt
the merger agreement. Additionally, it is a condition to Digital
Angel’s obligation to consummate the merger that the
holders of a majority of the outstanding shares of Digital Angel
common stock not held by Applied Digital or its affiliates vote
to approve and adopt the merger agreement. Abstentions and
broker non-votes will have the effect of a vote against the
proposal.
A copy of the merger agreement is attached to this joint proxy
statement/prospectus as Annex A. Digital Angel stockholders
are encouraged to read the merger agreement in its entirety. For
a detailed summary of the merger agreement, please see the
section of this joint proxy statement/prospectus entitled
“The Merger Agreement” beginning on page 100.
Recommendation
of the Board of Directors
The board of directors of Digital Angel established a special
committee composed of disinterested members of Digital
Angel’s board of directors to review and evaluate the terms
and conditions, and determine the advisability, of the proposed
merger. The special committee negotiated the terms and
conditions of the merger agreement on behalf of Digital Angel
and determined that the merger is advisable, fair to and in the
best interests of Digital Angel and its stockholders (other than
Applied Digital and Applied Digital’s affiliates) and
recommended that Digital Angel’s board of directors approve
the merger agreement.
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Digital Angel’s board of directors, based on the
recommendation of the Digital Angel special committee,
determined that the merger is advisable, fair to, and in the
best interests of Digital Angel and its stockholders (other than
Applied Digital and Applied Digital’s affiliates), approved
the merger agreement and declared its advisability, approved the
merger and other transactions contemplated by the merger
agreement, and unanimously recommends the approval and adoption
of the merger agreement by the stockholders of Digital Angel.
The board of directors of Digital Angel unanimously recommends a
vote
“FOR”
the approval and adoption of the
merger agreement. Applied Digital has advised Digital Angel that
it intends to vote in favor of the approval and adoption of the
merger agreement.
Digital
Angel Proposal 2: To Elect Five Directors, Each to Serve
Until the Next Annual Meeting of Stockholders, in Each Case,
Until Their Successors are Duly Elected and
Qualified
Pursuant to Delaware corporate law, Digital Angel is required to
hold an annual meeting to elect directors. If the merger with
Applied Digital is consummated, Digital Angel will become a
wholly-owned subsidiary of Applied Digital and those directors
nominated below, if elected, would continue to serve as
directors of Digital Angel. Pursuant to the terms of the merger
agreement, after the merger, the board of directors of Applied
Digital will consist of four directors designated by the current
Applied Digital board and three directors designated by the
current Digital Angel board.
Digital Angel’s board of directors currently consists of
five directors, serving until the 2007 annual meeting of
stockholders, which is scheduled for November 27, 2007, and
until their successors are elected and qualified. During 2006
and through August 6, 2007, Kevin McGrath, Digital
Angel’s former president and chief executive officer,
served as a director on Digital Angel’s board of directors.
Effective August 6, 2007, Kevin McGrath resigned from the
positions of president, chief executive officer and director.
There is currently a vacancy on the board of directors that
Digital Angel does not plan to fill. The current members of
Digital Angel’s board of directors are as follows:
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Positions with Digital Angel
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Barry M. Edelstein
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Interim President and Chief Executive Officer, Director
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Scott R. Silverman
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Chairman of the Board
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John R. Block
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Director
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Howard S. Weintraub, Ph.D.
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Director
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Michael S. Zarriello
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Director
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The age indicated and other information in each director’s
biography is as of August 31, 2007.
Barry M. Edelstein
, 44, has been Digital Angel’s
interim president and chief executive officer since
August 6, 2007. He has been a director since June 2005.
Mr. Edelstein has served as president and chief executive
officer of ScentSational Technologies, Inc. since January 2003.
From 2000 to 2002, Mr. Edelstein was vice president, sales
and sales operations for Comcast Business Communications Inc.,
where he managed the integration of Comcast Telecommunications
Inc. with two other subsidiaries and led a team that oversaw the
sales, marketing, customer care, billing operations and supplier
management function of the company. From 1997 to 2000, he was
vice president, sales and marketing for Comcast
Telecommunications Inc., a provider of long distance, internet
and private network services in the mid-Atlantic region of the
U.S. From 1992 to 1997, he was president and founding
principal of GlobalCom Telecommunications, a regional reseller
of long distance, private network and internet services which
was sold to Comcast in June 1997. Prior to that, he was an
associate at Rubin, Shapiro & Wiese, a Philadelphia
law firm specializing in real estate and corporate commercial
litigation. Mr. Edelstein has a bachelor’s degree in
business administration from Drexel University and received his
law degree from Widener University School of Law, Wilmington,
Delaware.
Scott R. Silverman
, 43, has been Digital Angel’s
chairman of the board of directors since February 2004 and has
been a director since July 2003. He has served as the chief
executive officer of VeriChip, a subsidiary of Applied Digital,
since December 5, 2006, as the chairman of VeriChip’s
board of directors since March
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2003, and as a member of VeriChip’s board of directors
since February 2002. He also served as VeriChip’s chief
executive officer from April 2003 to June 2004. He served as
chairman of the board of directors of Applied Digital from March
2003 to July 3, 2007, as chief executive officer of Applied
Digital from March 2003 to December 5, 2006, and as acting
president of Applied Digital from April 2005 to December 5,
2006. From March 2002 to March 2003, he served as Applied
Digital’s president and a member of its board of directors.
From August 2001 to March 2002, he served as a special advisor
to Applied Digital’s board of directors. From September
1999 to March 2002, Mr. Silverman operated his own private
investment banking firm. From October 1996 to September 1999, he
served in various capacities with Applied Digital, including
positions related to business development, corporate development
and legal affairs. Mr. Silverman has served as the chairman
of the board of Applied Digital’s wholly-owned subsidiary,
InfoTech, since January 2006. Mr. Silverman is an attorney
licensed to practice in New Jersey and Pennsylvania.
John R. (Jack) Block
, 72, joined Digital Angel’s
board of directors in January 2004. Mr. Block has served as
senior policy advisor for Olsson, Frank, Weeda, P.C., a law
firm, since January 2006. From January 2003 through December
2005, Mr. Block served as the executive vice president of
the Food Marketing Institute, a trade association in
Washington, D.C. From 1986 until December 2002,
Mr. Block was president and chief executive officer of Food
Distributors International and the International Foodservice
Distributors Association (NAWGA/IFDA). Mr. Block was
appointed to President Reagan’s Cabinet in 1981 and served
for five years as the Secretary of the USDA. As a member of the
Reagan Cabinet and a key member of the Economic Policy Council,
he dealt with a wide range of complex domestic farm program and
tax issues. Under his leadership, the USDA’s Food for Peace
Program was a primary resource in feeding the starving African
continent. During his tenure as Secretary of Agriculture,
Mr. Block visited more than 30 foreign countries, meeting
with heads of state and agriculture ministers from all over the
globe and negotiating sensitive agreements critical to
U.S. farm interests. From 1977 to 1981, he served as
Director of Agriculture for the State of Illinois.
Mr. Block currently has a syndicated weekly radio
commentary broadcast carried by more than 600 stations in
30 states. Mr. Block serves on a number of corporate
boards, including New York Stock Exchange-listed Hormel Foods
Corporation. He is on the board of directors of the
U.S. Friends of the World Food Programme, a joint
initiative of the United Nations and the Food and Agricultural
Organization, chairman of the Agribusiness Alliance of the
Citizens Network for Foreign Affairs in Washington, and on the
Advisory Board of the Illinois Global Partnership.
Howard S. Weintraub
, Ph.D., 64, has been a director
since March 2002. Dr. Weintraub has been a principal of
Landfall Therapeutics Consulting Group, LLC, a solo research
consulting service, since July 2003. Dr. Weintraub retired
from C. R. Bard, Inc., a medical device company, in 2003, where
he was vice president, research and development, corporate
staff. From 1988 to 1998, he held a series of senior research
and technology management positions at Bristol-Myers Squibb.
Dr. Weintraub was previously associated with Ortho
Pharmaceutical Corporation, a Johnson & Johnson company,
from 1973 until 1988, where he held senior research management
positions. He also has authored or co-authored over 50
scientific publications and abstracts. Dr. Weintraub
previously served as chairman of the Industrial Pharmaceutical
Technology Section of the American Association of Pharmaceutical
Scientists (formerly American Pharmacists Association), and was
the chairman of the Drug Metabolism Sub-Section of the Research
and Pharmaceutical Manufacturers’ Association.
Dr. Weintraub earned a Bachelor of Science Degree in
Pharmacy from Columbia University and his Ph.D. in
biopharmaceutics from the State University of New York at
Buffalo. He is a member of the board of directors of the
privately-held biotechnology firm, Bioenergy, Inc., where he
also chairs the company’s scientific advisory board. He is
a member of the medical advisory board of VeriChip, the
scientific advisory board of the Ascent Technologies Group,
Polymerix Corporation, a specialty development-stage
pharmaceutical company, and the strategic advisory board of
Aderans Corp.
Michael S. Zarriello
, 57, has been a director since
September 2003. He served as senior vice president and chief
financial officer for Rural/Metro Corporation, a medical
transportation company, in Scottsdale, Arizona, from July 2003
to December 2006. From 1998 to 2003, Mr. Zarriello was a
senior managing director of Jesup & Lamont Securities
Corporation and President of Jesup & Lamont Merchant
Partners LLC, both of which are investment banking firms. From
1989 to 1997, Mr. Zarriello was a managing
director-principal of Bear Stearns & Co., Inc., an
investment bank, and, from 1989 to 1991, he served as chief
financial officer of
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the Principal Activities Group that invested Bear Stearns’
capital in middle-market companies. Mr. Zarriello also
served as a member of the board of directors of Applied Digital
from May 2003 until July 2006.
Each of the nominees has consented to be named in this joint
proxy statement/prospectus and to serve as a member of Digital
Angel’s board of directors if elected. In the event that a
nominee withdraws or for any reason is not able to serve as a
director, the proxy will be voted for such other person as may
be designated by the board of directors, but in no event will
the proxy be voted for more than five nominees as directors.
Digital Angel’s management has no reason to believe that
the nominees will not serve if elected.
The affirmative vote of a plurality of the votes cast by holders
of the outstanding shares of Digital Angel’s common stock
entitled to vote at the special and annual meeting is required
for the approval of the election of a director. You may vote in
favor of a nominee, or you may withhold your vote from a
nominee. Votes that are withheld with respect to this matter
will be excluded entirely from the vote and will have no effect,
other than for purposes of determining the presence of a quorum.
Brokers that do not receive instructions are entitled to vote
those shares with respect to the election of directors.
Recommendation
of the Board of Directors
The board of directors of Digital Angel recommends a vote
“FOR”
each of the five nominees for the
election of directors.
Digital
Angel Proposal 3: The Approval and Adoption of an Amendment
to the Restated Certificate of Incorporation
On March 20, 2007, Digital Angel’s board of directors
approved an amendment to Digital Angel’s restated
certificate of incorporation. The proposed amendment removes the
requirement that holders of 66.6% of the issued and outstanding
shares of Digital Angel approve the issuance of common stock
(including options or warrants) for non-cash consideration or
for less than fair market value.
The amendment to the restated certificate of incorporation
deletes Article Ninth, section (ii), which requires
that at least 66.6% of the issued and outstanding shares approve
the following:
(ii) The issuance of Digital Angel’s common stock,
including options or warrants, for non-cash consideration or for
less than fair market value. Fair market value means the average
of the daily market price of Digital Angel’s common stock
during the ten consecutive trading days before the date of
purchase.
Digital Angel’s board of directors believes that it is in
Digital Angel’s best interests that it have the flexibility
to issue shares of common stock for non-cash consideration or
less than fair market value, as needs may arise in connection
with financing activities, without further stockholder action,
unless required by applicable law, regulation, listing
requirements or Digital Angel’s restated certificate of
incorporation. The rules of the AMEX would require that a
majority of the votes cast by Digital Angel’s stockholders
approve the issuance of 20% of its outstanding shares at less
than market value. The board also believes that the 66.6% vote
requirement can limit stockholders’ ability to effect
change, in that such a requirement essentially provides a veto
to a large minority of stockholders. Digital Angel currently has
no agreements, understandings or plans for the issuance of
shares of its common stock for non-cash consideration or for
less than fair market value.
Article Ninth was originally adopted by stockholders in
connection with the merger that resulted in Digital Angel’s
acquisition of Digital Angel Technology Corporation, Timely
Technology Corp. and an 85.0% interest in Signature Industries
Limited. The merger was completed on March 27, 2002. The
merger agreement required that the stock of these three
companies and the assets of Digital Angel Technology
Corporation, all of which were pledged by Applied Digital as
security for substantial indebtedness to IBM Credit Corporation,
be delivered to Digital Angel at the closing of the merger, free
and clear of all liens, security interests and mortgages. As
part of a major restructuring of its lending relationship with
Applied Digital and as one of the conditions to releasing its
security interest in the stock of these transferred companies
and the assets of Digital Angel Technology Corporation, IBM
Credit Corporation required that Article Ninth
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be included in the restated certificate of incorporation. In
approving the adoption of Article Ninth, the board determined
that the benefits to Digital Angel of the merger, which could
not have occurred without the consent of IBM Credit Corporation,
and the release of the security interests substantially
outweighed the restrictions being imposed by IBM Credit
Corporation as a condition of giving its consent to the merger
and releasing its security interests.
The issuance of additional shares of Digital Angel’s common
stock at a discount may, among other things, have a dilutive
effect on earnings per share and on stockholders’ equity
and voting rights.
The affirmative vote of the holders of 66.6% of the issued and
outstanding shares of Digital Angel’s common stock is
required for the approval and the adoption of the amendment to
the restated certificate of incorporation. You may vote in favor
or against the proposal, or you may abstain. Brokers that do not
receive instructions are not entitled to vote those shares with
respect to this proposal. Abstentions and broker non-votes will
have the effect of a vote against the proposal.
A copy of the amendment to the restated certificate of
incorporation, in substantially the form to be filed with the
Secretary of State of the State of Delaware, is attached to this
joint proxy statement/prospectus as Annex E. Digital Angel
stockholders are encouraged to read the attached Annex E.
If proposal 3 is approved, the amendment will become
effective upon filing the amendment to the restated certificate
of incorporation with the Secretary of State of the State of
Delaware.
Recommendation
of the Board of Directors
The board of directors of Digital Angel unanimously recommends a
vote
“FOR”
the approval and adoption of the
amendment to the Digital Angel restated certificate of
incorporation.
Digital
Angel Proposal 4: Approval, if Necessary, of an Adjournment
or Postponement of the Special and Annual Meeting, Including, if
Necessary, to Solicit Additional Proxies in Favor of the
Approval and Adoption of the Merger Agreement, if There are Not
Sufficient Votes to Approve and Adopt the Merger Agreement by a
Majority of Those Shares Not Held by Applied Digital and its
Affiliates
A majority of the stockholders entitled to vote at the special
and annual meeting, present in person or by proxy, has the power
to approve any adjournment or postponement of the special and
annual meeting, including, if necessary, to solicit additional
proxies if there are not sufficient votes to approve and adopt
the merger agreement by a majority of those shares not held by
Applied Digital and its affiliates.
An abstention will have the same effect as a vote against the
proposal. A broker non-vote will have no effect on the outcome
of the vote for the proposal.
Recommendation
of the Board of Directors
The board of directors of Digital Angel unanimously recommends a
vote
“FOR”
the approval, if necessary, of any
adjournment or postponement of the special and annual meeting,
including, if necessary, to solicit additional proxies in favor
of approval and adoption of the merger agreement if there are
not sufficient votes for the proposal.
The Digital Angel board of directors has fixed the close of
business on September 28, 2007, as the record date for
determination of Digital Angel stockholders entitled to notice
of, and to vote at, the special and annual meeting. Only holders
of record of Digital Angel common stock as of the close of
business on that date are entitled to vote at the special and
annual meeting. As of the record date, there were
45,869,933 shares of Digital Angel’s common stock
issued and outstanding, held by approximately 273 stockholders
of record. As of the record date, the directors and executive
officers of Digital Angel and their affiliates held 29,113,420
outstanding shares, or approximately 63.5% of the total
outstanding shares, of Digital Angel common stock. Each share of
Digital Angel common stock issued and outstanding as of the
Digital Angel record date entitles its holder to cast one vote
at the special and annual meeting.
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Voting
of Proxies at the Special and Annual Meeting and Revocation of
Proxies
The Digital Angel proxy accompanying this joint proxy
statement/prospectus is solicited on behalf of the board of
directors of Digital Angel for use at the Digital Angel special
and annual meeting.
General.
Shares represented by a properly
signed and dated proxy will be voted at the special and annual
meeting in accordance with the instructions indicated on the
proxy. Proxies that are properly signed and dated, but which do
not contain voting instructions, will be voted:
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“FOR” the proposal to approve and adopt the merger
agreement;
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“FOR” the proposal to elect each of the five director
nominees;
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“FOR” the proposal to approve and adopt an amendment
to Digital Angel’s restated certificate of
incorporation; and
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“FOR” the proposal to approve, if necessary, any
adjournment or postponement of the special and annual meeting,
including, if necessary, to solicit additional proxies if there
are not sufficient votes to approve and adopt the merger
agreement by a majority of those shares not held by Applied
Digital and its affiliates.
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The proxy holder may vote the proxy in its discretion as to any
other matter that may properly come before the Digital Angel
special and annual meeting. The affirmative vote of holders of a
majority of the outstanding shares of Digital Angel’s
common stock entitled to vote at the special and annual meeting
is required to approve and adopt the merger agreement.
Additionally, it is a condition to Digital Angel’s
obligation to consummate the merger that the holders of a
majority of the outstanding shares of Digital Angel common stock
not held by Applied Digital or its affiliates vote to approve
and adopt the merger agreement. The affirmative vote of a
plurality of the votes cast by holders of the outstanding shares
of Digital Angel’s common stock entitled to vote at the
special and annual meeting is required for the election of
directors. The affirmative vote of the holders of 66.6% of the
issued and outstanding shares of Digital Angel’s common
stock is required for the approval and adoption of the amendment
to the restated certificate of incorporation. A majority of the
stockholders entitled to vote at the special and annual meeting,
present in person or by proxy, has the power to approve any
adjournment or postponement of the special and annual meeting,
including, if necessary, to solicit additional proxies if there
are not sufficient votes for the approval and adoption of the
merger agreement.
Abstentions.
Digital Angel will count a
properly executed proxy marked “ABSTAIN” as present
for purposes of determining whether a quorum is present, but the
shares represented by that proxy will not be voted at the
special and annual meeting. If a Digital Angel stockholder
abstains from voting or does not vote (either in person or by
proxy), it will have the same effect as a vote against the
proposal to approve and adopt the merger agreement, the proposal
to approve and adopt an amendment to Digital Angel’s
restated certificate of incorporation and the proposal to
approve any adjournment or postponement of the special meeting,
including, if necessary, to solicit additional proxies if there
are not sufficient votes for the approval and adoption of the
merger agreement.
For the election of the five directors, you may vote in favor of
a nominee, or you may withhold your vote from a nominee. Votes
that are withheld with respect to this matter will be excluded
entirely from the vote and will have no effect, other than for
purposes of determining the presence of a quorum.
Broker Non-Votes.
If your shares are held by
your broker, except as to the proposal to elect five directors,
your broker will not be able to vote your shares for you on the
proposals without instructions from you on how to vote your
shares. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares.
If a Digital Angel stockholder abstains from voting or does not
vote (either in person or by proxy), it will have the same
effect as a vote against the proposal to approve and adopt the
merger agreement and the proposal to approve and adopt an
amendment to Digital Angel’s restated certificate of
incorporation. Failure to instruct your broker how to vote on
all other Digital Angel proposals will be treated as neither a
vote “FOR” nor a vote “AGAINST” the proposal
for purposes of determining whether the proposal has been
approved, and thus will have no effect on the outcome of the
vote for the proposal.
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Voting Shares in Person That are Held Through
Brokers.
If your shares are held by your broker
or another nominee and you wish to vote those shares in person
at the special and annual meeting, you must obtain from the
nominee holding your Digital Angel common stock a properly
executed legal proxy identifying you as a Digital Angel
stockholder, authorizing you to act on behalf of the nominee at
the special and annual meeting, and identifying the number of
shares with respect to which the authorization is granted.
If you submit a proxy, you may revoke it at any time before it
is voted by:
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delivering to the secretary of Digital Angel a written notice,
dated later than the proxy you wish to revoke, stating that
proxy is revoked;
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submitting to the secretary of Digital Angel a new, signed proxy
with a date later than the proxy you wish to revoke; or
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attending the special and annual meeting and voting in person.
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Notices to the secretary of Digital Angel should be addressed to
the Secretary, Digital Angel Corporation, 1690 South Congress
Avenue, Suite 201, Delray Beach, Florida 33445.
To conduct business at the special and annual meeting, a quorum
must be present. Digital Angel’s bylaws provide that the
holders of a majority of all of the shares of stock entitled to
vote at the special and annual meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or
except to the extent that the presence of a larger number may be
required by law. Digital Angel will treat shares of common stock
represented by a properly signed and returned proxy, including
abstentions and broker non-votes, as present at the meeting for
purposes of determining the existence of a quorum. If sufficient
votes to constitute a quorum are not received by the date of the
special and annual meeting, the persons named as proxies may
propose one or more adjournments of the meeting to permit
further solicitation of proxies. The inspector of elections
appointed for the Digital Angel special and annual meeting will
tabulate the votes. The persons named as proxies would generally
exercise their authority to vote in favor of adjournment.
Solicitation
of Proxies and Expenses
Digital Angel and Applied Digital will equally share the costs
of soliciting proxies for their respective meetings. Certain
directors, officers and employees of Digital Angel may solicit
proxies, without additional remuneration, by telephone,
facsimile, electronic mail, telegraph and in person. Following
the mailing of this joint proxy statement/prospectus, Digital
Angel will request brokers, custodians, nominees and other
record holders to forward copies of this joint proxy
statement/prospectus to persons for whom they hold shares of
common stock and to request authority for the exercise of
proxies. In such cases, Digital Angel, upon the request of the
record holder, will reimburse such holders for their reasonable
expenses.
Digital Angel and Applied Digital have retained D.F. King &
Co., Inc. to assist them in the solicitation of proxies. Digital
Angel and Applied Digital estimate that their proxy solicitor
fees will be approximately $7,500, plus out-of-pocket expenses.
If your shares are registered in the name of a bank or brokerage
firm, you may be eligible to vote your shares by telephone or
internet. A large number of banks and brokerage firms are
participating in the Broadridge Investor Communication Services
telephone or internet voting program. This program provides
eligible stockholders the opportunity to vote by telephone or
internet. If your bank or brokerage firm is participating in
Broadridge’s program, your voting form will provide
instructions. If your voting form does not reference telephone
or internet information, please complete and return the paper
proxy card in the self-addressed, postage-paid envelope
provided. If you have any questions about executing your proxy
or require assistance, please contact: Patricia M. Petersen,
vice president, general counsel and secretary, at
(561) 276-0477.
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Contact
for Questions and Assistance in Voting
If you have a question about the merger, or how to vote or
revoke a proxy, or you wish to obtain additional copies of this
joint proxy statement/prospectus, please contact:
D.F. King
& Co., Inc.
48 Wall Street
New York, New York 10005
Telephone: (800) 967-7635
Board
of Directors Recommendations
After careful consideration, the board of directors of Digital
Angel believes, based on the recommendation of the Digital Angel
special committee, that the merger is advisable, fair to, and in
the best interests of Digital Angel and its stockholders (other
than Applied Digital and Applied Digital’s affiliates). The
Digital Angel board of directors unanimously recommends that its
stockholders vote “FOR” the proposal to approve and
adopt the merger agreement. In addition, the Digital Angel board
of directors unanimously recommends that its stockholders vote
“FOR” the proposal to approve and adopt an amendment
to Digital Angel’s restated certificate of incorporation to
remove the requirement that holders of 66.6% of the issued and
outstanding shares of Digital Angel approve the issuance of
common stock (including options or warrants) for non-cash
consideration or for less than fair market value,
“FOR” the proposal to elect each of the five director
nominees, and “FOR” the proposal to approve, if
necessary, any adjournment or postponement of the special and
annual meeting, including, if necessary, to solicit additional
proxies if there are not sufficient votes to approve and adopt
the merger agreement by a majority of those shares not held by
Applied Digital and its affiliates.
Surrender
of Certificates
Please DO NOT send your Digital Angel stock certificates with
your proxy card. If the merger is approved, you will be sent
written instructions for exchanging your stock certificates.
Contacting the Board of
Directors.
Stockholders may communicate with the
board of directors, or with any committee of the board, by
writing to Patricia M. Petersen, Digital Angel’s vice
president, general counsel and secretary, by calling
Ms. Petersen at
(561) 276-0477
or via
e-mail
at
ppetersen@digitalangelcorp.com. All communications will be
reviewed by management and then forwarded to the appropriate
director or directors or to the full board of directors, as
appropriate.
Multiple Stockholders Sharing the Same
Address.
Regulations regarding the delivery of
copies of proxy materials and annual reports to stockholders
permit Digital Angel, banks, brokerage firms and other nominees
to send one annual report and proxy statement to multiple
stockholders who share the same address under certain
circumstances, unless contrary instructions are received from
stockholders. This practice is known as
“householding.” Stockholders who hold their shares
through a bank, broker or other nominee may have consented to
reducing the number of copies of materials delivered to their
address. In the event that a stockholder wishes to request
delivery of a single copy of annual reports or proxy statements
or to revoke a “householding” consent previously
provided to a bank, broker or other nominee, the stockholder
must contact the bank, broker or other nominee, as applicable,
to revoke such consent. In any event, if a stockholder wishes to
receive a separate joint proxy statement/prospectus for the 2007
Special and Annual Meeting of Stockholders, the stockholder may
receive printed copies by contacting Digital Angel Corporation,
Investor Relations, 1690 S. Congress Ave.,
Suite 201, Delray Beach, Florida 33445 by mail or by
calling Allison Tomek at
(561) 805-8000.
Any stockholders of record sharing an address who now receive
multiple copies of Digital Angel’s annual reports and proxy
statements, and who wish to receive only one copy of these
materials per household in the future should also contact
Digital Angel Corporation, Investor Relations, by mail or
telephone, as instructed above. Any stockholders sharing an
address whose shares of common stock are held by a bank, broker
or other nominee who now receive multiple copies of Digital
Angel’s annual reports and proxy statements, and
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who wish to receive only one copy of these materials per
household, should contact the bank, broker or other nominee to
request that only one set of these materials be delivered in the
future.
Stockholder Proposals for 2008 Annual
Meeting.
If the merger agreement with Applied
Digital is not approved and adopted or the merger is not
consummated, stockholder proposals should be sent to Digital
Angel at the address set forth in the notice of special and
annual meeting of stockholders. The deadline for submission of
stockholder proposals, pursuant to
Rule 14a-8
of the Exchange Act, for inclusion in Digital Angel’s proxy
statement for the 2008 Annual Meeting of Stockholders is
June 6, 2008. Additionally, Digital Angel must receive
notice of any stockholder proposal to be submitted at the 2008
Annual Meeting of Stockholders (but not required to be included
in Digital Angel’s proxy statement) by August 20,
2008, or such proposal will be considered untimely pursuant to
Rule 14a-4
and
14a-5(e)
under the Exchange Act and the persons named in the proxies
solicited by management may exercise discretionary voting
authority with respect to such proposal.
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As of September 28, 2007, Applied Digital owned
approximately 55.6% of Digital Angel’s outstanding shares
of common stock. In connection with the merger, Applied Digital
will acquire all of the outstanding shares of common stock of
Digital Angel that it does not currently own (approximately
20.4 million, or 44.4%, of the outstanding shares of
Digital Angel as of September 28, 2007). After the merger,
Digital Angel will be a wholly-owned subsidiary of Applied
Digital.
The board of directors and management of each of Applied Digital
and Digital Angel have from time to time engaged with their
respective senior management to review possible strategic
opportunities with industry peers with the objective of further
enhancing stockholder value and meeting the needs of their
customers.
In July of 2006, Digital Angel formed a special committee to
consider strategic alternatives, including a sale of Digital
Angel to a third party, an acquisition of Applied Digital’s
shares by Digital Angel, or a transaction with Applied Digital.
To aid in their review, the Digital Angel special committee
hired Raymond James as an investment advisor.
During the summer and early fall of 2006, the Digital Angel
special committee reviewed a number of strategic alternatives,
including pursuing a transaction with Applied Digital. The
Digital Angel special committee and the Applied Digital special
committee, which had been formed to represent Applied
Digital’s interest during the discussions, explored the
possibility of a transaction between the two companies,
specifically an acquisition of Applied Digital by Digital Angel.
By mid-November, the special committees had decided not to
pursue a business combination between the two companies,
primarily due to the inability of the committees to agree on
financial terms of the transaction given the trading prices of
the two companies’ shares at the time, and the special
committees were disbanded. However, the management of both
companies indicated that they would continue to monitor market
conditions relating to the potential for a business combination
transaction between the two companies or some other strategic
transaction.
Beginning in the spring of 2007, Michael Krawitz, Applied
Digital’s chief executive officer, Kevin McGrath, the
then-current chief executive officer of Digital Angel, and Scott
Silverman, the chairman of both Applied Digital’s and
Digital Angel’s boards of directors, again discussed the
advantages of a potential business combination of the two
companies and the possibility of renewed discussions regarding
such a transaction. The informal discussions progressed so that,
by May 2007, Messrs. Krawitz, McGrath and Silverman had
discussed a potential transaction in which Applied Digital would
now be the acquiring party and would pay, in the form of Applied
Digital common stock, to Digital Angel stockholders in the range
of 15% over Digital Angel’s stock price for each share of
Digital Angel stock it did not already own. During this period,
both Mr. Krawitz and Mr. McGrath informed their
respective boards of directors, both informally and at various
meetings, of these discussions.
On March 7, 2007, Digital Angel’s board of directors
empowered the corporation’s existing independent directors
committee, which consisted of Michael Zarriello, Barry
Edelstein, John Block, and Howard Weintraub, to act as the
Digital Angel special committee for the purposes of determining
whether a transaction should proceed.
On May 4, 2007, at a meeting of the Applied Digital board
of directors, management updated the board of directors
regarding the possibility of a transaction in which Applied
Digital would acquire all the shares of Digital Angel stock it
did not own at an exchange ratio representing a 15% premium over
the market price of Digital Angel shares. At the meeting, the
board of directors determined, as a result of the existence of
potential conflicts regarding Mr. Silverman, that it was
advisable to establish a special committee of the board of
directors to evaluate the proposed transaction with Digital
Angel and to negotiate the terms of any such transaction. The
board of directors designated Michael Norris (chair), Daniel
Penni, Dennis Rawan, and Constance Weaver as the members of the
Applied Digital special committee.
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On May 11, 2007, the Applied Digital special committee
engaged the law firm of Baker Botts L.L.P. to act as the
committee’s legal advisor.
On May 11, 2007, the Digital Angel special committee
engaged the law firm of Cozen O’Connor to act as the
committee’s legal advisor.
On May 26, 2007, Mr. Norris and Michael Zarriello, the
chairman of Digital Angel’s special committee, discussed by
telephone potential deal structures, as well as the composition
of the Applied Digital board of directors following the
transaction.
On May 30, 2007, the Applied Digital special committee
engaged Duff & Phelps as its financial advisor to
provide an opinion regarding fairness in connection with a
possible business combination with Digital Angel.
On June 4, 2007, the Digital Angel special committee
engaged Merriman, Curhan Ford & Co., or Merriman, as its
financial advisor and to provide a fairness opinion in
connection with a possible business combination with Applied
Digital. Prior to the Digital Angel special committee’s
engagement of Merriman, the Digital Angel special committee had
several discussions with representatives of Merriman to discuss
Merriman’s qualifications and approach, and to discuss
Merriman’s prior engagement by an affiliate of Applied
Digital, which engagement Merriman indicated had terminated
several months prior.
On June 5, 2007, Applied Digital and Digital Angel entered
into a mutual non-disclosure agreement which permitted their
respective advisors to conduct in-depth due diligence. Both
companies proceeded thereafter to exchange due diligence
material and to conduct due diligence during June and July. Also
during this period, the Applied Digital special committee
directed its counsel to distribute a draft merger agreement to
the Digital Angel special committee and its counsel, and to
begin negotiations of the merger agreement.
On June 18, 2007, Digital Angel’s board of directors
established a new special committee of the board of directors
with an expanded mandate to evaluate a potential transaction
with Applied Digital, which also consisted of Michael Zarriello,
Barry Edelstein, John Block, and Howard Weintraub.
On June 18, 2007, Mr. Norris and Mr. Zarriello
again spoke about the composition of the Applied Digital board
of directors following the transaction, as well as the premium
to be paid to Digital Angel’s stockholders.
Mr. Zarriello indicated that the Digital Angel special
committee believed that the proposed merger premium should be
higher than the proposed 15% premium.
On June 20, 2007, the Applied Digital special committee met
to consider Digital Angel’s proposal to increase the
premium for Digital Angel’s stockholders, as well as other
issues relating to the structure of the merger transaction. At
the conclusion of this meeting, the Applied Digital special
committee determined that it needed additional information from
the Digital Angel special committee to evaluate fully Digital
Angel’s proposal to increase the amount of the premium.
Later the same day, Mr. Norris and representatives of
Duff & Phelps participated in a conference call with
Mr. Zarriello, Mr. Edelstein and representatives of
Merriman regarding the valuation of Digital Angel and the
proposed premium to be received by Digital Angel public
stockholders.
On June 21, 2007, the Digital Angel special committee met
with its financial and legal advisors. At the conclusion of this
meeting, the Digital Angel special committee re-affirmed its
belief that the proposed merger premium should be higher than
the proposed 15% premium.
On June 22, 2007, the Applied Digital special committee met
with its financial and legal advisors to evaluate the proposal
of the Digital Angel special committee to increase the merger
consideration. After extensive discussion, the Applied Digital
special committee agreed to increase the premium to be received
by Digital Angel stockholders to 16% over the average market
price during the 10 days prior to execution of a definitive
merger agreement, and also agreed on a new proposal regarding
the composition of Applied Digital’s board of directors
following the transaction. Mr. Norris was asked to
communicate these proposals to Mr. Zarriello on behalf of
the Applied Digital special committee.
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Through the end of June and into July, Mr. Norris,
Mr. Zarriello, and Mr. Edelstein held a series of
telephone conferences during which they discussed various
proposals and counter-proposals regarding the business and
financial terms of the proposed merger transaction, including
the amount of the premium for Digital Angel stockholders and
whether the premium would be calculated by reference to an
average market price over a 10, 15 or
30-day
trailing period. At the same time, counsel for each of the
special committees continued to negotiate a merger agreement and
counsel to the companies continued their due diligence.
On July 13, 2007, Mr. Edelstein informed the Digital
Angel special committee that he was being considered for an
officer position with Digital Angel, and resigned from the
Digital Angel special committee.
Also during July, the Digital Angel special committee became
aware of a potential conflict of interest regarding its
financial advisor, Merriman. The potential conflict arose as a
result of Merriman being engaged by an affiliate of Applied
Digital, for which it had previously performed services before
being engaged by the Digital Angel special committee. As a
result of the potential conflict, the Digital Angel special
committee decided to terminate its relationship with Merriman on
July 13, 2007, and to seek another investment banker to
provide an opinion as to the fairness of the common stock
exchange ratio.
On July 24, 2007, after considering a number of candidates
to provide an opinion as to the fairness of the common stock
exchange ratio, the Digital Angel special committee met with its
legal advisors and representatives of Seven Hills Partners LLC,
or Seven Hills, to discuss Seven Hills’ qualifications and
approach, after which representatives of Seven Hills left the
meeting. The committee then decided to engage Seven Hills as its
financial advisor and instructed its counsel to negotiate an
agreement with Seven Hills. The Digital Angel special committee
engaged Seven Hills on July 31, 2007 as its financial
advisor, to provide an opinion as to the fairness of the common
stock exchange ratio to Digital Angel’s stockholders, other
than Applied Digital and its affiliates.
On August 2, 2007, Mr. Zarriello placed a telephone
call to Mr. Norris to indicate that the Digital Angel
special committee still considered Applied Digital’s offer
of a 16% premium to be too low.
The Applied Digital special committee met on the morning of
August 3, 2007 to discuss the fact that the Digital Angel
special committee considered Applied Digital’s current
offer to be too low. After extensive discussion, the Applied
Digital special committee concluded that it was unlikely that
the two committees would agree in a reasonable period of time on
a premium to be paid to the Digital Angel stockholders. As a
result of this determination, the Applied Digital special
committee resolved to terminate further negotiations with
Digital Angel. Following the Applied Digital special committee
meeting, Mr. Norris notified Mr. Zarriello of the
special committee’s decision.
Upon hearing from Mr. Norris, Mr. Zarriello spoke by
telephone with Mr. Krawitz. Mr. Zarriello told
Mr. Krawitz that the Digital Angel special committee
believed that the proposed transaction had merit and that the
special committee was still willing to continue its discussions
with the Applied Digital special committee. Mr. Krawitz
informed the Applied Digital special committee of
Mr. Zarriello’s call, and the various committee
members agreed to resume negotiations regarding the transaction.
On August 5, 2007, after informing the members of the
Digital Angel special committee, Mr. Zarriello contacted
Mr. Norris to transmit a final proposal from the Digital
Angel special committee that would fix the common stock exchange
ratio at 1.4 shares of Applied Digital common stock for
each share of Digital Angel common stock, which represented a
premium of approximately 21% over the average closing price of
Applied Digital and Digital Angel stock as of the previous
twenty trading days.
On August 7, 2007, the Applied Digital special committee
met to consider Digital Angel’s latest proposal. At the
meeting, Mr. Norris reported to the members of the special
committee that Duff & Phelps had confirmed on an
earlier call that the Digital Angel proposal would not affect
their opinion. After further review and discussion, the Applied
Digital special committee accepted the Digital Angel proposal
and instructed counsel to finalize a definitive merger agreement.
Following the committee meeting, Mr. Norris informed
Mr. Zarriello that the Applied Digital special committee
had accepted the Digital Angel proposal, subject to finalizing
the definitive merger agreement.
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On August 8, 2007, the Applied Digital special committee
met to consider the proposed transaction. At the meeting, the
Applied Digital special committee considered the structure,
terms and effects of the transaction. Mr. Krawitz reviewed
the strategic rationale and the anticipated benefits of the
transaction to Applied Digital. Representatives of
Duff & Phelps reviewed with the Applied Digital
special committee the financial terms of the transaction and
discussed certain financial analyses conducted with respect to
the common stock exchange ratio. Duff & Phelps then
delivered its oral opinion (which was subsequently confirmed in
writing) to the effect that, as of the date of the opinion and
based upon and subject to the qualifications, limitations and
assumptions set forth in the opinion, the common stock exchange
ratio was fair, from a financial point of view, to Applied
Digital’s public stockholders. Representatives of Baker
Botts reviewed the terms of the merger agreement and legal
issues relating to the proposed merger transaction. After
deliberation, the Applied Digital special committee unanimously
determined the merger to be advisable, fair to, and in the best
interests of Applied Digital and its public stockholders and
recommended that Applied Digital’s board of directors
approve the merger agreement.
Immediately following the Applied Digital special committee
meeting, Applied Digital’s board of directors met to
consider the proposed transaction. After receiving the
recommendation of the Applied Digital special committee, the
board of directors unanimously determined the merger to be
advisable, fair to, and in the best interests of Applied Digital
and its public stockholders, approved the merger agreement, and
recommended that Applied Digital’s stockholders vote in
favor of the issuance of shares of Applied Digital common stock
in the merger.
On August 8, 2007, the Digital Angel special committee met
to consider the proposed transaction. At the meeting, the
Digital Angel special committee considered the structure, terms
and effects of the transaction. Mr. Zarriello and
Ms. Breece, Digital Angel’s acting chief financial
officer, reviewed the strategic rationale and the anticipated
benefits of the transaction to Digital Angel. Representatives of
Seven Hills discussed with the Digital Angel special committee
the financial terms of the transaction and presented certain
financial analyses conducted with respect to the transaction.
Seven Hills then delivered its oral opinion (which was
subsequently confirmed in writing) to the effect that, as of the
date of the opinion and based upon and subject to the factors
and assumptions set forth in the opinion, the common stock
exchange ratio was fair, from a financial point of view, to
Digital Angel’s stockholders, other than Applied Digital
and its affiliates. Representatives of Cozen O’Connor
reviewed the terms of the merger agreement and legal issues
relating to the proposed merger transaction, and representatives
of Digital Angel’s counsel reviewed certain of the terms of
the merger agreement and the due diligence that had been
completed. After deliberation, the Digital Angel special
committee unanimously determined the merger to be advisable,
fair to, and in the best interests of Digital Angel and its
stockholders, other than Applied Digital and its affiliates, and
recommended that Digital Angel’s board of directors approve
the merger agreement.
Immediately following the Digital Angel special committee
meeting, Digital Angel’s board of directors met to consider
the proposed transaction. After receiving the recommendation of
the Digital Angel special committee, the board of directors
unanimously determined the merger to be advisable, fair to, and
in the best interests of Digital Angel and its stockholders,
other than Applied Digital and its affiliates, approved and
adopted the merger agreement and declared its advisability,
approved the merger and other transactions contemplated by the
merger agreement, and recommended that Digital Angel’s
stockholders vote in favor of the approval and adoption of the
merger agreement.
Following each company’s board meeting, the merger
agreement was finalized and, on August 8, 2007, the parties
signed the merger agreement. On August 9, 2007, Applied
Digital and Digital Angel issued a joint press release
announcing the execution of the merger agreement.
Description
of Contracts and Other Arrangements Between Applied Digital and
Digital Angel
Director
and Officer Roles and Relationships with Applied Digital’s
Subsidiaries
As of September 28, 2007, Applied Digital owned
approximately 55.6% of Digital Angel’s outstanding shares
of common stock. Several of Applied Digital’s directors and
executive officers have served and, in certain cases, continue
to serve as directors and officers of Digital Angel, InfoTech,
Thermo Life, and
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VeriChip. By virtue of the relationships described below,
certain of Applied Digital’s directors and executive
officers may face situations in which there are actual or
apparent conflicts of interest that could interfere, or appear
to interfere, with their ability to act in a manner that is in
Applied Digital’s best business interests.
At the board level:
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Two of Applied Digital’s five directors — Daniel
E. Penni and Constance K. Weaver — currently serve on
the five-member board of directors of VeriChip.
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Mr. Penni serves as the chairman of Applied Digital’s
board of directors. He also serves as the chair of the
compensation committee of Applied Digital’s board and as a
member of the audit committee and nominating committee of
Applied Digital’s board and as the chair of the
compensation committee and a member of the audit committee of
VeriChip’s board.
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Ms. Weaver serves as the chair of the compliance and
governance committee and as a member of the nominating committee
and compensation committee of Applied Digital’s board of
directors. She also serves as the chair of the nominating and
governance committee and as a member of the audit committee of
VeriChip’s board.
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Mr. Zarriello, who resigned as an Applied Digital director
effective July 12, 2006, continues to serve as a director
of Digital Angel.
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Mr. Silverman, who served as the chairman of Applied
Digital’s board of directors from March 2003 to July 2007,
currently serves as the chairman of the boards of directors of
each of Digital Angel, InfoTech and VeriChip.
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At the officer level:
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Mr. Silverman, who served as Applied Digital’s chief
executive officer from March 2003 to December 2006 and as
Applied Digital’s acting president from April 2005 to
December 2006, currently serves as the chief executive officer
of VeriChip.
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Mr. Silverman also served as the chief executive officer of
Thermo Life, a company with two employees that has not generated
any revenue since its formation through April 4, 2007.
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Ms. Breece serves as the acting chief financial officer of
both Applied Digital and Digital Angel.
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In their various capacities with Applied Digital’s
subsidiaries, Messrs. Penni, Zarriello, Silverman and
Ms. Weaver have been granted stock option awards by Applied
Digital subsidiaries, including Digital Angel. In addition,
several executive officers of Applied Digital have been granted
option awards by Applied Digital subsidiaries, including Digital
Angel.
Applied
Digital’s Financing
On August 31, 2007, Applied Digital closed a
$7.0 million, non-convertible debt financing transaction
with Kallina, pursuant to the terms of a securities purchase
agreement, dated August 31, 2007, between Applied Digital
and Kallina, or the Applied Digital financing transaction.
Kallina is a wholly-owned subsidiary of Applied Digital’s
current senior secured lender, Laurus.
Under the terms of the securities purchase agreement, Kallina
extended financing to Applied Digital in the form of a
$7.0 million, secured term note, or the Applied Digital
note. The Applied Digital note accrues interest at a rate per
annum equal to the “prime rate” published in The Wall
Street Journal from time to time, plus 3.0% (but such rate shall
not at any time be less than 11.0%), and which will mature on
August 31, 2009.
Applied Digital is obligated to make monthly principal payments
of $166,666.67, plus interest, beginning on March 1, 2008.
The terms of the Applied Digital note allow for optional
redemption by paying 103% of the principal amount. The Applied
Digital note also contains certain events of default, including,
among other things, failure to pay, violation of non-financial
covenants, and certain other expressly enumerated events. In the
event of default, Kallina is entitled to additional interest on
the outstanding principal balance of the
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Applied Digital note and on all outstanding obligations under
the Applied Digital note and the related agreements entered into
in conjunction with the Applied Digital note in an amount equal
to 1% per month.
To secure Applied Digital’s obligations under the
securities purchase agreement, Applied Digital has granted
Kallina a security interest in substantially all of Applied
Digital’s assets, and Applied Digital has pledged all of
the issued and outstanding capital stock owned by Applied
Digital in InfoTech and certain other wholly-owned subsidiaries
of Applied Digital, as well as a portion of the issued and
outstanding stock owned by Applied Digital in VeriChip and
Digital Angel.
The securities purchase agreement contains various customary
representations and warranties of Applied Digital and certain of
its subsidiaries, as well as customary affirmative and negative
covenants. Digital Angel and certain of its subsidiaries agreed
to guarantee the obligations of Applied Digital under the
Applied Digital financing transaction. In connection with the
Applied Digital financing transaction, Kallina assigned certain
of its rights and obligations to each of Valens Offshore SPV II,
Corp., or Valens Offshore, and Valens U.S. SPV I, LLC,
or Valens U.S., pursuant to an amendment and partial
assignment of loans, liens and documents. Applied Digital,
Kallina, Valens Offshore, Valens U.S. and Laurus also
entered into an intercreditor agreement regarding the rights and
priorities of the parties to Applied Digital’s collateral.
In connection with the execution of the securities purchase
agreement, Applied Digital transferred to Kallina
200,000 shares of VeriChip common stock that it owned and
reduced the exercise price on existing warrants to purchase
approximately 1.7 million shares of its common stock held
by Laurus, from $1.88 to $1.35. VeriChip has agreed to enter
into a registration rights agreement with Kallina to register
the 200,000 shares.
Digital
Angel’s Financing
Effective August 31, 2007, Digital Angel closed a
$6.0 million, revolving asset-based financing transaction
with Kallina, pursuant to the terms of a security agreement,
among Digital Angel and Digital Angel Technology Corporation,
Fearing Manufacturing Co., Inc. and Digital Angel International,
Inc., which are referred to as the eligible subsidiaries, and
Kallina. Under the terms of the security agreement, Digital
Angel may borrow, from time to time, under a revolving facility,
an amount equal to the lesser of the amount of availability
under the borrowing base and $6.0 million, subject to
certain reserves that Kallina is authorized to take in its
reasonable commercial judgment. Under the terms of the security
agreement, the borrowing base is calculated as a percentage of
the total amount of eligible accounts and inventory owned by
Digital Angel and the eligible subsidiaries. Amounts outstanding
under the revolving facility accrue interest at a rate per year
equal to the “prime rate” published in The Wall Street
Journal from time to time, plus 2.0% (but such rate cannot at
any time be less than 10.0%), and which matures on
August 31, 2010. Digital Angel and the eligible
subsidiaries have pledged, in support of the obligations under
the revolving facility, all of their respective assets,
excluding the stock of all foreign subsidiaries other than stock
held by Digital Angel in Signature Industries Limited. Digital
Angel used a portion of the proceeds from the revolving facility
to terminate and pay off all obligations under a revolving
invoice funding facility with Greater Bay Business Funding, a
division of Greater Bay Bank, N.A., and the remaining proceeds
for working capital purposes.
In connection with the Digital Angel financing transaction,
Digital Angel issued warrants that represent the ability to
purchase 967,742 shares of Digital Angel’s common
stock at an exercise price of $1.69 per share. The warrants can
be exercised at any time prior to August 31, 2014. Digital
Angel also entered into a registration rights agreement with
Kallina, pursuant to which Digital Angel has agreed to file a
shelf registration statement no later than December 31,
2007 covering the resale by Kallina of those shares received
upon exercise of the warrants.
Intercompany
Financing
Effective August 31, 2007, Digital Angel and Applied
Digital entered into a secured term note in the amount of
$7.0 million, on terms substantially similar to those in
the note issued by Applied Digital to Kallina in the Applied
Digital financing transaction, or the intercompany loan. As part
of the consideration for the intercompany loan, Digital Angel
agreed to pay Applied Digital a structuring fee of $100,000,
payable at
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Digital Angel’s election in stock or cash, reimburse
Applied Digital for any other out-of-pocket fees required to be
paid by Applied Digital in connection with the Digital Angel
financing transaction or the Applied Digital financing
transaction, and issue to Applied Digital 921,402 shares of
Digital Angel common stock.
Digital Angel used the proceeds from the intercompany loan to
repay all amounts due under its $6.0 million,
10.25% senior secured debenture and intends to use the
remaining proceeds for working capital purposes. Pursuant to the
terms of the debenture, in connection with the prepayment,
Digital Angel paid 102% of the outstanding principal amount of
the debenture, plus all accrued and unpaid interest.
Agreement
between VeriChip and Digital Angel
VeriChip and Digital Angel executed a supply, license and
development agreement dated March 4, 2002, as amended and
restated on December 27, 2005, and as amended on
May 9, 2007. Under this agreement, Digital Angel is
VeriChip’s sole supplier of human-implantable microchips.
VeriChip’s purchases of product under the supply, license
and development agreement were approximately $0.0 million
and $0.2 million in the six-months ended June 30, 2007
and 2006, respectively. Under the terms of the May 9, 2007
amendment, the term of the agreement was extended from March
2013 to March 2014. Also, under the May 9, 2007 amendment,
the annual minimum purchase requirements were each extended one
year and, accordingly, there is no minimum purchase requirement
in 2007. The approximately $0.9 million originally required
to be purchased in 2007 is now required to be purchased in 2008.
As long as VeriChip continues to meet minimum purchase
requirements, the agreement will automatically renew annually
under its terms until the expiration of the last of the patents
covering any of the supplied products. The supply, license and
development agreement may be terminated prior to its stated term
under specified events, including as a result of a bankruptcy
event of either party or an uncured default. In addition,
Digital Angel may sell the microchips to third parties if
VeriChip does not take delivery and pay for a minimum number of
microchips, as specified in the supply, license and development
agreement. Further, the supply, license and development
agreement provides that Digital Angel shall, at VeriChip’s
option, furnish and operate a computer database to provide data
collection, storage and related services for VeriChip’s
customers for a fee, as provided. VeriChip does not currently
utilize this service.
The terms of the original supply, license and development
agreement, and each amendment to the agreement, were negotiated
by the executive officers of the respective companies and
approved by the independent members of each company’s board
of directors.
Digital Angel relies solely on a production agreement with RME,
a subsidiary of Raytheon Company, for the manufacture of its
human-implantable microchip products. RME utilizes Digital
Angel’s equipment in the production of the microchips. On
April 28, 2006, Digital Angel entered into a new production
agreement with RME related to the manufacture and distribution
of glass-encapsulated syringe-implantable transponders,
including the human-implantable microchip products sold by
VeriChip. This new agreement expires on June 30, 2010. The
technology underlying these systems is covered, in part, by
U.S. Patent No. 5,211,129, “Syringe-Implantable
Identification Transponders.” In 1994, Destron/IDI, Inc., a
predecessor company to Digital Angel, granted a co-exclusive
license under this patent, other than for certain specified
fields of use related to Applied Digital’s Animal
Applications segment, which were retained by the predecessor
company to Hughes and its then wholly-owned subsidiary, HID. The
specified fields of use retained by the predecessor company of
Hughes do not include human identification or security
applications. The rights licensed to Hughes and HID were freely
assignable, and it is unknown which party or parties currently
have these rights or whether these rights have been assigned,
conveyed or transferred to any third party.
VeriChip does not anticipate generating more than nominal
revenue from the sale of its human implantable microchips prior
to the expiration of the patent in April 2008. Hughes, HID, any
of their respective successors in interest, or any party to whom
one of the foregoing parties may have assigned its rights under
the 1994 license agreement may commence a claim against Applied
Digital or VeriChip asserting that VeriChip is violating its
rights. If such a claim is successful, sales of VeriChip’s
human-implantable systems could be enjoined, and VeriChip could
be required to cease its efforts to create a market for these
systems, until the patent expires in April 2008. In addition,
VeriChip could be required to pay damages, which
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may be substantial. Regardless of whether any claimant is
successful, VeriChip would face the prospect of the expenditure
of funds in litigation, the diversion of management time and
resources, damage to its reputation and the potential impairment
in the marketability of its systems even after the expiration of
the patent, which could harm its business and negatively affect
its prospects.
Applied Digital is aware that Digital Angel and the successor to
HID are in the process of finalizing a cross-license that
includes Digital Angel obtaining a royalty-free, non-exclusive
license to the successor’s rights to the implantable human
applications of the ’129 patent, for which it claims
certain ownership rights to. That agreement is anticipated to
have no cost to Applied Digital or VeriChip.
Transition
Services Agreement Between Applied Digital and
VeriChip
During the four years ended December 31, 2005, Applied
Digital provided certain general and administrative services to
VeriChip, including accounting, finance, payroll and legal
services, telephone, rent and other miscellaneous items. The
costs of these services, which are eliminated in consolidation
of financial statements, were determined based on
VeriChip’s use of such services.
On December 27, 2005, Applied Digital entered into a
transition services agreement with VeriChip, under which it
agreed to continue to provide VeriChip with certain
administrative transition services, including payroll, legal,
finance, accounting, information technology, tax services, and
services related to VeriChip’s initial public offering. As
compensation for these services, VeriChip agreed to pay Applied
Digital approximately $62,000 per month for fixed costs
allocable to these services, among other reimbursable expenses.
On December 21, 2006, Applied Digital and VeriChip entered
into an amended and restated transition services agreement,
which became effective on February 14, 2007, the date of
completion of VeriChip’s initial public offering. There is
no stated expiration date to the transition services agreement.
The term of the amended and restated agreement will continue
until such time as VeriChip requests that Applied Digital cease
performing the transition services, provided that Applied
Digital is not obligated to continue to provide the transition
services after February 14, 2009. Except for any request by
VeriChip that Applied Digital cease to perform transition
services, subject to certain notice provisions, the agreement
may not be terminated by either party, except in the event of a
material default in Applied Digital’s delivery of the
transition services or in VeriChip’s payment for those
services. The services that Applied Digital provides under the
amended and restated transition services agreement are the same
as those provided under the initial agreement. In connection
with the December 21, 2006 amendment, the estimated monthly
charge for the fixed costs allocable to these services was
increased to approximately $72,000 per month, primarily as the
result of an increased allocation for office space. Effective
April 1, 2007, the estimated monthly charge for the fixed
costs allocable to these services was reduced to $40,000 per
month, primarily as a result of a reduction in allocable
accounting fees and accounting and legal services.
The terms of the transition services agreement and the amendment
and restatement of the agreement were negotiated between certain
of VeriChip’s and Applied Digital’s executive
officers. These executive officers were independent of one
another, and the terms of the agreements were based upon
historical amounts incurred by Applied Digital for payment of
such services to third parties. However, these costs may not
necessarily be indicative of the costs which would be incurred
by VeriChip as an independent, standalone entity.
The costs of these services to VeriChip were $0.1 million
and $0.3 million for the three and six months ended
June 30, 2007, respectively, and $0.2 million and
$0.4 million for the three and six months ended
June 30, 2006, respectively.
Loan
Agreement with VeriChip
Applied Digital has funded and financed VeriChip’s
operations since it began operation in January 2002, which
resulted in an amount due to Applied Digital by VeriChip
totaling approximately $8.6 million (which included
$0.4 million of accrued interest) at December 31,
2005. On December 27, 2005, Applied Digital and VeriChip
converted the amounts due, including accrued interest, into an
$8.5 million revolving line of credit under the terms of a
loan agreement, security agreement and revolving line of credit
note.
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On October 6, 2006, Applied Digital and VeriChip entered
into an amendment to the loan agreement that increased the
principal amount available thereunder to $13.0 million and
changed the interest rate to a fixed rate of 12% per annum.
Previously, VeriChip’s indebtedness to Applied Digital bore
interest at the prevailing prime rate of interest as published
from time to time by The Wall Street Journal. The amendment
further provided that the loan matured in July 2008, but could
be extended at Applied Digital’s option through
December 27, 2010.
On January 19, 2007, February 8, 2007 and again on
February 13, 2007, Applied Digital and VeriChip entered
into further amendments to the loan documents, which increased
the maximum principal amount of indebtedness that VeriChip may
incur to $14.5 million. A portion of this increase was used
to cover approximately $0.7 million of intercompany
advances made to VeriChip by Applied Digital during the first
week of January 2007. Upon the consummation of VeriChip’s
initial public offering on February 14, 2007, the loan
ceased to be a revolving line of credit, and VeriChip has no
ability to incur additional indebtedness to Applied Digital
under the loan documents. The interest continues to accrue on
the outstanding indebtedness at a rate of 12% per annum. Under
the terms of the loan agreement, as amended on February 8,
2007, VeriChip was required to repay Applied Digital
$3.5 million of principal and accrued interest upon the
consummation of its offering. VeriChip paid the
$3.5 million on February 14, 2007, resulting in a
balance due of approximately $11.6 million on
February 14, 2007. VeriChip is not obligated to repay an
additional amount of its indebtedness until January 1,
2008. Effective with the payment of the $3.5 million, all
interest which has accrued on the loan as of the last day of
each month, commencing with the month in which such payment is
made, shall be added to the principal amount. Commencing
January 1, 2008 through January 1, 2010, VeriChip is
obligated to repay $0.3 million on the first day of each
month. A final balloon payment equal to the outstanding
principal amount then due under the loan, plus all accrued and
unpaid interest, will be due and payable on February 1,
2010. As of June 30, 2007, approximately $12.2 million
was outstanding under the loan.
The loan is collateralized by interests in all property and
assets of VeriChip, including the stock of VeriChip’s
subsidiaries, but is not secured by any of the property or
assets of VeriChip’s subsidiaries.
Satisfaction
of Loan Agreement
On May 15, 2007, Applied Digital and InfoTech, Applied
Digital’s majority-owned subsidiary, entered into a
satisfaction of loan agreement, or SLA. On or about
June 27, 2003, InfoTech made a loan to Applied Digital in
the original principal amount of $1.0 million. The loan was
scheduled to mature on June 30, 2007. In full satisfaction
of Applied Digital’s obligations under the loan and the
related documents, Applied Digital and InfoTech entered into the
SLA, pursuant to which Applied Digital agreed to issue and
deliver to InfoTech 833,333 shares of Applied Digital
common stock. Applied Digital was obligated to continue to pay
InfoTech interest in cash on the sum of $1.0 million at the
existing rate per annum under the note, which was 16%, until the
date the shares were registered. The shares were registered on
June 11, 2007. Since the value of the 833,333 shares
issued to InfoTech exceeded $1.0 million on the effective
date of the registration statement, InfoTech is required to
return to Applied Digital the number of shares valued in excess
of the $1.0 million as of that date, or approximately
129,603 shares. As of June 30, 2007, InfoTech has sold
141,065 of these shares for net proceeds of $189,128, and it has
recorded a loss on the sale of the shares of approximately
$11,000. In addition, during the three-months ended
June 30, 2007, InfoTech was required to record an
unrealized loss of approximately $29,000, representing the
reduction in the fair market value of the shares on the date of
the effectiveness of the registration statement, which value was
$1.41 per share, and the value of the 562,665 unsold shares as
of June 30, 2007, of $1.37 per share. Because such realized
and unrealized losses resulted from transactions in Applied
Digital’s own common stock, they were eliminated upon the
consolidation of InfoTech and Applied Digital’s operating
results and, accordingly, they are not reflected in the
unaudited condensed consolidated financial statements. The fair
value of Applied Digital common stock held by InfoTech as of
June 30, 2007, including the 129,603 shares that
InfoTech had not yet returned to Applied Digital as of such
date, was approximately $0.8 million.
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Legal
Fees Paid to Akin Gump Strauss Hauer & Feld
LLP
During the six-months ended June 30, 2006, VeriChip
incurred legal fees of $0.8 million to VeriChip’s
legal counsel, Akin Gump Strauss Hauer & Feld LLP, or
Akin Gump. Tommy G. Thompson, a partner with Akin Gump, had been
a member of VeriChip’s board of directors since July 2005,
and, as a result of his directorship services, holds fully
vested options to purchase 0.1 million shares of Applied
Digital common stock. Effective March 8, 2007,
Mr. Thompson resigned his directorship position with
VeriChip.
Digital
Angel Lease with LANO Holding ApS
Digital Angel’s subsidiary, DSD Holding A/S, leases a
13,600 square foot building located in Hvidovre, Denmark.
The building is occupied by DSD Holding A/S’s
administrative and production operations. The lease agreement
has no expiration but includes a three-month termination notice
requirement that can be utilized by the owner or DSD Holding
A/S. DSD Holding A/S leases the building from LANO Holding ApS.
LANO Holding ApS is 100% owned by Lasse Nordfjeld, president of
Digital Angel’s Animal Applications Group.
For additional related party transactions, see “Certain
Relationships and Related Transactions” beginning on
page 188.
Recommendations
of the Applied Digital Special Committee and Board of
Directors
After careful consideration, the Applied Digital special
committee determined that the merger is advisable, fair to and
in the best interests of Applied Digital and its stockholders
and recommended that the Applied Digital board of directors
approve the merger agreement.
After careful consideration, the Applied Digital board of
directors, based on the recommendation of the Applied Digital
special committee, (i) determined that the merger is
advisable, fair to, and in the best interests of Applied Digital
and its public stockholders, (ii) approved and adopted the
merger agreement, the merger and the other transactions
contemplated by the merger agreement, (iii) approved the
making of an amendment to the Applied Digital certificate of
incorporation in order to increase the number of authorized
shares of Applied Digital capital stock, and
(iv) recommended that the Applied Digital stockholders vote
“FOR” the proposal to issue Applied Digital common
stock pursuant to the merger agreement and “FOR” the
proposal to amend Applied Digital’s certificate of
incorporation to increase the total number of authorized shares
of Applied Digital capital stock from 130 million shares,
of which 125 million are common stock, to 170 million
shares of capital stock, of which 165 million will be
common stock.
Applied
Digital’s Reasons for the Merger
Special
Committee Reasons for the Merger
In reaching its determination to recommend that the Applied
Digital board approve the merger agreement, the Applied Digital
special committee considered numerous factors in consultation
with its outside legal and financial advisors and Applied
Digital’s senior management, including the following
material factors and benefits of the merger, each of which the
Applied Digital special committee believed supported its
determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the Applied Digital
special committee and the Digital Angel special committee and
their respective legal and financial advisors.
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The opinion received by the Applied Digital special committee
and later confirmed in writing, dated August 8, 2007, of
Duff & Phelps to the effect that, as of that date and
subject to the various assumptions, limitations and
qualifications set forth in its opinion, the common stock
exchange ratio in the merger was fair, from a financial point of
view, to the public stockholders of Applied Digital. The full
text of Duff & Phelps’s written opinion, dated
August 8, 2007, which describes the assumptions made,
matters considered and limitations on the review undertaken, is
attached to this joint proxy statement/prospectus as
Annex B.
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The merger is expected to result in an estimated cost savings of
approximately $2.0 million in general and administrative
expense annually.
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The merger is expected to streamline operations and eliminate
inefficiencies resulting from operating two separate public
companies.
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The merger will simplify the corporate ownership structure and
increase transparency for investors.
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The merger will eliminate management and board of directors
inefficiencies associated with managing current intercompany
issues.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company, higher
share price and potential to improve analyst coverage.
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The merger will allow Applied Digital stockholders to
participate more fully in any potential growth of Digital Angel
as a result of their increased ownership percentage in Digital
Angel.
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The merger is expected to enable the combined company to be a
stronger
U.S.-based
global competitor.
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The merger will create a larger public company.
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Digital Angel is obligated to reimburse Applied Digital for
expenses in connection with the transaction, up to a maximum of
$750,000, if Applied Digital terminates the merger agreement
because:
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Digital Angel breaches a representation, warranty or covenant in
the merger agreement that is reasonably likely to have a
material adverse effect on Digital Angel;
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Digital Angel’s board of directors changes its
recommendation in favor of the issuance of shares of Applied
Digital common stock in the merger; or
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A willful and material breach by Digital Angel causes the making
of a superior proposal by a third party.
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The Applied Digital special committee believes that the above
factors generally supported its determination. The Applied
Digital special committee did, however, consider the potential
adverse effects of other factors in connection with the merger.
The material negative factors considered were:
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The cost savings anticipated for Applied Digital and Digital
Angel as a combined company may not be achieved;
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Digital Angel’s growth prospects may be less than currently
anticipated and not as great as the growth experienced by
Applied Digital alone, or by Applied Digital’s other
affiliates, including VeriChip;
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The value of the shares to be received by Digital Angel public
stockholders may vary based upon the nature of the fixed
exchange ratio; and
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The Applied Digital stockholders will suffer dilution if the
merger is consummated.
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The foregoing discussion summarizes the material factors
considered by the Applied Digital special committee in its
consideration of the merger agreement and the merger. After
considering these factors, the Applied Digital special committee
concluded that the positive factors relating to the merger
agreement and the merger substantially outweighed the potential
negative factors. In view of the wide variety of factors
considered by the Applied Digital special committee, and the
complexity of these matters, the Applied Digital special
committee did not find it practicable to quantify or otherwise
assign relative weights to the foregoing factors. In addition,
individual members of the Applied Digital special committee may
have assigned different weights to various factors. The Applied
Digital special committee recommended approval of the merger
agreement based upon the totality of the information presented
to and considered by it.
Board
Reasons for the Merger
In reaching its determination to recommend that Applied
Digital’s stockholders vote for the approval of the
issuance of Applied Digital common stock pursuant to the merger
agreement, Applied Digital’s board
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considered numerous factors, including the recommendation of the
Applied Digital special committee, as well as the above factors,
benefits and adverse effects of the merger considered by the
Applied Digital special committee, which the board believed
supported its determinations.
The foregoing discussion summarizes the material factors
considered by the Applied Digital board in its consideration of
the merger agreement and the merger. After considering these
factors, the Applied Digital board concluded that the positive
factors relating to the merger agreement and the merger
substantially outweighed the potential negative factors. In view
of the wide variety of factors considered by the Applied Digital
board, and the complexity of these matters, the Applied Digital
board did not find it practicable to quantify or otherwise
assign relative weights to the foregoing factors. In addition,
individual members of the Applied Digital board may have
assigned different weights to various factors. The Applied
Digital board recommended approval of the merger agreement based
upon the totality of the information presented to and considered
by it.
THE APPLIED DIGITAL SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDED
THAT THE APPLIED DIGITAL BOARD OF DIRECTORS APPROVE THE MERGER
AGREEMENT. AS A RESULT, THE APPLIED DIGITAL BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF APPLIED DIGITAL VOTE
“FOR” THE PROPOSAL TO ISSUE APPLIED DIGITAL
COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND
“FOR” THE PROPOSAL TO AMEND APPLIED
DIGITAL’S CERTIFICATE OF INCORPORATION TO INCREASE THE
TOTAL NUMBER OF AUTHORIZED SHARES OF APPLIED DIGITAL CAPITAL
STOCK FROM 130 MILLION SHARES, OF WHICH 125 MILLION ARE COMMON
STOCK, TO 170 MILLION SHARES, OF WHICH 165 MILLION WILL BE
COMMON STOCK.
Recommendations
of the Digital Angel Special Committee and Board of
Directors
After careful consideration, the Digital Angel special committee
determined that the merger is advisable, fair to, and in the
best interests of Digital Angel and its stockholders (other than
Applied Digital and its affiliates) and recommended that the
Digital Angel board of directors approve the merger agreement.
After careful consideration, the Digital Angel board of
directors, based on the recommendation of the special committee,
(i) determined that the merger is advisable, fair to, and
in the best interests of Digital Angel and its stockholders
(other than Applied Digital and its affiliates),
(ii) approved and adopted the merger agreement and declared
its advisability, and approved the merger and the other
transactions contemplated by the merger agreement and
(iii) recommended that the Digital Angel stockholders vote
“FOR” the proposal to approve and adopt the merger
agreement.
In considering the recommendation of Digital Angel’s board
with respect to the merger agreement, you should be aware that
some directors and officers of Digital Angel may have interests
in the merger that are different from, or are in addition to,
the interests of Digital Angel’s stockholders. See
“The Merger — Interests of Certain Persons in the
Merger.”
Digital
Angel’s Reasons for the Merger
Special
Committee Reasons for the Merger
In reaching its determination to recommend that the Digital
Angel board approve the merger agreement, the Digital Angel
special committee considered numerous factors in consultation
with its outside legal advisors and Digital Angel’s senior
management, including the following material factors and
benefits of the merger, each of which the Digital Angel special
committee believed supported its determinations:
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The terms of the transaction were determined through
arm’s-length negotiations between the Digital Angel special
committee and the Applied Digital special committee and their
respective legal and financial advisors.
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It is a condition to closing that the merger agreement be
approved by a majority of Digital Angel disinterested
stockholders, which excludes Applied Digital and each person
that is an affiliate of
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Applied Digital, at the special and annual meeting. Directors
and officers of Digital Angel who are not affiliates of Applied
Digital are considered disinterested stockholders for purposes
of voting on the merger agreement. As of September 28,
2007, these directors and officers collectively, together with
their associates and affiliates, beneficially own approximately
2.1 million shares, or 4.5% of Digital Angel common stock.
These directors and officers have indicated that they plan to
vote their shares in favor of the merger agreement, and their
votes will count in determining whether a majority of Digital
Angel disinterested stockholders has approved and adopted the
merger agreement.
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The opinion of Seven Hills received by the Digital Angel special
committee on August 8, 2007 (later confirmed in writing)
stating that, as of that date and subject to the various
assumptions and qualifications set forth in its opinion, the
common stock exchange ratio was fair, from a financial point of
view, to the holders of Digital Angel common stock, other than
Applied Digital and its affiliates. The full text of Seven
Hills’ written opinion, dated August 8, 2007, which
describes the assumptions made, matters considered and
limitations on the review undertaken, is attached to this joint
proxy statement/prospectus as Annex C.
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The expectation that the merger will qualify as a transaction of
a type that is generally tax-free for United States federal
income tax purposes.
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The consideration offered represents a premium for Digital Angel
common stock of approximately 21% over the average closing price
of Applied Digital’s and Digital Angel’s stock as of
the previous twenty trading days ending on August 7, 2007,
the day immediately prior to the signing of the merger agreement.
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The merger is expected to result in an estimated cost savings of
approximately $2.0 million annually.
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The merger will eliminate certain duplicate costs related to
operating two separate public companies.
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The merger eliminates Applied Digital’s majority ownership
position in Digital Angel, which may have discouraged some
investors from buying Digital Angel stock due to uncertainty
concerning Applied Digital’s intentions regarding such
stock.
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The merger will give Digital Angel stockholders ownership in
Applied Digital which owns interests in other companies,
including VeriChip.
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The merger may result in potentially greater stockholder
liquidity due to increased size of the combined company and
potential to improve analyst coverage.
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The merger will allow stockholders to continue to participate in
any potential growth of the combined company.
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The merger agreement provides that Digital Angel has the right
to terminate the merger agreement if, among other reasons, the
board of directors changes its recommendation in favor of the
merger agreement under limited circumstances.
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Applied Digital is obligated to reimburse Digital Angel for
expenses in connection with the transaction, up to a maximum of
$750,000, if Digital Angel terminates the merger agreement
because:
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Applied Digital breaches a representation, warranty or covenant
in the merger agreement that is reasonably likely to have a
material adverse effect on Applied Digital or the surviving
corporation;
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Applied Digital’s board changes its recommendation in favor
of the issuance of shares of Applied Digital common stock in the
merger; or
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Applied Digital agrees to be acquired by a third party.
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The Digital Angel special committee believes that the above
factors generally supported its determination. The Digital Angel
special committee did, however, consider the potential adverse
effects of other factors in connection with the merger. The
material negative factors considered were:
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The common stock exchange ratio is fixed, and Digital Angel
stockholders cannot be certain of the dollar value of the merger
consideration to be received in the merger, which may be less
than the 21% premium discussed above.
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The cost savings anticipated for Applied Digital and Digital
Angel as a combined company may not be achieved, or delays or
difficulties in eliminating certain redundant costs of the two
companies could delay or prevent the realization of the
anticipated cost savings.
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Applied Digital will have a significant amount of outstanding
indebtedness, and may require additional financing. Applied
Digital’s inability to obtain new financing may require it
to reduce funds available for investment in research and
development and capital expenditures.
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Digital Angel stockholders will be subject to risks relating to
Applied Digital’s other businesses, including VeriChip and
InfoTech.
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Digital Angel stockholders will be subject to risks relating to
any litigation pending against Applied Digital or its other
subsidiaries.
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The risk that, after the merger, the combined company may lose
key personnel.
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The possibility that the merger may not be completed, or that
completion of the merger may be delayed.
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Digital Angel is required to pay the expenses of Applied
Digital, up to a maximum of $750,000, upon the occurrence of the
termination of the merger under certain circumstances.
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The foregoing discussion summarizes the material factors
considered by the Digital Angel special committee in its
consideration of the merger agreement and the merger. After
considering these factors, the Digital Angel special committee
concluded that the positive factors relating to the merger
agreement and the merger substantially outweighed the potential
negative factors. In view of the wide variety of factors
considered by the Digital Angel special committee, and the
complexity of these matters, the Digital Angel special committee
did not find it practicable to quantify or otherwise assign
relative weights to the foregoing factors. In addition,
individual members of the Digital Angel special committee may
have assigned different weights to various factors. The Digital
Angel special committee recommended approval of the merger
agreement based upon the totality of the information presented
to and considered by it.
Board
Reasons for the Merger
In reaching its determination to recommend that Digital
Angel’s stockholders vote for approval and adoption of the
merger agreement, Digital Angel’s board considered numerous
factors, including the following material factors and benefits
of the merger, each of which the board believed supported its
determinations:
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The recommendation of the Digital Angel special committee,
including the above factors, benefits and adverse effects of the
merger considered by the Digital Angel special
committee; and
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The opinion of Seven Hills received by the Digital Angel special
committee on August 8, 2007, that, as of that date and
subject to the various assumptions and limitations set forth in
its opinion, the common stock exchange ratio was fair, from a
financial point of view, to the holders of Digital Angel common
stock (other than to Applied Digital and its affiliates). The
full text of Seven Hills’ written opinion, dated
August 8, 2007, which describes the assumptions made,
matters considered and limitations on the review undertaken, is
attached to this joint proxy statement/prospectus as
Annex C.
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The foregoing discussion summarizes the material factors
considered by the Digital Angel board in its consideration of
the merger agreement and the merger. After considering these
factors, the Digital Angel board concluded that the positive
factors relating to the merger agreement and the merger
substantially outweighed
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the potential negative factors. In view of the wide variety of
factors considered by the Digital Angel board, and the
complexity of these matters, the Digital Angel board did not
find it practicable to quantify or otherwise assign relative
weights to the foregoing factors. In addition, individual
members of the Digital Angel board may have assigned different
weights to various factors. The Digital Angel board recommended
the approval and adoption of the merger agreement based upon the
totality of the information presented to and considered
by it.
THE DIGITAL ANGEL SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDED
THAT THE DIGITAL ANGEL BOARD OF DIRECTORS APPROVE THE MERGER
AGREEMENT. AS A RESULT, THE DIGITAL ANGEL BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF DIGITAL ANGEL VOTE
“FOR” THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT.
Opinion
of Financial Advisor to the Applied Digital Special
Committee
The Applied Digital special committee retained Duff &
Phelps to act as its financial advisor and to provide an opinion
regarding fairness to the Applied Digital special committee in
connection with the merger. On August 8, 2007,
Duff & Phelps rendered its oral opinion to the Applied
Digital special committee (which was subsequently confirmed in
writing by delivery of Duff & Phelps’s written
opinion dated August 8, 2007) to the effect that, as of
August 8, 2007, the common stock exchange ratio in the
merger was fair, from a financial point of view, to the public
stockholders of Applied Digital.
Duff & Phelps’s opinion was directed to the
Applied Digital special committee and only addressed the
fairness, from a financial point of view, of the common stock
exchange ratio in the merger and does not address any other
aspect or implication of the merger. The summary of
Duff & Phelps’s opinion in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the full text of its written opinion, which is included as
Annex B to this joint proxy statement/prospectus and sets
forth the procedures followed, assumptions made, qualifications
and limitations on the review undertaken, and other matters
considered by Duff & Phelps in preparing its opinion.
We encourage you to carefully read the full text of
Duff & Phelps’s written opinion. However, neither
Duff & Phelps’s written opinion nor the summary
of its opinion and the related analyses set forth in this joint
proxy statement/prospectus are intended to be, and do not
constitute advice or a recommendation to any stockholder as to
how such stockholder should act or vote with respect to the
merger.
In connection with its opinion, Duff & Phelps made
certain reviews, analyses and inquiries as it deemed necessary
and appropriate under the circumstances. Duff & Phelps
also took into account its assessment of general economic,
market and financial conditions, as well as its experience in
securities and business valuation, in general, and with respect
to similar transactions, in particular. Duff &
Phelps’s due diligence with regards to the merger included,
but was not limited to, the items summarized below.
1. Conducted meetings with members of the senior management
team of Digital Angel in person and via teleconference,
including Kevin N. McGrath, the then-current president and chief
executive officer, and Lorraine Breece, vice president, acting
chief financial officer and treasurer, at which the operations,
financial condition, future prospects, and projected operations
and performance of Digital Angel were discussed;
2. Conducted meetings with members of the senior management
team of Applied Digital in person and via teleconference,
including Michael Krawitz, chief executive officer, and Lorraine
Breece, senior vice president and acting chief financial
officer, at which the operations, financial condition, future
prospects, and projected operations and performance of Applied
Digital and of Digital Angel were discussed;
3. Reviewed the financial statements and filings with the
SEC, including the annual reports on
Form 10-K
for the fiscal years ended December 31, 2002 through 2006,
and the quarterly reports on
Form 10-Q
for the fiscal quarters ended March 31, 2006 and
March 31, 2007 for each of Applied Digital and Digital
Angel;
4. Reviewed certain publicly available business and
financial information for each of Applied Digital and Digital
Angel, and the industries in which they operate;
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5. Reviewed financial projections for Digital Angel
prepared by Digital Angel management for the fiscal years 2007
through 2011, which we refer to as the Digital Angel forecasts;
6. Reviewed the merger agreement;
7. Reviewed the confidential memorandum, dated August 2006,
prepared by Raymond James & Associates, Inc. for
Digital Angel;
8. Reviewed the Digital Angel management presentation;
9. Reviewed a schedule of cost savings expected to be
realized as a result of the merger, as prepared by the
management of Applied Digital, which we refer to as the cost
savings;
10. Reviewed the pro forma impact of the merger on Applied
Digital;
11. Reviewed the historical trading price and trading
volume of the Applied Digital common stock, the Digital Angel
common stock and the publicly-traded securities of certain other
companies that Duff & Phelps deemed relevant;
12. Compared the financial performance of Applied Digital
and of Digital Angel and the prices and trading activity of the
Applied Digital common stock and the Digital Angel common stock
with those of certain other publicly-traded companies that
Duff & Phelps deemed relevant;
13. Compared certain financial terms of the merger to
financial terms, to the extent publicly available, of certain
other business combination transactions that Duff &
Phelps deemed relevant; and
14. Conducted certain other analyses and considered certain
other factors as Duff & Phelps deemed appropriate.
In performing its analyses and rendering its opinion with
respect to the merger, Duff & Phelps, with Applied
Digital’s consent:
1. Relied upon the accuracy, completeness, and fair
presentation of all information, data, advice, opinions and
representations obtained from public sources or provided to it
from private sources, including the management of Applied
Digital and Digital Angel, and did not independently verify that
information;
2. Assumed that any estimates, evaluations, forecasts and
projections, as well as the cost savings, furnished to
Duff & Phelps were reasonably prepared and based upon
the best currently available information and good faith judgment
of the person furnishing the same;
3. Assumed that information supplied to Duff &
Phelps and representations and warranties made in the merger
agreement were substantially accurate;
4. Assumed that all of the conditions required to implement
the merger would be satisfied and that the merger would be
completed in accordance with the merger agreement without any
amendments thereto or any waivers of any terms or conditions
thereof; and
5. Assumed that all governmental, regulatory or other
consents and approvals necessary for the consummation of the
merger would be obtained without any adverse effect on Applied
Digital, Digital Angel or the contemplated benefits expected to
be derived in the merger.
In Duff & Phelps’s analysis and in connection
with the preparation of its opinion, Duff & Phelps
made numerous assumptions with respect to industry performance,
general business, market and economic conditions and other
matters, many of which are beyond the control of any party
involved in the merger. To the extent that any of the foregoing
assumptions or any of the facts on which its opinion was based
prove to be untrue in any material respect, its opinion cannot
and should not be relied upon.
Duff & Phelps did not make any independent evaluation,
appraisal or physical inspection of the solvency of Applied
Digital or Digital Angel or of any specific assets or
liabilities (contingent or otherwise). Duff &
Phelps’s opinion should not be construed as a valuation
opinion, credit rating, solvency opinion, an analysis of
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the creditworthiness of Applied Digital or Digital Angel or
otherwise as tax advice or as accounting advice.
Duff & Phelps was not requested to, and did not,
provide advice concerning the structure, the specific amount or
form of the consideration, or any other aspect of the merger, or
to provide services other than the delivery of its opinion.
Duff & Phelps was not requested to, and did not,
solicit any expressions of interest from any other parties with
respect to the sale of all or any part of Digital Angel or
Applied Digital or any other alternative transaction.
Duff & Phelps did not participate in negotiations with
respect to the terms of the merger agreement or the merger and,
therefore, Duff & Phelps assumed that such terms were
the most beneficial terms, from Applied Digital’s
perspective, that could, under the circumstances, be negotiated
among the parties to the merger agreement and the merger. In
addition, Duff & Phelps did not express any opinion as
to the market price or value of the Applied Digital common stock
or Digital Angel common stock after announcement of the merger.
In rendering its opinion, Duff & Phelps relied upon
the fact that the Applied Digital special committee and Applied
Digital had been advised by counsel as to all legal matters with
respect to the merger, including whether all procedures required
by law to be taken in connection with the merger had been duly,
validly and timely taken; and Duff & Phelps did not
make, and assumed no responsibility to make, any representation,
or render any opinion, as to any legal matter.
Duff & Phelps prepared its opinion effective as of
August 8, 2007. Duff & Phelps’s opinion was
necessarily based upon market, economic, financial and other
conditions as they existed and could be evaluated as of
August 8, 2007, and Duff & Phelps disclaimed any
undertaking or obligation to advise any person of any change in
any fact or matter affecting its opinion which may have come or
been brought to the attention of Duff & Phelps after
August 8, 2007. Notwithstanding and without limiting the
foregoing, in the event that there was any change in any fact or
matter affecting its opinion after August 8, 2007 and prior
to the completion of the merger, Duff & Phelps
reserved the right to change, modify or withdraw its opinion.
The basis and methodology for Duff & Phelps’s
opinion have been designed specifically for the express purposes
of the Applied Digital special committee and may not translate
to any other purposes. Duff & Phelps’s opinion
was not a recommendation as to how the Applied Digital special
committee or any stockholder should vote or act with respect to
any matters relating to the merger, or whether to proceed with
the merger or any related transaction, nor did it indicate that
the consideration paid was the best possibly attainable under
any circumstances. Instead, it merely stated whether the
exchange ratio in the merger was within a range suggested by
certain financial analyses. The decision as to whether to
proceed with the merger or any related transaction may depend on
an assessment of factors unrelated to the financial analysis on
which Duff & Phelps’s opinion was based.
Duff & Phelps’s opinion should not be construed
as having created any fiduciary duty on the part of
Duff & Phelps to any party.
Duff & Phelps’s opinion may be included in its
entirety in any proxy statement distributed to stockholders of
Applied Digital in connection with the merger or other document
required by law or regulation to be filed with the SEC, and may
be summarized or the existence of its opinion may otherwise be
referenced in those documents, provided that any summary or
reference language shall be subject to prior approval by
Duff & Phelps. Except as described above, without
Duff & Phelps’s prior consent, its opinion may
not be quoted from or referred to, in whole or in part, in any
written document or used for any other purpose.
Duff & Phelps had not been requested to opine as to,
and its opinion did not address: (i) the fairness of any
portion or aspect of the merger to the holders of any class of
securities, creditors or other constituencies of Applied Digital
or Digital Angel, or any other party other than those set forth
in its opinion; (ii) the relative merits of the merger as
compared to any alternative business strategies that might exist
for Applied Digital, Digital Angel or any other party, or the
effect of any other transaction in which Applied Digital,
Digital Angel or any other party might engage; (iii) the
fairness of any portion or aspect of the merger to any one class
or group of Applied Digital’s or any other party’s
security holders vis-à-vis any other class or group of
Applied Digital’s or such other party’s security
holders (including without limitation the allocation of any
consideration amongst or within such classes or groups of
security holders); or (iv) whether or not Applied Digital,
Digital Angel, their respective security holders or any other
party is receiving or paying reasonably equivalent value in the
merger.
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In preparing its opinion to the Applied Digital special
committee, Duff & Phelps performed a variety of
analyses, including those described below. The summary of
Duff & Phelps’s valuation analyses is not a
complete description of the analyses underlying Duff &
Phelps’s opinion. The preparation of an opinion regarding
fairness is a complex process involving various quantitative and
qualitative judgments and determinations with respect to the
financial, comparative and other analytic methods employed and
the adaptation and application of these methods to the unique
facts and circumstances presented. As a consequence, neither an
opinion regarding fairness nor its underlying analyses is
readily susceptible to partial analysis or summary description.
Duff & Phelps arrived at its opinion based on the
results of all analyses undertaken by it and assessed as a whole
and did not draw, in isolation, conclusions from or with regard
to any individual analysis, analytic method or factor.
Accordingly, Duff & Phelps believes that its analyses
must be considered as a whole and that selecting portions of its
analyses, analytic methods and factors, or focusing on
information presented in tabular format, without considering all
analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the
processes underlying its analyses and opinion.
In performing its analyses, Duff & Phelps considered
general business, economic, industry and market conditions,
financial and otherwise, and other matters as they existed on,
and could be evaluated as of, the date of its written opinion.
No company, transaction or business used in Duff &
Phelps’s analyses for comparative purposes is identical to
Applied Digital, Digital Angel or the merger. Duff &
Phelps made judgments and assumptions with regard to industry
performance, general business, economic, regulatory, market and
financial conditions and other matters, many of which are beyond
the control of Applied Digital and Digital Angel, such as the
impact of competition on the business of Applied Digital and on
the industry generally, industry growth and the absence of any
adverse material change in the financial condition and prospects
of Applied Digital or its industry or in the markets generally.
Duff & Phelps believes that mathematical analyses
(such as determining average and median) are not by themselves
meaningful methods of using selected company data and must be
considered together with qualities, judgments and informed
assumptions to arrive at sound conclusions. While the results of
each analysis were taken into account in reaching its overall
conclusion with respect to fairness, Duff & Phelps did
not make separate or quantifiable judgments regarding individual
analyses. The implied reference range values indicated by
Duff & Phelps’s analyses are illustrative and not
necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less
favorable than those suggested by the analyses. In addition, any
analyses relating to the value of assets, businesses or
securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold,
which may depend on a variety of factors, many of which are
beyond the control of Applied Digital and Duff &
Phelps. Much of the information used in, and accordingly the
results of, Duff & Phelps’s analyses are
inherently subject to substantial uncertainty.
Duff & Phelps’s opinion was provided to the
Applied Digital special committee in connection with its
consideration of the merger and was only one of many factors
considered by it in evaluating the merger. Neither
Duff & Phelps’s opinion nor its analyses were
determinative of the merger consideration or of the views of the
Applied Digital special committee or management of Applied
Digital with respect to the merger.
The following is a summary of the material analyses prepared in
connection with Duff & Phelps’s opinion rendered
on August 8, 2007. The order of the analyses does not
represent relative importance or weight given to those analyses
by Duff & Phelps. The fact that any specific analysis
has been referred to in the summary below is not meant to
indicate that such analysis was given greater weight than any
other analysis. The analyses summarized below include
information presented in tabular format. The tables alone do not
constitute a complete description of the analyses. Considering
the data in the tables below without considering the full
narrative description of the analyses, as well as the
methodologies underlying and the assumptions, qualifications and
limitations affecting each analysis, could create a misleading
or incomplete view of Duff & Phelps’s analyses.
For purposes of its analyses, Duff & Phelps reviewed a
number of financial and operating metrics including:
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Enterprise Value — generally the value as of a
specified date of the relevant company’s outstanding equity
securities (taking into account its outstanding warrants and
other convertible securities), plus the
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value of its net debt (the value of its outstanding
indebtedness, preferred stock and capital lease obligations less
the amount of cash on its balance sheet), as of a specified date.
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EBITDA — generally the amount of the relevant
company’s earnings before interest, taxes, depreciation,
and amortization for a specified time period.
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Unless the context indicates otherwise, enterprise values used
in the selected companies analysis described below were
calculated using the closing price of Digital Angel common
stock, Applied Digital common stock and the common stock of the
selected companies listed below as of August 3, 2007, and
the enterprise values for the target companies used in the
selected transactions analysis described below were calculated
as of the announcement date of the relevant transaction, based
on the purchase prices to be paid in the selected transactions.
Accordingly, this information does not necessarily reflect
current or future market conditions. Estimates of projected
EBITDA for Digital Angel were based on estimates provided by
Digital Angel management. Estimates of projected EBITDA for
Applied Digital were based on publicly available research
estimates. Estimates of projected EBITDA for the selected
companies listed below were based on publicly available research
analyst estimates for the selected companies.
Digital
Angel — Animal Applications Business
Segment
Discounted Cash Flow
Analysis.
Duff & Phelps calculated the
net present value of the unlevered, after-tax cash flows of the
Animal Applications business segment based on estimates provided
by Digital Angel’s management. In performing this analysis,
Duff & Phelps used discount rates ranging from 13.5%
to 14.5%, based on the Animal Application business
segment’s estimated weighted average cost of capital, and
calculated a terminal value by using a commonly accepted
perpetuity formula. This discounted cash flow analysis indicated
an implied reference range enterprise value for the Animal
Applications business segment of approximately
$48.9 million to $53.3 million.
Selected Companies Analysis.
Duff &
Phelps calculated multiples of enterprise value to latest twelve
months, or LTM, revenue and considered certain financial data
for the Animal Applications business segment and five selected
companies that provide RFID-based solutions.
The selected companies were:
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Alanco Technologies, Inc.;
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Intermec, Inc.;
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Sirit Inc.;
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Socket Communications, Inc.; and
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WJ Communications, Inc.
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This selected companies analysis indicated the following:
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Multiple Description
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Low
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High
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Median
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Enterprise Value as a multiple of:
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LTM Revenue
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1.17
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3.31
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1.83x
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Duff & Phelps applied multiple ranges based on this
selected companies analysis to corresponding financial data for
the Animal Applications business segment, including estimates
provided by Digital Angel’s management. This selected
companies analysis indicated an implied reference range
enterprise value of the Animal Applications business segment of
$44.0 million to $52.0 million.
Precedent Transactions
Analysis.
Duff & Phelps calculated
multiples of enterprise value to LTM revenue based on the
purchase prices paid in four selected publicly-announced
transactions.
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The selected transactions (and date of announcement) were:
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Acquiror
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Target
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Date of Announcement
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VeriChip
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eXI Wireless Inc.
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January 2005
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WJ Communications, Inc.
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Telenexus, Inc.
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November 2006
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Minerva Capital
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Premo Corporation
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April 2007
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Symphony Technology Group
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Aldata Solution Oyj
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May 2007
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This selected transactions analysis indicated the following:
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Multiple Description
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Low
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High
|
|
|
Median
|
|
|
|
|
Enterprise Value as a multiple of
|
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|
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LTM revenue
|
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1.41
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x
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|
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6.23
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x
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|
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1.71x
|
|
Duff & Phelps applied multiple ranges based on this
selected transactions analysis to corresponding financial data
for the Animal Applications business segment. This selected
transactions analysis indicated an implied reference range
enterprise value of the Animal Applications business segment of
$44.0 million to $52.0 million.
Digital
Angel — GPS and Radio Communications Business
Segment
Discounted Cash Flow
Analysis.
Duff & Phelps calculated the
net present value of the unlevered, after-tax cash flows of the
GPS and Radio Communications business segment based on estimates
provided by Digital Angel’s management. In performing this
analysis, Duff & Phelps used discount rates ranging
from 13.5% to 14.5%, based on the GPS and Radio Communications
business segment’s estimated weighted average cost of
capital, and calculated a terminal value by using a commonly
accepted perpetuity formula. This discounted cash flow analysis
indicated an implied reference range enterprise value for the
GPS and Radio Communications business segment of approximately
$19.8 million to $22.9 million.
Selected Companies Analysis.
Duff &
Phelps calculated multiples of enterprise value to 2008
projected EBITDA and considered certain financial data for the
GPS and Radio Communications business segment and four selected
companies that provide GPS-based solutions.
The selected companies were:
|
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•
|
Hemisphere GPS Inc.;
|
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|
|
•
|
LoJack Corporation;
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|
|
|
•
|
Garmin Ltd.; and
|
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|
|
|
•
|
Trimble Navigation Limited.
|
This selected companies analysis indicated the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Low
|
|
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High
|
|
|
Median
|
|
|
|
|
Enterprise Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008E EBITDA
|
|
|
9.0
|
x
|
|
|
22.0
|
x
|
|
|
15.6x
|
|
Duff & Phelps applied multiple ranges based on this
selected companies analysis to corresponding financial data for
the GPS and Radio Communications business segment, including
estimates provided by Digital Angel’s management. This
selected companies analysis indicated an implied reference range
enterprise value of the GPS and Radio Communications business
segment of $19.0 million to $22.0 million.
Precedent Transactions
Analysis.
Duff & Phelps calculated
multiples of enterprise value to LTM revenue based on the
purchase prices paid in four selected publicly-announced
transactions.
87
The selected transactions (and date of announcement) were:
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Acquiror
|
|
Target
|
|
Date of Announcement
|
|
|
|
Esterline Technologies Corporation
|
|
CMC Electronics Holdings Inc.
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|
January 2007
|
|
Cobra Electronics Corporation
|
|
Performance Products Limited
|
|
October 2006
|
|
Navico Acquisition Corp.
|
|
Lowrance Electronics, Inc.
|
|
January 2006
|
|
LoJack Corporation
|
|
Boomerang Tracking Inc.
|
|
August 2004
|
This selected transactions analysis indicated the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Low
|
|
|
High
|
|
|
Median
|
|
|
|
|
Enterprise Value as a multiple of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTM revenue
|
|
|
1.38
|
x
|
|
|
2.52
|
x
|
|
|
1.80x
|
|
Duff & Phelps applied multiple ranges based on this
selected transactions analysis to corresponding financial data
for the GPS and Radio Communications business segment. This
selected transactions analysis indicated an implied reference
range enterprise value of the GPS and Radio Communications
business segment of $22.0 million to $26.0 million.
Digital
Angel — Sum of the Parts Analysis
Based on its analyses of the Animal Applications business
segment, Duff & Phelps determined an implied reference
range enterprise value of the Animal Applications business
segment of $45.0 million to $52.0 million, and, based
on its analyses of the GPS and Radio Communications business
segment, Duff & Phelps determined an implied reference
range enterprise value of the GPS and Radio Communications
business segment of $20.0 million to $24.0 million.
Duff & Phelps also determined the range of present
value of Digital Angel’s $76.1 million of net
operating loss carryforwards to be $12.9 million to
$18.3 million. In addition, Duff & Phelps
determined the range of present value of Digital Angel’s
approximately $2.6 million in annual cost savings, as
provided by the management of Digital Angel, to be
$14.9 million to $16.3 million. Therefore,
Duff & Phelps’s analyses indicated an implied
reference range enterprise value of Digital Angel of
$88.1 million to $105.5 million, or an implied equity
value per share of Digital Angel common stock of between $1.98
and $2.37.
Applied
Digital Selected Companies Analysis
Duff & Phelps calculated multiples of enterprise value
to 2008 projected EBITDA and considered certain financial data
for Applied Digital and twelve selected companies that provide
RFID- or GPS-based solutions.
The selected companies were:
|
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•
|
Alanco Technologies, Inc.;
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|
|
•
|
Intermec, Inc.;
|
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|
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•
|
Sirit Inc.;
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•
|
Socket Communications, Inc.;
|
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•
|
WJ Communications, Inc.;
|
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|
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•
|
Hemisphere GPS Inc.;
|
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|
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•
|
LoJack Corporation;
|
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|
|
|
•
|
Garmin Ltd.;
|
|
|
|
|
•
|
Trimble Navigation Limited;
|
|
|
|
|
•
|
Digital Angel;
|
88
This selected companies analysis indicated the following:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Multiple Description
|
|
Low
|
|
|
High
|
|
|
Median
|
|
|
|
|
Enterprise Value as a multiple of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008E EBITDA
|
|
|
6.1
|
x
|
|
|
22.0
|
x
|
|
|
13.6
|
x
|
|
LTM Revenue
|
|
|
1.12
|
x
|
|
|
9.23
|
x
|
|
|
1.85
|
x
|
Other
Matters
Duff & Phelps was engaged by the Applied Digital
special committee pursuant to a letter agreement dated
May 30, 2007 to provide an opinion to the Applied Digital
special committee regarding the fairness, from a financial point
of view, to the public stockholders of Applied Digital of the
common stock exchange ratio in the merger. The Applied Digital
special committee engaged Duff & Phelps based on its
experience, having been founded in 1932, and reputation as one
of the leading middle-market investment banking and independent
financial advisory firms in the United States. Duff &
Phelps is regularly engaged to render financial opinions in
connection with mergers, acquisitions, divestitures, leveraged
buyouts, recapitalizations, and for other purposes. Pursuant to
the engagement letter, Applied Digital paid Duff &
Phelps a customary fee for its services, a portion of which
became payable upon the execution of Duff &
Phelps’s engagement letter, and the balance of which became
payable upon the delivery of Duff & Phelps’s
opinion, regardless of the conclusion reached therein. No
portion of Duff & Phelps’s fee is contingent upon
the successful completion of the merger. Applied Digital also
agreed to reimburse Duff & Phelps for certain expenses
and to indemnify Duff & Phelps, its affiliates and
certain related parties against certain liabilities and
expenses, including certain liabilities under the federal
securities laws arising out of, or relating to, Duff &
Phelps’s engagement. Other than this engagement,
Duff & Phelps did not provide, and has not provided
other, financial advisory services to Applied Digital or to
Digital Angel.
Opinion
of Financial Advisor to the Digital Angel Special
Committee
Pursuant to a letter agreement dated July 31, 2007, the
Digital Angel special committee engaged Seven Hills to render an
opinion as to the fairness of the common stock exchange ratio in
the proposed merger of Digital Angel and Applied Digital. Seven
Hills was not engaged to, nor did it, evaluate Digital
Angel’s underlying business decision to enter into the
merger agreement or the merger, or to evaluate alternative
transaction structures or other financial or strategic
alternatives, or to solicit third-party indications of interest
with regard to Digital Angel’s assets or common stock or
otherwise participate in the transaction process. Seven Hills
was not asked to pass upon, and expressed no opinion with
respect to, any matters, including any agreements between
Digital Angel and Applied Digital or its affiliates, other than
the fairness, from a financial point of view, of the common
stock exchange ratio proposed in the merger to the stockholders
of Digital Angel common stock (other than Applied Digital and
its affiliates) pursuant to the merger.
On August 8, 2007, Seven Hills delivered to the Digital
Angel special committee an oral summary of its opinion (which
was subsequently confirmed in writing) that, as of that date and
based upon the assumptions made, matters considered and limits
of review set forth in Seven Hills’ written opinion, the
common stock exchange ratio proposed in the merger was fair,
from a financial point of view, to stockholders of Digital Angel
common stock other than Applied Digital and its affiliates.
The full text of Seven Hills’ written opinion, which sets
forth, among other things, the assumptions made, procedures
followed, matters considered and limitations on the scope of the
review undertaken by Seven Hills in delivering its opinion, is
attached to this joint proxy statement/prospectus as
Annex C. Stockholders of Digital Angel common stock (other
than Applied Digital and its affiliates) should read the opinion
carefully and in its entirety. The following description of
Seven Hills’ opinion is only a summary of the written
opinion and is qualified in its entirety by the written opinion.
89
Seven Hills provided the opinion described above for the
information and assistance of the Digital Angel special
committee. All terms of the merger agreement, including the
common stock exchange ratio, proposed in the merger, however,
were determined through negotiations solely and exclusively
between Digital Angel and Applied Digital, and were approved by
the Digital Angel special committee.
Seven Hills directed its opinion to the Digital Angel special
committee. The opinion does not constitute a recommendation as
to how any holder of shares of Digital Angel common stock should
vote with respect to the merger or any other matter. The opinion
addresses only the fairness, from a financial point of view, of
the common stock exchange ratio proposed in the merger to
stockholders of Digital Angel common stock other than Applied
Digital and its affiliates. It does not address the underlying
decision by Digital Angel to engage in the merger.
In reading the discussion of the opinion set forth below, you
should be aware that Seven Hills’ opinion was provided to
the Digital Angel special committee in connection with, and for
the purposes of, its evaluation of the merger; does not
constitute a recommendation to stockholders of Digital Angel
common stock or any other person as to how to vote or act on any
matter relating to the merger agreement or the merger; and does
not constitute a recommendation to Digital Angel’s board of
directors or the Digital Angel special committee in connection
with the merger.
In connection with its opinion, Seven Hills reviewed and
considered, among other things:
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•
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a draft of the merger agreement dated August 7, 2007;
|
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|
|
|
•
|
certain publicly available financial and other information for
Digital Angel and Applied Digital, including Annual Reports on
Form 10-K
for the fiscal year ended December 31, 2006 and Quarterly
Reports on
Form 10-Q
for the quarter ended March 31, 2007, and certain other
relevant financial and operating data furnished to Seven Hills
by the management of Digital Angel;
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•
|
certain financial analyses, financial forecasts, reports and
other information concerning Digital Angel, prepared and
furnished to Seven Hills by the management of Digital Angel;
|
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|
|
•
|
certain financial forecasts and other information concerning
Applied Digital, furnished to Seven Hills by the management of
Digital Angel;
|
|
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|
|
|
|
•
|
due diligence discussions conducted by Seven Hills with certain
members of the management of Digital Angel concerning the
historical and current business operations and strategy,
financial conditions and prospects of Digital Angel and such
other matters that Seven Hills deemed relevant;
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•
|
certain operating results, the reported closing price and
trading histories of the shares of Digital Angel’s common
stock and Applied Digital’s common stock, and operating
results, the reported price and trading histories of certain
publicly-traded companies that Seven Hills deemed relevant;
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•
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certain financial terms of the merger as compared to the
financial terms of certain selected business combinations that
Seven Hills deemed relevant; and
|
|
|
|
|
|
|
•
|
such other information, financial studies, analyses,
investigations, and other factors that Seven Hills deemed
relevant for the purposes of its opinion.
|
In conducting its review and arriving at its opinion, Seven
Hills relied, with Digital Angel’s consent, and without
independent investigation, upon the accuracy and completeness of
all financial and other information provided to Seven Hills by
Digital Angel or Digital Angel’s advisors, including,
without limitation, the representations and warranties contained
in the merger agreement, or that was publicly available. Seven
Hills did not assume any responsibility for the accuracy or
completeness, or independently verify, such information. The
analyses of Seven Hills were based on, among other things, the
financial projections of Digital Angel prepared by the
management of Digital Angel and the financial projections of
Applied Digital prepared by the management of Applied Digital.
With respect to the financial projections, which were furnished
to Seven Hills, discussed with Seven Hills or reviewed for Seven
Hills by the management of Digital Angel, Seven Hills assumed
such financial projections were reasonably prepared on bases
reflecting the best currently available estimates and good faith
judgments of the management of Digital Angel or Applied Digital,
as the case may
90
be, as to the future competitive, operating and regulatory
environments and related financial performance of Digital Angel
or Applied Digital, as the case may be, and such projections and
the assumptions derived therefrom provided a reasonable basis
for Seven Hills’ opinion. Seven Hills expressed no view as
to such financial projections, or the assumptions on which they
were based.
In addition, Seven Hills did not conduct, nor did Seven Hills
assume any obligation to conduct, any physical inspection of the
properties or facilities of Digital Angel or Applied Digital.
Seven Hills assumed that, in the course of obtaining the
necessary regulatory and third party approvals, consents and
releases for the merger, no modification, delay, restriction or
condition would be imposed that would have a material adverse
effect on the merger and that the merger would be consummated in
accordance with applicable laws and regulations and the terms of
the merger agreement, without delay, waiver, amendment or
modification of any material term, condition or agreement.
Considering any portion of such analyses or the factors
considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying
the conclusions expressed in the opinion.
Seven Hills was not asked to pass upon, and expressed no opinion
with respect to, any matters, including any agreements between
Digital Angel and Applied Digital or any of their respective
affiliates, other than the fairness, from a financial point of
view, of the common stock exchange ratio proposed in the merger
to stockholders of Digital Angel common stock other than Applied
Digital and its affiliates.
Seven Hills did not make or obtain any independent evaluations,
valuations or appraisals of the assets or liabilities of Digital
Angel, nor was Seven Hills furnished with such materials. Seven
Hills assumed, with Digital Angel’s consent, that there
were no legal issues with regard to Digital Angel or Applied
Digital that would have affected Seven Hills’ opinion, and
Seven Hills relied on this assumption without undertaking any
independent investigation or inquiry. Seven Hills’ opinion
was necessarily based upon economic and market conditions and
other circumstances as they existed and could be evaluated by
Seven Hills on the date the opinion was delivered to the Digital
Angel special committee. It should be understood that, although
subsequent developments may affect its opinion, Seven Hills does
not have any obligation to update, revise or reaffirm its
opinion, and Seven Hills expressly disclaims any responsibility
to do so. Seven Hills’ opinion did not address the relative
merits of the merger as compared to other business strategies
that might be available to Digital Angel, nor did it address the
underlying business decision of Digital Angel to proceed with
the merger. Seven Hills expressed no view as to the federal,
state or local tax consequences of the merger.
For purposes of rendering its opinion, Seven Hills assumed, in
all respects material to its analysis, that the representations
and warranties of each party contained in the merger agreement
were true and correct, that each party would perform all of the
covenants and agreements required to be performed by it under
the merger agreement, and that all conditions to the
consummation of the merger will be satisfied without waiver
thereof. Seven Hills assumed that the final form of the merger
agreement would not vary materially from the final draft
furnished to it for review and that the merger will be
consummated substantially in accordance with the terms described
in such draft, without any amendment or waiver of material terms
or conditions. Seven Hills also assumed that all governmental,
regulatory and other consents and approvals necessary for the
consummation of the merger will be obtained without any adverse
effect on Digital Angel, on Applied Digital, or on the
contemplated benefits of the merger.
In receiving Seven Hills’ oral summary of its opinion on
August 8, 2007, the Digital Angel special committee was
aware of, and consented to, the assumptions and other matters
discussed above.
The following represents a brief summary of the material
financial analyses employed by Seven Hills in connection with
providing its opinion to the Digital Angel special committee.
The following summary does not purport to be a complete
description of the financial analyses performed by Seven Hills,
nor does the order of analyses described represent relative
importance or weight given to those analyses. Some of the
summaries of financial analyses performed by Seven Hills include
information presented in tabular format. The tables alone do not
constitute a complete description of the financial analyses and
should be read in conjunction with the accompanying text.
Considering the data set forth in the tables without considering
the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the
analyses, could create a misleading or incomplete view of the
financial analyses performed by Seven Hills.
91
Historical Exchange Ratio Analysis.
Seven
Hills reviewed the historical exchange ratios between Digital
Angel common stock and Applied Digital common stock. The
exchange ratios used in this analysis were determined by
dividing the closing price per share of Digital Angel common
stock by the closing price per share of Applied Digital common
stock on each day during the one-month period ended
August 7, 2007, on each day during the three-month period
ended August 7, 2007, and on each day during the
year-to-date period ended August 7, 2007. Seven Hills
graphically examined the historical exchange ratios over the
various periods and compared the historical exchange ratios over
the various periods to the common stock exchange ratio proposed
in the merger.
Comparable Public Company Analysis.
Based on
public information, Seven Hills compared selected financial
information, financial ratios and public market enterprise value
multiples for Digital Angel to the corresponding data for the
following five publicly-traded identification products and
components companies:
Identification
Products and Components Companies
|
|
|
|
|
|
•
|
WJ Communications, Inc.
|
|
|
|
|
•
|
Sirit, Inc.
|
|
|
|
|
•
|
Micronetics, Inc.
|
|
|
|
|
•
|
Endwave Corporation
|
|
|
|
|
•
|
Merrimac Industries, Inc.
|
Seven Hills chose these companies because they were
publicly-traded companies that, for purposes of the analysis,
Seven Hills considered reasonably comparable to Digital Angel.
The selected public companies may significantly differ from
Digital Angel based on, among other things, levels of
profitability, rates of revenue growth, the size of the
companies, the geographic coverage of the companies’
operations and the particular business segments in which the
companies focus.
Seven Hills reviewed, among other information, multiples of
enterprise value, which we refer to as EV, and share price
values for the comparable companies implied by those comparable
companies’ share prices as of August 7, 2007:
|
|
|
|
|
|
•
|
last twelve months revenue, referred to as EV/LTM revenue; and
|
|
|
|
|
|
|
•
|
calendar year 2007 revenue, referred to as EV/CY07 revenue.
|
Seven Hills applied a range of EV multiples derived from this
analysis to Digital Angel’s LTM revenue and CY07 revenue to
generate an enterprise value range for Digital Angel, from which
Seven Hills then derived a range of implied equity values per
share for Digital Angel common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
Implied Equity
|
|
|
Equity Value
|
|
|
|
|
Multiples
|
|
|
Value
|
|
|
per Share
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
EV/LTM Revenue
|
|
|
0.80x-1.50
|
x
|
|
$
|
38.9-$83.7
|
|
|
$
|
0.87-$1.86
|
|
|
EV/CY07 Revenue
|
|
|
0.80x-1.25
|
x
|
|
$
|
48.3-$82.4
|
|
|
$
|
1.08-$1.84
|
|
Premiums Paid Analysis for Minority
Squeeze-Outs.
Based on public information, Seven
Hills calculated the implied exchange ratio based on premiums to
closing stock prices paid in minority squeeze-out transactions
in the United States since 2003 where the acquiror owned greater
than 50% of the target company before the transaction, which we
refer to as a “minority squeeze-out”. Seven Hills
reviewed the consideration paid in the following 18 transactions
announced since January 1, 2003.
92
|
|
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|
|
Acquiror
|
|
Target
|
|
|
|
Samson Investment Company
|
|
PYR Energy Corporation
|
|
ROG Acquisition, Inc.
|
|
Refac Optical Group
|
|
The Toronto-Dominion Bank
|
|
TD Banknorth, Inc.
|
|
The Nielsen Company
|
|
NetRatings, Inc.
|
|
Erie Acquisition, Inc.
|
|
Erie Family Life Insurance Company
|
|
Vector Group Limited
|
|
New Valley Corporation
|
|
New Harvest, Inc.
|
|
Northland Cranberries, Inc.
|
|
Wachovia Corporation
|
|
WFS Financial, Inc.
|
|
IYG Holding Company
|
|
7-Eleven, Inc.
|
|
The Absolut Spirits Company, Inc.
|
|
Cruzan International, Inc.
|
|
Santos Limited
|
|
Tipperary Corporation
|
|
Leucadia National Corporation
|
|
MK Resources Company
|
|
Vishay Intertechnology, Inc.
|
|
Siliconix, Inc.
|
|
News Corporation
|
|
Fox Entertainment Group, Inc.
|
|
Cox Enterprises, Inc.
|
|
Cox Communications, Inc.
|
|
O. Victor Edelbrock, Jr., President and CEO
|
|
Edelbrock Corporation
|
|
Hako-Werke International GmbH
|
|
Minuteman International, Inc.
|
|
IMC Global, Inc. (nka Mosaic Global Holdings, Inc.)
|
|
Phosphate Resource Partners Limited Partnership
|
Seven Hills calculated the premium per share paid by the
acquiror compared to the average closing share price of the
target company over the last (i) one trading day,
(ii) five trading days and (iii) 20 trading days prior
to the announcement of the transaction. Seven Hills applied a
range of premiums derived from the analysis to the closing price
of Digital Angel common stock on August 7, 2007. Seven
Hills then generated a range of implied exchange ratios based on
the Applied Digital common stock closing price of $1.16 as of
August 7, 2007. Based on its analysis, Seven Hills
determined a range of implied exchange ratios of 1.20 to
1.43 shares of Applied Digital common stock for each share
of Digital Angel common stock.
Precedent Acquisitions Analysis.
Based on
public information, Seven Hills calculated the implied exchange
ratio based on multiples of enterprise value to LTM revenues in
the five identification products, asset tracking and
location-based services transactions identified below that have
been announced since January 1, 2002 and include targets
with less than $150 million in LTM revenues.
|
|
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|
|
Acquiror
|
|
Target
|
|
|
|
Digital Angel
|
|
McMurdo Limited
|
|
Dmartek Limited
|
|
Pro Tech Monitoring, Inc.
|
|
L-1 Identity Solutions, Inc.
|
|
ComnetiX, Inc.
|
|
Cobra Electronics Corporation
|
|
Performance Products Limited
|
|
Simrad Yachting AS
|
|
Lowrance Electronics, Inc.
|
Seven Hills applied a range of multiples derived from this
analysis to Digital Angel’s LTM revenues to generate an
enterprise value range for Digital Angel, from which Seven Hills
then derived a range of implied equity values per share of
Digital Angel common stock. Seven Hills then generated a range
of implied exchange ratios based on the Applied Digital common
stock closing price of $1.16 as of August 7, 2007. Based on
its analysis, Seven Hills determined a range of implied exchange
ratios of 0.38 to 1.61 shares of Applied Digital common
stock for each share of Digital Angel common stock.
Discounted Cash Flow Analysis.
Based on
information provided by the management of Digital Angel, Seven
Hills calculated the implied exchange ratio based upon the
present value of Digital Angel’s after-tax discounted cash
flows, from financial forecasts for the fiscal years ended
December 31, 2008 through
93
December 31, 2011, and the terminal value of Digital Angel
at December 31, 2011, based upon multiples of EBITDA.
After-tax cash flow was calculated by subtracting from projected
EBITDA, projected taxes, capital expenditures, changes in
working capital, and adding changes in other assets and
liabilities. In performing this analysis, Seven Hills utilized
discount rates ranging from 20.0% to 24.0%, based on the
estimated weighted average cost of capital of comparable
identification products and components companies (as listed
above). Seven Hills utilized terminal multiples of enterprise
value to estimated 2011 EBITDA ranging from 7.0 times to 11.0
times.
Based on the enterprise value range from the analysis, Seven
Hills derived a range of implied equity values per share for
Digital Angel. Seven Hills then generated a range of implied
exchange ratios based on the Applied Digital common stock
closing price of $1.16 as of August 7, 2007. Based on its
analysis, Seven Hills determined a range of implied exchange
ratios of 1.23 to 2.08 shares of Applied Digital common
stock for each share of Digital Angel common stock.
Consideration Sum-of-Parts Analysis.
Based on
public information and information provided by the management of
Digital Angel, Seven Hills compared Applied Digital’s
common stock price of $1.16 as of August 7, 2007 to the
implied equity value per share of Applied Digital common stock
based on a sum-of-parts analysis. Seven Hills utilized a
sum-of-parts analysis to account for Applied Digital’s
ownership of 54.7% of Digital Angel’s fully-diluted shares
outstanding (treasury method), its ownership of 51.7% of
VeriChip’s fully-diluted shares outstanding (treasury
method), and its three wholly-owned subsidiary companies. Seven
Hills did not value the holdings of InfoTech, a publicly-held
company, as the value of these holdings was not material to the
value of the consideration. Seven Hills calculated the implied
equity value per share of Applied Digital common stock based on
the analyses explained below.
Seven Hills calculated the implied equity value per share of
Digital Angel common stock and VeriChip common stock based on
multiples of enterprise value to LTM revenues and CY07 revenues
of comparable public companies with LTM revenues less than
$150 million.
Seven Hills also calculated the implied equity value per share
of each of Applied Digital’s three wholly-owned
subsidiaries based upon the discounted present value of each
wholly-owned subsidiary’s after-tax cash flows, from
financial forecasts for the fiscal years ended December 31,
2008 through December 31, 2011, and the terminal value of
each wholly-owned subsidiary at December 31, 2011, based
upon a perpetuity growth rate applied to after-tax free cash
flow. After-tax cash flow for each wholly-owned subsidiary was
calculated by subtracting from projected EBITDA, the
subsidiaries’ projected taxes, capital expenditures, and
changes in working capital of the subsidiaries. In performing
this analysis, Seven Hills utilized discount rates ranging from
35.0% to 45.0%. Seven Hills applied a perpetuity growth rate to
estimated 2011 free cash flow of 2.0%.
Seven Hills applied Applied Digital’s percentage ownership
in each subsidiary to the implied equity value of each
subsidiary to generate a range of implied equity values per
share for Applied Digital.
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Implied Equity
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Equity Value
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Value
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per Share
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(Dollars in millions)
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EV/LTM Revenue
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$
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77.3 - $130.5
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$
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1.14 - $1.93
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EV/CY07 Revenue
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$
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85.2 - $122.9
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$
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1.26 - $1.82
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Other
Considerations
The merger and acquisition transaction environment varies over
time because of macroeconomic factors, such as interest rate and
equity market fluctuations, and microeconomic factors, such as
industry results and growth expectations. No company or
transaction reviewed was identical to the proposed transaction
and, accordingly, the foregoing analyses involve complex
considerations and judgments concerning differences in financial
and operating characteristics and other factors that would
affect the acquisition values in comparable transactions,
including the size and demographic and economic characteristics
of the markets of each company and the competitive environment
in which it operates.
94
The preparation of a fairness opinion is a complex process
involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, is
not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analysis or the summary
set forth above, without considering the analysis as a whole,
could create an incomplete view of the processes underlying the
opinion of Seven Hills. In arriving at its fairness
determination, Seven Hills considered the results of all these
constituent analyses and did not attribute any particular weight
to any particular factor or analysis considered by it; rather,
Seven Hills made its determination as to fairness on the basis
of its experience and professional judgment after considering
the results of all such analyses. Certain of Seven Hills’
analyses are based upon forecasts of future results and are not
necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such
analyses. The foregoing summary does not purport to be a
complete description of the analyses performed by Seven Hills.
Additionally, analyses relating to the value of businesses or
securities are not appraisals. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
In performing its analyses, Seven Hills made numerous
assumptions with respect to industry performance, general
business and economic conditions and other matters, many of
which are beyond the control of Digital Angel or Applied
Digital. The analyses performed by Seven Hills are not
necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than
those suggested by these analyses. These analyses were prepared
solely as part of the analysis performed by Seven Hills with
respect to the fairness, from a financial point of view, of the
common stock exchange ratio proposed in the merger to
stockholders of Digital Angel common stock, other than Applied
Digital and its affiliates. Seven Hills’ opinion is
necessarily based on economic, market and other conditions in
effect on, and the information made available to Seven Hills as
of, the date of the opinion, and, although subsequent
developments may affect Seven Hills’ opinion, Seven Hills
does not have any obligation to update, revise, or reaffirm its
opinion.
As described above, Seven Hills’ opinion to the Digital
Angel special committee was among many factors taken into
consideration by the Digital Angel special committee in making
its determination to approve the merger agreement. The decision
to recommend to Digital Angel’s board of directors the
approval of the terms of the merger agreement, including the
common stock exchange ratio proposed in the merger, was solely
that of the Digital Angel special committee. The opinion of
Seven Hills was provided to the Digital Angel special committee
in connection with, and for the purpose of, its evaluation of
the merger and does not constitute a recommendation to any
person, including the stockholders of Digital Angel common
stock, as to how such person should vote or act on any matter
related to the merger agreement or the merger.
Digital Angel agreed to pay Seven Hills a customary fee, a
portion of which was paid upon signing of the engagement letter
and the remainder upon Seven Hills advising the Digital Angel
special committee that it had substantially completed its
analysis. No portion of Seven Hills’ fee or expense
reimbursement was contingent upon the successful completion of
the merger, any other related transaction, or the conclusions
reached in the Seven Hills’ opinion. No limitations were
imposed by the Digital Angel special committee on Seven Hills
with respect to the investigations made or procedures followed
by it in rendering its opinion. Further, Digital Angel has
agreed to reimburse Seven Hills for its out-of-pocket expenses
and to indemnify Seven Hills, its affiliates, and its respective
partners, directors, officers, agents, consultants, employees
and controlling persons against specific liabilities, including
liabilities under the federal securities laws.
Interests
of Certain Persons in the Merger
In considering the recommendations of Applied Digital’s and
Digital Angel’s respective boards of directors, you should
be aware that certain directors and officers of Applied Digital
and Digital Angel may have interests in the merger that may be
different from, or in addition to, your interests as a
stockholder generally and may create potential and actual
conflicts of interest. The boards of directors of each of
Applied Digital and Digital Angel were aware of these interests
and considered them when they approved and adopted the merger
agreement and the merger.
95
The interests of the directors and executive officers include,
among others:
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•
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several of Applied Digital’s former directors and executive
officers serve as directors and officers of Digital Angel,
including:
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•
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Mr. Silverman, who served as the chairman of Applied
Digital’s board of directors from March 2003 to July 2007,
as Applied Digital’s chief executive officer from March
2003 to December 2006 and as Applied Digital’s acting
president from April 2005 to December 2006, currently serves as
the chairman of the board of directors of Digital Angel;
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•
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Mr. Zarriello, who resigned as an Applied Digital director
effective July 12, 2006, continues to serve as a director
of Digital Angel; and
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•
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Lorraine M. Breece serves as acting chief financial officer for
both Applied Digital and Digital Angel.
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•
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the appointment of four individuals designated by Applied
Digital and the appointment of three individuals designated by
Digital Angel to serve on the board of directors of Applied
Digital upon completion of the merger;
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•
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significant cash or stock payment that may be payable to
Mr. Krawitz, Applied Digital’s chief executive officer
and president, if his employment is terminated following the
merger. See Applied Digital’s proposal 4;
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•
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the employment of certain officers of Digital Angel by Applied
Digital upon completion of the merger;
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•
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the potential receipt of severance payments, payable to certain
Digital Angel officers, if such persons were to be terminated
following the merger. See “Management of Digital
Angel — Narrative Disclosure to Summary Compensation
Table and Grants of Plan-Based Awards Table —
Employment Agreements”;
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•
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the acceleration of the vesting of certain Digital Angel equity
awards, including certain Digital Angel equity awards held by
current or former directors and executive officers of Applied
Digital, in connection with the completion of the merger or upon
certain terminations of employment following the merger. The
following chart sets forth, as of September 28, 2007, the
number of unvested stock options, shares of restricted Digital
Angel common stock, and unvested Digital Angel restricted stock
units held by Digital Angel’s current chief executive
officer and chief financial officer, named executive officers,
other executive officers as a group, and non-employee directors
as a group.
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Unvested Restricted
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Unvested
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Name and Principal Position
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Restricted Stock
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Stock Units
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Stock Options
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Barry Edelstein, Interim President and Chief Executive Officer,
Director
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0
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0
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280,000
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Lorraine Breece, Acting Chief Financial Officer, Treasurer and
Vice President
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0
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0
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103,333
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Kevin McGrath, Former President and Chief Executive Officer
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0
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0
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1,000,000
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James P. Santelli, Former Chief Financial Officer, Senior Vice
President, Finance, Treasurer, and Assistant Secretary
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0
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0
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0
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David Cairnie, Managing Director, Signature Industries Limited
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0
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0
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60,000
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Lasse Nordfjeld, President, Animal Applications Group
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0
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0
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60,000
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Other executive officers as a group (1 individual)
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0
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0
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80,000
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Non-employee directors as a group (4 individuals)
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100,000
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25,000
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900,000
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96
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•
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the payment of $12,000 to each member of the Digital Angel
special committee and an additional $12,000 fee to the chairman
of the Digital Angel special committee for serving on the
Digital Angel special committee;
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•
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the payment of $14,000 to each member of the Applied Digital
special committee and an additional $10,000 fee to the chairman
of the Applied Digital special committee for serving on the
Applied Digital special committee;
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•
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the continued indemnification of, and provision for
directors’ and officers’ liability insurance coverage
to, current directors and officers of Digital Angel following
the merger; and
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•
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the ownership of Digital Angel stock and options by officers and
directors of Applied Digital.
|
Completion
and Effectiveness of the Merger
The merger will be completed when all of the conditions to
completion of the merger are satisfied or waived, including the
approval and adoption of the merger agreement by the holders of
a majority of the outstanding shares of Digital Angel common
stock entitled to vote at the special and annual meeting, as
well as the holders of a majority of the outstanding shares of
Digital Angel common stock not held by Applied Digital or its
affiliates. The merger will become effective upon the filing of
a certificate of merger in the office of the Secretary of State
of the State of Delaware.
Board
of Directors of Applied Digital Following the Merger
Immediately following the effective time of the merger, Applied
Digital’s board of directors shall consist of four
individuals designated by Applied Digital and three individuals
designated by Digital Angel. At the effective time of the
merger, Scott R. Silverman, the current chairman of the board of
directors of Digital Angel, intends to resign from the board of
directors of Digital Angel. Michael E. Krawitz will remain on
the Applied Digital board of directors.
Treatment
of Digital Angel Common Stock
Upon completion of the merger, each share of Digital Angel
common stock then outstanding, other than shares owned by
Applied Digital or its affiliates, will be canceled and
automatically converted into the right to receive
1.4 shares of Applied Digital common stock. This amount
represents a premium for Digital Angel’s common stock of
approximately 21% over the average closing price of Applied
Digital and Digital Angel’s stock as of the previous twenty
trading days ending on August 7, 2007. For purposes of
illustration only, if the merger had been consummated on
August 8, 2007, the last trading day prior to announcement
of the merger, each share of Digital Angel common stock, which
had a closing price of $1.40 per share, would have been
exchanged for 1.4 shares of Applied Digital common stock
with a value of $1.54 (based on Applied Digital’s common
stock closing price of $1.10 per share on that same date). By
comparison, if the merger had been consummated on
October 3, 2007, the latest practicable date before the
printing of this joint proxy statement/prospectus, each share of
Digital Angel common stock, which had a closing price of
$1.44 per share, would have been exchanged for
1.4 shares of Applied Digital common stock with a value of
$1.47 (based on the closing price of Applied Digital’s
common stock of $1.05 per share on that same date). Applied
Digital and Digital Angel estimate that Applied Digital will
issue approximately 28,524,641 shares of Applied Digital
common stock in the merger, based on the number of shares of
Digital Angel common stock outstanding on September 28,
2007, and will reserve an additional approximately
18,194,700 shares of Applied Digital common stock for
issuance in connection with Applied Digital’s assumption of
Digital Angel’s outstanding options, warrants and
restricted stock.
The total number of shares of Applied Digital common stock
issuable as merger consideration is subject to adjustment if,
after the date of the merger agreement, but prior to the
effective time of the merger, the shares of issued and
outstanding Applied Digital common stock increases, decreases or
changes into or is exchanged for a different kind of number of
securities, to provide the holders of Digital Angel common stock
the same economic effect as contemplated by the merger agreement
prior to such event.
97
Exchange
of Digital Angel Common Stock for Applied Digital Common
Stock
As soon as reasonably practicable after the effective time of
the merger, Applied Digital will cause the exchange agent to
mail to the holders of record of Digital Angel common stock a
letter of transmittal and instructions on how to surrender
Digital Angel stock certificates or book entry shares in
exchange for Applied Digital common stock certificates or book
entry shares. Upon surrendering their Digital Angel common
stock, the letter of transmittal and any other documents
required by the exchange agent, the holders of Digital Angel
stock certificates or book entry shares will be entitled to
receive a certificate representing that number of whole shares
of Applied Digital common stock which that holder has the right
to receive. Any fractional share of Digital Angel common stock
shall be rounded up to the nearest whole share of Digital Angel
common stock.
Applied Digital intends to account for the merger using the
purchase method of accounting for business combinations, with
Applied Digital being considered the acquiror of Digital Angel,
in conformity with accounting principles generally accepted in
the United States of America. This means that Applied Digital
will allocate 44% of the purchase price to the fair value of
assets, including identifiable intangible assets acquired and
liabilities assumed from Digital Angel at the effective time of
the merger, with the excess purchase price, if any, being
recorded as goodwill. Under the purchase method of accounting,
goodwill is not amortized but is tested for impairment at the
time of the acquisition and at least annually thereafter.
Governmental
and Regulatory Matters
Neither Applied Digital nor Digital Angel is aware of any
material governmental or regulatory approval required for
completion of the merger, other than the effectiveness of the
registration statement of which this joint proxy
statement/prospectus is a part, compliance with applicable
corporate law of Delaware, and compliance with applicable state
“blue sky” laws.
Material
United States Federal Income Tax Consequences
The merger generally is intended to qualify as a tax-free
transaction, and it is a condition to the merger that Applied
Digital and Digital Angel each receive a legal opinion from
Holland & Knight LLP to the effect that the merger
will constitute a reorganization within the meaning of 368(a) of
the Internal Revenue Code. Assuming the merger qualifies as a
reorganization, Digital Angel stockholders who realize a loss as
a result of the merger will not be allowed to recognize such
loss for U.S. federal income tax purposes, and Digital
Angel stockholders who realize a gain as a result of the
exchange of Digital Angel common stock for shares of Applied
Digital common stock will not be required to recognize such gain
for U.S. federal income tax purposes.
Tax matters are very complicated, and the tax consequences of
the merger to you will depend on the facts of your own
situation. You should consult your tax advisor for a full
understanding of the tax consequences of the merger to you.
This summary may not contain all of the information that is
important to you. You should carefully read this entire document
and the other documents included elsewhere in this joint proxy
statement/prospectus for a more complete understanding of the
merger. In particular, you should read the documents attached to
this joint proxy statement/prospectus, including the merger
agreement, which is attached to this joint proxy
statement/prospectus as Annex A.
In accordance with Section 262 of the DGCL, no appraisal
rights will be available to holders of shares of the Digital
Angel or Applied Digital common stock.
98
Listing
of Applied Digital Common Stock to be Issued in the
Merger
Applied Digital has agreed to cause the shares of Applied
Digital common stock issued in the merger to be approved for
listing on the Nasdaq Capital Market, subject to official notice
of issuance.
Cessation
of Trading and Deregistration of Digital Angel’s Common
Stock
If the merger is consummated, the Digital Angel common stock
will cease to be traded on the AMEX and will be deregistered
under the Exchange Act.
Restriction
on Resales of Applied Digital Common Stock by
Affiliates
The Applied Digital common stock to be issued in the merger will
be registered under the Securities Act. These shares may be
traded freely and without restriction by those stockholders not
deemed to be “affiliates” of Digital Angel as that
term is defined under the Securities Act. An affiliate of a
corporation, as defined by the rules promulgated under the
Securities Act, is a person who directly or indirectly, through
one or more intermediaries, controls, is controlled by or is
under common control with, that corporation. Any transfer by an
affiliate of Digital Angel must be one permitted by the resale
provisions of Rule 145 promulgated under the Securities
Act. If a Digital Angel affiliate becomes an affiliate of
Applied Digital, any transfer must be permitted by the resale
provisions of Rule 144 promulgated under the Securities Act
or otherwise permitted under the Securities Act. These
restrictions are expected to apply to the executive officers,
directors and significant stockholders of Digital Angel.
Affiliates of Digital Angel have agreed to comply with these
restrictions.
Operations
Following the Merger
As of September 28, 2007, Applied Digital owned
approximately 55.6% of Digital Angel’s outstanding shares
of common stock. As a result of the merger, Digital Angel will
become a wholly-owned subsidiary of Applied Digital. After
completion of the merger, Digital Angel will continue its
operations as a wholly-owned subsidiary of Applied Digital under
the name “Digital Angel Corporation.” The stockholders
of Digital Angel will become stockholders of Applied Digital,
and their rights as stockholders will be governed by Applied
Digital’s existing certificate of incorporation, Applied
Digital’s existing amended and restated bylaws and the laws
of the State of Delaware. See “Comparison of the Rights of
Stockholders of Applied Digital and Digital Angel.”
Restated
Certificate of Incorporation and Bylaws of Digital
Angel
Upon completion of the merger, the restated certificate of
incorporation of Digital Angel as in effect immediately prior to
the effective time of the merger will be the certificate of
incorporation of the surviving corporation, once it is merged
with Digital Angel Acquisition Corp., a wholly-owned subsidiary
of Applied Digital. Additionally, the bylaws of Digital Angel
shall be amended and restated, upon completion of the merger, to
be identical to the bylaws of Digital Angel Acquisition Corp.,
as in effect immediately prior to the effective time of the
merger.
99
The following is a brief summary of the material provisions of
the merger agreement, a copy of which is attached as
Annex A, which agreement is hereby incorporated by
reference into this joint proxy statement/prospectus.
Stockholders of Applied Digital and Digital Angel are urged to
read the merger agreement in its entirety for a more complete
description of the merger. In the event of any discrepancy
between the terms of the merger agreement and the following
summary, the merger agreement will control.
Following the approval of the merger proposal by the
stockholders of Digital Angel, the approval of the charter
amendment proposal and the issuance proposal by the stockholders
of Applied Digital, and the satisfaction or waiver of the other
conditions to the merger set forth in the merger agreement,
Digital Angel Acquisition Corp., a wholly-owned subsidiary of
Applied Digital, will merge with and into Digital Angel, with
Digital Angel continuing as the surviving corporation under the
name “Digital Angel Corporation” and as a wholly-owned
subsidiary of Applied Digital.
The parties will cause the merger to become effective by filing
a certificate of merger with the Secretary of State of the State
of Delaware. The parties anticipate that the closing of the
merger will occur during Applied Digital’s and Digital
Angel’s quarter ending December 31, 2007. In this
summary, the time when the merger becomes effective is referred
to as the effective time of the merger.
At the effective time of the merger, the directors and officers
of Digital Angel immediately prior to the effective time of the
merger will remain the directors of the company surviving the
merger.
Upon completion of the merger, each share of Digital Angel
common stock then outstanding at the effective time, which is
not owned or controlled by Digital Angel, Applied Digital or any
subsidiary of Applied Digital, will be converted into the right
to receive 1.4 shares of Applied Digital common stock. Each
share of Digital Angel common stock and right to acquire Digital
Angel common stock that is owned or controlled by Digital Angel,
Applied Digital or any subsidiary of Applied Digital will
automatically be canceled, retired and cease to exist without
payment of any consideration.
The total number of shares of Applied Digital common stock
issuable as merger consideration is subject to adjustment should
Applied Digital effect certain changes to its capitalization
prior to the effective time of the merger. Under such
circumstances, appropriate adjustments will be made to provide
the holders of Digital Angel common stock the same economic
effect as contemplated by the merger agreement prior to such
event. In addition, any applicable withholding taxes may be
deducted from the merger consideration.
Digital
Angel’s Stock Options and Other Awards
At the effective time, each Digital Angel stock option and
warrant existing on the effective date will be assumed by
Applied Digital. Each holder of Digital Angel stock options or
warrants will thereafter have the right to purchase that number
of shares of Applied Digital common stock determined by
multiplying the number of shares of Digital Angel common stock
subject to such Digital Angel stock option or warrant at the
effective time by the common stock exchange ratio. The exercise
price per share of Applied Digital common stock, which will
apply to such converted Digital Angel stock options and
warrants, will be equal to the exercise price per share of the
corresponding Digital Angel stock options and warrants
immediately prior to the effective time of the merger, divided
by the common stock exchange ratio, and rounded up to the
nearest whole cent. If the foregoing calculation results in a
converted Digital Angel stock option or warrant being
exercisable for a fraction of a share of Applied Digital common
stock, then the number of shares of Applied Digital common stock
subject to such option or warrant will be rounded up to the
nearest whole number of shares. The terms and conditions of each
converted Digital Angel stock option or warrant will otherwise
remain as set forth in the original Digital Angel stock option
agreement or warrant.
100
At the effective time, each then-outstanding right to receive a
share of Digital Angel restricted stock will be assumed by
Applied Digital. Each holder of a right to receive Digital Angel
restricted stock will thereafter have the right to receive that
number of shares of Applied Digital restricted stock determined
by multiplying the number of shares of Digital Angel restricted
stock that a holder has the right to receive by the common stock
exchange ratio. The terms and restrictions applicable to each
converted right to receive Digital Angel restricted stock will
otherwise remain as set forth in the original Digital Angel
restricted share agreement.
Procedures
for Exchanging Stock Certificates
At or prior to the effective time of the merger, Applied Digital
shall deposit with the exchange agent certificates or evidence
of shares in book-entry form, representing shares of Applied
Digital common stock in such denominations as necessary for the
exchange of shares of Digital Angel common stock pursuant to the
merger agreement.
As soon as reasonably practicable after the effective time of
the merger, the exchange agent shall mail to all record holders
of Digital Angel common stock (1) a letter of transmittal
and (2) instructions on how to use the letter of
transmittal to surrender the holder’s shares of Digital
Angel common stock in exchange for the number of shares of
Applied Digital common stock to which the holder is entitled as
merger consideration.
You should not forward your stock
certificates to the exchange agent without a letter of
transmittal, and you should not return your stock certificates
with the enclosed proxy.
Upon surrendering their Digital Angel common stock, the
completed and executed letter of transmittal and any other
documents reasonably required by the exchange agent, the holders
of Digital Angel common stock will be entitled to receive a
stock certificate or book-entry shares representing that number
of whole shares of Applied Digital common stock that such holder
has the right to receive, as well as any dividends or other
distributions to which the holder is entitled. After the
effective time of the merger and until properly surrendered to
the exchange agent, outstanding Digital Angel stock certificates
and book-entry shares will represent only the right to receive,
upon surrender, that number of whole shares of Applied Digital
common stock issuable as merger consideration, subject to any
required withholding taxes.
Distributions
with Respect to Unexchanged Shares
Digital Angel stockholders are not entitled to receive any
dividends or other distributions on the Applied Digital common
stock that is issuable as merger consideration with respect to
their shares of Digital Angel stock until the merger is
completed and they have properly surrendered their Digital Angel
stock certificates or book-entry shares to the exchange agent.
Upon such surrender, these stockholders will be entitled to
receive a certificate or book entry representing shares of
Applied Digital common stock that were issued to the holder as
merger consideration, as well as, where the record date occurs
on or after the effective time of the merger, the payment date
occurs on or prior to the date of surrender, and such dividend
or distribution was not previously paid, any dividends or other
distributions, without interest, payable with respect to such
shares. However, where the record date occurs on or after the
effective time of the merger, but the payment date is subsequent
to surrender, these stockholders will receive any dividends or
other distributions due them, without interest, at the
appropriate payment date.
No fractional share of Applied Digital common stock will be
issued upon the surrender of certificates or book-entry shares
formerly representing Digital Angel common stock or otherwise in
the merger. Instead, any fractional share of Applied Digital
common stock issuable as merger consideration shall be rounded
up to the nearest whole share of Applied Digital common stock;
provided that, prior to rounding, all shares of Digital Angel
common stock held by a holder shall be aggregated, after giving
effect to the exercise of any Digital Angel stock options or
warrants to be exercised by such holder in connection with the
closing of the merger.
101
Representations
and Warranties
Applied Digital, Digital Angel and Digital Angel Acquisition
Corp. each made representations and warranties in the merger
agreement to each other regarding facts pertinent to the merger.
With respect to Applied Digital, “subsidiaries” refers
to Computer Equity Corporation, Government Telecommunications,
Inc., Pacific Decision Sciences Corporation, Perimeter
Acquisition Corp. and Thermo Life (and, under certain
circumstances, VeriChip and InfoTech). With respect to Digital
Angel, “subsidiaries” refers to Digital Angel
Holdings, LLC, Digital Angel Technology Corporation, Digital
Angel International, Inc., Signature Industries Limited, DSD
Holding A/S, Fearing Manufacturing Co., Inc. and Timely
Technology Corporation. These representations and warranties are
further described below.
The assertions embodied in those representations and warranties
were made solely for purposes of the merger agreement and may be
subject to important qualifications and limitations agreed to by
the parties in connection with negotiating its terms. Moreover,
some of those representations and warranties may not be accurate
or complete as of any particular date, because they are subject
to a contractual standard of materiality or material adverse
effect different than that generally applicable to public
disclosures to stockholders, or may have been used for the
purposes of allocating risk between the parties to the merger
agreement rather than establishing matters of fact. For the
foregoing reasons, you should not rely on the representations
and warranties contained in the merger agreement as statements
of factual information.
Applied Digital, Digital Angel and Digital Angel Acquisition
Corp. each made representations and warranties relating to,
among other things:
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corporate organization, good standing and qualification to do
business of itself and its subsidiaries;
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corporate power and authority to enter into and perform its
obligations under, and enforceability of, the merger agreement;
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required regulatory consents, approvals, orders and filings;
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the absence of conflicts with, or defaults under, organizational
documents, other contracts and applicable laws and judgments;
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capital structure of itself and its subsidiaries;
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the accuracy and truthfulness of all required filings with the
SEC;
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the fair presentation of the consolidated financial condition,
results of operations, cash flows and stockholders’ equity
of itself and its subsidiaries within the financial statements
included in, or incorporated by reference into, all required
filings with the SEC;
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certain changes in its businesses and that of its subsidiaries
since December 31, 2006;
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material contracts;
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compliance with applicable laws;
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real and personal property;
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tax matters;
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litigation;
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compliance with the Employee Retirement Income Security Act of
1974, as amended, and other employee benefit matters;
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environmental matters;
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intellectual property matters;
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insurance matters;
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finder’s fees; and
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information supplied for inclusion in this joint proxy
statement/prospectus.
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102
Conduct
of Business Pending the Merger
Each of Applied Digital, Digital Angel and Digital Angel
Acquisition Corp. has agreed that, between the date of the
merger agreement and the effective time of the merger (or the
date the merger agreement is terminated), without the other
party’s prior written consent, it will not, and it will
cause each of its subsidiaries not to:
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conduct its businesses and the business of its subsidiaries
other than in the ordinary and usual course and consistent with
past practices;
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fail to use reasonable best efforts to preserve intact any of
their business organizations and assets;
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authorize for issuance, issue, grant, sell, deliver, dispose,
pledge or otherwise encumber any additional shares of its
capital stock or any rights relating to such shares, or permit
any additional shares of its capital stock to become subject to
new stock option grants or other stock-based rights;
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declare, pay or set aside for payment any dividends or other
distributions on any shares of its capital stock;
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enter into, modify, or renew employment, consulting, severance
or similar arrangements with any of its or its subsidiaries
directors, officers or independent contractors, or grant any
increase in employee compensation or benefits, other than as
required by law, to satisfy certain existing contracts or in the
ordinary course of business;
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enter into, establish, adopt or modify any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare arrangements, or any
trust agreements with respect to any of its or its
subsidiaries’ directors, officers, employees or independent
contractors;
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sell, transfer, mortgage, lease, encumber, or otherwise dispose
of or discontinue any material portion of its assets, businesses
or properties, other than sales of securities or other
investments or assets in the ordinary course of business;
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acquire substantial equity interest in, or a material portion of
the assets of, other individuals, business entities,
unincorporated organizations or governments, other than for the
purchase of securities or other investments or assets in the
ordinary course of business;
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amend its charter or bylaws or the charter or bylaws of any of
its subsidiaries;
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implement or adopt any change in accounting principles,
practices or methods, except as may be required by generally
accepted accounting principles in the United States of America;
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enter into, renew or terminate any material contract, or amend
in any material respect, or waive any material right under, any
existing material contracts, other than in the ordinary course
of business;
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settle any claims, actions, arbitrations, audits, hearings,
investigations or suits, except for proceedings that involve
solely money damages in an amount, individually and in the
aggregate, of not more than $100,000 and which could not
reasonably be expected to establish adverse precedent for
subsequent settlements;
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authorize or make any capital expenditures other than those
disclosed in annual budgets or in amounts not exceeding $100,000
in the aggregate, or expenditures made through entering into
capital leases;
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make or change any tax election, change any annual tax
accounting period, adopt or change any method of tax accounting,
file any amended tax return, enter into any closing agreement,
settle any tax claim or assessment, surrender or compromise any
right to claim a tax refund, or consent to any extension or
waiver of any applicable limitations period, other than as
required by law or in the ordinary course of business;
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incur any indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance existing short-term
indebtedness, as well as indebtedness between and among itself
and its subsidiaries);
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assume, guarantee, endorse or otherwise become responsible for
the obligations of others; or forgive or extinguish any
indebtedness to itself or its subsidiaries for borrowed money or
otherwise waive any rights under any agreement pursuant to which
such indebtedness was incurred; and
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agree, commit to do, or adopt any resolutions of its board of
directors in support of any action precluded by the preceding
covenants.
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Until the effective time of the merger or the termination of the
merger agreement, Digital Angel agrees that it will not, and it
will not permit its subsidiaries or the officers, directors,
employees, representatives, agents or affiliates of Digital
Angel or its subsidiaries, to take any of the following actions,
directly or indirectly:
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initiate, solicit, encourage or otherwise facilitate (including
by way of furnishing information or otherwise) any inquiries or
the making of any proposal or offer that constitutes, or may
reasonably be expected to lead to, an acquisition proposal, as
defined below;
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enter into, maintain or continue discussions, or negotiate with
any person or entity, in furtherance of such inquiries or to
obtain an acquisition proposal; or
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agree to, approve, recommend, or endorse any acquisition
proposal, or resolve, agree or publicly propose to take any such
action.
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Digital Angel shall promptly notify Applied Digital of any such
inquiries and proposals received by Digital Angel or any of its
subsidiaries or representatives relating to any of such matters.
However, if, prior to the approval of the merger by Digital
Angel’s stockholders, Digital Angel receives an
unsolicited, written, bona fide acquisition proposal that its
board of directors (upon the recommendation of the Digital Angel
special committee) determines in good faith (after consultation
with its financial advisors and outside counsel) constitutes, or
could reasonably be expected to lead to, a superior proposal, as
defined below, Digital Angel may provide access or furnish
information with respect to it and its subsidiaries to, and may
enter into discussions or negotiations with, the person or
entity who has made (and not withdrawn) that acquisition
proposal, if:
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the acquisition proposal did not result from Digital Angel, its
subsidiaries or its representatives, or the representatives of
its subsidiaries, violating the restrictions relating to other
negotiations set forth above;
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prior to delivering or making available the non-public
information or entering into discussions with the person or
group making the acquisition proposal, Digital Angel receives
from the person or group a customary confidentiality
agreement; and
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subject to the right of Digital Angel to withhold information
where such disclosure would violate or prejudice the rights of
its or its subsidiaries’ clients, jeopardize the
attorney-client privilege of Digital Angel or its subsidiaries,
or contravene any law or binding agreement entered into prior to
the date of the merger agreement, Digital Angel promptly
delivers the non-public information to Applied Digital, if not
previously provided, that it delivers or makes available to the
person or group that has submitted the acquisition proposal.
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Digital Angel shall, within one business day, notify Applied
Digital of the receipt of any acquisition proposal and the
material terms and conditions thereof. Further, Digital Angel
shall promptly keep Applied Digital advised on a
substantially-current basis of any developments relating to any
such acquisition proposal.
In addition, Digital Angel shall not enter into any letter of
intent, memorandum of understanding, agreement in principle,
acquisition agreement, merger agreement, option agreement, joint
venture agreement, partnership agreement or other agreement
constituting or related to, or which is intended to or is
reasonably likely to lead to, any acquisition proposal.
104
An “acquisition proposal” is any offer or proposal
regarding any of the following (other than the transactions
contemplated by the merger agreement):
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any merger, reorganization, consolidation, share exchange,
recapitalization, business combination, liquidation,
dissolution, or other similar transaction involving, or, an
acquisition in any manner of, all or any significant portion of
the assets, or any significant equity interest of, Digital Angel
or any of its subsidiaries in a single transaction or series of
related transactions, which would reasonably be expected to
interfere with the completion of the merger; or
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any tender offer or exchange offer for any outstanding shares of
capital stock of Digital Angel or the filing of a registration
statement under the Securities Act in connection therewith.
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A “superior proposal” means a written offer made by a
third party that the Digital Angel board (upon the
recommendation of the Digital Angel special committee, if
appropriate) reasonably determines to be bona fide and
determines, in good faith and after consultation with its
financial advisors and outside counsel, to be more favorable to
holders of Digital Angel common stock, other than Applied
Digital and its affiliates, than the merger (taking into account
all financial, regulatory, legal and other aspects of such offer
and transaction, and any changes to the terms of the merger
agreement proposed by Applied Digital in response to such
superior proposal or otherwise) and that, if consummated, would
result in such third party:
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acquiring, directly or indirectly, more than 50% of the voting
power of Digital Angel common stock (or, in the case of a direct
merger, the common stock of the resulting company); or
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all or substantially all of the consolidated assets of Digital
Angel and its subsidiaries for consideration consisting of cash
and/or
securities payable to holders of shares of Digital Angel common
stock.
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The Digital Angel board of directors may, or propose publicly
to, withdraw or modify, in a manner adverse to Applied Digital
or Digital Angel Acquisition Corp., its recommendation in favor
of the merger proposal, or resolve, agree or propose publicly to
take any such action (any such action, or such resolution or
agreement to take such action, is referred to herein as an
“adverse recommendation change”), if:
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the Digital Angel board of directors receives an acquisition
proposal that the Digital Angel board of directors determines,
in good faith and after consultation with its outside counsel
and financial advisors, does constitute, or could reasonably be
expected to lead to, a superior proposal; or
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the Digital Angel board of directors determines, in good faith
and after consultation with its outside counsel, that its
failure to change, withhold, withdraw, amend or modify its
recommendation with respect to the merger would result in
Digital Angel’s board’s breach of its fiduciary duties
to the Digital Angel stockholders under applicable law;
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provided, in each case, that Digital Angel shall provide Applied
Digital with no less than two business days’ notice of any
expected adverse recommendation change prior to any such change.
The Applied Digital board of directors may fail to make, or may
withdraw or modify, its recommendation in favor of the proposal
to issue Applied Digital common stock in connection with the
merger and to amend Applied Digital’s certificate of
incorporation to increase the number of authorized shares
necessary to effectuate the transactions contemplated by the
merger agreement, or fail to seek the requisite stockholder
approval of such proposals, if it determines, in good faith and
after consultation with outside counsel, that failure to so act
would result in a breach by the Applied Digital board of
directors of its fiduciary duties to Applied Digital’s
stockholders under, applicable law, provided, that Applied
Digital shall provide Digital Angel with no less than two
business days notice of such determination.
In the event that Applied Digital discontinues any Digital Angel
benefit plans for the benefit of any employees of Digital Angel
or its subsidiaries and replaces them with new benefit plans,
Applied Digital or its
105
subsidiaries shall cause each such benefit plan to treat a
continuing employee in the same manner as similarly situated
employees of Applied Digital and to treat the prior service with
Digital Angel as if those services were provided to Applied
Digital or its subsidiaries, as the case may be, solely for
purposes of eligibility to participate and for vesting
thereunder. In addition, to the extent commercially reasonable,
Applied Digital and its subsidiaries will cause any and all
preexisting condition limitations and eligibility waiting
periods, under any health plans maintained or adopted by Applied
Digital or its subsidiaries in which continuing employees are
eligible to participate after the effective time of the merger,
to be waived with respect to the continuing employees and their
eligible dependents who, immediately prior to the effective time
of the merger, participated in a Digital Angel-sponsored health
plan.
Director
and Officer Indemnification
From the effective time of the merger, and for a period of not
less than six years afterwards, Applied Digital and the
surviving corporation shall indemnify and hold harmless each
current (as of the effective time) and former officer and
director of Digital Angel and its subsidiaries against all
claims, losses, liabilities, fines and reasonable fees, costs
and expenses incurred in connection with any proceeding arising
out of or pertaining to the fact that such officer or director
is, or was at any time prior to the effective time, a director
or officer of Digital Angel or its subsidiaries, pertaining to
any matter existing or occurring at or prior to the effective
time, to the same extent such directors and officers are
indemnified or have the right to advancement of expenses as of
the date of the merger agreement by Digital Angel, pursuant to
the Digital Angel certificate of incorporation, bylaws and
indemnification agreements, if any, in existence on the date of
the merger agreement.
For a period of six years after the effective time of the
merger, the surviving corporation shall maintain in effect a
“tail policy” based on the current policies of
directors’ and officers’ liability insurance
maintained by Digital Angel with respect to claims arising from,
or related to, facts or events which occurred at or before the
effective time.
Board
of Directors of Applied Digital Following the Merger
Immediately following the effective time of the merger, Applied
Digital’s board of directors shall consist of four
individuals designated by Applied Digital and three individuals
designated by Digital Angel. At the effective time of the
merger, Scott R. Silverman, the current chairman of the board of
directors of Digital Angel, intends to resign from the board of
directors of Digital Angel. Michael E. Krawitz will remain on
the Applied Digital board of directors.
Conditions
to Completion of the Merger
The obligations of Applied Digital, Digital Angel and Digital
Angel Acquisition Corp. to consummate the transactions
contemplated by the merger agreement are subject to the
satisfaction or written waiver by Applied Digital and Digital
Angel, at or prior to the effective time of the merger, of each
of the following conditions:
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no governmental entity will have issued a temporary restraining
order, preliminary or permanent injunction or other order
preventing the merger;
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no governmental entity will have enacted or issued any law,
regulation or order that is in effect and has the effect of
making the merger illegal or otherwise prohibiting the closing;
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Applied Digital’s registration statement, of which this
joint proxy statement/prospectus is a part, must be effective,
no stop order suspending its effectiveness may be in effect, and
no proceeding for that purpose shall have been initiated or
threatened in writing by the SEC;
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the shares of Applied Digital common stock to be issued in the
merger must be approved for listing on the Nasdaq Capital
Market, subject to official notice of issuance;
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the merger agreement must be approved and adopted by the holders
of a majority of the outstanding shares of Digital Angel common
stock entitled to vote at the special and annual meeting, as
well as the
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holders of a majority of the outstanding shares of Digital Angel
common stock not held by Applied Digital or its affiliates;
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the issuance of the shares of Applied Digital common stock to be
issued in connection with the merger and an amendment to Applied
Digital’s certificate of incorporation must be approved by
Applied Digital’s stockholders;
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Applied Digital and Digital Angel must receive a tax opinion
substantially to the effect that the transactions contemplated
by the merger agreement should qualify as a
“reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code;
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all required consents and approvals must be obtained, unless the
failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a material
adverse effect on Applied Digital or Digital Angel or to
materially adversely affect the consummation of the merger;
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Applied Digital must file a certificate of amendment with the
Secretary of State of the State of Delaware to increase the
number of authorized shares of Applied Digital common stock;
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the representations and warranties of each party in the merger
agreement must be true and correct, subject to various
qualifications;
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the parties must have complied in all material respects with
their respective agreements and covenants in the merger
agreement;
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the parties must each receive a written fairness opinion from
their respective investment banking firms; and
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Applied Digital must receive letters of resignation necessary to
cause the Applied Digital board of directors to be constituted
as provided in the merger agreement, and Digital Angel must
provide to Applied Digital the names of the three individuals
designated by Digital Angel to serve on the board of directors
of Applied Digital.
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Digital Angel’s obligations to consummate the transactions
contemplated by the merger agreement are subject to the
satisfaction or written waiver by Digital Angel, at or prior to
the effective time, of each of the following additional
conditions:
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the representations and warranties of Applied Digital and
Digital Angel Acquisition Corp. contained in the merger
agreement, disregarding all qualifications and exceptions
relating to materiality or material adverse effect or any
similar standard or qualification, must be true and correct as
of the date of the merger agreement and as of the date of
effective time of the merger (except that those representations
and warranties which address matters only as of a particular
date shall remain true and correct only as of such date), except
where the failure of such representations or warranties to be so
true or correct would not, or would not reasonably be expected
to, individually or in the aggregate, have a material adverse
effect;
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notwithstanding the first bullet point, the representations and
warranties of Applied Digital and Digital Angel Acquisition
Corp. regarding Applied Digital’s capital stock (subject to
de minimis deviations) and the absence of any event, occurrence,
development or state of circumstances or facts which has had, or
is reasonably likely to have, a material adverse effect on
Applied Digital and any of its subsidiaries since
December 31, 2006 must be true and correct as of the date
of the merger agreement and as of the date of effective time of
the merger;
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Digital Angel must have received a certificate from a senior
executive officer of Applied Digital certifying the accuracy of
the representations and warranties;
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Applied Digital must have complied in all material respects with
its respective agreements and covenants in the merger agreement;
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Digital Angel must have received a written fairness opinion from
its investment banking firm; and
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Applied Digital shall have received letters of resignation
necessary to cause the Applied Digital board of directors to be
constituted as provided in the merger agreement; provided,
however, that Digital Angel shall have provided to Applied
Digital the names of the three individuals designated by Digital
Angel.
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Applied Digital’s and Digital Angel Acquisition
Corp.’s obligations to consummate the transactions
contemplated by the merger agreement are subject to the
satisfaction or written waiver by Applied Digital of each of the
following additional conditions:
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the representations and warranties of Digital Angel contained in
the merger agreement, disregarding all qualifications and
exceptions relating to materiality or material adverse effect or
any similar standard or qualification, must be true and correct
as of the date of the merger agreement and as of the effective
time of the merger (except that those representations and
warranties which address matters only as of a particular date
shall remain true and correct only as of such date), except
where the failure of such representations or warranties to be so
true or correct would not, or would not reasonably be expected
to, individually or in the aggregate, have a material adverse
effect;
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notwithstanding the first bullet point, the representations and
warranties of Digital Angel regarding Digital Angel’s
capital stock (subject to de minimis deviations) and the absence
of any event, occurrence, development or state of circumstances
or facts which has had, or is reasonably likely to have, a
material adverse effect on Digital Angel and any of its
subsidiaries since December 31, 2006 must be true and
correct as of the date of the merger agreement and as of the
effective time of the merger;
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Applied Digital must have received a certificate from a senior
executive officer of Digital Angel certifying the accuracy of
the representations and warranties;
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Digital Angel must have complied in all material respects with
its respective agreements and covenants in the merger
agreement; and
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Applied Digital must have received a written fairness opinion
from its investment banking firm.
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A “material adverse effect” means, with respect to
Applied Digital, Digital Angel, or the surviving corporation,
respectively, any change, effect, event or occurrence that,
individually or in the aggregate, has a material adverse effect
on the financial position, results of operations, assets,
properties, or businesses of Applied Digital and its
subsidiaries, taken as a whole, Digital Angel and its
subsidiaries, taken as a whole, or the surviving corporation and
its subsidiaries, taken as a whole, as the case may be; provided
that “material adverse effect” shall not be deemed to
include the effects of:
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any change in the trading prices of Digital Angel common stock
or Applied Digital common stock between the date of the merger
agreement and the effective time of the merger;
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any changes in GAAP that affect generally entities such as
Applied Digital or Digital Angel;
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general business or economic conditions, or general changes or
developments, affecting the industries in which Applied Digital
or Digital Angel operate or areas where Applied Digital or
Digital Angel do business, directly or through its subsidiaries,
except to the extent that any such change has a disproportionate
impact on Applied Digital or its subsidiaries or Digital Angel
or its subsidiaries; or
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the announcement of the merger agreement or the consummation of
the transactions contemplated by the merger agreement, including
compliance with the covenants set forth in the merger agreement,
or any action taken or omitted to be taken by (x) Digital
Angel at the written request, or with the prior written consent,
of Applied Digital or Digital Angel Acquisition Corp., or
(y) Applied Digital or Digital Angel Acquisition Corp. at
the written request, or with the prior written consent, of
Digital Angel.
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108
The merger agreement may be terminated, and the merger may be
abandoned at any time prior to the effective time of the merger,
whether before or after requisite approval by Digital
Angel’s stockholders and Applied Digital’s
stockholders:
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by the mutual consent of Applied Digital and Digital Angel;
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by Applied Digital or Digital Angel in the event of either:
(1) a breach by the other party of any representation or
warranty contained in the merger agreement, which breach cannot
be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach, or
(2) a breach by the other party of any of the covenants or
agreements in the merger agreement, which breach cannot be or
has not been cured within 30 days after the giving of
written notice to the breaching party of such breach and which
breach, in each case, is reasonably likely, individually or in
the aggregate, to have a material adverse effect on the
breaching party or the surviving corporation;
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at any time prior to the effective time of the merger, by
Applied Digital or Digital Angel in the event that the merger is
not consummated by March 31, 2008, or such later date as
Digital Angel and Applied Digital may mutually agree, except to
the extent that the failure of the merger then to be consummated
arises out of, or results from, the knowing action or inaction
of the party seeking to terminate under the circumstances set
forth in this bullet point;
|
|
|
|
|
|
|
•
|
by Digital Angel or Applied Digital in the event that
(1) the approval of any governmental authority required for
consummation of the merger and the other transactions
contemplated by the merger agreement shall have been denied by
final nonappealable action of such governmental authority, or
such governmental authority shall have requested the permanent
withdrawal of any application therefor, provided, however, that
the party seeking to terminate the merger agreement pursuant to
the circumstances outlined in this bullet point shall have used
commercially reasonable efforts to prevent the entry of, and to
remove, such restraint, or (2) the requisite stockholder
approval is not obtained at Digital Angel special and annual
meeting or at any adjournment or postponement thereof, or
(3) the requisite stockholder approval is not obtained at
the Applied Digital special meeting or at any adjournment or
postponement thereof;
|
|
|
|
|
|
|
•
|
by Digital Angel prior to obtaining the requisite stockholder
vote in the event that Digital Angel receives and accepts a
superior proposal;
|
|
|
|
|
|
|
•
|
by Applied Digital in the event that an adverse recommendation
change by Digital Angel has occurred (other than an adverse
recommendation change by Digital Angel occurring as a result of
an Applied Digital material adverse effect);
|
|
|
|
|
|
|
•
|
by Digital Angel in the event that an adverse recommendation
change by Applied Digital has occurred (other than an adverse
recommendation change by Applied Digital occurring as a result
of a Digital Angel material adverse effect);
|
|
|
|
|
•
|
by Applied Digital in the event that a willful and material
breach by Digital Angel of its non-solicitation obligations
under the merger agreement has occurred and such breach leads to
the making of a superior proposal; and
|
|
|
|
|
•
|
by Digital Angel in the event that Applied Digital receives and
accepts an acquisition proposal with respect to Applied Digital.
|
Fees
and Expenses of the Merger
All fees and expenses incurred in connection with the merger
agreement and the transactions contemplated by the merger
agreement will be paid by the party incurring such expenses,
whether or not the merger is consummated; provided, however,
that Applied Digital will pay (i) all fees and expenses,
other than attorneys’, accountants’, financial
advisors’ and consultants’ fees and expenses, which
will be paid by the party incurring such fees and expenses,
incurred in relation to the printing and filing with the SEC of
this joint
109
proxy statement/prospectus (including any preliminary materials
related thereto) and this registration statement (including
financial statements and exhibits) and any amendments or
supplements thereto and (ii) the filing fee(s) for this
registration statement; provided, however, that, if the merger
agreement is terminated for any reason, Digital Angel will repay
to Applied Digital one-half of all the expenses in
clauses (i) and (ii) actually paid by Applied Digital.
Applied Digital has agreed to reimburse Digital Angel for all
the transaction fees and expenses incurred by Digital Angel, up
to a maximum of $750,000, if the merger agreement is terminated
by Digital Angel (i) because of a breach by Applied Digital
of any representation or warranty or covenant or agreement in
the merger agreement, subject to certain cure periods, that is
reasonably likely, individually or in the aggregate, to have a
material adverse effect on Applied Digital or the surviving
corporation, (ii) in the event that an adverse
recommendation change by Applied Digital has occurred (other
than an adverse recommendation change by Applied Digital
occurring as a result of a Digital Angel material adverse
effect), or (iii) in the event that Applied Digital
receives and accepts an acquisition proposal with respect to
Applied Digital.
Digital Angel has agreed to reimburse Applied Digital for all
the transaction fees and expenses incurred by Applied Digital,
up to a maximum of $750,000, if the merger agreement is
terminated by (i) Applied Digital because of a breach by
Digital Angel of any representation or warranty or covenant or
agreement in the merger agreement, subject to certain cure
periods, that is reasonably likely, individually or in the
aggregate, to have a material adverse effect on Digital Angel or
the surviving corporation, (ii) Applied Digital in the
event that an adverse recommendation change has occurred (other
than an adverse recommendation change occurring as a result of
an Applied Digital material adverse effect), (iii) Applied
Digital in the event that a willful and material breach by
Digital Angel of its non-solicitation obligations under the
merger agreement has occurred and such breach leads to the
making of a superior proposal, or (iv) Digital Angel prior
to obtaining the requisite vote by Digital Angel’s
stockholders in the event that Digital Angel receives and
accepts a superior proposal.
Prior to the effective time of the merger, any provision of the
merger agreement may be (i) waived by the party benefited
by the provision, or (ii) amended or modified at any time
by written agreement among Applied Digital, Digital Angel and
Digital Angel Acquisition Corp., approved or authorized by their
respective boards of directors and executed in the same manner
as the merger agreement. However, after approval of the merger
by Digital Angel’s stockholders and Applied Digital’s
stockholders, no amendment may be made that, under applicable
law, requires further approval of these stockholders, without
obtaining such required further approval.
110
UNAUDITED
PRO FORMA CONDENSED FINANCIAL DATA
REFLECTING THE RECLASSIFICATION OF APPLIED DIGITAL’S
SUBSIDIARIES, COMPUTER
EQUITY CORPORATION AND PERIMETER ACQUISITION CORP., AS
DISCONTINUED OPERATIONS
On September 30, 2007, Applied Digital’s board of
directors decided to sell two of its wholly-owned subsidiaries:
Computer Equity Corporation and Perimeter Acquisition Corp.
Accordingly, these businesses will be classified as discontinued
operations in Applied Digital’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007. In addition, at
that time, their results for all prior periods will be
reclassified.
The following unaudited pro forma condensed balance sheet has
been prepared to reflect the operations of Computer Equity
Corporation and Perimeter Acquisition Corp. as discontinued
operations as of June 30, 2007. The unaudited pro forma
condensed statements of operations for the six-months ended
June 30, 2007 and the year ended December 31, 2006
reflect the operations of Computer Equity Corporation and
Perimeter Acquisition Corp., as if they had been classified as
discontinued operations on the first day of the respective
periods.
The unaudited pro forma financial information is not necessarily
indicative of the financial position or operating results that
would have occurred had Computer Equity Corporation and
Perimeter Acquisition Corp. been discontinued on the dates, or
at the beginning of the periods, for which the discontinued
status is being given effect.
111
Unaudited
Pro Forma Condensed Balance Sheet
June 30, 2007
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
|
|
|
|
|
Applied
|
|
|
Computer
|
|
|
Perimeter
|
|
|
Applied
|
|
|
|
|
Digital
|
|
|
Equity
|
|
|
Acquisition
|
|
|
Digital
|
|
|
|
|
Historical
|
|
|
Corporation
|
|
|
Corp.
|
|
|
Pro Forma
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,515
|
|
|
$
|
(223
|
)(a)
|
|
$
|
(25
|
)(b)
|
|
$
|
15,267
|
|
|
Restricted cash
|
|
|
127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
|
Accounts receivable
|
|
|
20,996
|
|
|
|
(1,372
|
)(a)
|
|
|
(451
|
)(b)
|
|
|
19,173
|
|
|
Inventories
|
|
|
16,513
|
|
|
|
(594
|
)(a)
|
|
|
(345
|
)(b)
|
|
|
15,574
|
|
|
Deferred taxes
|
|
|
376
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376
|
|
|
Other current assets
|
|
|
3,870
|
|
|
|
(86
|
)(a)
|
|
|
(188
|
)(b)
|
|
|
3,596
|
|
|
Current assets of discontinued operations
|
|
|
5,886
|
|
|
|
2,275
|
(a)
|
|
|
1,009
|
(b)
|
|
|
9,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
63,283
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,283
|
|
|
Property and Equipment, net
|
|
|
12,620
|
|
|
|
(151
|
)(a)
|
|
|
(30
|
)(b)
|
|
|
12,439
|
|
|
Goodwill and Intangible Assets, net
|
|
|
103,655
|
|
|
|
(9,549
|
)(a)
|
|
|
(530
|
)(b)
|
|
|
93,576
|
|
|
Other Assets, net
|
|
|
1,265
|
|
|
|
(4
|
)(a)
|
|
|
(81
|
)(b)
|
|
|
1,180
|
|
|
Other Assets of discontinued operations
|
|
|
1,170
|
|
|
|
9,704
|
(a)
|
|
|
641
|
|
|
|
11,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181,993
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
13,439
|
|
|
$
|
(11
|
)(a)
|
|
$
|
—
|
|
|
$
|
13,428
|
|
|
Accounts payable
|
|
|
20,184
|
|
|
|
(3,951
|
)(a)
|
|
|
(347
|
)(b)
|
|
|
15,886
|
|
|
Accrued expenses
|
|
|
12,492
|
|
|
|
(1,126
|
)(a)
|
|
|
(166
|
)(b)
|
|
|
11,200
|
|
|
Deferred revenue
|
|
|
2,072
|
|
|
|
—
|
|
|
|
(885
|
)(b)
|
|
|
1,187
|
|
|
Current liabilities of discontinued operations
|
|
|
9,465
|
|
|
|
5,088
|
(a)
|
|
|
1,398
|
(b)
|
|
|
15,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
57,652
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,652
|
|
|
Long-Term Debt and Notes Payable
|
|
|
12,708
|
|
|
|
(3
|
)(a)
|
|
|
—
|
|
|
|
12,705
|
|
|
Deferred Taxes
|
|
|
5,092
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,092
|
|
|
Other Liabilities
|
|
|
1,420
|
|
|
|
—
|
|
|
|
(95
|
)(b)
|
|
|
1,392
|
|
|
Deferred Revenue
|
|
|
1,660
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,660
|
|
|
Other Liabilities of discontinued operations
|
|
|
2,585
|
|
|
|
3
|
(a)
|
|
|
95
|
(b)
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
81,117
|
|
|
|
—
|
|
|
|
—
|
|
|
|
81,117
|
|
|
Minority Interest
|
|
|
56,859
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,859
|
|
|
Minority Interest, discontinued operations
|
|
|
904
|
|
|
|
—
|
|
|
|
—
|
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,763
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,763
|
|
|
Stockholders’ Equity
|
|
|
43,113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,113
|
|
|
|
|
$
|
181,993
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
Unaudited
Pro Forma Condensed Statement of Operations
For the Six Months Ended June 30, 2007
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
|
|
|
|
|
Applied
|
|
|
Computer
|
|
|
Perimeter
|
|
|
Applied
|
|
|
|
|
Digital
|
|
|
Equity
|
|
|
Acquisition
|
|
|
Digital
|
|
|
|
|
Historical
|
|
|
Corporation
|
|
|
Corp.
|
|
|
Pro Forma
|
|
|
|
|
Product revenue
|
|
$
|
53,279
|
|
|
$
|
(3,115
|
)(c)
|
|
$
|
(307
|
)(d)
|
|
$
|
49,857
|
|
|
Service revenue
|
|
|
8,166
|
|
|
|
(2,835
|
)(c)
|
|
|
(1,222
|
)(d)
|
|
|
4,109
|
|
|
Other revenue
|
|
|
1,550
|
|
|
|
(1,550
|
)(c)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
62,995
|
|
|
|
(7,500
|
)
|
|
|
(1,529
|
)
|
|
|
53,966
|
|
|
Cost of products sold
|
|
|
31,583
|
|
|
|
(3,001
|
)(c)
|
|
|
(191
|
)(d)
|
|
|
28,391
|
|
|
Cost of services sold
|
|
|
3,737
|
|
|
|
(1,469
|
)(c)
|
|
|
(642
|
)(d)
|
|
|
1,626
|
|
|
Cost of other revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27,675
|
|
|
|
(3,030
|
)
|
|
|
(696
|
)
|
|
|
23,949
|
|
|
Selling, general and administrative expenses
|
|
|
32,016
|
|
|
|
(1,945
|
)(c)
|
|
|
(512
|
)(d)
|
|
|
29,559
|
|
|
Research and development expenses
|
|
|
5,351
|
|
|
|
—
|
|
|
|
(185
|
)(d)
|
|
|
5,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
37,367
|
|
|
|
(1,945
|
)
|
|
|
(697
|
)
|
|
|
34,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before other items
|
|
|
(9,692
|
)
|
|
|
(1,085
|
)
|
|
|
1
|
|
|
|
(10,776
|
)
|
|
Interest and other income
|
|
|
2,015
|
|
|
|
(7
|
)(c)
|
|
|
—
|
|
|
|
2,008
|
|
|
Interest expense
|
|
|
(2,167
|
)
|
|
|
(1
|
)(c)
|
|
|
(47
|
)(d)
|
|
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(152
|
)
|
|
|
(6
|
)
|
|
|
(47
|
)
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes, minority interest
and gain (loss) attributable to capital transactions of
subsidiaries
|
|
|
(9,844
|
)
|
|
|
(1,091
|
)
|
|
|
(46
|
)
|
|
|
(10,981
|
)
|
|
(Provision) benefit for income taxes
|
|
|
(460
|
)
|
|
|
116
|
(c)
|
|
|
—
|
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before minority interest and
gain (loss) attributable to capital transactions of subsidiaries
|
|
|
(10,304
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,325
|
)
|
|
Minority interest
|
|
|
4,207
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,207
|
|
|
Net gain on capital transaction of subsidiaries
|
|
|
4,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,750
|
|
|
Loss attributable to changes in minority interest as a result of
capital transactions of subsidiaries
|
|
|
(5,860
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(7,207
|
)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(8,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations — basic and
diluted
|
|
$
|
(0.11
|
)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding —
basic and diluted
|
|
|
67,353
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
Unaudited
Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 2006
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
|
|
|
|
|
Applied
|
|
|
Computer
|
|
|
Perimeter
|
|
|
Applied
|
|
|
|
|
Digital
|
|
|
Equity
|
|
|
Acquisition
|
|
|
Digital
|
|
|
|
|
Historical
|
|
|
Corporation
|
|
|
Corp.
|
|
|
Pro Forma
|
|
|
|
|
Product revenue
|
|
$
|
89,530
|
|
|
$
|
(8,829
|
)(e)
|
|
$
|
(649
|
)(f)
|
|
$
|
80,052
|
|
|
Service revenue
|
|
|
15,489
|
|
|
|
(5,962
|
)(e)
|
|
|
(2,151
|
)(f)
|
|
|
7,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
105,019
|
|
|
|
(14,791
|
)
|
|
|
(2,800
|
)
|
|
|
87,428
|
|
|
Cost of products sold
|
|
|
51,759
|
|
|
|
(7,586
|
)(e)
|
|
|
(365
|
)(f)
|
|
|
43,808
|
|
|
Cost of services sold
|
|
|
6,065
|
|
|
|
(3,311
|
)(e)
|
|
|
(1,377
|
)(f)
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47,195
|
|
|
|
(3,894
|
)
|
|
|
(1,058
|
)
|
|
|
42,243
|
|
|
Selling, general and administrative expenses
|
|
|
58,030
|
|
|
|
(3,765
|
)(e)
|
|
|
(1,268
|
)(f)
|
|
|
52,997
|
|
|
Research and development expenses
|
|
|
7,572
|
|
|
|
—
|
|
|
|
(344
|
)(f)
|
|
|
7,228
|
|
|
Goodwill and Asset Impairment
|
|
|
6,629
|
|
|
|
(6,629
|
)(e)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
72,231
|
|
|
|
(10,394
|
)
|
|
|
(1,612
|
)
|
|
|
60,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before other items
|
|
|
(25,036
|
)
|
|
|
6,500
|
|
|
|
554
|
|
|
|
(17,982
|
)
|
|
Interest and other income
|
|
|
1,347
|
|
|
|
—
|
|
|
|
(6
|
)(f)
|
|
|
1,341
|
|
|
Interest expense
|
|
|
(3,219
|
)
|
|
|
(82
|
)(e)
|
|
|
—
|
|
|
|
(3,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(1,872
|
)
|
|
|
(82
|
)
|
|
|
(6
|
)
|
|
|
(1,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes, minority interest
and gain (loss) attributable to capital transactions of
subsidiaries
|
|
|
(26,908
|
)
|
|
|
6,582
|
|
|
|
548
|
|
|
|
(19,778
|
)
|
|
(Provision) benefit for income taxes
|
|
|
(62
|
)
|
|
|
(89
|
)(e)
|
|
|
7
|
(f)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before minority interest and
gain (loss) attributable to capital transactions of subsidiaries
|
|
|
(26,970
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,922
|
)
|
|
Minority interest
|
|
|
2,510
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,510
|
|
|
Net loss on capital transactions of subsidiaries
|
|
|
(1,632
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,632
|
)
|
|
Gain attributable to changes in minority interest as a result of
capital transactions of subsidiaries
|
|
|
503
|
|
|
|
—
|
|
|
|
—
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(25,589
|
)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(18,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share from continuing operations —
basic and diluted
|
|
$
|
(0.38
|
)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding —
basic and diluted
|
|
|
67,338
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
PRO FORMA
ADJUSTMENTS FOR THE UNAUDITED PRO FORMA
CONDENSED BALANCE SHEET AT JUNE 30, 2007 AND THE
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 2007 AND THE
YEAR ENDED DECEMBER 31, 2006 ARE AS FOLLOWS:
Pro Forma
Adjustments
(a) To reflect the assets and liabilities of Computer
Equity Corporation as discontinued operations at June 30,
2007. Computer Equity Corporation was discontinued in the third
quarter ended September 30, 2007.
(b) To reflect the assets and liabilities of Perimeter
Acquisition Corp. as discontinued operations at June 30,
2007. Perimeter Acquisition Corp. was discontinued in the third
quarter ended September 30, 2007.
(c) To eliminate the results of operations of Computer
Equity Corporation as discontinued operations for the six months
ended June 30, 2007. Computer Equity Corporation was
discontinued in the third quarter ended September 30, 2007.
(d) To eliminate the results of operations of Perimeter
Acquisition Corp. as discontinued operations for the six months
ended June 30, 2007. Perimeter Acquisition Corp. was
discontinued in the third quarter ended September 30, 2007.
(e) To eliminate the results of operations of Computer
Equity Corporation as discontinued operations for the year ended
December 31, 2006. Computer Equity Corporation was
discontinued in the third quarter ended September 30, 2007.
(f) To eliminate the results of operations of Perimeter
Acquisition Corp. as discontinued operations for the year ended
December 31, 2006. Perimeter Acquisition Corp. was
discontinued in the third quarter ended September 30, 2007.
As a result of the planned sales and the current expectation of
the market value of Computer Equity Corporation and Perimeter
Acquisition Corp., Applied Digital expects to record an
impairment charge associated with Computer Equity
Corporation’s goodwill of approximately $3.5 million
during the third quarter of 2007. The unaudited pro forma
condensed financial data as of June 30, 2007 and for the
year ended December 31, 2006 and the six-months ended
June 30, 2007 do not include this estimated impairment
charge.
115
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
REFLECTING THE MERGER
In accordance with the merger agreement, Applied Digital will
acquire all of the outstanding common shares of Digital Angel
that it does not currently own (approximately 20.4 million,
or 44.4%, of the outstanding shares of Digital Angel as of
September 28, 2007). Unless otherwise indicated, all
information in this section is as of June 30, 2007.
The following unaudited pro forma condensed combined financial
statements are based on the historical consolidated financial
statements of Applied Digital after adjustment to reclassify
Applied Digital’s subsidiaries, Computer Equity Corporation
and Perimeter Acquisition Corp., as discontinued operations,
which is reflected in the accompanying pro forma financial
statements presented above, and after giving effect to Applied
Digital’s acquisition of the shares of common stock
currently held by the non-controlling stockholders of Digital
Angel, using the purchase method of accounting and applying the
assumptions and adjustments described in the accompanying notes.
Since Digital Angel is a majority-owned subsidiary of Applied
Digital, its financial results are included in Applied
Digital’s historical consolidated financial statements.
Therefore, the merger adjustments in the unaudited pro forma
condensed combined financial statements reflect the elimination
of the minority stockholders’ interest in Digital Angel and
other adjustments associated with purchase accounting.
The unaudited pro forma condensed combined statements of
operations for the six months ended June 30, 2007 and the
year ended December 31, 2006 are presented as if the
acquisition had occurred on January 1, 2007 and 2006,
respectively. The unaudited pro forma condensed combined balance
sheet is presented as if the acquisition had occurred on
June 30, 2007. You should read this information in
conjunction with the:
|
|
|
|
|
|
•
|
accompanying notes to the unaudited pro forma condensed combined
financial statements included in this joint proxy
statement/prospectus beginning on page 120;
|
|
|
|
|
|
|
•
|
separate unaudited historical financial statements of Applied
Digital as of and for the three and six month periods ended
June 30, 2007, included in Applied Digital’s Quarterly
Report on
Form 10-Q
for the six months ended June 30, 2007, and audited
historical financial statements of Applied Digital as of and for
the year ended December 31, 2006, included in Applied
Digital’s Current Report on
Form 8-K
filed with the SEC on September 10, 2007 to reflect Applied
Digital’s former InfoTech business and Digital Angel’s
former OuterLink Corporation business as discontinued operations
and to modify the related disclosures, which financial
statements are incorporated by reference into this joint proxy
statement/prospectus; and
|
|
|
|
|
|
|
•
|
separate unaudited historical financial statements of Digital
Angel as of and for the three and six month periods ended
June 30, 2007, included in this joint proxy
statement/prospectus beginning on page FS-2, and audited
historical financial statements of Digital Angel as of and for
the year ended December 31, 2006, included in this joint
proxy statement/prospectus beginning on page FS-23 that
reflect Digital Angel’s former OuterLink Corporation
business as discontinued operations and to modify the related
disclosures.
|
The pro forma information presented is for illustrative purposes
only and is not necessarily indicative of the financial position
or results of operations that would have been realized if the
merger had been completed on the dates indicated, nor is it
indicative of future operating results or financial position.
The pro forma adjustments are based upon available information
and certain assumptions that Applied Digital believes are
reasonable and do not take into account anticipated operating
efficiencies, cost savings or restructuring costs resulting from
the merger.
Pursuant to the purchase method of accounting, the total
estimated purchase price has been preliminarily allocated to the
assets acquired and liabilities assumed based on an allocation
of their respective fair values at June 30, 2007. Any
differences between the fair value of the total consideration
issued and the fair value of the tangible and intangible assets
acquired and liabilities assumed will be recorded as goodwill.
Since these unaudited pro forma condensed combined financial
statements have been prepared based on preliminary estimates of
fair values attributable to the merger, the actual amounts
recorded for the merger may differ materially from the
information presented. Applied Digital’s management has
determined the preliminary fair value of the intangible assets
at the pro forma condensed combined balance sheet date of
June 30, 2007. These
116
allocations are subject to change pending further review of the
fair value of the assets acquired and liabilities assumed, as
well as the impact of potential restructuring activities and
actual transaction costs. Additionally, the fair value of the
tangible and intangible assets acquired and liabilities assumed
may be materially impacted by the results of Digital
Angel’s operations up to the closing date of the merger.
Unaudited
Pro Forma Condensed Combined Consolidated Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
Historical(A)
|
|
|
|
|
|
|
|
|
|
|
Applied
|
|
|
Merger
|
|
|
Proforma
|
|
|
|
|
Digital(1)
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
(In thousands)
|
|
|
|
|
ASSETS
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,267
|
|
|
$
|
—
|
|
|
$
|
15,267
|
|
|
Restricted cash
|
|
|
127
|
|
|
|
—
|
|
|
|
127
|
|
|
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $658)
|
|
|
19,173
|
|
|
|
—
|
|
|
|
19,173
|
|
|
Inventories
|
|
|
15,574
|
|
|
|
—
|
|
|
|
15,574
|
|
|
Deferred taxes
|
|
|
376
|
|
|
|
—
|
|
|
|
376
|
|
|
Other current assets
|
|
|
3,596
|
|
|
|
—
|
|
|
|
3,596
|
|
|
Current assets from discontinued operations
|
|
|
9,170
|
|
|
|
—
|
|
|
|
9,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
63,283
|
|
|
|
—
|
|
|
|
63,283
|
|
|
Property and equipment, net
|
|
|
12,439
|
|
|
|
—
|
|
|
|
12,439
|
|
|
Goodwill and intangibles, net
|
|
|
93,576
|
|
|
|
(1,401
|
)(2)
|
|
|
92,175
|
|
|
Other assets, net
|
|
|
1,180
|
|
|
|
(130
|
)(3)
|
|
|
1,050
|
|
|
Other assets from discontinued operations
|
|
|
11,515
|
|
|
|
—
|
|
|
|
11,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
181,993
|
|
|
$
|
(1,531
|
)
|
|
$
|
180,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
13,428
|
|
|
$
|
—
|
|
|
$
|
13,428
|
|
|
Accounts payable
|
|
|
15,886
|
|
|
|
—
|
|
|
|
15,886
|
|
|
Accrued expenses
|
|
|
11,200
|
|
|
|
870
|
(4)
|
|
|
12,070
|
|
|
Deferred revenue
|
|
|
1,187
|
|
|
|
—
|
|
|
|
1,187
|
|
|
Current liabilities of discontinued operations
|
|
|
15,951
|
|
|
|
—
|
|
|
|
15,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
57,652
|
|
|
|
870
|
|
|
|
58,522
|
|
|
Long-term debt and notes payable
|
|
|
12,705
|
|
|
|
—
|
|
|
|
12,705
|
|
|
Deferred taxes
|
|
|
5,092
|
|
|
|
—
|
|
|
|
5,092
|
|
|
Other liabilities
|
|
|
1,392
|
|
|
|
—
|
|
|
|
1,392
|
|
|
Deferred revenue
|
|
|
1,660
|
|
|
|
—
|
|
|
|
1,660
|
|
|
Other liabilities from discontinued operations
|
|
|
2,683
|
|
|
|
—
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
81,117
|
|
|
|
—
|
|
|
|
81,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
56,859
|
|
|
|
(44,042
|
)(5)
|
|
|
12,817
|
|
|
Minority interest, discontinued operations
|
|
|
904
|
|
|
|
—
|
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Minority Interest
|
|
|
57,763
|
|
|
|
(44,052
|
)
|
|
|
13,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares: Authorized 5,000 shares of $10 par
value; special voting, no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Common shares: Authorized 125,000 shares of $.01 par
value; 69,214 shares issued and 68,422 shares
outstanding
|
|
|
692
|
|
|
|
281
|
(6)
|
|
|
973
|
|
|
Additional paid-in capital
|
|
|
521,131
|
|
|
|
41,360
|
(6)
|
|
|
562,491
|
|
|
Accumulated deficit
|
|
|
(476,556
|
)
|
|
|
—
|
|
|
|
(476,556
|
)
|
|
Accumulated other comprehensive income
|
|
|
434
|
|
|
|
—
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
Historical(A)
|
|
|
|
|
|
|
|
|
|
|
Applied
|
|
|
Merger
|
|
|
Proforma
|
|
|
|
|
Digital(1)
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
(In thousands)
|
|
|
|
|
Subtotal
|
|
|
45,701
|
|
|
|
41,641
|
|
|
|
87,342
|
|
|
Treasury stock (carried at cost, 792 shares)
|
|
|
(2,588
|
)
|
|
|
—
|
|
|
|
(2,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
43,113
|
|
|
|
41,641
|
|
|
|
84,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
181,993
|
|
|
$
|
(1,531
|
)
|
|
$
|
180,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended June 30, 2007
|
|
|
|
|
Historical(A)
|
|
|
|
|
|
|
|
|
|
|
Applied
|
|
|
Merger
|
|
|
Pro Forma
|
|
|
|
|
Digital(1)
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Product revenue
|
|
$
|
49,857
|
|
|
$
|
—
|
|
|
$
|
49,857
|
|
|
Service revenue
|
|
|
4,109
|
|
|
|
—
|
|
|
|
4,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
53,966
|
|
|
|
—
|
|
|
|
53,966
|
|
|
Cost of products sold
|
|
|
28,391
|
|
|
|
—
|
|
|
|
28,391
|
|
|
Cost of services sold
|
|
|
1,626
|
|
|
|
—
|
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products and services sold
|
|
|
30,017
|
|
|
|
—
|
|
|
|
30,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,949
|
|
|
|
—
|
|
|
|
23,949
|
|
|
Selling, general and administrative expense
|
|
|
29,559
|
|
|
|
—
|
|
|
|
29,559
|
|
|
Research and development
|
|
|
5,166
|
|
|
|
—
|
|
|
|
5,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
34,725
|
|
|
|
—
|
|
|
|
34,725
|
|
|
Operating loss before other items
|
|
|
(10,776
|
)
|
|
|
—
|
|
|
|
(10,776
|
)
|
|
Interest and other income
|
|
|
2,008
|
|
|
|
—
|
|
|
|
2,008
|
|
|
Interest expense
|
|
|
(2,213
|
)
|
|
|
—
|
|
|
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(205
|
)
|
|
|
—
|
|
|
|
(205
|
)
|
|
Loss from continuing operations before taxes, minority interest
and gain (loss) attributable to capital transactions of
subsidiaries
|
|
|
(10,981
|
)
|
|
|
—
|
|
|
|
(10,981
|
)
|
|
(Provision) benefit for income taxes
|
|
|
(344
|
)
|
|
|
—
|
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before minority interest and
gain (loss) attributable to capital transaction of subsidiaries
|
|
|
(11,325
|
)
|
|
|
—
|
|
|
|
(11,325
|
)
|
|
Minority interest
|
|
|
4,207
|
|
|
|
(2,453
|
)(7)
|
|
|
1,754
|
|
|
Net (loss) gain on capital transaction of subsidiaries
|
|
|
4,750
|
|
|
|
58
|
(8)
|
|
|
4,808
|
|
|
(Loss) gain attributable to changes in minority interest as a
result of capital transactions of subsidiaries
|
|
|
(5,860
|
)
|
|
|
512
|
(9)
|
|
|
(5,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations(10)
|
|
$
|
(8,228
|
)
|
|
$
|
(1,883
|
)
|
|
$
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations — basic and
diluted
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding —
basic and diluted
|
|
|
67,353
|
|
|
|
|
|
|
|
95,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
Historical(A)
|
|
|
|
|
|
|
|
|
|
|
Applied
|
|
|
Merger
|
|
|
Proforma
|
|
|
|
|
Digital(1)
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
Product revenue
|
|
$
|
80,052
|
|
|
$
|
—
|
|
|
$
|
80,052
|
|
|
Service revenue
|
|
|
7,376
|
|
|
|
—
|
|
|
|
7,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
87,428
|
|
|
|
—
|
|
|
|
87,428
|
|
|
Cost of products sold
|
|
|
43,808
|
|
|
|
—
|
|
|
|
43,808
|
|
|
Cost of services sold
|
|
|
1,377
|
|
|
|
—
|
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products and services sold
|
|
|
45,185
|
|
|
|
—
|
|
|
|
45,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,243
|
|
|
|
—
|
|
|
|
42,243
|
|
|
Selling, general and administrative expense
|
|
|
52,997
|
|
|
|
—
|
|
|
|
52,997
|
|
|
Research and development
|
|
|
7,228
|
|
|
|
—
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
60,225
|
|
|
|
—
|
|
|
|
60,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before other items
|
|
|
(17,982
|
)
|
|
|
—
|
|
|
|
(17,982
|
)
|
|
Interest and other income
|
|
|
1,341
|
|
|
|
—
|
|
|
|
1,341
|
|
|
Interest expense
|
|
|
(3,137
|
)
|
|
|
—
|
|
|
|
(3,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(1,960
|
)
|
|
|
—
|
|
|
|
(1,960
|
)
|
|
Loss from continuing operations before taxes, minority interest
and gain (loss) attributable to capital transactions of
subsidiaries
|
|
|
(19,778
|
)
|
|
|
—
|
|
|
|
(19,778
|
)
|
|
(Provision) benefit for income taxes
|
|
|
(144
|
)
|
|
|
—
|
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before minority interest and
gain (loss) attributable to capital transaction of subsidiaries
|
|
|
(19,922
|
)
|
|
|
—
|
|
|
|
(19,922
|
)
|
|
Minority interest
|
|
|
2,510
|
|
|
|
(2,346
|
)(7)
|
|
|
164
|
|
|
Net (loss) gain on capital transaction of subsidiaries
|
|
|
(1,632
|
)
|
|
|
(321
|
)(8)
|
|
|
(1,953
|
)
|
|
Gain (loss) attributable to changes in minority interest as a
result of capital transactions of subsidiaries
|
|
|
503
|
|
|
|
(135
|
)(9)
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations(10)
|
|
$
|
(18,541
|
)
|
|
$
|
(2,802
|
)
|
|
$
|
(21,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations — basic and
diluted
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding —
basic and diluted
|
|
|
67,338
|
|
|
|
|
|
|
|
95,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The historical financial statement results of Applied Digital
reflect the reclassification of Computer Equity Corporation and
Perimeter Acquisition Corp. as discontinued operations. See
“Unaudited Pro Forma Condensed Financial Data Reflecting
the Reclassification of Applied Digital’s Subsidiaries,
Computer Equity Corporation and Perimeter Acquisition Corp., as
Discontinued Operations” and “Unaudited Pro Forma
Condensed Combined Financial Data Reflecting the Merger”
beginning on page 111 of this joint proxy
statement/prospectus.
|
|
|
|
|
1.
|
Basis of
Pro Forma Presentation
|
On August 8, 2007, Applied Digital and Digital Angel
entered into a definitive merger agreement in a transaction to
be accounted for using the purchase method of accounting with
Applied Digital as the purchaser. Per the terms of the merger
agreement, each share of Digital Angel common stock then
outstanding, other than shares owned by Applied Digital or its
affiliates, will be canceled and automatically converted into
the right to receive 1.4 shares of Applied Digital common
stock. Each outstanding stock option and warrant to
120
purchase shares of Digital Angel common stock issued by Digital
Angel will be converted into an option to purchase that number
of shares of Applied Digital common stock determined by
multiplying the number of shares of Digital Angel common stock
subject to such Digital Angel stock option or warrant by 1.4, at
an exercise price per share of Applied Digital common stock
equal to the exercise price per share of such Digital Angel
stock option or warrant divided by 1.4, rounded up to the
nearest whole cent. Any fractional shares will be rounded up to
the nearest whole number of shares.
The total number of shares of Applied Digital common stock
issuable as merger consideration is subject to adjustment if,
after the date of the merger agreement, but prior to the
effective time of the merger, the shares of issued and
outstanding Applied Digital common stock increase, decrease or
change into, or are exchanged for, a different kind or number of
securities, to provide the holders of Digital Angel common stock
the same economic effect as contemplated by the merger agreement
prior to such event. The total estimated purchase price of
approximately $42.6 million is comprised of an estimated
28.1 million shares of Applied Digital common shares, the
fair value of the assumed outstanding Digital Angel stock
options and warrants, and estimated transaction costs.
The unaudited pro forma condensed combined balance sheet is
presented to give effect to the merger as if the transaction had
been consummated on June 30, 2007. The unaudited pro forma
condensed combined statement of operations for the six months
ended June 30, 2007 and for the year ended
December 31, 2006 are presented as if the transaction had
been consummated on January 1, 2007 and 2006, respectively.
The unaudited pro forma condensed combined balance sheet
provides for the issuance of approximately 28.1 million
Applied Digital common shares, based upon a fixed common stock
exchange ratio of 1.4 Applied Digital common shares for each
outstanding share of Digital Angel common stock held by
non-controlling owners as of June 30, 2007. The actual
number of Applied Digital common shares to be issued will be
determined based on the actual number of shares of Digital Angel
common stock outstanding and held by non-controlling owners at
the closing date of the merger. Under the purchase method of
accounting, the fair value of the total consideration was
determined using an average of Applied Digital’s closing
stock prices beginning two trading days before and ending two
trading days after August 9, 2007, the date on which the
acquisition was announced.
Applied Digital will assume approximately 12.1 million
options and warrants of Digital Angel to purchase the equivalent
of approximately 17.0 million Applied Digital common shares
at a weighted average exercise price of $2.58. The fair value of
options and warrants to be assumed was estimated using the Black
Scholes valuation model and a share price of $1.152 per share,
which represents the average closing price of Applied
Digital’s common stock beginning two trading days before
and ending two trading days after August 9, 2007, the date
on which the acquisition was announced. The actual number of
Digital Angel options and warrants to be assumed will be
determined based on the actual number of Digital Angel options
and warrants outstanding as the closing date.
The total estimated purchase price of the merger is as follows
(in thousands):
|
|
|
|
|
|
|
Fair value of Applied Digital common stock to be issued
|
|
$
|
32,366
|
|
|
Estimated fair value of stock options and warrants assumed
|
|
|
9,275
|
|
|
Estimated direct transaction costs
|
|
|
1,000
|
|
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
42,641
|
|
Preliminary
Estimated Purchase Price Allocation
The preliminary allocation of the purchase price to Digital
Angel’s tangible and intangible assets acquired and
liabilities assumed was based on their estimated fair values as
of June 30, 2007. The valuation of these tangible and
identifiable intangible assets and liabilities is subject to
further management review and may change materially between the
preliminary valuation date and the closing date of the merger.
Adjustments to these estimates may be included in the final
allocation of the purchase price of Digital Angel, if the
adjustment is determined within the purchase price allocation
period (up to twelve months from the closing date). The excess
of the purchase price over the estimated tangible and
identifiable intangible assets acquired and liabilities assumed
has been allocated to goodwill.
121
A preliminary allocation of the total estimated purchase price
to major categories of assets in the accompanying pro forma
condensed combined financial statements is summarized below (in
thousands):
|
|
|
|
|
|
|
Minority owners’ portion of tangible assets acquired
|
|
$
|
19,353
|
|
|
Minority owners’ portion of goodwill and intangible assets
acquired
|
|
|
23,288
|
|
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
42,641
|
|
Tangible
Assets, Goodwill and Intangible Assets
Applied Digital has estimated the fair value of tangible assets,
goodwill and intangible assets, assumed. Some of these estimates
are subject to change. These estimates are based on a
preliminary valuation and are subject to further review by
Applied Digital, which may result in material adjustments at the
closing date of the merger and thereafter during the purchase
price allocation period. Furthermore, the fair values of the
tangible and intangible assets acquired may be affected and
materially changed by the results of Digital Angel’s
operations up to the closing date of the merger.
The following pro forma adjustments are included in the
unaudited pro forma condensed combined statements of operations
and the unaudited pro forma condensed combined balance sheet:
(1) Represents Applied Digital’s consolidated
financial position and results of operations, which include the
results of Digital Angel.
(2) Adjustments to goodwill (in thousands):
|
|
|
|
|
|
|
To eliminate minority interest in Digital Angel goodwill and
intangibles from previous acquisitions
|
|
$
|
(24,689
|
)
|
|
To record goodwill related to the merger with Digital Angel
|
|
|
23,288
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,401
|
)
|
As a result of the merger, an impairment charge may be required
to be recorded at the consummation of the merger based on the
fair value as compared to the carrying amount.
(3) Adjustment to reclassify Applied Digital direct
acquisition costs as of June 30, 2007.
(4) Adjustment to accrued liabilities to reflect estimated
direct acquisition-related costs expected to be incurred.
(5) Adjustment to eliminate the minority interest in
Digital Angel.
(6) Adjustment to record the common shares issued and value
of the Digital Angel options and warrants, which will be
converted into options and warrants to acquire shares of Applied
Digital common stock.
(7) Adjustment to eliminate the minority interest portion
of Digital Angel results.
(8) Adjustment to eliminate (loss) gain on capital
transactions of Digital Angel (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
|
June 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
To eliminate loss on capital transactions of Digital Angel
|
|
$
|
58
|
|
|
$
|
—
|
|
|
To eliminate gain on capital transactions of Digital Angel
|
|
|
—
|
|
|
|
(321
|
)
|
|
Total
|
|
$
|
58
|
|
|
$
|
(321
|
)
|
122
(9) Adjustment to eliminate (loss) gain attributable to
changes in minority interest as a result of capital transactions
with Digital Angel (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
|
June 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
To eliminate loss attributable to changes in minority interest
as a result of capital transactions with Digital Angel
|
|
$
|
512
|
|
|
$
|
—
|
|
|
To eliminate gain attributable to changes in minority interest
as a result of capital transactions with Digital Angel
|
|
|
—
|
|
|
|
(135
|
)
|
|
Total
|
|
$
|
512
|
|
|
$
|
(135
|
)
|
(10) Loss from continuing operations does not include
approximately $2.0 million of stock-based compensation
expense for the accelerated vesting of Digital Angel’s
stock options. All unvested Digital Angel stock options will
automatically vest upon consummation of the merger.
(11) The pro forma number of shares used in per share
calculations reflects the weighted average of Applied Digital
common shares for each period presented combined with the
outstanding Digital Angel common shares at June 30, 2007
that it does not currently own, adjusted to reflect the common
stock exchange ratio of 1.4 Applied Digital common shares for
each outstanding share of Digital Angel common stock.
123
INFORMATION
ABOUT APPLIED DIGITAL
Applied Digital and its subsidiaries (either wholly- or
majority-owned) develop innovative identification and security
products for consumer, commercial and government sectors
worldwide. Applied Digital’s unique and often proprietary
products provide identification and security for people,
animals, food chains, government/military assets, and commercial
assets. Included in this diverse product line are applications
for RFID, end-to-end food safety systems, GPS, satellite
communications, and secure telecommunications infrastructure.
Applied Digital and its subsidiaries currently engage in the
following principal business activities:
|
|
|
|
|
|
•
|
developing, marketing and selling RFID systems used to identify,
locate and protect people and their assets in a variety of
healthcare, security, and identification applications;
|
|
|
|
|
•
|
marketing visual identification tags and implantable RFID
microchips, primarily for identification, tracking and location
of pets, livestock and other animals, and, more recently, for
animal bio-sensing applications, such as temperature reading for
companion pet and livestock (e.g., cattle) applications;
|
|
|
|
|
•
|
developing and marketing GPS-enabled products used for location
tracking and message monitoring of vehicles, pilots and aircraft
in remote locations;
|
|
|
|
|
•
|
marketing secure voice, data and video telecommunications
networks, primarily to several agencies of the
U.S. government;
|
|
|
|
|
•
|
developing and marketing call center and customer relationship
management software and services; and
|
|
|
|
|
•
|
selling vibration monitoring systems.
|
As of June 30, 2007, Applied Digital’s business
operations consisted of the operations of four wholly-owned
subsidiaries, Pacific Decision Sciences Corporation, Computer
Equity Corporation, Perimeter Acquisition Corp. and Thermo Life,
which Applied Digital collectively refers to as its Advanced
Technology segment, and three majority-owned subsidiaries:
VeriChip (NASDAQ: CHIP), Digital Angel (AMEX: DOC), and InfoTech
(OTC: IFTH). As of September 28, 2007, Applied Digital
owned approximately 52.0% of VeriChip, approximately 55.6% of
Digital Angel and approximately 50.9% of InfoTech. During the
quarter ended June 30, 2007, Applied Digital’s board
of directors decided to sell InfoTech and, accordingly, InfoTech
is now classified as discontinued operations. On
September 30, 2007, Applied Digital’s board of
directors decided to sell Computer Equity Corporation and
Perimeter Acquisition Corp. Accordingly, these businesses will
be classified as discontinued operations in Applied
Digital’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007. In addition, at
that time, their results for all prior periods will be
reclassified. See “Unaudited Pro Forma Condensed Financial
Data Reflecting the Reclassification of Applied Digital’s
Subsidiaries, Computer Equity Corporation and Perimeter
Acquisition Corp., as Discontinued Operations” and
“Unaudited Pro Forma Condensed Combined Financial Data
Reflecting the Merger,” beginning on page 111 of this
joint proxy statement/prospectus, which present the operations
of Computer Equity Corporation and Perimeter Acquisition Corp.
as discontinued operations.
Applied Digital operates in five business segments: Healthcare,
Security and Industrial, Animal Applications, GPS and Radio
Communications and Advanced Technology.
Legal
Proceedings
Applied Digital is currently involved in several legal
proceedings. Applied Digital has accrued its estimate of the
probable costs for the resolution of these claims, and, as of
June 30, 2007, recorded approximately $0.9 million in
reserves with respect to such claims. This estimate has been
developed in consultation with outside counsel handling its
defense in these matters and is based upon an analysis of
potential results, assuming a combination of litigation and
settlement strategies. Applied Digital does not believe the
outcome of these proceedings will have a material adverse effect
on its consolidated financial position. It is possible, however,
that future results of operations and cash flows for any
particular quarterly or annual period could be materially
affected by changes in its estimates.
Maudlin
Suit
On October 22, 2003, Melvin Maudlin, a former employee of
Pacific Decision Sciences Corporation, a wholly-owned subsidiary
of Applied Digital, or PDSC, filed suit in the Superior Court of
the State of California for the County of Orange against PDSC,
Hark Vasa, a former employee and owner at PDSC, and Applied
Digital
124
in connection with a purported trust agreement involving PDSC
which, according to Mr. Maudlin, provided that he was to
receive monthly payments of $10,000 for approximately
17 years. Mr. Maudlin obtained a pre-judgment right to
attach order in the amount of his total claim of
$2.1 million, and subsequently obtained a purported writ of
attachment of certain PDSC assets, which Applied Digital
successfully appealed and had overturned. The case proceeded to
a bench trial before the Superior Court, which resulted in a
judgment in favor of PDSC on the grounds that the purported
trust was illegal and void. Mr. Maudlin appealed the
judgment. On March 21, 2006, the Court of Appeal of the
State of California, Fourth Appellate District, reversed the
trial court judgment and remanded the case for further
proceedings in the Superior Court. PDSC’s and Applied
Digital’s Petition for Review with the California Supreme
Court was denied on July 12, 2006. On July 21, 2006,
the Court of Appeal’s opinion became final. On
April 12, 2007, pursuant to the Court’s mandatory
settlement conference procedures, the parties entered into a
settlement in principle as between Applied Digital and PDSC, on
the one hand, and Maudlin on the other hand. Under the
parties’ agreement, Applied Digital paid $450,000 in cash
to Maudlin and his lawyers on June 26, 2007. Applied
Digital is also required to deliver unrestricted shares of its
common stock to Maudlin valued at $800,000 over the next two
years. On July 27, 2007, the SEC declared effective a
registration statement registering these shares. On
June 27, 2007, the suit was dismissed with prejudice.
Applied Digital has recorded the excess liability of
$0.9 million as other income during the three-months ended
June 30, 2007 as a result of this settlement during the
three-months ended June 30, 2007. This income is included
in its Advanced Technology segment.
Vasa
Suit
On or about January 21, 2004, Hark M. Vasa and his family
partnerships, the majority shareholder of PDSC’s
predecessor at the time Applied Digital acquired that company,
filed a complaint against Applied Digital and PDSC, which is a
wholly-owned subsidiary of Applied Digital, in the Circuit Court
of the 15th Judicial District in Palm Beach County, Florida
for breach of contract and the implied covenant of good faith
and fair dealing. Plaintiffs sought damages arising from the
purported delay in the registration of the shares they received
in connection with Applied Digital’s acquisition of
PDSC’s predecessor. Trial in this case was set to commence
on October 15, 2007.
On September 28, 2007, the parties entered into a
memorandum of settlement. Under the parties’ agreement,
Applied Digital agreed to issue an aggregate amount of shares of
its common stock to Mr. Vasa valued at $2.1 million and to
file one or more registration statements registering the resale
of such shares. Mr. Vasa will receive stock valued at
$500,000 in each of the years 2007 and 2008, stock valued at
$400,000 in each of the years 2009 and 2010, and stock valued at
$300,000 in year 2011. Annual payments will be due on or about
October 15th of each year. The amount of shares to be
issued will be calculated based on the average closing price per
share of Applied Digital common stock reported on the Nasdaq for
the 10 consecutive trading-day period preceding the date of
issuance. Applied Digital is required to have the shares
registered for resale 180 days from the date of each
issuance. If the number of shares issued on any specific
issuance date does not have the values set forth above on the
date the shares are required to be registered, Applied Digital
will be required to issue additional shares to Mr. Vasa to
cover the difference or pay the difference in cash. Applied
Digital also agreed to fund a project with Mr. Vasa for
potential business development and to provide $250,000 per year
for three years beginning in 2007. Applied Digital will also
provide an amount not to exceed $50,000 per year for three years
to cover associated expenses. It is anticipated that Applied
Digital will accrue and charge to expense the aggregate present
value of these payments during the third quarter of 2007. The
parties are currently in the process of finalizing a settlement
agreement detailing the terms and conditions of the settlement.
Verizon
Suit
On August 14, 2006, Applied Digital filed an action against
Verizon Federal, Inc. in Fairfax County Circuit Court in
Virginia asserting damages arising from Verizon’s wrongful
usurpation of Government Telecommunications Inc.’s, or
GTI’s, business opportunity with the District of Columbia
Public Schools for the supply and installation of internal
connection wiring and cabling equipment and related goods and
services. Applied Digital’s complaint pleads two counts:
Count I — Breach of Contract, for which it is seeking
lost profits of approximately $1.9 million, and Count
II — Tortious Interference with Contractual Relations,
for which it is seeking restitution damages of
$7.0 million. On October 27, 2006, Verizon filed a
motion to
125
dismiss GTI’s complaint. Following oral arguments on the
matter, on December 1, 2006, the court denied the motion.
Also in December 2006, Verizon filed a counterclaim against GTI
seeking $4.1 million in monies that Verizon claims are owed
it by GTI on related work. Trial is set for December 2007.
Applied Digital intends to vigorously pursue its case against
Verizon and to vigorously defend the counterclaim action. Given
the uncertainties associated with all litigation and given the
early stage of these proceeding, Applied Digital is unable to
offer any assessment of the outcome of its complaint and
Verizon’s counterclaim.
VeriChip
Stock Option Claims
VeriChip has received demand letters from attorneys for several
former employees
and/or
consultants of Applied Digital and VeriChip, asserting claims
related to stock options to acquire 0.5 million shares of
VeriChip’s common stock which management believes such
employees
and/or
consultants had forfeited when they ceased their employment or
relationship with Applied Digital
and/or
VeriChip. Applied Digital believes that all of these potential
claims are without merit and intends to vigorously defend them
in the event the claims are asserted or litigated.
Applied Digital was incorporated on May 11, 1993 in
Missouri and reincorporated on April 20, 2007 in Delaware.
Applied Digital’s principal executive offices are located
at 1690 South Congress Avenue, Suite 200, Delray Beach,
Florida 33445, and its telephone number is
(561) 805-8000.
126
DIGITAL
ANGEL SELECTED HISTORICAL FINANCIAL DATA
(In
thousands, except per share data)
The following selected consolidated financial information
reflects the account balances and activities of OuterLink
Corporation as discontinued operations. The selected
consolidated financial information as of and for the three-year
period ended December 31, 2006 is derived from Digital
Angel’s audited consolidated financial statements beginning
on page FS-23. The selected consolidated financial
information as of and for the two-year period ended
December 31, 2003 is derived from Digital Angel’s
audited consolidated financial statements. The selected
consolidated financial information as of June 30, 2007 and
for the six months ended June 30, 2007 and June 30,
2006 is derived from the unaudited consolidated financial
statements beginning on page FS-2, and, in the opinion of
Digital Angel’s management, includes all normal and
recurring adjustments that are considered necessary for the fair
presentation of the results for the interim period. The
operating results for the six months ended June 30, 2007
are not necessarily indicative of the results to be expected for
the full year or any other interim period.
The selected historical financial data is only a summary, and
should be read in conjunction with “
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations of Digital Angel
” beginning on page 129
and the consolidated financial statements and the related notes
beginning on
page FS-23.
Digital Angel’s historical financial data may not be
indicative of the results of operations or financial position to
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six-Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
34,831
|
|
|
$
|
27,747
|
|
|
$
|
53,710
|
|
|
$
|
53,241
|
|
|
$
|
43,628
|
|
|
$
|
32,873
|
|
|
$
|
30,401
|
|
|
Service revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
1,309
|
|
|
|
921
|
|
|
|
1,559
|
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
34,831
|
|
|
|
27,747
|
|
|
|
54,410
|
|
|
|
54,550
|
|
|
|
44,549
|
|
|
|
34,432
|
|
|
|
32,516
|
|
|
Cost of products sold
|
|
|
21,509
|
|
|
|
16,275
|
|
|
|
31,919
|
|
|
|
29,930
|
|
|
|
24,872
|
|
|
|
19,712
|
|
|
|
18,023
|
|
|
Cost of services sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,322
|
|
|
|
11,472
|
|
|
|
22,491
|
|
|
|
24,620
|
|
|
|
19,677
|
|
|
|
14,720
|
|
|
|
13,099
|
|
|
Selling, general and administrative expense
|
|
|
15,277
|
|
|
|
11,631
|
|
|
|
24,228
|
|
|
|
21,217
|
|
|
|
16,712
|
|
|
|
15,496
|
|
|
|
36,360
|
|
|
Research and development expense
|
|
|
2,804
|
|
|
|
1,522
|
|
|
|
3,442
|
|
|
|
3,343
|
|
|
|
2,033
|
|
|
|
4,898
|
|
|
|
3,034
|
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,759
|
)
|
|
|
(1,681
|
)
|
|
|
(5,179
|
)
|
|
|
60
|
|
|
|
932
|
|
|
|
(5,674
|
)
|
|
|
(64,166
|
)
|
|
Interest income
|
|
|
46
|
|
|
|
174
|
|
|
|
270
|
|
|
|
347
|
|
|
|
32
|
|
|
|
15
|
|
|
|
1
|
|
|
Interest (expense) — Applied Digital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,806
|
)
|
|
Interest (expense) — others
|
|
|
(998
|
)
|
|
|
(205
|
)
|
|
|
(466
|
)
|
|
|
(364
|
)
|
|
|
(1,337
|
)
|
|
|
(772
|
)
|
|
|
(256
|
)
|
|
Realized losses on Applied Digital common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,231
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Change in derivative warranty liability
|
|
|
296
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Income
|
|
|
62
|
|
|
|
45
|
|
|
|
97
|
|
|
|
63
|
|
|
|
112
|
|
|
|
157
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for taxes,
minority interest and equity in net loss of affiliate
|
|
|
(5,353
|
)
|
|
|
(1,668
|
)
|
|
|
(5,277
|
)
|
|
|
106
|
|
|
|
(1,492
|
)
|
|
|
(6,274
|
)
|
|
|
(65,643
|
)
|
|
Income tax (provision) benefit
|
|
|
(38
|
)
|
|
|
72
|
|
|
|
72
|
|
|
|
41
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before minority interest and
equity in net loss of affiliate
|
|
|
(5,391
|
)
|
|
|
(1,596
|
)
|
|
|
(5,205
|
)
|
|
|
147
|
|
|
|
(1,492
|
)
|
|
|
(6,274
|
)
|
|
|
(65,643
|
)
|
|
Minority interest share of (losses) income
|
|
|
15
|
|
|
|
(58
|
)
|
|
|
5
|
|
|
|
351
|
|
|
|
249
|
|
|
|
(298
|
)
|
|
|
(96
|
)
|
|
Equity in net loss of affiliate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before discontinued operations
|
|
|
(5,376
|
)
|
|
|
(1,654
|
)
|
|
|
(5,210
|
)
|
|
|
(204
|
)
|
|
|
(1,741
|
)
|
|
|
(5,976
|
)
|
|
|
(65,838
|
)
|
|
Net income (loss) from discontinued operations
|
|
|
(833
|
)
|
|
|
(1,056
|
)
|
|
|
(1,593
|
)
|
|
|
(9,272
|
)
|
|
|
(3,216
|
)
|
|
|
(3,482
|
)
|
|
|
(26,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,209
|
)
|
|
$
|
(2,710
|
)
|
|
$
|
(6,803
|
)
|
|
$
|
(9,476
|
)
|
|
$
|
(4,957
|
)
|
|
$
|
(9,458
|
)
|
|
$
|
(92,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(2.68
|
)
|
|
Loss from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.21
|
)
|
|
|
(0.10
|
)
|
|
|
(0.13
|
)
|
|
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(3.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic and diluted
|
|
|
44,539
|
|
|
|
44,097
|
|
|
|
44,308
|
|
|
|
43,820
|
|
|
|
33,173
|
|
|
|
26,959
|
|
|
|
24,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,004
|
|
|
$
|
1,521
|
|
|
$
|
9,949
|
|
|
$
|
17,468
|
|
|
$
|
894
|
|
|
$
|
206
|
|
|
Property and equipment, net
|
|
|
11,040
|
|
|
|
9,985
|
|
|
|
8,444
|
|
|
|
5,892
|
|
|
|
6,528
|
|
|
|
6,379
|
|
|
Goodwill and other intangibles, net
|
|
|
54,865
|
|
|
|
52,877
|
|
|
|
50,304
|
|
|
|
45,144
|
|
|
|
45,119
|
|
|
|
45,084
|
|
|
Total assets
|
|
|
97,981
|
|
|
|
89,896
|
|
|
|
90,207
|
|
|
|
92,673
|
|
|
|
66,227
|
|
|
|
64,558
|
|
|
Long-term debt and notes payable
|
|
|
3,790
|
|
|
|
4,036
|
|
|
|
3,656
|
|
|
|
2,285
|
|
|
|
2,818
|
|
|
|
2,404
|
|
|
Total debt
|
|
|
13,084
|
|
|
|
8,163
|
|
|
|
6,036
|
|
|
|
2,362
|
|
|
|
7,826
|
|
|
|
3,170
|
|
|
Minority interest
|
|
|
409
|
|
|
|
465
|
|
|
|
618
|
|
|
|
249
|
|
|
|
—
|
|
|
|
298
|
|
|
Total stockholders’ equity
|
|
|
62,964
|
|
|
|
68,546
|
|
|
|
72,446
|
|
|
|
79,761
|
|
|
|
48,483
|
|
|
|
55,012
|
|
128
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF DIGITAL ANGEL
For purposes of this Management’s Discussion and Analysis
of Financial Condition and Results of Operations of Digital
Angel, “we,” “us” and “our” mean
Digital Angel and its subsidiaries. The following discussion and
analysis of our financial condition and results of operations
should be read in conjunction with the accompanying financial
statements and related notes thereto.
We consist of Digital Angel Corporation and our
subsidiaries — Digital Angel Technology Corporation,
Fearing Manufacturing Co., Inc., Timely Technology Corp.,
Signature Industries Limited (90.9%-owned subsidiary), DSD
Holding A/S and its subsidiaries, Daploma International A/S
(including its 70%-owned subsidiary, Daploma Polska) and Digitag
A/S, Digital Angel Holdings, LLC, and Digital Angel
International, Inc. and its subsidiaries, Digital Angel S.A.,
Digital Angel do Brasil Produtos de Informatica LTDA, Digital
Angel Chile S.A., Digital Angel Paraguay S.A. and Digital Angel
Uruguay S.A.
Overview
We develop and deploy sensor and communication technologies that
enable rapid and accurate identification, location tracking, and
condition monitoring of high-value assets. We are currently
comprised of two segments: (1) Animal Applications and
(2) GPS and Radio Communications. Previously, we combined
our Corporate functions with our Animal Applications segment.
Beginning April 1, 2007, Corporate has been reclassified
and presented separately for the six-month periods ended
June 30, 2007 and 2006. All other periods have not been
reclassified as it is not practicable to do so.
Animal Applications
— Develops,
manufactures and markets visual and electronic identification
tags and RFID microchips, primarily for identification, tracking
and location of companion pets, horses, livestock, fish and
wildlife worldwide, and, more recently, for animal bio-sensing
applications, such as temperature reading for companion pet,
horse and livestock applications. The Animal Applications
segment consists of our operations located in Minnesota, DSD
Holding A/S and its wholly- and majority-owned subsidiaries
located in Denmark and Poland, and Digital Angel International,
Inc. and its subsidiaries located in Argentina, Brazil, Chile,
Paraguay and Uruguay. The positive identification and tracking
of livestock and fish are crucial for asset management and for
disease control and food safety. In addition to the visual ear
tags which have been sold by us since the late 1940s, Animal
Applications utilizes RFID technologies in its electronic ear
tags and implantable microchips.
GPS and Radio Communications
— Designs,
manufactures, and markets GPS-enabled equipment used for
location tracking and message monitoring of vehicles, aircraft
and people in remote locations. The GPS and Radio Communications
segment consists of our subsidiary Signature Industries Limited
(90.9%-owned) which is located in the United Kingdom. Our focus
is in the areas of search and rescue and locator beacons, and
tracking systems, which include mobile satellite data
communications service and software for mapping and messaging
for a variety of industries, including the military, air and
ground ambulance operators, law enforcement agencies and energy
companies.
Our Animal Applications segment’s revenue increased to
$38.1 million for the year ended December 31, 2006
compared to $36.0 million for the year ended
December 31, 2005. The increase in the Animal Applications
segment’s revenue was principally due to an increase in
sales of our livestock and companion pet products. During 2007,
we anticipate that our Animal Applications segment’s
revenue may increase through our renewed agreement with
Schering-Plough. In April 2006, we were awarded a
U.S. patent for our Bio-Thermo temperature-sensing,
implantable RFID microchip designed for non-laboratory
applications that use RFID technology to determine the body
temperature of its host animal. In addition, several proposals
related to the establishment of a national electronic
identification program for livestock are being considered by the
Administration and Congress. We cannot estimate the impact a
national identification program would have on our Animal
Applications segment’s revenue. However, if implemented, we
would expect the impact to be favorable. Our Animal Applications
segment experienced operating losses for the years ended
December 31, 2006, 2005 and 2004. We cannot be certain when
our Animal Applications segment will achieve profitability.
129
Our GPS and Radio Communications segment’s revenue
decreased to $16.4 million for the year ended
December 31, 2006 compared to $18.6 million for the
year ended December 31, 2005. The decrease in our GPS and
Radio Communications segment’s revenue was principally due
to the decrease in sales of our Personal Locator Beacons, or
PLBs, as a result of the completion in May 2005 of a contract
with the Indian government, and a decrease in sales to other
SARBE product customers, including the United Kingdom Ministry
of Defense. During 2007 and 2008, we anticipate that our GPS and
Radio Communications segment’s revenue will increase from
the 2006 levels as the market for our beacons expands. In
addition, the URT33 beacon, which will become obsolete when
existing frequencies on 121.5 and 243 MHz cease to be
monitored by COSPAS-SARSAT on February 1, 2009, will need
to be replaced with the new generation 406 MHz beacons,
such as our SARBE G2R.
Significant
Factors Affecting our Results of Operations and Financial
Condition
Acquisition
of McMurdo Limited
On April 5, 2007, our subsidiary, Signature Industries
Limited acquired certain assets of McMurdo Limited’s marine
electronics business, including fixed assets, inventory,
customer lists, customer and supplier contracts and relations,
trade and business names and associated assets, for a purchase
price of $4.7 million in cash. The McMurdo Limited
acquisition agreement included an additional purchase
consideration to be paid to the sellers of McMurdo Limited,
based on revenues in 2007. We expect to pay approximately
$2.0 million in additional purchase price consideration
during the fourth quarter of 2007, since McMurdo Limited’s
revenue is expected to exceed the threshold.
Sale
of OuterLink Corporation
On July 2, 2007, we completed the sale of our wholly-owned
subsidiary, OuterLink Corporation, to Newcomb Communications,
Inc. OuterLink Corporation, which operated in our GPS and Radio
Communications business segment, provides satellite-based mobile
asset tracking and data messaging systems used to manage the
deployment of aircraft and land vehicles. We sold 100% of the
issued and outstanding shares of stock of OuterLink Corporation
for a purchase price of $1.0 million. Consideration
consisted of a cash payment of $800,000 and a promissory note of
$200,000, which matures on December 31, 2007.
Digital
Angel’s Financing
Effective August 31, 2007, we and Applied Digital entered
into financings with Kallina. Kallina is a wholly-owned
subsidiary of Applied Digital’s current senior secured
lender, Laurus. As a result of the refinancings, which are more
fully discussed below, our domestic operations are now funded by
Applied Digital and Applied Digital’s lender. The
refinancings, which eliminated two of our existing lenders, are
expected to streamline the lending functions of the two
companies in anticipation of the proposed merger.
Effective August 31, 2007, we closed a $6.0 million,
revolving asset-based financing transaction with Kallina,
pursuant to the terms of a security agreement, among us, Digital
Angel Technology Corporation, Fearing Manufacturing Co., Inc.,
Digital Angel International, Inc., which we refer to as the
eligible subsidiaries, and Kallina. Under the terms of the
security agreement, we may borrow, from time to time, under a
revolving facility, an amount equal to the lesser of the amount
of availability under the borrowing base and $6.0 million,
subject to certain reserves that Kallina is authorized to take
in its reasonable commercial judgment. Under the terms of the
security agreement, the borrowing base is calculated as a
percentage of the total amount of eligible accounts and
inventory owned by us and the eligible subsidiaries. Amounts
outstanding under the revolving facility accrue interest at a
rate per year equal to the “prime rate” published in
The Wall Street Journal from time to time, plus 2.0% (but such
rate cannot at any time be less than 10.0%), and which matures
on August 31, 2010. We and the eligible subsidiaries have
pledged, in support of the obligations under the revolving
facility, all of our respective assets, excluding the stock of
all foreign subsidiaries other than stock held by us in
Signature Industries Limited. We used a portion of the proceeds
from the revolving facility to terminate and pay off all
obligations under a revolving invoice funding facility with
Greater Bay Business Funding, a division of Greater Bay Bank,
N.A., and the remaining proceeds for working capital purposes.
130
In connection with the Digital Angel financing transaction, we
issued warrants that represent the ability to purchase
967,742 shares of our common stock at an exercise price of
$1.69 per share. The warrants can be exercised at any time prior
to August 31, 2014. We also entered into a registration
rights agreement with Kallina pursuant to which we have agreed
to file a shelf registration statement no later than
December 31, 2007 covering the resale by Kallina of those
shares received upon exercise of the warrants.
Concurrently with the closing of the Digital Angel financing
transaction, Applied Digital closed a $7.0 million,
non-convertible debt financing transaction with Kallina,
pursuant to the terms of a securities purchase agreement,
effective August 31, 2007, between Applied Digital and
Kallina. We and the eligible subsidiaries have agreed to
guarantee the obligations of Applied Digital under the Applied
Digital financing transaction. Applied Digital has agreed to
guarantee our obligations and the eligible subsidiaries’
obligations under the Digital Angel financing transaction.
Intercompany
Financing
Effective August 31, 2007, we and Applied Digital entered
into a secured term note in the amount of $7.0 million, on
terms substantially similar to those in the note issued by
Applied Digital to Kallina in the Applied Digital financing
transaction, or the intercompany loan. As part of the
consideration for the intercompany loan, we agreed to pay
Applied Digital a structuring fee of $100,000, payable at our
election in stock or cash, reimburse Applied Digital for any
other out-of-pocket fees required to be paid by Applied Digital
in connection with our financing transaction or the Applied
Digital financing transaction, and issue to Applied Digital
856,886 shares of our common stock.
We used the proceeds from the intercompany loan to repay all
amounts due under our $6.0 million, 10.25% senior
secured debenture and intend to use the remaining proceeds for
working capital purposes. Pursuant to the terms of the
debenture, in connection with the prepayment, we paid 102% of
the outstanding principal amount of the debenture, plus all
accrued and unpaid interest.
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.
On an on-going basis, we evaluate these estimates, including
those related to inventory obsolescence, goodwill, intangibles
and other long-lived assets and income taxes. We base these
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting
policies reflect our more significant estimates and assumptions
used in the preparation of the financial statements.
Goodwill,
Intangibles and Other Long-Lived Assets
Goodwill and other intangible assets are carried at cost, net of
accumulated amortization. On January 1, 2002, we adopted
Statement of Financial Accounting Standards (SFAS) No. 142,
“Goodwill and Other Intangible Assets.”
SFAS No. 142 requires that goodwill and certain
intangibles no longer be amortized but instead be tested for
impairment at least annually by applying a fair value based
test. There was no impairment of goodwill upon the adoption of
SFAS No. 142 on January 1, 2002.
In accordance with SFAS 142, we are required to allocate
goodwill to the various reporting units. As of December 31,
2006, the reporting units consisted of the following (the
reporting units listed below are those businesses which have
goodwill and for which discrete financial information is
available and upon which management makes operating decisions):
|
|
|
|
|
|
•
|
Animal Applications (goodwill of $44.0 million as of
December 31, 2006);
|
131
|
|
|
|
|
|
•
|
Signature Industries Limited (goodwill of $1.1 million as
of December 31, 2006); and
|
|
|
|
|
|
|
•
|
DSD Holding A/S (goodwill of $6.1 million as of
December 31, 2006).
|
Since the adoption of SFAS No. 142 on January 1,
2002, we evaluate the goodwill of the various reporting units as
of each
December 31
st
.
Our management compiled the cash flow forecasts, growth rates,
gross margin, fixed and variable cost structure, depreciation
and amortization expenses, corporate overhead, tax rates, and
capital expenditures, among other data and assumptions related
to the financial projections upon which the fair value is based.
The methodology, including residual or terminal enterprise
values, was based on the following factors: risk free rate of
20 years; current leverage (E/V); leveraged
beta — Bloomberg; unleveraged beta; risk premium; cost
of equity; after-tax cost of debt; and weighted average cost of
capital. These variables generated a discount rate calculation.
The assumptions used in the determination of fair value using
discounted cash flows were as follows:
|
|
|
|
|
|
•
|
Cash flows were generated for five years based on the expected
recovery period for the goodwill;
|
|
|
|
|
|
|
•
|
Adjusted earnings before interest, taxes, depreciation and
amortization as the measure of cash flow; and
|
|
|
|
|
•
|
Discount rates ranging from 16.5% to 26.0%. The discount rate
used by us was the rate of return expected from the market or
the rate of return expected for a similar investment with
similar risks.
|
We performed a company comparable analysis utilizing financial
and market information on publicly-traded companies that are
considered to be generally comparable to our reporting units.
Each analysis provided a benchmark for determining the terminal
values for each business unit to be utilized in its discounted
cash flow analysis. The analysis generated a multiple for each
reporting unit, which was incorporated into the appropriate
business unit’s discounted cash flow model.
Future goodwill impairment reviews may result in additional
write-downs. Such determination involves the use of estimates
and assumptions, which may be difficult to accurately measure or
value. In preparing the five-year financial projections for the
2006 goodwill impairment analysis, we assumed annual revenue
growth for our Animal Applications, Signature Industries Limited
and DSD Holding A/S reporting units. Additionally, based upon
the best information available at the time of the valuation, we
assumed overall gross margin improvement. Based upon the
historic performance of these reporting units, although actual
and estimated future results may be less than projected at the
date of the most recent valuation, we do not presently
anticipate that such results would result in an impairment
charge for any of these reporting units.
We assess the fair value of our goodwill annually or earlier if
events occur or circumstances change that would more likely than
not reduce the fair value of our goodwill below its carrying
value. These events or circumstances would include a significant
change in business climate, including a significant, sustained
decline in an entity’s market value, legal factors,
operating performance indicators, competition, sale or
disposition of a significant portion of the business, or other
factors. If we determine that significant impairment has
occurred, we would be required to write off the impaired portion
of goodwill. Impairment charges could have a material adverse
effect on our financial condition and results of operations.
Property, plant and equipment and definite-lived intangible
assets are depreciated or amortized over their useful lives.
Useful lives are based on management’s estimates of the
period that the assets will generate revenue. Long-lived assets
are evaluated for impairment whenever events and circumstances
indicate an asset may be impaired. Based upon our annual review
for impairment, we recorded an impairment charge of
$7.1 million in 2005 related to goodwill and other
intangible assets at OuterLink Corporation.
Inventories
Estimates are used in determining the likelihood that inventory
on hand can be sold. Historical inventory usage and current
revenue trends are considered in estimating both obsolescence
and slow-moving inventory. Inventory is stated at lower of cost
or market, determined by the
first-in,
first-out method, net of any reserve for obsolete or slow-moving
inventory.
132
Deferred
Taxes
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. While we have considered future taxable income and tax
planning strategies in assessing the need for the valuation
allowance, in the event we were to subsequently determine that
we would be able to realize our deferred tax assets in the
future in excess of our net recorded amount, an adjustment to
the deferred tax asset would increase income in the period such
determination was made. Similarly, should we determine that we
would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax asset
would reduce income in the period such determination was made.
Revenue
Recognition
We recognize product revenue at the time product is shipped and
title has transferred, provided that a purchase order has been
received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the sales price is
fixed and determinable, and collectibility is deemed probable.
If uncertainties regarding customer acceptance exist, revenue is
recognized when such uncertainties are resolved. There are no
significant post-contract support obligations at the time of
revenue recognition. Our accounting policy regarding vendor and
post-contract support obligations is based on the terms of the
customers’ contracts, billable upon occurrence of the
post-sale support. Costs of products sold and services provided
are recorded as the related revenue is recognized. We offer a
warranty on our products. For non-fixed-fee and fixed-fee jobs,
service revenue is recognized based on the actual direct labor
hours in the job multiplied by the standard billing rate and
adjusted to net realizable value, if necessary. Other revenue is
recognized at the time the service or goods are provided. It is
our policy to record contract losses in their entirety in the
period in which such losses are foreseeable.
Consolidated
Results of Operations for the Three and Six Months Ended June
30, 2007
The following table summarizes our results of operations as a
percentage of net operating revenues and is derived from the
unaudited condensed consolidated statements of operations
included in this joint proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Total net revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of sales
|
|
|
60.7
|
|
|
|
60.8
|
|
|
|
61.8
|
|
|
|
58.7
|
|
|
Gross profit
|
|
|
39.3
|
|
|
|
39.2
|
|
|
|
38.2
|
|
|
|
41.3
|
|
|
Selling, general and administrative expenses
|
|
|
39.7
|
|
|
|
45.7
|
|
|
|
43.9
|
|
|
|
41.9
|
|
|
Research and development expenses
|
|
|
8.1
|
|
|
|
5.9
|
|
|
|
8.0
|
|
|
|
5.5
|
|
|
Operating loss
|
|
|
(8.5
|
)
|
|
|
(12.4
|
)
|
|
|
(13.7
|
)
|
|
|
(6.1
|
)
|
|
Interest income
|
|
|
—
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
Interest expense
|
|
|
(3.4
|
)
|
|
|
(0.9
|
)
|
|
|
(2.9
|
)
|
|
|
(0.7
|
)
|
|
Change in derivative warrant liability
|
|
|
(0.4
|
)
|
|
|
—
|
|
|
|
0.9
|
|
|
|
—
|
|
|
Other income
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
Loss from continuing operations before income taxes and minority
interest
|
|
|
(12.3
|
)
|
|
|
(12.5
|
)
|
|
|
(15.3
|
)
|
|
|
(6.0
|
)
|
|
Income tax (provision) benefit
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
Minority interest share of loss (income)
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
|
(0.2
|
)
|
|
Loss from continuing operations
|
|
|
(12.4
|
)
|
|
|
(12.7
|
)
|
|
|
(15.4
|
)
|
|
|
(6.0
|
)
|
|
Net loss from discontinued operations
|
|
|
(1.6
|
)
|
|
|
(4.4
|
)
|
|
|
(2.4
|
)
|
|
|
(3.8
|
)
|
|
Net loss
|
|
|
(14.0
|
)%
|
|
|
(17.1
|
)%
|
|
|
(17.8
|
)%
|
|
|
(9.8
|
)%
|
133
Results
of Operations by Segment
Three
Months Ended June 30, 2007 Compared to Three Months Ended
June 30, 2006
Animal
Applications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
Total net revenue
|
|
$
|
11,029
|
|
|
|
100.0
|
%
|
|
$
|
8,375
|
|
|
|
100.0
|
%
|
|
$
|
2,654
|
|
|
|
31.7
|
%
|
|
Cost of sales
|
|
|
7,214
|
|
|
|
65.4
|
|
|
|
5,568
|
|
|
|
66.5
|
|
|
|
1,646
|
|
|
|
29.6
|
|
|
Gross profit
|
|
|
3,815
|
|
|
|
34.6
|
|
|
|
2,807
|
|
|
|
33.5
|
|
|
|
1,008
|
|
|
|
35.9
|
|
|
Selling, general and administrative expenses
|
|
|
3,642
|
|
|
|
33.0
|
|
|
|
2,798
|
|
|
|
33.4
|
|
|
|
844
|
|
|
|
30.2
|
|
|
Research and development expenses
|
|
|
677
|
|
|
|
6.1
|
|
|
|
727
|
|
|
|
8.7
|
|
|
|
(50
|
)
|
|
|
(6.9
|
)
|
|
Operating loss
|
|
$
|
(504
|
)
|
|
|
(4.5
|
)%
|
|
$
|
(718
|
)
|
|
|
(8.6
|
)%
|
|
$
|
214
|
|
|
|
(29.8
|
)
|
Revenues
Our Animal Applications segment’s revenue increased
approximately $2.7 million for the three months ended
June 30, 2007 compared to the three months ended
June 30, 2006. The increase was principally due to an
increase in microchip sales of approximately $2.9 million
to Schering-Plough, the exclusive distributor in the
U.S. of our companion pet implantable microchips.
Schering-Plough, who markets the chips under the brand name Home
Again, has been investing significant resources in marketing and
advertising the chip. We expect orders for 2007 to exceed four
million pet chips by year end, which is more than twice the
units sold in 2006. This increase was partially offset by a
decrease of electronic identification and visual product sales
to livestock customers of $0.2 million. Sales to fish and
wildlife customers are expected to increase in the third quarter
of 2007.
Gross
Profit and Gross Profit Margin
Our Animal Applications segment’s gross profit increased
approximately $1.0 million in the three months ended
June 30, 2007 compared to the three months ended
June 30, 2006. The gross profit margin increased to 34.6%
in the three months ended June 30, 2007 as compared to
33.5% in the three months ended June 30, 2006. We attribute
the increase in gross profit and gross profit margin to
increased sales in the current period.
Selling,
General and Administrative Expenses
Our Animal Applications segment’s selling, general and
administrative expenses increased $0.8 million in the three
months ended June 30, 2007 compared to the three months
ended June 30, 2006. The increase in selling, general and
administrative expenses relates primarily to legal expenses of
$0.5 million related to the maintenance and protection of
our intellectual property, as well as an increase in
compensation expense associated with an increase in our sales
and marketing force in the United States. Selling, general and
administrative expenses as a percentage of revenue remained
relatively constant for the respective periods. We have reached
a final settlement in the lawsuit that we initiated to protect
our intellectual property and, as a result, we expect that our
legal expenses will decrease going forward.
Research
and Development Expenses
Our Animal Applications segment’s research and development
expenses remained relatively constant in the three months ended
June 30, 2007 compared to the three months ended
June 30, 2006. Research and development expenses relate to
new product development associated with RFID microchips and
related scanners.
134
GPS
and Radio Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
Total net revenue
|
|
$
|
8,504
|
|
|
|
100.0
|
%
|
|
$
|
4,053
|
|
|
|
100.0
|
%
|
|
$
|
4,451
|
|
|
|
#
|
%
|
|
Cost of sales
|
|
|
4,641
|
|
|
|
54.6
|
|
|
|
1,994
|
|
|
|
49.2
|
|
|
|
2,647
|
|
|
|
#
|
|
|
Gross profit
|
|
|
3,863
|
|
|
|
45.4
|
|
|
|
2,059
|
|
|
|
50.1
|
|
|
|
1,804
|
|
|
|
87.6
|
|
|
Selling, general and administrative expenses
|
|
|
3,464
|
|
|
|
40.7
|
|
|
|
2,277
|
|
|
|
56.2
|
|
|
|
1,187
|
|
|
|
52.1
|
|
|
Research and development expenses
|
|
|
909
|
|
|
|
10.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
909
|
|
|
|
#
|
|
|
Operating loss
|
|
$
|
(510
|
)
|
|
|
(6.0
|
)%
|
|
$
|
(218
|
)
|
|
|
(5.4
|
)%
|
|
$
|
(292
|
)
|
|
|
#
|
|
|
|
|
|
|
#
|
|
Variance not meaningful
|
Revenues
Our GPS and Radio Communications segment’s revenue
increased approximately $4.5 million in the three months
ended June 30, 2007 compared to the three months ended
June 30, 2006. The increase in revenue was principally due
to an increase in sales of SARBE products of $0.1 million,
an increase in sales of alarm products of $0.1 million, an
increase in Radio Hire division sales of $0.3 million, and
the inclusion of $3.9 million of sales from our McMurdo
Limited division, which was acquired on April 5, 2007. We
believe that McMurdo Limited will provide us with more
predictable revenue in our search and rescue beacon business
going forward.
Gross
Profit
Our GPS and Radio Communications segment’s gross profit
increased approximately $1.8 million in the three months
ended June 30, 2007 compared to the three months ended
June 30, 2006. Of this increase, $1.5 million is
attributable to McMurdo Limited, which was acquired in April
2007, and the increased SARBE and Radio Hire division sales.
Second quarter gross profit margin was 45.4% in the three-month
period ended June 30, 2007 as compared to 50.8% in the
three months ended June 30, 2006. The decrease in gross
profit margin relates primarily to a shift in the mix of
products in the three months ended June 30, 2007, and to
lower margin products from our Scotland operations, as well as
the addition of the McMurdo Limited operations. Currently, we
earn lower margins at our McMurdo Limited division than we do at
our existing business lines.
Selling,
General and Administrative Expenses
Our GPS and Radio Communications segment’s selling, general
and administrative expenses increased approximately
$1.2 million in the three months ended June 30, 2007
compared to the three months ended June 30, 2006. This
increase in selling, general and administrative expenses relates
primarily to the addition of McMurdo Limited, which had expenses
of $0.8 million in the second quarter. The remaining
$0.4 million is due to an increase in compensation expense
associated with the addition of new personnel and general salary
increases. As a percentage of revenue, selling, general and
administrative expenses decreased to 40.7% in the three months
ended June 30, 2007 from 56.2% in the three months ended
June 30, 2006. The decrease in selling, general and
administrative expenses as a percentage of revenue resulted
primarily from the increase in revenue and lower selling,
general and administrative expenses as a percentage of revenue
at McMurdo Limited.
Research
and Development Expenses
Our GPS and Radio Communications segment’s research and
development expenses increased approximately $0.9 million
in the three months ended June 30, 2007 compared to the
three months ended June 30, 2006. This increase was driven
by the addition of McMurdo Limited and the costs associated with
the
135
development of a new search and rescue beacon, which were not
included in the same period in 2006. The development of the new
beacon was our first contract with a branch of the
U.S. military. Previously, sales of our location beacons
have been to foreign governments. Revenue from the contract,
totaling approximately $0.9 million, is expected to be
earned in the three months ended September 30, 2007, when
we deliver to the U.S. Air Force a replacement for its
current URT 33 search and rescue beacon.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
Total net revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
%
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Selling, general and administrative expenses
|
|
|
656
|
|
|
|
610
|
|
|
|
46
|
|
|
|
7.5
|
|
|
Research and development expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating loss
|
|
$
|
(656
|
)
|
|
$
|
(610
|
)
|
|
$
|
(46
|
)
|
|
|
7.5
|
|
Selling,
General and Administrative Expenses
Our Corporate segment’s selling, general and administrative
expenses remained relatively constant for the three-month period
ended June 30, 2007 compared to the three-month period
ended June 30, 2006.
Consolidated
Results of Operations
Net Loss
from Continuing Operations
Our net loss from continuing operations increased
$0.8 million to $2.4 million for the three months
ended June 30, 2007 compared to a loss of $1.6 million
for the three months ended June 30, 2006. These results
were primarily driven by the increase in legal expenses related
to the maintenance and protection of our intellectual property,
the increase in research and development expenses at Signature
Industries Limited, and an increase in interest expense.
Interest
Expense
Interest expense was $674,000 and $111,000 for the three months
ended June 30, 2007 and 2006, respectively. The increase in
interest expense relates primarily to interest, discount
amortization and deferred debt cost amortization associated with
our 10.25% senior secured debenture (“debenture”)
and invoice funding facility.
Derivative
Warrant Liability
Expense recognized from the change in the derivative warrant
liability was $105,000 for the three months ended June 30,
2007. The expense is attributed to the change in the fair value
of the warrant liability associated with the warrants issued in
connection with the debenture and subsequent amendment. As the
warrant contains certain anti-dilution provisions, we have
accounted for the fair value of the warrant as a liability. At
each balance sheet date, the warrant fair value is revalued
using the Black-Scholes valuation model with changes in value
recorded in the statement of operations as income or expense.
Income
Taxes
We had income tax expense of $13,000 for the three months ended
June 30, 2007 compared to $11,000 in the same period of
2006 related to foreign income in our Poland subsidiary. We
account for income taxes under the asset and liability approach.
Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributed to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred
tax assets and liabilities are measured using the enacted
136
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to reverse. A
valuation allowance is provided against net deferred tax assets
when it is more likely than not that a tax benefit will not be
realized. Due to our current tax position, we have recorded a
valuation allowance to fully reserve our net deferred tax asset.
Six
Months Ended June 30, 2007 Compared to Six Months Ended
June 30, 2006
Animal
Applications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
Total net revenue
|
|
$
|
21,289
|
|
|
|
100.0
|
%
|
|
$
|
19,878
|
|
|
|
100.0
|
%
|
|
$
|
1,411
|
|
|
|
7.1
|
%
|
|
Cost of sales
|
|
|
14,500
|
|
|
|
68.1
|
|
|
|
12,420
|
|
|
|
62.5
|
|
|
|
2,080
|
|
|
|
16.7
|
|
|
Gross profit
|
|
|
6,789
|
|
|
|
31.9
|
|
|
|
7,458
|
|
|
|
37.5
|
|
|
|
(669
|
)
|
|
|
(9.0
|
)
|
|
Selling, general and administrative expenses
|
|
|
7,580
|
|
|
|
35.6
|
|
|
|
5,772
|
|
|
|
29.0
|
|
|
|
1,808
|
|
|
|
31.3
|
|
|
Research and development expenses
|
|
|
1,279
|
|
|
|
6.0
|
|
|
|
1,521
|
|
|
|
7.7
|
|
|
|
(242
|
)
|
|
|
(15.9
|
)
|
|
Operating loss
|
|
$
|
(2,070
|
)
|
|
|
(9.7
|
)%
|
|
$
|
163
|
|
|
|
0.8
|
%
|
|
$
|
(2,234
|
)
|
|
|
#
|
|
|
|
|
|
|
#
|
|
Variance not meaningful
|
Revenues
Our Animal Applications segment’s revenue increased
approximately $1.4 million in the six months ended
June 30, 2007 compared to the six months ended
June 30, 2006. The increase was principally due to the
aforementioned increase in microchip sales of approximately
$3.0 million to Schering-Plough, the exclusive distributor
in the U.S. of our companion pet, implantable microchips.
Partially offsetting the increase was a decrease of electronic
identification and visual product sales to livestock customers
of $1.0 million. This decrease was the result of a decrease
in demand as U.S. livestock owners delayed entry of their
cattle into the feed lots, due to a rise in feed costs
associated with drought conditions and to the use of corn to
make ethanol products. We also experienced a decrease in sales
to fish and wildlife customers of $0.5 million and a
decrease in sales to VeriChip of $0.1 million.
Gross
Profit and Gross Profit Margin
Our Animal Applications segment’s gross profit decreased
approximately $0.7 million in the six months ended
June 30, 2007 compared to the six months ended
June 30, 2006. The gross margin was 31.9% in the six months
ended June 30, 2007 compared to 37.5% in the six months
ended June 30, 2006. We attribute the decrease in gross
profit margin in the six months ended June 30, 2007 to a
decrease in high-margin engineering service revenue, a decrease
in the average sales price for companion pet products shipped in
the United States, higher material and freight costs associated
with fulfilling demand for companion pet products in the United
States, warranty costs for
e.Tags
tm
shipped to Canada, and increased overhead costs related to the
startup of molding operations in our St. Paul facility. A
significant portion of these additional costs were incurred
during the first quarter of 2007.
Selling,
General and Administrative Expenses
Our Animal Applications segment’s selling, general and
administrative expenses increased approximately
$1.8 million in the six months ended June 30, 2007
compared to the six months ended June 30, 2006. This was
attributable to an increase of $1.2 million in legal
expenses related to the maintenance and protection of our
intellectual property, an increase of $0.3 million related
to salary expense for the addition of new personnel, as well as
general salary increases and severance payments, and an increase
of $0.3 million for consulting and other fees. Selling,
general and administrative expenses as a percentage of revenue
increased to 35.6% from 29.0% in the same respective periods as
a result of the increase in expenses. We have reached a
137
tentative settlement in the lawsuit that we initiated to
protect our intellectual property, and, as a result, we expect
that our legal expenses will decrease going forward.
Research
and Development Expenses
Our Animal Applications segment’s research and development
expenses decreased approximately $0.2 million in the six
months ended June 30, 2007 compared to the six months ended
June 30, 2006. Research and development expenses relate to
new product development associated with RFID microchips and
related scanners.
GPS
and Radio Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
Total net revenue
|
|
$
|
13,542
|
|
|
|
100.0
|
%
|
|
$
|
7,870
|
|
|
|
100.0
|
%
|
|
$
|
5,672
|
|
|
|
72.1
|
%
|
|
Cost of sales
|
|
|
7,009
|
|
|
|
51.8
|
|
|
|
3,855
|
|
|
|
49.0
|
|
|
|
3,154
|
|
|
|
81.8
|
|
|
Gross profit
|
|
|
6,533
|
|
|
|
48.2
|
|
|
|
4,015
|
|
|
|
51.0
|
|
|
|
2,518
|
|
|
|
62.7
|
|
|
Selling, general and administrative expenses
|
|
|
6,091
|
|
|
|
45.0
|
|
|
|
4,370
|
|
|
|
55.5
|
|
|
|
1,721
|
|
|
|
39.4
|
|
|
Research and development expenses
|
|
|
1,525
|
|
|
|
11.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,525
|
|
|
|
#
|
|
|
Operating loss
|
|
$
|
(1,083
|
)
|
|
|
(8.0
|
)%
|
|
$
|
(355
|
)
|
|
|
(4.5
|
)%
|
|
$
|
(728
|
)
|
|
|
#
|
|
|
|
|
|
|
#
|
|
Variance not meaningful
|
Revenues
Our GPS and Radio Communications segment’s revenue
increased approximately $5.7 million in the six months
ended June 30, 2007 compared to the six months ended
June 30, 2006. The increase in revenue was due to an
increase in sales of SARBE product’s of $0.8 million,
an increase in sales of alarm products of $0.4 million, an
increase in Radio Hire division sales of $0.6 million, and
the inclusion of $3.9 million of sales from our McMurdo
Limited division, which was acquired on April 5, 2007.
Gross
Profit
Our GPS and Radio Communications segment’s gross profit
increased approximately $2.5 million in the six months
ended June 30, 2007 compared to the six months ended
June 30, 2006. The increase in gross profit relates to the
previously mentioned increase in sales from our existing
businesses and the inclusion of approximately $1.5 million
of gross profit from McMurdo Limited. The gross profit margin
decreased to 48.2% in the six months ended June 30, 2007 as
compared to 51.0% in the six months ended June 30, 2006.
The decrease in gross profit margin relates to the product mix.
Currently, we earn lower margins at our McMurdo Limited division
than we do for our existing business lines.
Selling,
General and Administrative Expenses
Our GPS and Radio Communications segment’s selling, general
and administrative expenses increased approximately
$1.7 million in the six months ended June 30, 2007
compared to the six months ended June 30, 2006. Excluding
the $0.8 million of expenses related to McMurdo Limited,
the remaining increase is due primarily to an increase in
exhibition and advertising expenses, as well as an increase in
compensation expense associated with the addition of new
personnel and general salary increases. As a percentage of
revenue, selling, general and administrative expenses decreased
to 43.2% in the six months ended June 30, 2007 from 53.2%
in the six months ended June 30, 2006. The decrease in
selling, general and administrative expenses as a percentage of
revenue resulted primarily from the increase in sales and lower
selling, general and administrative expenses as a percentage of
revenue at McMurdo Limited.
138
Research
and Development Expenses
Our GPS and Radio Communications segment’s research and
development expenses increased approximately $1.5 million
in the six months ended June 30, 2007 compared to the six
months ended June 30, 2006. This increase was driven by the
addition of $1.2 million of development costs for the
development of a new search and rescue beacon, which were not
included in the same period in 2006. The development of the new
pilot location beacon is more fully discussed in the comparison
of our GPS and Radio Communications segment’s results of
operations for the three months ended June 30, 2007
compared to the three months ended June 30, 2006. In
addition, we incurred approximately $0.3 million in
research and development expenses related to the acquisition of
McMurdo Limited, which was acquired on April 5, 2007.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
Total net revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
%
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Selling, general and administrative expenses
|
|
|
1,606
|
|
|
|
1,489
|
|
|
|
117
|
|
|
|
7.9
|
|
|
Research and development expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating loss
|
|
$
|
(1,606
|
)
|
|
$
|
(1,489
|
)
|
|
$
|
(117
|
)
|
|
|
7.9
|
|
Selling,
General and Administrative Expense
Our Corporate segment’s selling, general and administrative
expenses increased approximately $0.1 million in the six
months ended June 30, 2007 compared to the six months ended
June 30, 2006. This was primarily attributable to general
salary increases, as well as other miscellaneous expenses.
Consolidated
Results of Operations
Net Loss
from Continuing Operations
Our net loss from continuing operations increased
$3.7 million to $5.4 million for the six months ended
June 30, 2007 compared to a loss of $1.7 million for
the six months ended June 30, 2006. These results were
primarily driven by the decrease in the Animal Applications
segment’s gross margin percentage in the first quarter of
2007, accompanied by increased legal fees associated with the
maintenance and protection of our intellectual property,
primarily driven by the Datamars litigation, the increase in
research and development expenses at Signature Industries
Limited, and an increase in interest expense offset slightly by
income from the reduction in the derivative warrant liability
associated with the debentures. The proceeds from the debentures
were used primarily to fund the McMurdo Limited acquisition.
Interest
Expense
Interest expense was $998,000 and $206,000 for the six months
ended June 30, 2007 and 2006, respectively. The increase in
interest expense relates primarily to interest, discount
amortization and deferred debt cost amortization associated with
our debenture, as well as interest related to our invoice
funding facility. The proceeds of the debenture were used
primarily to fund the McMurdo Limited acquisition.
Derivative
Warrant Liability
Income from the reduction in the derivative warrant liability
was $296,000 for the six months ended June 30, 2007. This
reduction is attributed to the change in the fair value of the
warrant liability associated with the warrants issued in
connection with the debenture and subsequent amendment. As the
warrant contains certain anti-dilution provisions, we have
accounted for the fair value of the warrant as a liability. At
each
139
balance sheet date, the warrant fair value is revalued using
the Black-Scholes valuation model, with changes in value
recorded in the statement of operations as income or expense.
Income
Taxes
We had income tax expense of $38,000 for the six months ended
June 30, 2007 versus an income tax benefit of $73,000 in
the same period of 2006 related to our foreign operations. We
account for income taxes under the asset and liability approach.
Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributed to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred
tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. A valuation
allowance is provided against net deferred tax assets when it is
more likely than not that a tax benefit will not be realized.
Due to our current tax position, we have recorded a valuation
allowance to fully reserve our net deferred tax asset.
Consolidated
Results of Operations for the Years Ended December 31,
2006, 2005 and 2004
The following table summarizes our results of operations as a
percentage of net operating revenues and is derived from the
accompanying consolidated statements of operations included in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of sales
|
|
|
58.7
|
|
|
|
54.9
|
|
|
|
55.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41.3
|
|
|
|
45.1
|
|
|
|
44.2
|
|
|
Selling, general and administrative expense
|
|
|
44.5
|
|
|
|
38.9
|
|
|
|
37.5
|
|
|
Research and development expense
|
|
|
6.3
|
|
|
|
6.1
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(9.5
|
)
|
|
|
0.1
|
|
|
|
2.1
|
|
|
Interest income
|
|
|
(0.5
|
)
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
|
Interest expense
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
3.0
|
|
|
Realized losses on Applied Digital common stock
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
2.8
|
|
|
Other income
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit and
minority interest
|
|
|
(9.7
|
)
|
|
|
(0.2
|
)
|
|
|
(3.3
|
)
|
|
Income tax benefit
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
Minority interest share of income
|
|
|
0.0
|
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(9.6
|
)
|
|
|
(0.4
|
)
|
|
|
(3.9
|
)
|
|
Loss from discontinued operations
|
|
|
(2.9
|
)
|
|
|
(17.0
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(12.5
|
)%
|
|
|
(17.4
|
)%
|
|
|
(11.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006 Compared to the Year Ended
December 31, 2005
Revenue
Revenue from operations for the year ended December 31,
2006 was $54.4 million, a decrease of approximately
$0.1 million from $54.5 million in the year ended
December 31, 2005. Revenue for the years ended
December 31, 2006 and 2005 for each of the operating
segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2006
|
|
|
Revenue
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
38,058
|
|
|
|
69.9
|
|
|
$
|
35,972
|
|
|
|
65.9
|
|
|
GPS and Radio Communications
|
|
|
16,352
|
|
|
|
30.1
|
|
|
|
18,578
|
|
|
|
34.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,410
|
|
|
|
100.0
|
|
|
$
|
54,550
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
The Animal Applications segment’s revenue increased
approximately $2.1 million, or 5.8%, in the year ended
December 31, 2006 compared to the year ended
December 31, 2005. The increase in revenue was principally
due to an increase in electronic identification and visual
product sales to livestock customers of approximately
$1.8 million, an increase in microchip sales to companion
animal customers of approximately $1.7 million, an increase
in product sales to customers in South America of
$0.5 million, and an incremental $0.7 million in sales
at DSD Holding A/S, which was acquired on February 28,
2005. These increases were offset by a decrease in microchip
sales to fish and wildlife customers of approximately
$2.3 million and a decrease in sales to VeriChip of
$0.3 million.
The GPS and Radio Communications segment’s revenue
decreased approximately $2.2 million, or 12.0%, in the year
ended December 31, 2006 compared to the year ended
December 31, 2005. The decrease in sales at Signature
Industries Limited relates to a decrease in sales of Signature
Industries Limited’s SARBE products of approximately
$3.0 million, partially offset by an increase in sales at
Signature Industries Limited’s Radio Hire division of
approximately $0.8 million. We attribute $2.2 million
of the SARBE product sales decrease to the completion of the
Indian government contract in May 2005, and $0.8 million of
the SARBE product sales decrease to other SARBE product
customers, including the United Kingdom Ministry of Defense.
Gross
Margin
Gross profit for the year ended December 31, 2006 was
$22.5 million, a decrease of approximately
$2.0 million, from $24.6 million in the year ended
December 31, 2005. As a percentage of revenue, the gross
profit margin decreased to 41.3% for the year ended
December 31, 2006 from 45.1% for the year ended
December 31, 2005.
Gross profit for the years ended December 31, 2006 and 2005
for each operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2006
|
|
|
Revenue
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
14,183
|
|
|
|
37.3
|
|
|
$
|
14,610
|
|
|
|
40.6
|
|
|
GPS and Radio Communications
|
|
|
8,308
|
|
|
|
50.8
|
|
|
|
10,010
|
|
|
|
53.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,491
|
|
|
|
41.3
|
|
|
$
|
24,620
|
|
|
|
45.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s gross profit of
$14.2 million in the year ended December 31, 2006
decreased approximately $0.4 million as compared to
$14.6 million in the year ended December 31, 2005. We
attribute the decrease in gross profit to a decrease in the
gross profit margin. The slight decrease in gross profit margin
as a percentage of revenue from 40.6% in 2005 to 37.3% in 2006
is primarily due to increased material costs, accompanied by
additional freight and importation duties associated with
providing inventory to South America from Denmark and the United
States.
The GPS and Radio Communications segment’s gross profit of
$8.3 million in the year ended December 31, 2006
decreased approximately $1.7 million as compared to
$10.0 million in the year ended December 31, 2005.
Gross profit margin decreased to 50.8% in 2006 from 53.9% in
2005. The decrease in gross profit margin relates to decreased
sales, and the decrease in gross profit margin as a percentage
of revenue relates primarily to higher margins on G2R SARBE
locator beacons shipped under the contract with the government
of India in the first six months of 2005. Signature Industries
Limited completed shipments under the contract with the
government of India in May 2005.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased
$3.0 million, or 14.2%, in the year ended December 31,
2006 compared to the year ended December 31, 2005. As a
percentage of revenue, selling, general and administrative
expense was 44.5% and 38.9% for the years ended
December 31, 2006 and 2005, respectively.
141
Selling, general and administrative expenses for the years ended
December 31, 2006 and 2005 for each of the operating
segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2006
|
|
|
Revenue
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
15,522
|
|
|
|
40.8
|
|
|
$
|
12,650
|
|
|
|
35.2
|
|
|
GPS and Radio Communications
|
|
|
8,706
|
|
|
|
53.2
|
|
|
|
8,567
|
|
|
|
46.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,228
|
|
|
|
44.5
|
|
|
$
|
21,217
|
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s selling, general and
administrative expenses increased approximately
$2.9 million in the year ended December 31, 2006
compared to the year ended December 31, 2005, and, as a
percentage of revenue, increased to 40.8% from 35.2% in the same
respective period. The increase in selling, general and
administrative expenses relates primarily to a charge of
approximately $0.2 million in acquisition-related expenses,
approximately $1.2 million of compensation expense,
approximately $0.3 million in recruiting and relocation
expenses, approximately $0.6 million of expenses related to
DSD Holding A/S, and increased selling, general, and
administrative expenses in our South American subsidiaries of
$0.6 million. The twelve-month period ended
December 31, 2006 includes a full twelve months of results
for DSD Holding A/S versus the ten months of results in the
period ended December 31, 2005.
The GPS and Radio Communications segment’s selling, general
and administrative expenses increased approximately
$0.1 million in the year ended December 31, 2006 to
$8.7 million as compared to $8.6 million in the year
ended December 31, 2005, due primarily to an increase in
general salary expenses at our subsidiary Signature Industries
Limited. The increase in selling, general, and administrative
expenses as a percentage of sales resulted primarily from the
decrease in sales in the current period.
Research
and Development Expense
Research and development expense was $3.4 million in the
year ended December 31, 2006, an increase of
$0.1 million, or 3.0%, from $3.3 million for the year
ended December 31, 2005. As a percentage of revenue,
research and development expense was 6.3% and 6.1% for the years
ended December 31, 2006 and 2005, respectively.
Research and development expense for the years ended
December 31, 2006 and 2005 for each of the operating
segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2006
|
|
|
Revenue
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
2,668
|
|
|
|
7.0
|
|
|
$
|
2,951
|
|
|
|
8.2
|
|
|
GPS and Radio Communications
|
|
|
774
|
|
|
|
4.7
|
|
|
|
392
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,442
|
|
|
|
6.3
|
|
|
$
|
3,343
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s research and development
expense decreased approximately $0.3 million in the year
ended December 31, 2006 compared to the year ended
December 31, 2005. The research and development expense
primarily consists of new product development related to RFID
microchips and associated scanners.
The GPS and Radio Communications segment’s research and
development expense increased approximately $0.4 million
for the year ended December 31, 2006 and relates primarily
to the development of the 406.6 MHz product family at
Signature Industries Limited.
Interest
Expense
Interest expense was $0.5 million and $0.4 million for
each of the years ended December 31, 2006 and 2005,
respectively. The increase in interest expense relates primarily
to an increase in borrowing on our line of credit and capital
leases entered into in the second half of 2006.
142
Income
Taxes
We had an income tax benefit of $72,000 and $41,000 in 2006 and
2005, respectively. At December 31, 2006, we had aggregate
U.S. federal net operating loss carryforwards of
approximately $53.5 million for income tax purposes. The
net operating loss carryforwards expire in various amounts
through 2026. Approximately $12.1 million of the net
operating loss carryforwards were acquired in connection with
various acquisitions and are limited as to use in any particular
year. A valuation allowance is provided against the net deferred
tax assets that more than likely will not be realized.
Discontinued
Operations
As discussed above, on July 2, 2007, we completed the sale
of our wholly-owned subsidiary, OuterLink Corporation, to
Newcomb Communications, Inc. The following discloses the losses
from discontinued operations for the years ended
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Revenue
|
|
$
|
2,570
|
|
|
$
|
2,276
|
|
|
Cost of sales
|
|
|
1,608
|
|
|
|
1,402
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
962
|
|
|
|
874
|
|
|
Selling, general and administrative expenses
|
|
|
1,181
|
|
|
|
1,850
|
|
|
Research and development expenses
|
|
|
1,375
|
|
|
|
1,331
|
|
|
Asset impairment
|
|
|
—
|
|
|
|
7,141
|
|
|
Other (income) expense
|
|
|
(1
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,593
|
)
|
|
$
|
(9,272
|
)
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005 Compared to the Year Ended
December 31, 2004
Revenue
Revenue from operations for the year ended December 31,
2005 was $54.6 million, an increase of $10.0 million,
or 22.5%, from $44.5 million in the year ended
December 31, 2004. Revenue for the years ended
December 31, 2005 and 2004 for each of the operating
segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2005
|
|
|
Revenue
|
|
|
2004
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
35,972
|
|
|
|
65.9
|
|
|
$
|
25,871
|
|
|
|
58.1
|
|
|
GPS and Radio Communications
|
|
|
18,578
|
|
|
|
34.1
|
|
|
|
18,678
|
|
|
|
41.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,550
|
|
|
|
100.0
|
|
|
$
|
44,549
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s revenue increased
approximately $10.1 million, or 39.0%, in the year ended
December 31, 2005 compared to the year ended
December 31, 2004. The increase in revenue was principally
due to an increase in electronic identification and visual
product sales to livestock customers of approximately
$2.6 million, an increase in microchip sales to companion
animal customers of approximately $1.5 million, an increase
in microchip sales to fish and wildlife customers of
approximately $1.3 million, an increase in sales to
VeriChip of approximately $0.6 million, and the inclusion
of approximately $3.8 million of revenue from DSD Holding
A/S. DSD Holding A/S was acquired on February 28, 2005.
The GPS and Radio Communications segment’s revenue
decreased approximately $0.1 million, or 0.5%, in the year
ended December 31, 2005 compared to the year ended
December 31, 2004. Sales in Signature Industries
Limited’s Radio Products division and Clifford and Snell
division increased approximately $0.6 million and
approximately $0.4 million, respectively, when compared to
2004. Sales in Signature Industries Limited’s SARBE
division decreased approximately $1.2 million, primarily
due to the completion of the G2R
143
contract with the Indian Air Force in May 2005, which had
increased sales over the last two years. Sales at Signature
Industries Limited’s SARBE division have increased over the
last two years as a result of the G2R contract with the Indian
Air Force. Continued growth at Signature Industries Limited may
depend on Signature Industries Limited’s ability to win a
large contract similar to the contract with the Indian Air Force.
Gross
Margin
Gross profit for the year ended December 31, 2005 was
$24.6 million, an increase of approximately
$4.9 million, or 25.1%, from $19.7 million in the year
ended December 31, 2004. As a percentage of revenue, the
gross profit margin was 45.1% and 44.2% for the years ended
December 31, 2005 and 2004, respectively.
Gross profit for the years ended December 31, 2005 and 2004
for each operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2005
|
|
|
Revenue
|
|
|
2004
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
14,610
|
|
|
|
40.6
|
|
|
$
|
10,108
|
|
|
|
39.1
|
|
|
GPS and Radio Communications
|
|
|
10,010
|
|
|
|
53.9
|
|
|
|
9,569
|
|
|
|
51.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,620
|
|
|
|
45.1
|
|
|
$
|
19,677
|
|
|
|
44.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s gross profit of
$14.6 million in the year ended December 31, 2005
increased approximately $4.5 million as compared to
$10.1 million in the year ended December 31, 2004. The
increase in gross profit relates primarily to increased sales.
Gross profit margin increased to 40.6% in 2005 from 39.1% in
2004, primarily due to decreased material costs in 2005.
The GPS and Radio Communications segment’s gross profit of
$10.0 million in the year ended December 31, 2005
increased approximately $0.4 million as compared to
$9.6 million in the year ended December 31, 2004.
Gross profit margin increased to 53.9% in 2005 from 51.2% in
2004. The increase in gross margin relates to increased margins
at all four divisions of our subsidiary, Signature Industries
Limited.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased
$4.5 million, or 27.0%, in the year ended December 31,
2005 compared to the year ended December 31, 2004. As a
percentage of revenue, selling, general and administrative
expense was 38.9% and 37.5% for the years ended
December 31, 2005 and 2004, respectively.
Selling, general and administrative expenses for the years ended
December 31, 2005 and 2004 for each of the operating
segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2005
|
|
|
Revenue
|
|
|
2004
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
12,650
|
|
|
|
35.2
|
|
|
$
|
8,682
|
|
|
|
33.6
|
|
|
GPS and Radio Communications
|
|
|
8,567
|
|
|
|
46.1
|
|
|
|
8,030
|
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,217
|
|
|
|
38.9
|
|
|
$
|
16,712
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s selling, general and
administrative expenses increased approximately
$3.9 million in the year ended December 31, 2005
compared to the year ended December 31, 2004 and, as a
percentage of revenue, increased to 35.2% from 33.6% in the same
respective period. The increase in selling, general and
administrative expense relates primarily to a charge of
approximately $1.2 million in legal expenses related to the
maintenance and protection of our intellectual property,
approximately $1.3 million of compensation expense, and
approximately $1.2 million of expense related to DSD
Holding A/S. DSD Holding A/S was acquired on February 28,
2005.
The GPS and Radio Communications segment’s selling, general
and administrative expenses increased approximately
$0.5 million in the year ended December 31, 2005 to
$8.6 million as compared to $8.0 million
144
in the year ended December 31, 2004, due primarily to
increased compensation and sales and marketing expenses at our
subsidiary Signature Industries Limited. As a percentage of
revenue, selling, general and administrative expenses increased
to 46.1% in 2005 from 43.0% in 2004, due to the slight decrease
in sales.
Research
and Development Expense
Research and development expense was $3.3 million in the
year ended December 31, 2005, an increase of
$1.3 million, or 64.4%, from $2.0 million for the year
ended December 31, 2004. As a percentage of revenue,
research and development expense was 6.1% and 4.6% for the years
ended December 31, 2005 and 2004, respectively.
Research and development expense (credit) for the years ended
December 31, 2005 and 2004 for each of the operating
segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
2005
|
|
|
Revenue
|
|
|
2004
|
|
|
Revenue
|
|
|
|
|
Animal Applications
|
|
$
|
2,951
|
|
|
|
8.2
|
|
|
$
|
2,222
|
|
|
|
8.6
|
|
|
GPS and Radio Communications
|
|
|
392
|
|
|
|
2.1
|
|
|
|
(189
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,343
|
|
|
|
6.1
|
|
|
$
|
2,033
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Animal Applications segment’s research and development
expense increased approximately $0.9 million in the year
ended December 31, 2005 compared to the year ended
December 31, 2004. The increase relates primarily to the
development of new large-scale radio frequency identification
antenna detection system for a fish and wildlife customer.
The GPS and Radio Communications segment’s research and
development credit balance is due to a customer reimbursing
Signature Industries Limited for research and development
expenses.
Interest
Expense
Interest expense was $0.4 million and $1.3 million for
each of the years ended December 31, 2005 and 2004,
respectively. Included in interest expense for the year ended
December 31, 2004 is approximately $0.8 million of
discount amortization and deferred debt cost amortization
associated with the Laurus financings.
Realized
Loss on Applied Digital Common Stock
On March 1, 2004, we issued 3,000,000 shares of our
common stock to Applied Digital pursuant to the stock purchase
agreement with Applied Digital dated August 14, 2003. The
stock purchase agreement provided for Applied Digital to
purchase 3,000,000 shares of our common stock, at a price
of $2.64 per share, and a warrant to purchase up to
1,000,000 shares of our common stock, which was exercisable
for five years beginning February 1, 2004, at a price per
share of $3.74, payable in cash or shares of common stock of
Applied Digital. The consideration for the sale of the
3,000,000 shares and the warrant was 1,980,000 shares
of Applied Digital common stock. As of December 31, 2004,
we had sold all of the 1,980,000 shares of Applied Digital
common stock for $6.7 million. We accounted for the Applied
Digital stock as a trading security under SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities.” In the year ended December 31, 2004, we
recorded realized losses on the Applied Digital common stock of
$1.2 million. In December 2004, Applied Digital exercised
its warrant for 1,000,000 shares of our common stock. Net
proceeds to us upon exercise of the warrant were
$3.7 million.
Income
Taxes
We had an income tax benefit of $41,000 in 2005. At
December 31, 2005, we had aggregate U.S. federal net
operating loss carryforwards of approximately $47.6 million
for income tax purposes. The net operating loss carryforwards
expire in various amounts through 2025. Approximately
$12.1 million of the net operating loss carryforwards were
acquired in connection with various acquisitions and are limited
as to use in any
145
particular year. A valuation allowance is provided against the
net deferred tax assets that more than likely will not be
realized.
Discontinued
Operations
As discussed above, on July 2, 2007, we completed the sale
of our wholly-owned subsidiary, OuterLink Corporation, to
Newcomb Communications, Inc.
On April 19, 2004, we sold certain assets of our Medical
Systems segment’s medical services business pursuant to an
asset purchase agreement, dated April 8, 2004, by and
between us and MedAire, Inc. Assets sold include all of the
tangible and intangible intellectual property developed for the
operation of the Medical Systems segment’s medical services
business, pharmaceutical supplies and other inventory items,
customer and supplier contracts, computer software licenses,
internet website and domain name and mailing lists. The purchase
price was approximately $0.4 million.
In addition, on July 30, 2004, we sold the Medical Systems
segment’s land and building for $1.5 million. We
recorded a gain of approximately $0.3 million on the sale
of the land and building. Net cash received on the sale of the
land and building, after paying off the related building
mortgage, was approximately $0.4 million. The net loss
recorded by us in the year ended December 31, 2004 in
connection with exiting this activity was $1.1 million.
The following discloses the losses from discontinued operations
for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Revenue
|
|
$
|
2,276
|
|
|
$
|
2,180
|
|
|
Cost of sales
|
|
|
1,402
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
874
|
|
|
|
420
|
|
|
Selling, general and administrative expenses
|
|
|
1,850
|
|
|
|
3,097
|
|
|
Research and development expenses
|
|
|
1,331
|
|
|
|
727
|
|
|
Asset impairment
|
|
|
7,141
|
|
|
|
—
|
|
|
Other (income) expense
|
|
|
(176
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(9,272
|
)
|
|
$
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Our principal use of liquidity is for operating cash
requirements, capital needs, and acquisitions. Our source of
liquidity has been from operating cash flow and proceeds from
investing and financing activities. We expect to generate cash
from operations and from financing activities in amounts
sufficient to fund the operations of our business over the next
twelve months. We funded our acquisition of McMurdo Limited.
with the proceeds from the sale of our 10.25% debenture
sold to Imperium Master Fund, Ltd. in February, 2007.
Cash
Flows
Cash totaled $1.0 million, $1.5 million and
$9.9 million in the six months ended June 30, 2007 and
in the years ended December 31, 2006 and 2005. Net cash of
$0.4 million was provided by operating activities in the
six months ended June 30, 2007. Net cash used in operating
activities totaled $1.8 million, $5.4 million and
$3.3 million in the six months ended June 30, 2006 and
in the years ended December 31, 2006 and 2005, and cash
provided by operating activities totaled $2.5 million in
the year ended December 31, 2004. In 2006, the use of cash
was due primarily to an increase in inventories of
$0.9 million and an increase in other current assets of
$0.9 million. Non-cash charges of $0.9 million for
equity-based compensation and $1.9 million for depreciation
and amortization were included in the 2006 net loss of
$6.8 million.
146
In 2007, the cash provided by operating activities was due
primarily to an increase in accounts payable and accrued
expenses of $6.3 million, due to an increase in payables in
connection with increased manufacturing activity, as well as
$2.9 million associated with the McMurdo Limited
operations, offset by an increase in inventory of
$1.1 million as a result of a build-up of purchased
components for
e.Tag
tm
inventories, and an increase in accounts receivable of
$1.1 million, primarily due to the McMurdo Limited purchase
price adjustment. Non-cash charges of $0.5 million for
equity-based compensation and $1.2 million for depreciation
and amortization, along with income of $0.3 million for a
reduction in derivative warrant liability, were included in the
six months ended June 30, 2007 net loss of
$6.2 million.
Net cash used in investing activities totaled $5.5 million,
$1.6 million, $4.4 million and $2.4 million in
the six months ended June 30, 2007 and 2006 and in the
years ended December 31, 2006 and 2005. The principal uses
of cash from investing activities in the six months ended
June 30, 2007 were payments for acquisition costs of
$4.7 million and property and equipment expenditures of
$0.9 million. The principal uses of cash from investing
activities in 2006 were $1.0 million used in the purchase
of DSD Holding A/S and $2.9 million of property, plant and
equipment expenditures. The principal uses of cash from
investing activities in 2005 were $1.4 million used in the
purchase of DSD Holding A/S and $1.2 million of property,
plant, and equipment expenditures.
Net cash provided by (used in) financing activities totaled
$4.5 million, $0.5 million, $1.4 million and
($1.6) million in the six months ended June 30, 2007
and 2006 and in the years ended December 31, 2006 and 2005.
In the six months ended June 30, 2007, cash provided by
financing activities consisted of proceeds of $6.0 million
from the issuance of the debenture, partially offset by payments
on notes payable and long-term debt of $0.8 million and
payments for financing costs of $0.7 million. In the same
period in 2006, cash provided by financing activities consisted
of proceeds from the exercise of options and warrants of
$0.6 million. In 2006, cash provided by financing
activities consisted of proceeds from the exercise of stock
options and warrants of $0.6 million and borrowings on our
line of credit. The principal use of cash from financing
activities in 2005 was $1.5 million to repurchase
328,100 shares of our common stock in market transactions.
Financing
and Liquidity
In the six months ended June 30, 2007, we obtained
approximately $5.9 million in cash and increased our total
amount of debt from $8.2 million as of December 31,
2006 to $14.1 million as of June 30, 2007. The primary
reason for the increase in debt relates to the issuance of our
debenture in February 2007. The proceeds from the debenture were
used primarily to fund the acquisition of McMurdo Limited, which
was acquired in April, 2007. In 2006, we used approximately
$8.4 million in cash and increased our total amount of debt
from $6.0 million at December 31, 2005 to
$8.2 million at December 31, 2006. The primary reason
for the increase in debt relates to capital leases entered into
in 2006 and additional borrowings on our line of credit.
The $14.1 million of debt outstanding at June 30, 2007
is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
|
|
Mortgage notes payable-Animal Applications and Corporate
facilities
|
|
$
|
2,197
|
|
|
Line of Credit — DSD Holding A/S
|
|
|
3,067
|
|
|
Equipment Loans/Notes Payable — DSD Holding A/S
|
|
|
1,299
|
|
|
Capital lease obligations
|
|
|
1,565
|
|
|
10.25% Senior Secured Debenture
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
$
|
14,128
|
|
|
|
|
|
|
|
147
The $8.2 million of debt outstanding at December 31,
2006 is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
|
|
Mortgage notes payable-Animal Applications and Corporate
facilities
|
|
$
|
2,226
|
|
|
Line of Credit — DSD Holding A/S
|
|
|
3,013
|
|
|
Equipment Loans/Notes Payable — DSD Holding A/S
|
|
|
1,398
|
|
|
Capital lease obligations
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
$
|
8,163
|
|
|
|
|
|
|
|
Equipment
Loans-DSD Holding A/S
DSD Holding A/S is party to equipment loans that are
collateralized by production equipment. Principal and interest
payments totaling approximately 0.3 million Danish kroner,
or DKK ($46,000 at June 30, 2007), are payable
monthly. Payments are due through July 2010. The interest rate
on the loans is variable and ranges from 6.0% to 7.8% as of
June 30, 2007.
Line
of Credit-DSD Holding A/S
DSD Holding A/S and its wholly-owned subsidiary, Daploma
International A/S, are party to a credit agreement with Danske
Bank A/S. On June 1, 2006, DSD Holding A/S and Daploma
International A/S amended the borrowing availability from DKK
12 million (approximately $2.2 million at
June 30, 2007) to DKK 18 million (approximately
$3.3 million at June 30, 2007). In connection with the
amendment, we executed a letter of support which confirms that
we shall maintain our holding of 100% of the share capital of
Daploma International A/S, and that we shall neither sell, nor
pledge, nor in any way dispose of any part of Daploma
International A/S or otherwise reduce our influence on Daploma
International A/S without the prior consent of Danske Bank A/S.
Interest is determined quarterly and is based on the
international rates Danske Bank A/S can establish on a loan in
the same currency on the international market plus 2.0%. At
June 30, 2007, the annual interest rate on the facility was
6.5%. Borrowing availability under the credit facility considers
guarantees outstanding. At June 30, 2007, the borrowing
availability on the credit agreement was DKK 0.9 million
(approximately $0.2 million at June 30, 2007). The
credit agreement shall remain effective until further notice.
DSD Holding A/S can terminate the credit agreement and pay the
outstanding balance, or Danske Bank A/S may demand the credit
line be settled immediately at any given time, without prior
notice.
Note
Payable-DSD
Holding A/S
As of June 30, 2007, DSD Holding A/S is party to a note
payable with Danske Bank. Principal and interest payments of DKK
0.3 million ($55,000 at June 30, 2007), plus
interest, are payable quarterly through December 15, 2008.
The interest rate on the note is calculated based on the
international rates Danske Bank can establish on a loan in DKK
in the international market plus 2.0%. The interest rate on the
note payable was 5.5% at June 30, 2007.
Invoice
Discounting Agreement
On April 9, 2003, Signature Industries Limited entered into
an invoice discounting agreement, which we refer to as the RBS
Invoice Discounting Agreement, with The Royal Bank of Scotland
Commercial Services Limited, which we refer to as RBS. The RBS
Invoice Discounting Agreement provides for Signature Industries
Limited to sell, with full title guarantee, most of its
receivables, as defined in the RBS Invoice Discounting
Agreement. Under the agreement, RBS prepays 80% of the
receivables sold in the United Kingdom and 80% of the
receivables sold in the rest of the world, not to exceed an
outstanding balance of £2,000,000 (approximately
$4.0 million at June 30, 2007) at any given time.
RBS pays Signature Industries Limited the remainder of the
receivable upon collection of the receivable. Receivables which
remain outstanding 90 days from the end of the invoice
month become ineligible, and RBS may require Signature
Industries Limited to repurchase the receivable. The discounting
charge accrues at an annual rate of 1.5% above the base rate, as
148
defined in the RBS Invoice Discounting Agreement (5.75% at
June 30, 2007). Signature Industries Limited pays a
commission charge to RBS of 0.16% of each receivable balance
sold. The RBS Invoice Discounting Agreement requires a minimum
commission charge of £833 (approximately $1,700) per month.
Discounting charges of $33,000 and $57,000 are included in
interest expense for the three and six months ended
June 30, 2007, respectively. As of June 30, 2007,
$1.5 million of receivables were financed under the RBS
Invoice Discounting Agreement, as amended.
Revolving
Invoice Funding Facility
On March 23, 2007, we entered into a revolving invoice
funding facility with Greater Bay Business Funding, a division
of Greater Bay Bank N.A. The Greater Bay facility provides that
we sell and assign to Greater Bay all rights, title, and
interest in the accounts receivable of Digital Angel Technology
Corporation. Under the Greater Bay facility, Greater Bay
advances 80% of the eligible receivables, as defined, not to
exceed a maximum of $5,000,000 at any given time. Greater Bay
pays the remainder of the receivable upon collection. Interest
is payable on the daily outstanding balance of funds drawn and
is equal to the Greater Bay Bank N.A. prime rate (8.25% at
June 30, 2007) plus 3.00%. The Greater Bay facility
has an initial term of 12 months and is guaranteed by
security interests covering all accounts, contract rights, and
general intangibles relating to our accounts receivable. As of
June 30, 2007, $2.1 million of receivables were
financed under the Greater Bay facility. The obligations under
this facility were terminated and repaid in full on
September 4, 2007. See “Significant Factors Affecting
our Results of Operations and Financial Condition—Digital
Angel’s Financing” beginning on page 130.
10.25% Senior
Secured Debenture
On February 6, 2007, we entered into a securities purchase
agreement pursuant to which we sold to Imperium Master Fund,
Ltd. a debenture in the original principal amount of $6,000,000
and a five-year warrant to purchase 699,600 shares of the
our common stock at a per share exercise price of $2.973. The
proceeds of the debenture were used primarily to fund the
acquisition of McMurdo Limited.
On June 28, 2007, we, in connection with our planned sale
of OuterLink Corporation, entered into amendments of the
securities purchase agreement and the registration rights
agreement between us and Imperium Master Fund, Ltd. As
consideration, we exchanged the 699,600 existing warrants for
841,000 newly issued seven-year warrants with an exercise price
of $1.701.
The warrants contain certain anti-dilution provisions, and,
accordingly, we have accounted for the fair value of the
warrants as a derivative liability subject to
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” At issuance, the fair
value of the 699,600 five-year warrants, as calculated using the
Black-Scholes valuation model, was $1,253,000 using the
following assumptions: volatility of 83.13%, risk-free interest
rate of 4.6%, dividend rate of 0.0% and expected life of
5 years. The fair value of the warrants was recorded as a
discount to the debenture and is being amortized to interest
expense over the life of the debenture. The warrant fair value
is revalued at each balance sheet date using the Black-Scholes
valuation model, with changes in value recorded in the condensed
consolidated statement of operations as income or expense. At
June 30, 2007, the warrant derivative fair value for the
841,000 seven-year warrants then outstanding was $958,000 using
the following assumptions: volatility of 73.91%, risk-free
interest rate of 4.6%, dividend rate of 0.0% and expected life
of 7 years. Approximately $105,000 of expense and
approximately $296,000 of income is included in the condensed
consolidated statement of operations for the three and six
months ended June 30, 2007, respectively, as a result of
the changes in the fair value of the warrant.
On August 24, 2007, we and Imperium Master Fund, Ltd.
agreed to an extension of the repayment date of the debenture by
up to one month, or until September 27, 2007.
On September 4, 2007, we used the proceeds from the
intercompany loan to pay 102% of the outstanding principal
amount of the debenture, plus all accrued and unpaid interest.
See “Significant Factors Affecting our Results of
Operations and Financial Condition — Intercompany
Loan.”
149
We will be required to generate funds to repay the intercompany
loan through a combination of operating cash flow, borrowings
under our existing invoice discounting agreement, and other
financing arrangements
and/or
third
party financings. Our historical sources of liquidity have
included proceeds from the sale of common stock, proceeds from
the issuance of debt, proceeds from the sale of one of our
businesses, proceeds from the sale of shares of Applied
Digital’s common stock under share exchange agreements, and
proceeds from the exercise of stock options and warrants. In
addition to these sources, other sources of liquidity may
include the raising of capital through private placements or
public offerings of debt or equity securities and proceeds from
the sale of additional businesses. However, going forward, some
of these sources may not be available or, if available, they may
not be on favorable terms. Therefore, our failure to generate
funds through additional financings may result in our inability
to continue as a going concern.
The following table summarizes our fixed cash obligations as of
December 31, 2006 over various future years (in thousands):
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Payments Due by Period
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Less than
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1-3
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4-5
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After
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Contractual Cash Obligations
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Total
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1 Year
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Years
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Years
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5 Years
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Notes Payable and Long-Term Debt
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$
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8,163
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$
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4,127
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$
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1,650
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$
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2,386
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$
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—
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Operating Leases
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19,088
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726
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1,198
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1,065
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16,099
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Employment Contracts
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1,217
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1,183
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34
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—
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—
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$
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28,468
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$
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6,036
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$
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2,882
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$
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3,451
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$
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16,099
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The McMurdo Limited acquisition agreement included an additional
purchase consideration to be paid to the sellers of McMurdo
Limited, based on revenues in 2007. We expect to pay
approximately $2.0 million in additional purchase price
consideration during the fourth quarter of 2007, since McMurdo
Limited’s revenue is expected to exceed the threshold.
Recently
Issued Accounting Standards
In December 2004, SFAS No. 123 (revised 2004),
“Share-Based Payment” (SFAS 123R) was issued.
SFAS 123R replaced SFAS No. 123 and supersedes
APB Opinion No. 25. The provisions of SFAS 123R became
effective for us beginning January 1, 2006. SFAS 123R
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. We vested all of
our out-of-the-money, unvested stock options issued to current
employees, officers and directors prior to November 15,
2005 on December 30, 2005, and, therefore, we do not expect
that the initial adoption of SFAS 123R will have a material
impact on our consolidated results of operations and earnings
(loss) per share. However, going forward, as we grant more
options or other share-based compensation, we expect that the
impact may be material.
In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151, “Inventory Costs, an
amendment of ARB No. 43, Chapter 4.”
SFAS No. 151 amends Accounting Research Bulletin (ARB)
No. 43, Chapter 4, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on
the normal capacity of the production facilities. We adopted
SFAS No. 151 beginning January 1, 2006. The
adoption of SFAS No. 151 did not have a material impact on
the consolidated results of our operations, financial position
or cash flows.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets” (SFAS 153).
This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets, and replaces
it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS No. 153 did not
have a material impact on the consolidated results of our
operations or financial position.
150
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections a replacement of
APB No. 20 and FAS No. 3” (SFAS 154).
SFAS 154 changes the requirements for the accounting for,
and reporting of, a change in accounting principle.
SFAS 154 also applies to all voluntary changes in
accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions,
those provisions should be followed. SFAS 154 is effective
for all accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We believe
the adoption of SFAS 154 will not have an impact on our
financial statements.
In June 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FAS No. 109” (FIN 48),
which clarifies the accounting for uncertainty in income taxes.
Currently, the accounting for uncertainty in income taxes is
subject to significant and varied interpretations that have
resulted in diverse and inconsistent accounting practices and
measurements. Addressing such diversity, FIN 48 prescribes
a consistent recognition threshold and measurement attribute, as
well as clear criteria for subsequently recognizing,
derecognizing and measuring changes in such tax positions for
financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income taxes.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We have not yet determined the impact of
FIN 48 on our consolidated financial position, results of
operations, cash flows or financial statement disclosures.
In September 2006, FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R),” which
requires employers to: (a) recognize in its statement of
financial position an asset for a plan’s overfunded status
or a liability for a plan’s underfunded status;
(b) measure a plan’s assets and its obligations that
determine its funded status as of the end of the employer’s
fiscal year; and (c) recognize changes in the funded status
of a defined benefit postretirement plan in the year in which
the changes occur. Those changes will be reported in
comprehensive income of a business entity. The requirement to
recognize the funded status of a benefit plan and the disclosure
requirements are effective as of the end of the fiscal year
ending after December 15, 2006, for entities with
publicly-traded equity securities. The requirement to measure
plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position
is effective for fiscal years ending after December 15,
2008. We have determined that the adoption of SFAS No. 158
will not have a material affect on our consolidated financial
position, results of operations, cash flows or financial
statement disclosures.
Also in September 2006, FASB issued SFAS No. 157,
“Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. This Statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. Earlier application is encouraged provided that the
reporting entity has not yet issued financial statements for
that fiscal year including financial statements for an interim
period within that fiscal year. We are assessing
SFAS No. 157 and have not yet determined the impact
that the adoption of SFAS No. 157 will have on our
consolidated results of operations or financial position.
In February 2007, FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
Liabilities,” including an amendment of FASB Statement 115.
This Statement provides companies with an option to report
selected financial assets and liabilities at fair value. This
Statement is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted. We are
assessing SFAS No. 159 and have not yet determined the
impact that the adoption of SFAS No. 159 will have on
our consolidated results of operations or financial position.
Quantitative
and Qualitative Disclosures about Market Risk
Digital Angel has operations and sales in various regions of the
world. See “Description of Digital Angel’s
Business — Government Regulation — Financial
Information About Geographic Areas.” Additionally, Digital
Angel exports to, and imports from, other countries. Digital
Angel’s operations may, therefore, be
151
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
Digital Angel’s product prices and operating costs or those
of its competitors.
Digital Angel presently does not use any derivative financial
instruments to hedge its exposure to adverse fluctuations in
interest rates, foreign exchange rates, fluctuations in
commodity prices or other market risks, nor does it invest in
speculative financial instruments. However, as Digital
Angel’s international business increases, it may consider
hedging its exposure to such market risks.
Due to the nature of Digital Angel’s borrowings and its
short-term investments, Digital Angel has concluded that there
is no material market risk exposure, and, therefore, no
quantitative tabular disclosures are required.
152
DESCRIPTION
OF DIGITAL ANGEL’S BUSINESS
Digital Angel develops and deploys sensor and communications
technologies that enable rapid and accurate identification,
location tracking, and condition monitoring of high-value
assets. Applications for Digital Angel’s products include
identification and monitoring of humans, pets, fish, poultry and
livestock through its patented implantable microchips; location
tracking and message monitoring of vehicles and aircraft in
remote locations through systems that integrate GPS and
geosynchronous satellite communications; and monitoring of asset
conditions, such as temperature and movement, through advanced
miniature sensors. Digital Angel operates in two business
segments: (1) Animal Applications and (2) GPS and
Radio Communications.
The Animal Applications segment develops, manufactures and
markets visual and electronic identification tags and RFID
microchips, primarily for identification, tracking and location
of companion pets, horses, livestock, fish and wildlife
worldwide, and, more recently, for animal bio-sensing
applications, such as temperature reading for companion pet,
horse and livestock applications. The Animal Applications
segment consists of Digital Angel’s operations located in
Minnesota, DSD Holding A/S and its wholly and majority-owned
subsidiaries located in Denmark and Poland, and Digital Angel
International, Inc. and its subsidiaries located in Argentina,
Brazil, Chile, Paraguay and Uruguay. The positive identification
and tracking of livestock and fish are crucial for asset
management and for disease control and food safety. In addition
to the visual ear tags which have been sold by Digital Angel
since the late 1940s, Animal Applications utilizes RFID
technologies in its electronic ear tags and implantable
microchips.
The GPS and Radio Communications segment designs, manufactures,
and markets GPS-enabled equipment used for location tracking and
message monitoring of marine vehicles, aircraft and people in
remote locations. The GPS and Radio Communications segment
consists of the operations of Digital Angel’s subsidiary,
Signature Industries Limited, located in the United Kingdom, and
includes the operations of the McMurdo Limited business acquired
by Signature Industries Limited in April 2007. Its focus is in
the areas of search and rescue and locator beacons, and tracking
systems, which include mobile satellite data communications
service and software for mapping and messaging for a variety of
industries, including the military, air and ground ambulance
operators, law enforcement agencies and energy companies.
Digital Angel was incorporated in Delaware on December 1,
1981. Digital Angel’s corporate headquarters are located at
490 Villaume Avenue, South St. Paul, MN 55075. Its telephone
number is
651-455-1621.
Recent
Events
In April 2007, Digital Angel, through its subsidiary Signature
Industries Limited, acquired certain assets and customer
contracts of McMurdo Limited, a United Kingdom-based subsidiary
of Chemring Group Plc and manufacturer of emergency location
beacons, for a purchase price of $4.7 million in cash.
McMurdo Limited develops and manufactures safety equipment
technology. Its products, including the original EPIRB
(Emergency Position Indicating Radio Beacon) and the first GMDSS
(Global Maritime Distress and Safety System) and the approved
Search and Rescue Transponder, have become standard life-saving
equipment on many recreational, commercial and military marine
vehicles. This acquisition was made to broaden Digital
Angel’s emergency location beacon product offering to serve
the military and commercial maritime sectors and provide
stability to Digital Angel’s revenue base. The McMurdo
Limited acquisition agreement included an additional purchase
consideration to be paid to the sellers of McMurdo Limited,
based on revenues in 2007. We expect to pay approximately
$2.0 million in additional purchase price consideration
during the fourth quarter of 2007, since McMurdo Limited’s
revenue is expected to exceed the threshold.
Discontinued
Operations
In May 2007, Digital Angel entered into a stock purchase
agreement with Newcomb Communications, Inc. to sell 100% of the
issued and outstanding shares of stock of OuterLink Corporation.
OuterLink Corporation, which operated in Digital Angel’s
GPS and Radio Communications business segment, provides
satellite-based mobile asset tracking and data messaging systems
used to manage the deployment of aircraft
153
and land vehicles. On July 2, 2007, Digital Angel
completed the sale of OuterLink Corporation. The consideration,
which is subject to certain adjustments based on OuterLink
Corporation’s closing balance sheet, initially consisted of
a cash payment of $800,000 and a promissory note of $200,000,
which matures on December 31, 2007. As a result of the sale
of OuterLink Corporation, its operations are included as part of
Digital Angel’s discontinued operations.
In connection with the closing, Digital Angel also executed a
one-year non-competition agreement with OuterLink Corporation.
Mr. Paul F. Newcomb, president of Newcomb Communications,
Inc., was the founder and president of the predecessor company
to OuterLink Corporation, which Digital Angel acquired in
January 2004.
Industry
Overview
Digital Angel’s current activities encompass the
development and marketing of RFID and GPS-enabled identification
and location products.
RFID has become an important technology widely adopted and used
in the automotive identification market, an industry
characterized by identifying and locating objects
electronically. RFID systems identify objects using radio
frequency transmissions, typically achieved with communication
between a microchip or tag and a scanner or reader.
Historically, RFID has been used to identify objects in the
retail, transportation and logistics industries, as well as to
identify and locate livestock and companion pets. Prior to the
adoption of RFID, users identified and tracked objects manually,
as well as through the use of bar code technology. These
solutions were limited because of the need for ongoing human
intervention and the lack of instantaneous location capabilities.
RFID technology seems to possess greater range, accuracy, speed
and lower line-of-sight requirements than bar code technology.
The basic components of an RFID system consist of:
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a “tag” containing a microchip-equipped transponder,
an antenna and a capacitor, which is attached to the item to be
identified, located or tracked, and which wirelessly transmits
stored information to a receiver;
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one or more receivers, also referred to as readers, which are
devices that read the tag by sending out an RFID signal to which
a tag, in the range of the signal, responds; and
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the equipment, cabling, computer network and software
applications to use the processed data for one or more
applications.
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Most RFID systems use either “active” or
“passive” tags, with the choice reflecting the
different characteristics of the tags and the nature of the RFID
system application. The key difference in the technology is that
active RFID systems deploy tags with battery-powered microchips
that emit a signal at regular intervals or continuously, and do
not rely on power from the reader to operate, while passive RFID
systems deploy tags with microchips that have no attached power
supply and receive an activating charge from the reader’s
signal. Applications that require receipt of signals between the
tag and the reader beyond approximately 10 meters in range
usually need a battery in the tags.
Digital Angel’s RFID businesses focus on (1) companion
pet identification and safeguarding, and (2) livestock/fish
identification tracking and food safety and traceability (e.g.,
livestock tracking).
Pet
Identification and Safeguarding
Pet identification and safeguarding systems involve the
insertion of a microchip with identifying information in the
animal. RFID scanners at animal shelters, veterinary clinics and
other locations read the microchip’s unique identification
number. Through the use of a database, the unique identification
number identifies the animal, the animal’s owner, and other
relevant information. As a result of the recent expansion
154
of the capabilities of the electronic chips (e.g., providing
feedback on the health of the animal, such as a temperature
reading), Digital Angel believes the market is expected to
expand even further and more rapidly.
Livestock/Fish
Identification Tracking and Food Safety and
Traceability
The use of RFID technology in the tracking of livestock in the
U.S. received a boost in December 2003 when a cow in
Mabton, Washington was found to have Chronic Wasting Disease
(commonly referred to as Mad Cow Disease), resulting in the
banning of the U.S. cattle industry’s exports. Since
that time, the USDA and other state agencies, and the Canadian
government, have been initiating pilot programs designed to test
the viability of large-scale food animal identification and
tracking systems. Currently, most livestock producers use visual
rather than electronic identification tags. Cattle and other
livestock tend to move from place to place, and from owner to
owner. For this reason, visual tags have limitations in terms of
the ability to trace where a diseased animal has been and what
other animals could have been exposed to it. The USDA is
targeting a national identification system that would allow such
tracing within 48 hours, enabling the implementation of
quarantines effectively and efficiently and helping to protect
the value of farmers’ livestock investments. During 2006,
the Canadian government decided to extend a national program
through December 2007 for the funding of livestock RFID readers
and scanning systems. The government-backed program is part of
Food Safety and Quality within Agri-Food Canada to reimburse
eligible participants by defraying a part of the cost of RFID
equipment used to scan electronically-identified animals as they
move from farm to market.
RFID microchips are also used for the tagging of fish,
especially salmon, for identification by biologists and
governments in environmental programs and studies, migratory
studies, and other purposes. These microchips are accepted as a
safe, reliable alternative to traditional identification methods
because, once the fish are implanted with the microchips, they
can be identified without recapturing or sacrificing the fish.
GPS
and Radio Communications
Global Navigation Satellite System (GNSS) is the standard
generic term for satellite navigation systems that provide
autonomous geospatial positioning with global coverage. The
Navigation Satellite Timing and Ranging Global Position System,
or NAVSTAR GPS, which was developed by the U.S. Department
of Defense, is the only fully operational GNSS. The satellite
constellation is managed by the U.S. Air Force
50th Space Wing. Although the cost of maintaining the
system is approximately $400 million per year, including
the replacement of aging satellites, GPS is free for civilian
use as a public good. In addition to NAVSTAR GPS, there is some
indication that other nations may begin deploying GNSS. The
Russian GLONASS positioning system is a GNSS in the process of
being restored to full operation. The European Union Galileo
positioning system is a next-generation GNSS in the initial
deployment phase, scheduled to be operational in a few years,
and China has indicated that it may expand its regional Beidou
navigation system into a global system.
A GPS receiver calculates its position by measuring the distance
between itself and three or more GPS satellites. Measuring the
time delay between transmission and reception of each GPS radio
signal gives the distance to each satellite, since the signal
travels at a known speed. The signals also carry information
about the satellites’ location. By determining the position
of, and distance to, at least three satellites, the receiver can
compute its position using trilateration. Receivers typically do
not have perfectly accurate clocks and, therefore, track one or
more additional satellites to correct the receiver’s clock
error.
The original motivation for satellite navigation was for
military applications. Today, GNSS systems have a wide variety
of civilian uses, such as:
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Navigation, ranging from personal hand-held devices for trekking
to devices fitted to cars, trucks, ships and aircraft;
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Location-based services, such as enhanced 911;
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155
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Entering data into a geographic information system;
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Search and rescue;
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Geophysical sciences; and
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Tracking devices used in wildlife management.
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Digital Angel’s focus is in the areas of search and rescue
and locator beacons. Digital Angel believes that there is
excellent growth potential in each of its markets and
particularly, for it, in sales of its military personnel
location beacons due to recent technology improvements. However,
each market in which Digital Angel competes is highly
competitive.
Operating
Segments
Digital Angel operates in two business segments: Animal
Applications and GPS and Radio Communications. In the year ended
December 31, 2006, the Animal Applications segment
represented 70% of Digital Angel’s consolidated revenue,
and the GPS and Radio Communications segment represented 30% of
Digital Angel’s consolidated revenue. Each of these
segments is presented below.
Animal
Applications Segment
Principal
Products and Services
Digital Angel’s Animal Applications segment develops,
manufactures and markets visual and electronic identification
tags and RFID microchips, primarily for the identification,
tracking and location of companion pets, horses, livestock, fish
and wildlife worldwide, and, more recently, for animal
bio-sensing applications, such as temperature reading for
companion pet, horse and livestock applications. Digital
Angel’s Animal Applications segment’s proprietary
products focus on pet identification and safeguarding and the
positive identification and tracking of livestock and fish,
which is crucial for asset management and for disease control
and food safety. This segment’s principal products are:
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visual and electronic ear tags for livestock; and
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implantable microchips and RFID scanners for the companion pet,
horse, livestock, fish and wildlife industries.
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Digital Angel holds patents on its syringe-injectable microchip
for use in animals. Each microchip is individually inscribed and
programmed to store a unique, permanent 10- to
16-digit
alphanumeric identification code. These microchips are passive
electronic devices ranging in size from 12 to 28 millimeters in
length and 2.1 to 3.5 millimeters in diameter. The microchip is
coupled with an antenna and placed either in a two-piece plastic
e.Tag
tm
or in a glass-like injectable capsule. The
e.Tag
tm
is primarily used in livestock application and typically affixed
to the ear of the animal. The implantable microchip is injected
under the skin using a hypodermic syringe, without requiring
surgery. Each capsule is coated with a polymer,
BioBond
tm
,
to form adherence to tissue, thereby preventing migration in the
host’s body. An associated scanner device uses radio
frequency to interrogate the microchips and read the code.
During 2006, Digital Angel received a patent for its
Bio-Thermo
®
implantable microchip product, which provides temperature
readings of animals by simply passing an RFID handheld scanner
over the animal or by having the animal walk through a portal
scanner.
Digital Angel’s pet identification and safeguarding systems
involve the insertion of a microchip with identifying
information in the animal. RFID scanners at animal shelters,
veterinary clinics and other locations read the microchip’s
unique identification number. Through the use of a database, the
unique identification number identifies the animal, the
animal’s owner, and other relevant information. Digital
Angel has an established infrastructure with RFID scanners
placed in approximately 75,000 global animal shelters and
veterinary clinics. More than 3.5 million companion animals
in the U.S. have been enrolled in Digital Angel’s
distributor’s database, and a pet is recovered in the
U.S. by that system every six minutes.
Digital Angel’s miniature RFID microchips are also used for
the tagging of fish, especially salmon, for identification by
biologists and governments in environmental programs and
studies, migratory studies, and
156
other purposes. These microchips are accepted as a safe,
reliable alternative to traditional identification methods
because, once the fish are implanted with the microchips, they
can be identified without recapturing or sacrificing the fish.
During 2006, Digital Angel installed what it believes is the
world’s largest RFID-ready system, a 16-foot by 16-foot
RFID antenna designed to electronically track indigenous salmon
populations. In addition, Digital Angel launched its
second-generation unitary core transponders. These updated
transponders are designed to provide greater reader reliability
while increasing reader range.
In addition to pursuing the market for permanent identification
of companion animals and tracking microchips for fish, Digital
Angel also produces visual identification and RFID products,
principally for livestock producers. The tracking of cattle and
hogs is crucial in order to provide security both for asset
management and for disease control and food safety. Digital
Angel has marketed visual identification products for livestock
since the 1940s. Digital Angel has marketed electronic
identification products for livestock since the late 1990s.
Visual identification products typically include numbered ear
tags. Electronic identification products for livestock are
currently being utilized by livestock producers and as part of
various pilot studies for the USDA’s and other state and
governmental cattle identification programs. Currently, sales of
visual products represent a substantial percentage of Digital
Angel’s sales to livestock producers. However, the use of
electronic identification products by livestock producers has
been steadily increasing, and Digital Angel expects the trend
toward electronic identification products to continue.
In addition to the use in animal applications, Digital
Angel’s implantable microchip was cleared by the FDA for
medical applications in humans in the United States in October
2004. Digital Angel has a long-term exclusive distribution and
licensing agreement with VeriChip covering the manufacturing,
purchasing and distribution of the implantable microchip. Sales
to VeriChip were $0.4 million, $0.7 million, and
$0.1 million in the years ended December 31, 2006,
2005 and 2004, respectively.
Growth
Strategy
The principal components of Digital Angel’s Animal
Applications segment’s growth strategy are to:
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Focus on animal identification products in the growing
livestock, fish and wildlife industries;
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Become a major player in the food source traceability and safety
tracking systems arena; and
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Increase Digital Angel’s market share in the pet
identification and equine markets, with enhanced products such
as Digital Angel’s Bio-Thermo product.
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Through Digital Angel’s Animal Applications segment,
Digital Angel is one of the leading suppliers in the
U.S. of RFID-enabled implantable microchip products for
companion animals, laboratory animals, fish and wildlife, and
visual and electronic identification tags for livestock. The
chipping of companion pets has increased in Europe, in part,
because, in 2004, several European countries began requiring
that all pets crossing their borders be identified with either a
tattoo or a microchip. In addition, world-wide standardization
of the frequency on which the microchips operate will most
likely lead to higher world-wide chipping rates. Digital
Angel’s chips can be read by the world standard, which is
134.2 kilohertz.
The USDA, the states of Kansas and Minnesota, and the government
of Canada are utilizing Digital Angel’s RFID system for use
in their respective large-scale food animal identification
programs. These pilot programs may lead to implementation of
national
and/or
regional RFID-enabled identification programs.
In April 2006, Digital Angel was awarded a U.S. Patent for
its
Bio-Thermo
®
temperature-sensing, implantable RFID microchip designed for
non-laboratory applications that uses RFID technology to
determine the body temperature of its host animal. Potential
applications for the
Bio-Thermo
®
chip include non-invasive monitoring of temperatures in cats,
dogs, livestock and horses and early detection of infectious
diseases, such as Avian Bird Flu in poultry. Digital Angel has
begun a national initiative to target the use of its
Bio-Thermo
®
microchips to address the more than $100 million
U.S. equine market for identification products. There are
approximately eight million horses in the U.S. that are
covered by identification and health status surveillance, which
is required by local and state equine animal health
professionals. Since late 2005, the California Horseracing
Board, a division of the California Department of Agriculture,
has been using federal funds to
157
implant all new, incoming young horses entering their racing
career with Digital Angel’s
Bio-Thermo
®
microchips. To date, the California Horseracing Board has
purchased 1,500
Bio-Thermo
®
chips, out of an order of 4,000, and an estimated 500 horses at
Southern California racetracks have already been successfully
implanted. The New York State Horse Health Assurance Program
recently implemented a comprehensive health campaign that
utilizes
Bio-Thermo
®
microchips, and other state agencies are expected to launch
similar programs.
In addition, future product enhancements include read/write
microchips and new scanning systems that will extend the
capabilities of Digital Angel’s products, while integrating
them with evolving animal management systems. Digital Angel
intends to continue to develop new products based on its
customers’ needs. Digital Angel plans to continue to
provide product offerings to identified market needs, including,
but not limited to, Country of Origin Labeling (COOL) and food
traceability safety.
Sales,
Marketing and Distribution
Digital Angel’s companion pet identification and location
system is marketed in the U.S. by Schering-Plough, under
the brand name Home
Again
®
Pet Recovery Service. In February 2007, Digital Angel signed a
new exclusive distribution agreement with Schering-Plough Home
Again LLC, a wholly-owned subsidiary of Schering-Plough, to
provide electronic identification microchips and scanners as
part of the Home
Again
®
Proactive Pet Recovery Network. Schering-Plough’s new
network, which markets the complete electronic pet
identification system under the brand name
HomeAgain
®
,
is the nation’s first comprehensive system to assist in the
search for lost pets. The new Schering-Plough distribution
agreement is for a period of two years, which may be extended
for one year, and does not provide for minimum purchase
requirements by Schering-Plough.
Digital Angel’s product is also marketed by various other
companies, including (i) in some countries in Europe by
Merial Pharmaceutical under the
Indexel
®
brand; (ii) in the United Kingdom and Ireland by Animalcare
under the
idENTICHIP
®
brand; and (iii) in other European countries and in
Australia, New Zealand and Japan by various distributors under
the
LifeChip
®
brand. Digital Angel has an established infrastructure with
readers placed in approximately 75,000 global animal shelters
and veterinary clinics.
BioMark, Inc. is Digital Angel’s U.S. distributor for
its fish and wildlife RFID microchip products. Electronic
identification products for livestock are sold directly to
Digital Angel’s customers under the Destron brand. Digital
Angel has multi-year supply and distribution agreements with
certain customers, which have varying expiration dates. The
remaining terms of such agreements are between one and eight
years. The supply and distribution agreements describe products,
delivery and payment terms and distribution territories. Digital
Angel’s agreements generally do not have minimum purchase
requirements and can be terminated without penalty.
For the year ended December 31, 2006, Schering-Plough
accounted for approximately 15% of Digital Angel’s
revenues. Digital Angel believes it would be able to arrange for
a third party to distribute its implantable microchips in the
U.S. if Schering-Plough no longer distributed them.
However, it may be difficult and time-consuming for Digital
Angel to arrange for distribution of the implantable microchip
by a third party, which may negatively affect future sales.
Digital Angel’s principal customers for electronic
identification devices for fish are Pacific States Marine and
the U.S. Army Corps of Engineers. The loss of, or a
significant reduction in, orders from these customers could have
a material adverse effect on Digital Angel’s financial
condition and results of operations.
Competition
The animal identification market is highly competitive. The
principal competitors in the U.S. visual identification
market are AllFlex USA, Inc. and Y-Tex Corporation, and the
principal competitors in the RFID market are Avid Identification
Systems, Inc., AllFlex, USA, Inc. and Datamars SA. Digital Angel
believes that its intellectual property position and reputation
for high-quality products are its competitive advantages.
Digital Angel’s principal competitors in Europe are Allflex
and Merko. Digital Angel believes that its efficient low-cost
production, reputation for high-quality ear tags, and its clear
focus on the market are its
158
competitive advantages. Digital Angel expects its competitors
to continue to improve the performance of, and support for,
their current products. Digital Angel also expects that, like
Digital Angel, they will introduce new products, technologies or
services. Digital Angel’s competitors’ new or upgraded
products could adversely affect sales of Digital Angel’s
current and future products.
Manufacturing;
Supply Arrangements
Digital Angel’s Animal Applications segment has not been
materially adversely affected by the inability to obtain raw
materials or products during the past three years. The segment
relies solely on a production arrangement with RME for the
assembly of its patented syringe-injectable transponders. The
term of that agreement ends on June 30, 2010, subject to
earlier termination by either party if, among other things, the
other party breaches the agreement and does not remedy the
breach within 30 days of receiving notice. Under the
agreement, RME is Digital Angel’s preferred supplier of the
glass encapsulated, syringe-implantable transponders, provided
that RME’s pricing remains market competitive. Certain of
the automated equipment and tooling used in the production of
the transponders are owned by Digital Angel; other automated
equipment and tooling is owned by RME. It would be difficult and
time-consuming for Digital Angel to arrange for production of
the transponders by a third party. Accordingly, Digital Angel
cannot assure that it would be able to procure alternative
manufacturing capability if it is unable to obtain the
implantable microchip from RME or another supplier.
Digital Angel’s Animal Applications segment’s other
principal suppliers are TSI Molding, Inc., BASF Corporation and
Creation Technologies. Digital Angel generally does not enter
into contracts with these suppliers.
GPS and
Radio Communications Segment
Principal
Products and Services
Digital Angel’s GPS and Radio Communications segment’s
proprietary products provide location tracking and message
monitoring of vehicles, aircraft, and people in remote
locations. This segment’s principal products are:
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GPS-enabled search and rescue equipment and intelligent
communications products and services for telemetry, mobile data
and radio communications applications, including Digital
Angel’s
SARBE
tm
brand, which serve commercial and military markets; and
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Alarm sounders for industrial use and other electronic
components.
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GPS-Enabled
Search and Rescue Equipment and Intelligent Communications
Products
Digital Angel’s PLBs, which are sold under the
SARBE
tm
brand name, are used by military air crew in the event of an
ejection or other event requiring emergency evacuation of an
aircraft in a remote, possibly hostile location. Digital
Angel’s majority-owned subsidiary, Signature Industries
Limited, which is based in the United Kingdom, has been
developing and manufacturing PLBs for five decades. Reports of
Second World War airmen and sailors at sea awaiting rescue, with
little more than the faint hope that a passing ship would find
them, was the catalyst that inspired Signature Industries
Limited to develop a new way of saving lives by making the
search part of search and rescue more effective. Today, Digital
Angel believes that it is a world-leading supplier of PLBs and
its
SARBE
tm
trademark is widely considered a generic term for these devices,
which are now found on ships, aircraft and submarines in the
armed forces of over 40 countries. United Kingdom airmen
were among the first to carry these life-saving devices. Today,
every Royal Air Force, Royal Navy and Army airman carries a
SARBE
tm
.
PLBs are also packed in the survival packs of life rafts on
military ships. Digital Angel’s latest-generation
SARBE
tm
for military personnel is the software-defined
SARBE
tm
G2R, which provides true global reach and recovery. This
programmable radio features peacetime and combat modes. As with
previous PLBs, G2R can be configured to operate with any fast
jet ejection seat and incorporates a specially-designed system
that automatically activates the beacon and deploys the antenna
to the optimum position. This ensures that, even if aircrew are
unconscious or injured, the
SARBE
tm
159
transmission will be initiated immediately as no human
intervention is required, reducing the time it takes to initiate
a search. Digital Angel’s
SARBE
tm
G2R has been approved to operate on the COSPAS-SARSAT Satellite
System. COSPAS-SARSAT is the internationally-funded satellite
system operator that detects activated search and rescue beacons
and is responsible for approving all rescue beacons.
Digital Angel is also a distributor of two-way communications
equipment in the United Kingdom. Its products range from
conventional radio systems for the majority of radio users, for
example, safety and security, construction, manufacturing, and
trunked radio systems for large-scale users, such as example
local authorities and public utilities. Digital Angel also
offers marine radios, air band radios and Immarsat communication
equipment for use on a global basis.
Alarm
Sounders
Digital Angel also manufactures electronic alarm sounders under
the Clifford & Snell name. These products are used to
provide audible and/or visual signals, which alert personnel in
hazardous areas, including the oil and petrochemical industry,
and in the fire and security market. Digital Angel’s recent
Yodalex explosion-proof sounders and strobes include an
omni-directional, high-sound output with sounder/strobe
combination, all sharing a common explosion-proof enclosure.
Growth
Strategy
Digital Angel believes that its PLBs offer the greatest source
of growth for its GPS and Radio Communications segment. Digital
Angel expects to see an increase in the demand for its beacons
over the next two years as air forces upgrade their gear. Air
forces in the United Kingdom and the U.S. will be required
to replace their existing beacons with the new generation
406 MHz beacons in the future. In August 2006, Digital
Angel was awarded a contract by the U.S. Air Force to
develop a new survival radio for military aircraft. Digital
Angel was one of only two companies to win the contract to
develop a new radio to replace the URT33, which is carried in
aircrew survival packs and sets off a distress signal in an
emergency. The URT33 will become obsolete when existing
frequencies on 121.5 and 243 MHz cease to be monitored by
COSPAS-SARSAT on February 1, 2009.
In addition, in April 2007, Digital Angel, through its
wholly-owned subsidiary, Signature Industries Limited, acquired
certain assets and customer contracts of McMurdo Limited, a
United Kingdom-based subsidiary of Chemring Group Plc and
manufacturer of emergency location beacons. McMurdo Limited had
a worldwide distribution network of approximately 60 outlets.
Digital Angel believes this acquisition will increase the
revenue base of its survival radio business and significantly
broadens its product offerings in both the maritime and military
sectors.
Digital Angel is also developing, under a joint venture
agreement, an automatically activated and deployed emergency
radio for the Royal Netherlands Navy, which will alert rescue
authorities and pinpoint a stricken submarine submerged or on
the surface. Digital Angel is also pursuing opportunities to
supply beacons to Scorpene submarines that have been ordered by
the Navies of Malaysia, India and Chile.
Digital Angel believes that another significant growth
opportunity will come in the next few years when the Galileo
GNNS network of satellites is launched and becomes operational.
This European GNNS system is set to begin satellite launches in
2007. It is also likely to add the facility for a confirmation
message to be relayed back to the active beacon, so those
awaiting rescue will know immediately that their signal has been
received and that help is at hand; this is something the present
satellite structure cannot do. It will add an additional degree
of confidence to anyone in distress with a PLB.
Sales
and Distribution
Digital Angel sells its PLBs directly to its customers through a
direct sales force of approximately six personnel, and through
supply and distribution agreements, which have varying
expiration dates. The remaining terms of such agreements are
between one and three years.
160
Digital Angel sells its alarm sounders through various
distributors located in Europe, Australia, New Zealand,
Hong Kong, Japan, South Africa, Singapore and the
U.S. Digital Angel is also a distributor of two-way
communications equipment in the United Kingdom. Digital
Angel’s agreements with these distributors have varying
expiration dates.
Competition
Principal methods of competition in Digital Angel’s GPS and
Radio Communications segment include geographic coverage,
service and product performance. The principal competitors for
its PLBs are Boeing North American Inc., General Dynamics
Decision Systems, Tadiran Spectralink Ltd., Becker Avionic
Systems, and ACR Electronics, Inc. Digital Angel believes that
being first to market with GPS in Digital Angel’s search
and rescue beacons, as well as the use of its search and rescue
beacons, in over forty countries are competitive advantages. In
addition, the barriers to entry in this market are high due to
the technical demands of the market.
Manufacturing;
Supply Arrangements
Digital Angel’s GPS and Radio Communications segment has
not been materially or adversely affected by the inability to
obtain raw materials or products during the past three years.
This segment’s principal suppliers are Contract Components
LTD., Motorola LTD. and Delta Impact LTD. Digital Angel
generally does not enter into contracts with these suppliers.
Financial
Information About Segments
Revenues from Digital Angel’s various segments over the
prior three years and the six months ended June 30, 2007
can be broken down as follows:
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For the Years
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For the Six Months
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Ended
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Ended
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December 31,
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June 30, 2007
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2006
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2005
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2004
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(In thousands)
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Animal Applications
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$
|
21,289
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$
|
38,058
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$
|
35,972
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$
|
25,871
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GPS and Radio Communications
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$
|
13,542
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$
|
16,352
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|
$
|
18,578
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|
$
|
18,667
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Total
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$
|
34,831
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|
$
|
54,410
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$
|
54,550
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$
|
44,548
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Refer to the segment information in Note 19 to Digital
Angel’s consolided financial statements beginning on
page FS-50.
Warranties
Digital Angel offers its customers a limited warranty, for a
period of between twelve and twenty-four months, on certain of
its products that the products will be free from defects in
workmanship and quality. Under the terms of Digital Angel’s
warranty, Digital Angel shall, at its sole option, repair or
replace the covered products at no cost to its distributor or
customer.
Backlog
Digital Angel generally produces goods to fill orders received
and anticipated orders based on distributors’ forecasts.
Digital Angel also maintains inventories of finished goods to
fill customer orders with short lead times. As a result, Digital
Angel generally does not have a significant backlog of orders,
and any such backlog is not indicative of future sales.
Research
and Development
During 2006, Digital Angel spent $3.4 million
($2.7 million in the Animal Applications segment and
$0.8 million in the GPS and Radio Communications segment)
on research and development activities relating
161
to the development of new products or improvements of existing
products. Digital Angel spent $3.3 million
($3.3 million in the Animal Applications segment and
$0.0 million in the GPS and Radio Communications segment)
in 2005 and $2.0 million ($2.0 million in the Animal
Applications segment and $0.0 million in the GPS and Radio
Communications segment) in 2004.
Government
Agreements
Customers for Digital Angel’s electronic identification
devices for fish include government contractors that rely on
funding from the United States government. Since these
contractors rely heavily on government funds, any decline in the
availability of such funds could result in a decreased demand by
these contractors for Digital Angel’s products. Any
decrease in demand by such customers could have a material
adverse effect on Digital Angel’s financial condition and
results of operations and result in a decline in the market
value of its common stock. The GPS and Radio Communications
segment is heavily dependent on contracts with domestic
government agencies and foreign governments, primarily relating
to military applications. The loss of, or a significant
reduction in, orders from these or Digital Angel’s other
major customers could have a material adverse effect on its
financial condition and results of operations.
Employees
As of June 30, 2007, Digital Angel had 325 full-time
employees, including 11 in management, 20 in sales positions, 79
in administrative positions, 29 in technical positions and 186
in production positions. Digital Angel’s Animal
Applications production workforce is party to a collective
bargaining agreement that expires May 31, 2008. Digital
Angel believes its relations with its employees are good.
Government
Regulation
Regulation
of RFID Technologies
Digital Angel’s active RFID systems, as well as its RFID
systems that use its implantable microchip, rely on low-power,
localized use of radio frequency spectrum to operate. As a
result, Digital Angel must comply with numerous laws and
regulations in the U.S. and other jurisdictions where it
sell its products. These laws and regulations relate to, among
other things, the design, testing, marketing, operation and sale
of RFID devices, and seek to ensure that such devices do not
cause interference to licensed spectrum services, mislead
consumers regarding their operational capabilities, or produce
emissions that are harmful to human health. In the U.S., the FCC
is the regulatory agency responsible for implementing these
regulations and requires that RFID devices, including those
Digital Angel markets and sells, be authorized and comply with
all applicable technical standards, operational and design
requirements, and labeling requirements, prior to being marketed
in the U.S. Other countries in which Digital Angel markets
and sells its RFID systems impose similar regulatory
requirements upon it and often require Digital Angel to
pre-register and clear its products prior to actively marketing
and selling to customers. As Digital Angel enters new markets,
the time required to comply with these requirements can delay
its ability to actively market and sell its products.
Regulation
by the FDA
Generally speaking, unless an exemption applies, each medical
device that Digital Angel wishes to distribute commercially in
the U.S. will require either prior clearance under
Section 510(k) of the Federal Food, Drug, and Cosmetic Act,
or FFDCA, or a pre-market approval application, or PMA, from the
FDA. Medical devices are classified into one of three
classes — Class I, Class II or
Class III — depending on the degree of risk to
the patient associated with the medical device and the extent of
control needed to ensure safety and effectiveness. Devices
deemed to pose lower risks are placed in either Class I or
II. The manufacturer of a Class II device is typically
required to submit to the FDA a pre-market notification,
requesting permission to commercially distribute the device and
demonstrating that the proposed device is substantially
equivalent to a previously cleared and legally marketed 510(k)
device or a device that was in
162
commercial distribution before May 28, 1976, for which the
FDA has not yet called for the submission of a PMA. This process
is known as 510(k) clearance. Devices deemed by the FDA to pose
the greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are generally
placed in Class III, requiring pre-market approval.
Digital Angel has registered with the FDA as a medical device
manufacturer. The FDA has broad post-market and regulatory
enforcement powers. Digital Angel is subject to unannounced
inspections by the FDA to determine its compliance with the
quality system regulation, or QSR, which requires manufacturers,
including third-party manufacturers, to follow stringent design,
testing, control, documentation, and other quality assurance
procedures during all aspects of the manufacturing process.
These inspections may include the manufacturing facilities of
Digital Angel’s suppliers. Digital Angel’s
manufacturing facility located in St. Paul, Minnesota, was
inspected by the FDA in late May and early June 2006, during
which the FDA inspector conducted a routine Level II
Quality System Inspectional Technique inspection. During the
inspection, the FDA inspector made three verbal observations
regarding deviations in Digital Angel’s quality system
unrelated to its implantable microchip. It is Digital
Angel’s understanding that it has corrected the three
deviations. To Digital Angel’s knowledge, the RME facility
has not yet been inspected by the FDA.
Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following sanctions:
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warning letters, fines, injunctions, consent decrees and civil
penalties;
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repair, replacement, issuance of refunds, recall or seizure of
products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusing requests for 510(k) clearance or pre-market approval of
new products, new intended uses or modifications to existing
products;
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withdrawing 510(k) clearance or pre-market approvals that have
already been granted; and
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criminal prosecution.
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National
Animal Identification System
The USDA is involved in the development and implementation of a
planned National Animal Identification System (NAIS), as well as
in the regulation of certain aspects of the companion animal
business. While the regulations governing these activities are
not yet finalized, Digital Angel believes that such regulations
will have an impact on its operations in the livestock and
companion animal markets. Animal products for food-producing
animals have been reviewed by the FDA’s Center for
Veterinary Medicine, and the FDA has determined that Digital
Angel’s product, as presently configured, is unregulated.
Foreign
Regulations
In addition to the regulations discussed above, certain of
Digital Angel’s products are subject to compliance with
applicable regulatory requirements in those foreign countries
where these products are sold. The contracts that Digital Angel
maintains with its distributors in these foreign countries
generally require the distributor to obtain all necessary
regulatory approvals from the governments of the countries in
which these distributors sell Digital Angel’s products.
Environmental
Matters
Digital Angel does not anticipate any material effect on its
capital expenditures, earnings or competitive position due to
compliance with government regulations involving environmental
matters.
163
Intellectual
Property
Digital Angel owns various patents and trademarks which it
considers in the aggregate to constitute a valuable asset.
Digital Angel believes certain of its patents may offer a
significant competitive advantage and/or barrier to entry in the
Animal Applications segment.
Digital Angel and Bio-Thermo are registered trademarks. SARBE
has trademark protection in Europe. The following patents are
among those owned by Digital Angel:
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U.S. Patent No. 5,211,129, “Syringe-Implantable
Identification Transponders,” issued on May 18, 1993.
This patent covers a portion of the implantable microchip
technology, which Digital Angel licenses to VeriChip. In 1994,
Destron/IDI, Inc., a predecessor company to Digital Angel,
granted a co-exclusive license under this patent, other than for
certain specific fields of use related to Digital Angel’s
Animal Applications segment, which were retained by the
predecessor company, to Hughes and its then wholly-owned
subsidiary, HID. Digital Angel retained all rights to the patent
in connection with its animal applications business. This patent
expires in 2008.
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U.S. Patent No. 7,176,846, “Passive Integrated
Transponder Tag With Unitary Antenna Core,” issued on
February 13, 2007. This patent covers Digital Angel’s
method of manufacturing an RFID microchip wherein the coil and
integrated circuit are unified, thereby allowing more space for
coil material, which enables a greater capture of magnetic field
resulting in longer read distance. This patent expires in 2020.
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U.S. Patent No. 7,015,826, “Method And Apparatus
For Sensing And Transmitting A Body Characteristic Of A
HOST,” issued on March 21, 2006. This patent covers
Digital Angel’s Bio-Thermo temperature-sensing, implantable
RFID microchip designed for non-laboratory applications that use
RFID technology to determine the body temperature of its host
animal. This patent expires in 2023.
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U.S. Patent No. 5,952,935, “Programmable Channel
Search Reader,” issued on September 14, 1999. This
patent covers Digital Angel’s RFID tag readers that are
capable of reading different RFID tags of different frequencies
or differing communications protocols. The patent expires in
2016.
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U.S. Patent No. 5,041,826, “Identification
System,” issued on August 20, 1991. This patent covers
Digital Angel’s RFID tag readers and the communication
protocol used to communicate with RFID tags. This patent expires
in 2008.
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U.S. Patent No. 5,166,676, “Identification
System,” issued on November 24, 1992. This patent
covers Digital Angel’s RFID tags and the communication
protocol used to communicate with RFID tag readers. This patent
expires in 2009.
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U.S. Patent No. 6,369,694, “Apparatus And Method
For Remotely Testing A Passive Integrated Transponder Tag
Interrogation System,” issued on April 9, 2002. This
patent covers Digital Angel’s method for remotely testing
transponders within a fixed field. This patent expires in 2020.
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U.S. Patent No. 6,700,547, “Multidirectional
Walkthrough Antenna,” issued on March 2, 2004. This
patent covers Digital Angel’s walk-through antenna for
communicating with interrogators used to read information from
transponders attached to livestock. This patent expires in 2020.
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U.S. Patent No. 6,833,790, “Livestock Chute
Scanner,” issued on December 21, 2004. This patent
covers Digital Angel’s interrogator device for reading a
plurality of transponders, including reading a plurality of
transponders attached to livestock. This patent expires in 2020.
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Seasonality
No significant portion of Digital Angel’s business is
considered to be seasonal. However, Digital Angel’s Animal
Applications and GPS and Radio Communications segments’
revenue, while not considered to be seasonal, may vary
significantly, based on government procurement cycles and
technological development. Digital Angel’s Animal
Applications segment’s revenues and operating income can be
affected by the timing of animal reproduction cycles.
164
Financial
Information About Geographic Areas
Information concerning principal geographic areas as of and for
the years ended December 31, 2006, 2005, and 2004, was as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
All Other
|
|
|
|
|
United States
|
|
|
Kingdom/Denmark
|
|
|
Foreign Countries
|
|
|
|
|
(In thousands)
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
26,735
|
|
|
$
|
14,970
|
|
|
$
|
12,705
|
|
|
Long-lived assets excluding goodwill and other intangible
assets, net
|
|
|
5,523
|
|
|
|
4,242
|
|
|
|
220
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
35,684
|
|
|
$
|
5,108
|
|
|
$
|
13,758
|
|
|
Long-lived assets excluding goodwill and other intangible
assets, net
|
|
|
4,350
|
|
|
|
3,824
|
|
|
|
270
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
28,054
|
|
|
$
|
4,369
|
|
|
$
|
12,126
|
|
|
Long-lived assets excluding goodwill and other intangible
assets, net
|
|
|
4,514
|
|
|
|
1,101
|
|
|
|
277
|
|
Availability
of Reports and Other Information
Digital Angel’s corporate website is
www.digitalangelcorp.com
. Digital Angel makes available,
free of charge, access to its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
Proxy Statement on Schedule 14A, and amendments to those
materials filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act on its website under “News-SEC
Filings,” as soon as reasonably practicable after it files
electronically such material with, or furnishes it to, the SEC.
In addition, the SEC’s website is
www.sec.gov
. The
SEC makes available on its website, free of charge, reports,
proxy and information statements, and other information
regarding issuers, such as Digital Angel, that is filed
electronically with the SEC. Additionally, Digital Angel’s
reports, proxy, and information statements may be read and
copied at the SEC’s public reference room at 100 F Street,
N.E., Washington, D.C. 20549. Information on Digital
Angel’s website or the SEC’s website is not part of
this joint proxy statement/prospectus.
Properties
Animal
Applications
Digital Angel owns a 79,692 square foot (gross building
area) masonry and steel industrial two-building complex located
in South St. Paul, Minnesota that is currently occupied by the
Animal Application segment’s administrative, sales,
engineering and manufacturing operations. The property is
encumbered by a mortgage in the aggregate principal amount of
$2.2 million.
Digital Angel leases 2,600 square feet in an office
building located in Delray Beach, Florida for certain corporate
employees. The lease expires in January 2011.
Digital Angel leases 1,497 square feet of office space in
Buenos Aires, Argentina. The lease expires in February 2008.
Digital Angel leases 970 square feet of office space in
Brazil. The lease is month to month.
Digital Angel’s subsidiary, DSD Holding A/S, leases a
13,600 square foot building located in Hvidovre, Denmark.
The building is occupied by DSD Holding A/S’s
administrative and production operations. The lease agreement
has no expiration but includes a three-month termination notice
requirement that can be utilized by the owner or DSD Holding
A/S. DSD Holding A/S leases the building from LANO Holding ApS,
which is 100% owned by Lasse Nordfjeld, president of Digital
Angel’s Animal Applications Group. In addition, DSD Holding
A/S leases a 1,900 square foot building in Warsaw, Poland.
The lease agreement has no expiration,
165
but includes a one-month termination notice requirement that
can be utilized by the owner or DSD Holding
A/S.
GPS
and Radio Communications
Digital Angel’s subsidiary, Signature Industries Limited,
leases, under a long-term lease expiring September 2042, a
60,000 square foot building located in Thamesmead, London
that is currently occupied by administrative, sales, engineering
and manufacturing personnel. In addition, Signature Industries
Limited leases three single-story buildings totaling
5,400 square feet within a small industrial estate in
Springburn, Glasgow for repair and servicing operations and
leases approximately 983 square feet of office space in
Aberdeen, Scotland. The lease for these three buildings expires
in 2010. Further, in connection with the acquisition of McMurdo
Limited, Signature Industries Limited entered into a lease for
McMurdo Limited’s 38,000 square foot corporate and
manufacturing facilities located in Portsmouth, England. The
lease expires on January 5, 2008.
Digital Angel considers its properties to be suitable and
adequate for their present purposes, well maintained and in good
operating condition.
Legal
Proceedings
Digital Angel Corporation v. Datamars, Inc., Datamars,
S.A., The Crystal Import Corporation and Medical Management
International, Inc.
On October 20, 2004, Digital Angel commenced an action in
the United States District Court for the District of Minnesota
against Datamars, Inc., Datamars, S.A., The Crystal Import
Corporation, or Crystal, and Medical Management International,
Inc. This suit claims that the defendants are marketing and
selling syringe-implantable identification transponders
manufactured by Datamars that infringe Digital Angel’s 1993
patent for syringe-implantable identification transponders,
which was previously found by the United States District Court
for the District of Colorado to be enforceable. The suit seeks,
among other things, an adjudication of infringement, injunctive
relief, and actual and punitive damages. On February 28,
2006, the Court conducted a hearing, or Markman Hearing, in
which each of the parties presented the Court with their views
regarding the scope of the claims set forth in the subject
patent. On May 22, 2006, the Court issued its order on the
Markman Hearing, largely adopting Digital Angel’s views on
the scope of the claims in the subject patent.
The Crystal Import Corporation v. Digital Angel, et
al.
On or about December 29, 2004, Crystal filed an action
against AVID Identification Systems, Inc., or AVID, and Digital
Angel in the United States District Court for the Northern
District of Alabama. Crystal’s complaint primarily asserted
federal and state antitrust and related claims against AVID,
though it also asserted similar claims against Digital Angel. On
October 12, 2005, the Alabama Court transferred the action
to Minnesota. Following the docketing of the action in
Minnesota, Digital Angel and AVID filed a motion seeking to stay
the case until the corresponding patent infringement actions
have been resolved.
Datamars and Crystal Import Settlements
On August 27, 2007, pursuant to the Court’s settlement
conference procedures, the parties in the above-described legal
proceedings finalized a global settlement. Under the terms of
the settlement agreement, Datamars made a lump-sum payment to
Digital Angel, the parties granted mutual releases, Digital
Angel dismissed the infringement claims against Datamars, and
Digital Angel was dismissed from the antitrust litigation.
Digital Angel also granted a non-exclusive license to Datamars
for syringe-implantable identification transponders that could
reasonably be alleged to be covered by the patent at issue in
the infringement litigation.
166
MANAGEMENT
OF DIGITAL ANGEL
Executive
Officers And Key Employees
As of the date of this joint proxy statement/prospectus, each of
the persons below served as one of Digital Angel’s
executive officers or key employees.
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Name
|
|
Age
|
|
Position
|
|
|
|
Barry M. Edelstein
|
|
|
44
|
|
|
Interim President and Chief Executive Officer
|
|
Lorraine M. Breece
|
|
|
55
|
|
|
Acting Chief Financial Officer, Vice President and Treasurer
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|
David M. Cairnie
|
|
|
63
|
|
|
Managing Director, Signature Industries Limited
|
|
Lasse Nordfjeld
|
|
|
61
|
|
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President of the Animal Applications Group
|
|
Patricia M. Petersen
|
|
|
47
|
|
|
Vice President, General Counsel and Secretary
|
Below is a summary of the business experience of each of Digital
Angel’s executive officers who does not serve on its board
of directors.
Lorraine M. Breece
has been Digital Angel’s acting
chief financial officer, vice president and treasurer since
May 18, 2007. Ms. Breece was appointed as Applied
Digital’s acting chief financial officer and treasurer in
March 2007. She has served as Applied Digital’s senior vice
president since April 2006 and as assistant secretary since
November 2006. She was appointed vice president of Applied
Digital in March 2004. In March 2001, she was named director of
accounting and SEC reporting for Applied Digital. She joined in
April 2000 as Applied Digital’s controller and chief
accounting officer, and she continues to serve as its chief
accounting officer. Prior to joining Applied Digital, from 1991
to 1999, Ms. Breece served as director of finance and chief
accounting officer of Nabi BioPharmaceuticals. From 1984 to
1990, she served as corporate controller for Levitt Corporation.
Ms. Breece has over 20 years employment/consulting
experience with public and private companies, including Trammell
Crow Company and Office Depot. Ms. Breece began her career
as an auditor with Coopers & Lybrand. She earned a
bachelor of administration in accounting from Florida Atlantic
University and is a CPA.
David M. Cairnie
has been the managing director of
Digital Angel’s United Kingdom-based subsidiary, Signature
Industries Limited, since March 27, 2002. Mr. Cairnie
has been the managing director of Signature Industries Limited
since the management-led buy-out in 1993. Before the
management-led buy-out, Signature Industries Limited was known
as FKI Communications, a division of FKI plc, where
Mr. Cairnie had been the managing director since 1990.
Before joining FKI Communications, Mr. Cairnie worked for
International Telephone and Telegraph (ITT). Mr. Cairnie
completed the ITT Senior Management Development program at the
London Business School and operated in various management roles
before joining FKI.
Lasse Nordfjeld
has been the president of the Animal
Applications Group of Digital Angel since February 28,
2005. From May 2001 to February 2005, Mr. Nordfjeld was
chief executive officer, president and a member of the board of
directors of DSD Holding A/S, which is the parent company of
DigiTag A/S and Daploma International A/S, manufacturers of
visual and electronic RFID tags for livestock.
Mr. Nordfjeld has also been the chairman for Daploma
International A/S since May 1996, as well as the president for
DigiTag A/S since May 2001, and has been a member of both of
their board of directors since May 1998.
Mr. Nordfjeld’s son, Torsten Nordfjeld, serves as
Digital Angel’s vice president of production for animal
applications. Prior to this, Mr. Nordfjeld served as a
technical director and was co-owner of UnoPlast, a manufacturer
of single-use devices for the healthcare sector, and served as a
Director of Production and held other senior-level executive
positions with Eskofot, a manufacturer of equipment for the
graphics industry. Mr. Nordfjeld has a bachelor’s
degree in engineering from Dansk Ingenior Akademi (DIA),
Lundtofte, Denmark and a bachelor of commerce in management and
economy from Handelsskolen, Helsingoer/Hilleroed, Denmark.
Patricia M. Petersen
has been vice president, general
counsel and secretary since September 2006. Prior to joining
Digital Angel, Ms. Petersen served as senior vice president
and general counsel of Technical Olympic USA, Inc., a national
homebuilding company, from 2002 to 2006, and as assistant
general counsel of
167
Corning Incorporated, a telecommunications and technology
company, from 2000 to 2002. From 1992 to 2000, Ms. Petersen
served as managing partner of the Nestor Nestor Kingston
Petersen law firm in Bucharest, Romania, and, from 1990 to 1992,
as associate counsel with the Hillis Clark Martin &
Peterson law firm in Seattle, Washington. Ms. Petersen
earned a bachelor’s degree from the University of Texas and
a juris doctorate degree from the Harvard Law School.
Compensation
Discussion And Analysis
Overview
The duties of the compensation committee include establishing
the salaries, incentives and other forms of compensation for
Digital Angel’s named executive officers. This includes
awards under its equity-based compensation plans. The
compensation committee’s current policy is to ensure that
compensation programs contribute directly to the success of
Digital Angel, including enhanced share value.
In connection with the compensation committee’s
deliberations for 2006 compensation, the compensation committee
selected and retained Riley, Dettmann & Kelsey LLC, an
independent compensation consulting firm, to advise the
compensation committee. The compensation committee received from
Riley, Dettmann & Kelsey LLC a comprehensive
position-by-position
benchmarking analysis regarding base salary, annual bonus and
total compensation levels at the companies that comprised
Digital Angel’s comparator group (as described below).
Riley, Dettmann & Kelsey LLC also provided the
compensation committee with a market update regarding changes in
equity incentive trends and other trends in the compensation
area. Riley, Dettmann & Kelsey LLC reports directly to
the compensation committee. Digital Angel believes that the use
of an independent consultant provides additional assurance that
its programs are reasonable and consistent with its objectives.
Philosophy
Digital Angel’s compensation programs are designed to:
|
|
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|
|
|
•
|
Provide competitive compensation and benefits to attract and
retain the highest-quality officers;
|
|
|
|
|
|
|
•
|
Provide variable pay opportunities through bonus plans and
incentive plans that reward performers who contribute to
superior company results; and
|
|
|
|
|
•
|
Establish an appropriate relationship between compensation and
the creation of long-term stockholder value.
|
Accordingly, the total compensation of Digital Angel’s
named executive officers has been set at levels that are
intended to be competitive with companies in industries similar
to Digital Angel’s, but whose revenues and number of
employees are greater than Digital Angel’s. Digital Angel
chose these companies because it anticipates growth in its
revenues and number of employees. In order to establish total
compensation levels, Digital Angel reviewed compensation
practices at selected peer companies. The companies comprising
the peer group are:
|
|
|
|
|
• Applied Signal Technology, Inc.
|
|
• FSI International
|
|
• Channell Commercial Corporation
|
|
• Lifecore Biomedical, Inc.
|
|
• Datalink Corporation
|
|
• LoJack Corporation
|
|
• Delphax Technologies, Inc.
|
|
• Nortech Systems, Inc.
|
Digital Angel did not target a specific position in the range of
comparative data for each individual or for each component of
compensation. However, Digital Angel considered that base
salaries above 50% of the median base salary of the peer group
would be competitive. Digital Angel established individual
compensation levels, based on the reviews discussed above, its
financial and operational performance, and other factors
regarding the individual officers, such as level of
responsibility, prior experience and its judgment as to each
officer’s individual performance.
168
To achieve its policy goals, the compensation committee has
utilized salary, cash bonuses and grants of stock options. The
compensation committee has focused on the establishment of
salaries and other items of compensation that are externally
competitive and internally equitable for each of Digital
Angel’s named executive officers. Digital Angel does not
currently provide its named executive officers with other
long-term incentive compensation, other than the ability to
contribute their earnings to Applied Digital’s 401(k) plan,
as described below.
Executive
Compensation Components and Practices (other than the Chief
Executive Officer)
Salaries.
As of December 31, 2006, each
named executive officer, other than Kevin McGrath, Digital
Angel’s former chief executive officer, had entered into an
employment agreement that specifies a minimum level of base
salary for the officer. The compensation committee, however, is
able to increase each officer’s salary as it deems
appropriate. Mr. Nordfjeld joined Digital Angel in
connection with its acquisition of DSD Holding A/S in February
2005. Although Digital Angel subsequently entered into a new
employment agreement with Mr. Nordfjeld, the material terms
of the agreement, such as base salary level, were influenced by
his prior employment agreement with DSD Holding A/S. At the
beginning of each fiscal year, the compensation committee
reviews salary recommendations for each of Digital Angel’s
named executive officers (other than the chief executive
officer) and then approves such recommendations, with
modifications that it deems appropriate. The salary
recommendations are made by Digital Angel’s chief executive
officer. Salaries are determined based on the benchmarking
review discussed above and evaluations of each individual
officer, market changes, and the economic and business
conditions affecting Digital Angel at the time of the
evaluation. Evaluations of each individual officer are based on
a relative valuing of the duties and responsibilities of such
officer, such officer’s role in developing and implementing
Digital Angel’s overall business strategy, and such
officer’s past and expected future performance.
As a result of its review of the peer group salary information,
for fiscal year 2006, the compensation committee approved a
salary increase for Mr. Cairnie to bring his salary in line
with what the compensation committee felt was a competitive
salary. The compensation committee did not increase the 2006
salaries of James Santelli, who served as Digital Angel’s
chief financial officer for all of 2006, and Mr. Nordfjeld.
However, the 2006 salaries reflect a full year of compensation
at the same base salary rate for Messrs. Santelli and
Nordfjeld, while the 2005 salaries reflected only ten months of
compensation. In addition, for Mr. Nordfjeld, the change in
the 2006 salary also reflects a change in the exchange rate,
since he is paid in British pounds, or GBP.
Bonuses.
The employment agreements for
Messrs. Cairnie and Nordfjeld provide for a minimum bonus
potential as a percentage of salary. The compensation committee,
however, is able to increase each such bonus potential as it
deems appropriate. In May 2006, Digital Angel established the
Digital Angel Corporation Annual Incentive Plan to promote the
interests of the company and to enhance stockholder value by
creating an annual incentive program to:
|
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•
|
attract and retain employees who will strive for
excellence; and
|
|
|
|
|
|
|
•
|
motivate those individuals to set above-average objectives and
achieve above-average results by providing them with rewards for
contributions to Digital Angel’s financial performance.
|
The annual incentive opportunities are tied directly to the
achievement of individual and company-wide financial and
operational performance targets that are established at the
beginning of each year by the compensation committee, based on
recommendations from Digital Angel’s chief executive
officer. At the end of each year, Digital Angel’s chief
executive officer provides the compensation committee with his
recommendations regarding the performance of each named
executive officer (other than the chief executive officer)
against his or her performance targets and the amount of bonus
to be paid to such officer.
In 2006, the compensation committee set targets for fiscal year
2006 for the various executives participating in the plan at
100%, 60% and 30% of their base salary. In no event could
amounts awarded under the plan exceed 200%, 120% or 60% of a
participant’s base salary. However, the compensation
committee can increase or decrease the amount of the annual
incentive in its discretion.
169
In March of 2007, the compensation committee reviewed the
accomplishments of each named executive officer during 2006
against the performance goals established at the beginning of
the year. Subject to management/board discretion, the 2006
performance goals for Digital Angel’s named executive
officers related to revenue, operating income and cash. These
factors were chosen because the compensation committee believes
that growing the top line is the most important factor for the
company’s near-term success. The performance goals for each
officer vary depending on the officer’s level and
performance. Performance goals are established at levels that
are achievable, but require better than expected planned
performance from each named executive officer. Each of the
performance goals has a minimum, target and maximum level of
payment opportunity. Because the performance goals were not met,
no bonuses under the plan were paid to Digital Angel’s
named executive officers in 2006. However, pursuant to
Mr. Cairnie’s employment agreement, he received a
bonus of $5,341 in 2006.
In September of 2007, the compensation committee set the targets
for fiscal year 2007 for the various senior executives
participating in the plan at 60% of their base salary and
executives participating in the plan at 30% of their base
salary. In no event can amounts awarded under the plan exceed
120% for senior executives, and 60% for executives, of their
base salary. The minimum targets have been set for senior
executives at 30%, and executives at 15%, of their base salary.
The chief executive officer, Barry Edelstein, is not eligible to
participate in the Digital Angel Corporation Annual Incentive
Plan during fiscal year 2007. Subject to the discretion of the
chief executive officer, the performance goals for Digital
Angel’s named executive officers relate to revenue,
operating income and cash. The compensation committee can
increase or decrease the amount of the annual incentive in its
discretion.
Equity-Based Compensation.
Digital
Angel’s board of directors’ historical practice has
been to grant equity-based awards to attract, retain, motivate
and reward the company’s employees, particularly its
executive officers, and to encourage their ownership of an
equity interest in Digital Angel. Such grants have consisted of
stock options — specifically, non-qualified stock
options, that is options that do not qualify as incentive stock
options under Section 422 of the Internal Revenue Code of
1986, as amended.
Historically, Digital Angel’s board has granted awards of
stock options to Digital Angel’s executive officers upon
their appointment as executive officers, with Digital
Angel’s obligation to grant the options typically
memorialized in the offer letter or employment agreement, or an
addendum to an employment agreement, entered into with the
applicable executive officer. In determining the aggregate
amount of options to be awarded company-wide, the compensation
committee considers the value of such option grants based on
SFAS 123R, and compares all of this information to the
comparative group data compiled by Riley, Dettmann &
Kelsey LLC. After a consideration of the relevant tax,
accounting, dilution, valuation, incentive and other
considerations, the compensation committee concluded that stock
option awards were the appropriate form of equity-based,
long-term incentive compensation.
In 2006, only Messrs. Nordfjeld and Cairnie received option
grants. In determining the size of the option grants to
Messrs. Nordfjeld and Cairnie, the compensation committee
granted an amount it believed would incentivize long-term
commitments to the company by these executives, as the
compensation committee does not expect to consider future grants
for the named executive officers for the next few years. The
options granted to Messrs. Nordfjeld and Cairnie provide
for a five-year vesting period, with options exercisable for
one-fifth of the underlying shares vesting each year.
Stock options for Digital Angel’s named executive officers
are granted at least at the prevailing market price on the grant
date, and thus will only have value if its stock price
increases. Generally, grants vest in equal amounts over a period
of five years. Digital Angel believes that this vesting schedule
aids the company in retaining executives and motivating
longer-term performance. The compensation committee
(1) sets the number of the total options to be awarded that
will be allocated to Digital Angel’s named executive
officers, (2) approves the absolute number of options to be
awarded to Digital Angel’s chief executive officer, and
(3) approves the chief executive officer’s recommended
allocation of the remainder of the named executive
officers’ award to the other individual named executive
officers.
Digital Angel does not have any program, plan or practice that
requires it to grant equity-based awards on specified dates, and
it has not made grants of such awards that were timed to precede
or follow the release or
170
withholding of material non-public information. It is possible
that Digital Angel will establish programs or policies regarding
the timing of equity-based awards in the future. Authority to
make equity-based awards to executive officers rests with
Digital Angel’s compensation committee, which considers the
recommendations of the company’s chief executive officer.
As an AMEX-listed company, Digital Angel is subject to AMEX
listing standards that, in general, require stockholder approval
of equity-based plans.
All equity-based awards have been reflected in Digital
Angel’s consolidated financial statements, based upon the
applicable accounting guidance. Previously, Digital Angel
accounted for equity compensation paid to its employees and
directors using the intrinsic value method under APB Opinion
No. 25 and FASB Financial Interpretation No. 44,
“Accounting for Certain Transactions Involving Stock
Compensation — an Interpretation of APB Opinion
No. 25.” Under the intrinsic value method, no
stock-based compensation was recognized in Digital Angel’s
consolidated statements of operations for options granted to its
directors, employees, consultants and others, because the
exercise price of such stock options equaled or exceeded the
fair value of the underlying stock on the dates of grant.
Effective January 1, 2006, Digital Angel adopted
SFAS 123R using the modified prospective transition method.
Under this method, stock-based compensation expense is
recognized using the fair value based method for all awards
granted on or after the date of adoption of SFAS 123R.
SFAS 123R requires Digital Angel to estimate and record an
expense over the service period of the stock-based award. In
2006, Digital Angel’s compensation committee, conscious of
the less favorable accounting treatment for stock options
resulting from adoption of SFAS 123R, took a more
deliberate approach to the granting of awards of stock options.
Digital Angel structures cash incentive compensation so that it
is taxable to its executive officers at the time it becomes
available to them. Digital Angel currently intends that all cash
compensation paid will be tax deductible for it. However, with
respect to equity-based awards, while any gain recognized by
Digital Angel’s executive officers and other employees from
non-qualified stock options should be deductible, to the extent
that in the future it grants incentive stock options, any gain
recognized by the optionee related to such options will not be
deductible by Digital Angel if there is no disqualifying
disposition by the optionee. In addition, Digital Angel’s
grant of shares of restricted stock or restricted stock units
that are not subject to performance vesting provisions may not
be fully deductible by Digital Angel at the time the grant is
otherwise taxable to the grantee.
Other Benefits.
Digital Angel believes
establishing competitive benefit packages for its employees is
an important factor in attracting and retaining highly qualified
personnel. Executive officers are eligible to participate in all
of its employee benefit plans, such as medical, dental, vision,
group life and disability insurance, in each case on the same
basis as other employees. Mr. McGrath was provided, and
Mr. Cairnie is provided, an individual term life insurance
policy. In addition, its United States employees, including the
named executive officers, are eligible to participate in the
Applied Digital retirement savings plan under
section 401(k), under which they may elect to contribute a
percentage of their salaries. Digital Angel provides an employer
match up to 4% of its employees’ contributions. Digital
Angel’s officers and employees residing in foreign
countries, including Mr. Cairnie who is a resident of the
United Kingdom and Mr. Nordfjeld who is a resident of
Denmark, may have somewhat different employee benefit and
retirement plans than those Digital Angel offers domestically,
typically based on certain legal requirements in those countries.
Severance and Change of Control
Benefits.
Digital Angel had entered into a
change-of-control agreement with Mr. McGrath and employment
agreements with its other named executive officers. Each of
these agreements provides for certain payments and other
benefits if the executive’s employment terminates under
certain circumstances, including in the event of a change in
control. See “Narrative Disclosure to Summary Compensation
Table and Grants of Plan-Based Awards Table —
Employment Agreements.”
The compensation committee believes that these severance and
change-in-control arrangements are an important part of the
overall compensation for Digital Angel’s named executive
officers, because they help to secure the continued employment
and dedication of Digital Angel’s named executive officers,
notwithstanding any concern that they might have regarding their
own continued employment prior to, or following, a change in
control. The compensation committee also believes that these
arrangements are important as a recruitment and retention device.
171
The executive employment agreements also contain provisions that
prohibit the executive from disclosing Digital Angel’s
confidential information and that prohibit the executive from
engaging in certain competitive activities or soliciting any of
its employees, customers, potential customers or acquisition
prospects. An executive will forfeit his right to receive
post-termination compensation if he breaches these or other
restrictive covenants in the employment agreements. Digital
Angel believes that these provisions help ensure the long-term
success of the company.
Perquisites.
The board of directors annually
reviews the perquisites that members of senior management
receive. Digital Angel generally provides reimbursement for its
named executive officers’ use of personal communication
devices. In addition, because Mr. Nordfjeld is a resident
of Denmark, it provides a vehicle allowance, which includes
lease payments and expenses. Digital Angel also provides
Mr. Nordfjeld with housing arrangements in Minnesota and
reimbursement for travel between Denmark and Minnesota. Digital
Angel has determined that providing Mr. Nordfjeld with
housing arrangements in Minnesota is more cost effective than
reimbursing him for hotel accommodations when he travels to
Minnesota.
2007 Modification to Mr. Cairnie’s
Compensation.
In September of 2007, the
compensation committee approved an increase in
Mr. Cairnie’s compensation, to be effective as of
October 1, 2007, in recognition of his role in the success
of the McMurdo Limited acquisition and his increased level of
responsibility for the merged operations. The compensation
committee approved an increase in Mr. Cairnie’s salary
to $312,515, a guaranteed bonus on September 1, 2008 in the
amount of $20,381, and an annual car allowance in the amount of
$20,100. Mr. Cairnie will be paid in GBP. These amounts
have been converted into U.S. dollars at the
September 21, 2007 exchange rate of 2.01.
Compensation
of Chief Financial Officer
On May 18, 2007, the board of directors of Digital Angel
appointed Lorraine Breece as acting chief financial officer,
treasurer and vice president of Digital Angel. Digital Angel
agreed to reimburse Applied Digital for the services
Ms. Breece provides to Digital Angel. It was determined
that the reimbursement to Applied Digital for
Ms. Breece’s services constitutes a related party
transaction pursuant to Digital Angel’s Policy for Related
Party Transactions. On May 18, 2007, the board of directors
and the independent director committee approved the
reimbursement arrangement and found it to be in Digital
Angel’s best interests. Pursuant to the terms of the
reimbursement arrangement, (i) Digital Angel will reimburse
Applied Digital one-half of Ms. Breece’s current
annual salary (one-half currently representing $75,000) and
one-half of Ms. Breece’s guaranteed annual bonus
(one-half currently representing $16,800);
(ii) Ms. Breece will be entitled to participate in
other Digital Angel benefit programs made available to similarly
situated employees; and (iii) Digital Angel will reimburse
Applied Digital one-half of Ms. Breece’s 2007
incentive compensation bonus, provided that the incentive
compensation plan established for Ms. Breece will be
modified to include Digital Angel-based incentive targets and
performance criteria established by Digital Angel’s
compensation committee. Ms. Breece shall not earn an amount
less than what she would have received under the plan without
the modifications. In such an event, Digital Angel is
responsible for the payment of the additional amount to meet
this minimum threshold. All Digital Angel payments made under
the reimbursement arrangement will be made on a going-forward
basis as of May 18, 2007, and the 2007 incentive bonus will
be pro-rated for the year. On August 15, 2007,
Ms. Breece was granted a ten-year option to purchase
100,000 shares of Digital Angel stock at $1.55 per share.
Thomas Hoyer resigned from his position as chief financial
officer of Digital Angel effective May 23, 2007. His letter
of resignation, dated May 16, 2007, was accepted by Digital
Angel. Digital Angel had originally appointed Thomas Hoyer as
its chief financial officer in January 2007. In connection with
its search for a new chief financial officer at that time,
Digital Angel consulted and retained an executive search firm.
Prior to commencing the executive search, the compensation
committee, in consultation with the executive search firm,
developed a range of the compensation package — in
terms of base salary, guaranteed bonus, additional at-risk
incentive compensation, and equity interest — that
would need to be provided to a candidate for the position. In
addition, the compensation committee reviewed generally the
compensation of chief financial officers of peer companies
provided by Riley, Dettmann & Kelsey LLC. The final
terms of Mr. Hoyer’s employment arrangement was a
result of negotiations between Digital Angel and Mr. Hoyer.
172
Mr. Hoyer’s employment agreement with Digital Angel
provided for an initial base salary of $265,000 per year, a
targeted annual bonus of 60% of his annual base salary based
upon plan metrics, Digital Angel’s performance and
individual contribution. His bonus was to be capped at 120% of
his annual base salary. In addition, he received a ten-year
option to purchase 250,000 shares of common stock. The
option was to vest ratably over a five-year period and had a
strike price equal to the market closing price as of
January 2, 2007. The option was forfeited upon
Mr. Hoyer’s resignation. Mr. Hoyer was also
entitled to participate in any of Digital Angel’s benefit
plans or programs, as are from time to time available to its
officers, and was entitled to an automobile allowance. The
agreement also provided that Mr. Hoyer would have received
a change-of-control payment if a change of control, as defined
in the agreement, had occurred and Mr. Hoyer’s
employment was terminated within three months of the change
of control (regardless if voluntary resignation or involuntary
termination). The change-of-control payment equaled the sum of
two times his then base salary, plus two times the larger of his
target bonus or average annual bonus for the prior three years.
In addition, all unvested stock options would have immediately
vested in full.
Mr. Santelli was receiving an annual base salary of
$205,000 at the time of his resignation as its chief financial
officer in January 2007. Mr. Santelli continued his
employment with Digital Angel until January 31, 2007, when
he retired, in order to effect a smooth transition to the new
chief financial officer. As described under “Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table — Employment Agreements,”
Digital Angel will pay Mr. Santelli a retirement package,
which includes payment of an amount equal to the sum of
13 months of his current base salary, plus 100% of the
larger of either his 2005 or 2006 bonus, which was $50,000 in
2005, and $4,944 in healthcare benefits.
Compensation
of Chief Executive Officer
The compensation committee fixes the base salary of Digital
Angel’s chief executive officer based on a review of
competitive compensation data, the chief executive
officer’s overall compensation package, and the
compensation committee’s assessment of his past performance
and its expectation as to his future performance in leading
Digital Angel. In connection with this process, Digital
Angel’s chief executive officer presents the compensation
committee for its consideration a self-assessment of his
performance during the applicable fiscal year and his proposed
goals for Digital Angel during the next fiscal year.
The compensation committee establishes Digital Angel’s
chief executive officer’s base salary based upon the same
criteria and review process that it uses for the establishment
of the base salaries of the other named executive officers. As a
result of its review, the compensation committee increased
Mr. McGrath’s base salary for 2006 by approximately
67%.
In 2007, the compensation committee reviewed
Mr. McGrath’s 2006 performance against his performance
goals established in 2006. The compensation committee considered
the same financial and operational achievements discussed above
in evaluating Mr. McGrath’s bonus for 2006. Because
the performance goals were not met, Mr. McGrath did not
receive a bonus or any equity-based grants in 2006.
Effective August 6, 2007, Mr. McGrath resigned as
Digital Angel’s president, chief executive officer and
director. Mr. McGrath continued his employment with Digital
Angel until September 7, 2007, in order to effect a smooth
transition to Mr. Edelstein, the interim president and
chief executive officer. Digital Angel’s board of directors
approved a severance payment for Mr. McGrath in the total
amount of $750,000, which will result in a third quarter charge,
of which $320,000 shall be payable in cash over the next twelve
months in accordance with Digital Angel’s ordinary payroll
practices, less required deductions and withholdings, and
$430,000 shall be payable through the issuance of
307,143 shares of restricted stock, which restrictions
would lapse in one year from the date of issuance. The number of
shares of restricted stock was determined by dividing $430,000
by the closing price of Digital Angel’s common stock at the
close of business on August 8, 2007. Digital Angel paid all
of Mr. McGrath’s accrued benefits through
September 7, 2007, including unused vacation time,
reimbursement of outstanding business expenses, accrued but
unpaid salary or bonus amounts, and the like. In addition,
Digital Angel reimbursed Mr. McGrath the cost of COBRA
contributions through September 7, 2008. In exchange for
the severance payment, Mr. McGrath was required to enter
into a
173
severance agreement with Digital Angel containing a general
release and waiver and non-competition and non-solicitation
provisions.
On August 6, 2007, Digital Angel, with board approval,
appointed Barry Edelstein, as interim president and chief
executive officer. In connection with his appointment,
Mr. Edelstein will receive a salary in the amount of
$40,000 per month, plus incentive bonus of up to $120,000.
Mr. Edelstein received a grant of 100,000 stock options,
exercisable at a strike price equal to $1.29. The stock options
granted have an exercise term of 10 years, and vest and
become exercisable as to 10% per year for eight years, beginning
on August 6, 2008, and 20% on August 6, 2016.
Mr. Edelstein will be entitled to participate in such other
benefits programs as are made available to Digital Angel’s
officers from time to time.
Effect
of Regulatory Requirements on Executive
Compensation
Code Section 162(m).
Under
U.S. federal income tax law, Digital Angel cannot take a
tax deduction for certain compensation paid in excess of
$1 million to its named executive officers. However,
performance-based compensation, as defined in the tax law, is
fully deductible if the programs are approved by stockholders
and meet other requirements.
Although the compensation committee has not adopted any specific
policy with respect to the application of Section 162(m),
the compensation committee generally seeks to structure
executive compensation to Digital Angel’s executive
officers in a manner that is intended to avoid disallowance of
deductions under Section 162(m). Digital Angel may make
payments that are not fully deductible if, in its judgment, such
payments are necessary to achieve its compensation objectives
and to protect stockholder interests.
Code Section 409A.
Code Section 409A
generally changes the tax rules that affect most forms of
deferred compensation that were not earned and vested prior to
2005. The compensation committee takes Code Section 409A
into account in determining the form and timing of compensation
paid to Digital Angel’s executives. The company operates
and administers its compensation arrangements in accordance with
a reasonable good faith interpretation of the new rules.
Code Sections 280G and
4999.
Sections 280G and 4999 of the Internal
Revenue Code of 1986, as amended, limit the company’s
ability to take a tax deduction for certain “excess
parachute payments” (as defined in Code Sections 280G
and 4999) and impose excise taxes on each executive that
receives “excess parachute payments” in connection
with his or her severance from the company in connection with a
change in control. The compensation committee considers the
adverse tax liabilities imposed by Code Sections 280G and
4999, as well as other competitive factors, when it structures
certain post-termination compensation payable to Digital
Angel’s named executive officers. The potential adverse tax
consequences to Digital Angel
and/or
the
executive, however, are not necessarily determinative factors in
such decisions.
Accounting Rules.
Various rules under
generally accepted accounting practices determine the manner in
which the company accounts for grants of equity-based
compensation to its employees in its financial statements. The
compensation committee takes into consideration the accounting
treatment of alternative grant proposals under SFAS 123R
when determining the form and timing of equity compensation
grants to employees, including Digital Angel’s named
executive officers. The accounting treatment of such grants,
however, is not determinative of the type, timing, or amount of
any particular grant of equity-based compensation to its
employees.
Summary
The compensation committee and the board of directors believe
that the caliber and motivation of all Digital Angel’s
employees, and especially its executive leadership, are
essential to its performance. Digital Angel believes its
management compensation programs contribute to its ability to
differentiate its performance from others in the marketplace.
The compensation committee believes that Digital Angel’s
overall executive compensation philosophy and programs are
market-competitive, performance-based and stockholder-aligned.
Accordingly, the compensation committee believes that Digital
Angel will continue to attract, motivate and retain high-caliber
executive management to serve the interests of Digital Angel and
its stockholders. Digital Angel will continue to evolve and
administer its compensation program in a manner that Digital
Angel believes will be in stockholders’ interests and
worthy of stockholder support.
174
Compensation
Committee Report
The compensation committee of Digital Angel’s board of
directors has submitted the following report for inclusion in
this joint proxy statement/prospectus.
The compensation committee reviewed and discussed the
Compensation Discussion and Analysis contained in this joint
proxy statement/prospectus with management. Based on the
compensation committee’s review and discussions with
management with respect to the Compensation Discussion and
Analysis, the compensation committee recommended to the board of
directors that the Compensation Discussion and Analysis be
included in this joint proxy statement/prospectus for filing
with the SEC.
The Compensation Committee
Howard S. Weintraub, Ph.D.
Michael S. Zarriello
John R. Block
175
The following table presents certain summary information for the
fiscal year ended December 31, 2006 concerning compensation
earned for services rendered in all capacities by the following
executive officers of Digital Angel whose total compensation
exceeded $100,000 during the fiscal year ended December 31,
2006:
|
|
|
|
|
|
•
|
the person that served as Digital Angel’s chief executive
officer;
|
|
|
|
|
•
|
each person that served as Digital Angel’s chief financial
officer; and
|
|
|
|
|
|
|
•
|
Digital Angel’s, or Digital Angel’s
subsidiaries’, other two most highly compensated executive
officers.
|
Digital Angel refers to these officers collectively as its named
executive officers.
2006
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
All Other
|
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Compensation
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
Kevin N. McGrath(1)
|
|
|
2006
|
|
|
|
316,538
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
27,643
|
(2)
|
|
|
344,181
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James P. Santelli(3)
|
|
|
2006
|
|
|
|
205,000
|
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
14,401
|
(4)
|
|
|
269,401
|
|
|
Chief Financial Officer, Senior Vice-President, Finance,
Treasurer, and Assistant Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Cairnie
|
|
|
2006
|
|
|
|
237,286
|
(5)
|
|
|
5,341
|
|
|
|
18,366
|
(6)
|
|
|
33,083
|
(7)
|
|
|
294,076
|
|
|
Managing Director, Signature Industries Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lasse Nordfjeld
|
|
|
2006
|
|
|
|
201,600
|
(8)
|
|
|
-0-
|
|
|
|
18,366
|
(6)
|
|
|
82,657
|
(9)
|
|
|
302,623
|
|
|
President, Animal Applications Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Effective August 6, 2007, Mr. McGrath resigned as
Digital Angel’s president, chief executive officer and
director.
|
|
|
|
|
|
(2)
|
|
Consists of (i) $12,000 for Mr. McGrath’s vehicle
allowance, (ii) $4,635 paid for Mr. McGrath’s
life insurance, (iii) reimbursement of $2,208 for
Mr. McGrath’s personal communication devices and
(iv) $8,800 of company matching contributions to the
Applied Digital 401(k) profit sharing plan.
|
|
|
|
(3)
|
|
Effective January 2, 2007, Mr. Santelli resigned as
Digital Angel’s vice president, finance and chief financial
officer.
|
|
|
|
(4)
|
|
Consists of (i) reimbursement of $5,601 for
Mr. Santelli’s personal communication devices and
(ii) $8,800 of company matching contributions to the
Applied Digital 401(k) profit sharing plan.
|
|
|
|
|
|
(5)
|
|
Mr. Cairnie was paid in GBP. The table reflects the amounts
converted into U.S. dollars at an exchange rate of 1.843.
|
|
|
|
|
|
(6)
|
|
The SFAS 123R fair value per share is based on certain
assumptions that Digital Angel explains in footnotes 1 and 15 to
its financial statements, which are included in its Annual
Report on
Form 10-K.
These options vest and become exercisable in five equal annual
installments, beginning on June 14, 2007, the first
anniversary of the grant date.
|
|
|
|
|
|
(7)
|
|
Consists of (i) $5,029 paid for Mr. Cairnie’s
life insurance, (ii) $8,592 paid for
Mr. Cairnie’s private health and disability insurance
and (iii) $19,462 of company contributions to a retirement
plan.
|
|
|
|
|
|
(8)
|
|
Mr. Nordfjeld was paid in DKK. The salary amount reflects
the amounts converted into U.S. dollars using an exchange rate
of 0.168.
|
|
|
|
|
|
(9)
|
|
Consists of (i) reimbursement of $9,093 for
Mr. Nordfjeld’s personal communications devices and
network, (ii) $34,046 for Mr. Nordfjeld’s vehicle
allowance, which includes lease payments and expenses for his
vehicle located in Denmark, (iii) $12,096 of company
contributions to a retirement plan, (iv) $527 paid for
Mr. Nordfjeld’s private health insurance,
(v) reimbursement of $10,354 for personal travel expenses
|
176
|
|
|
|
|
|
|
and (vi) $16,541 housing arrangement expenses for his home
in Minnesota. Mr. Nordfjeld splits his time between Denmark
and Digital Angel’s headquarters in South St. Paul,
Minnesota. Digital Angel has determined that providing
Mr. Nordfjeld with housing arrangements in Minnesota would
be more cost effective than reimbursing him for hotel expenses.
Further, Digital Angel reimburses Mr. Nordfjeld for his
travel between Denmark and Minnesota.
|
2006
Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise or
|
|
|
Grant
|
|
|
|
|
|
|
|
Securities
|
|
|
Base Price
|
|
|
Date Fair
|
|
|
|
|
|
|
|
Underlying
|
|
|
of Option
|
|
|
Value of
|
|
|
|
|
Grant
|
|
|
Options
|
|
|
Awards
|
|
|
Option
|
|
|
Name
|
|
Date
|
|
|
(#)(1)
|
|
|
($/Sh)
|
|
|
Awards ($)
|
|
|
|
|
Kevin N. McGrath
|
|
|
N/A
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
N/A
|
|
|
James P. Santelli
|
|
|
N/A
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
N/A
|
|
|
David M. Cairnie
|
|
|
06/14/06
|
|
|
|
75,000
|
|
|
|
3.26
|
|
|
|
169,531
|
|
|
Lasse Nordfjeld
|
|
|
06/14/06
|
|
|
|
75,000
|
|
|
|
3.26
|
|
|
|
169,531
|
|
|
|
|
|
|
(1)
|
|
This column represents the number of stock options granted in
2006 to the named executive officers. These options vest and
become exercisable ratably in five equal annual installments,
beginning on June 14, 2007, the first anniversary of the
grant date.
|
Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table
Employment Agreements:
Digital Angel did not have a formal written employment agreement
with Kevin N. McGrath, Digital Angel’s former president and
chief executive officer. On December 2, 2004, Digital Angel
entered into a change-of-control agreement with
Mr. McGrath. Upon a change of control (as defined in the
agreement), Mr. McGrath would have been entitled to receive
three times his base salary and three times his average bonus
paid to him for the three full years immediately prior to the
change of control. In addition, all unvested stock options would
have immediately vested in full. Further, Digital Angel would
have continued to pay any lease payments on any vehicle then
used by Mr. McGrath.
Effective August 6, 2007, Mr. McGrath resigned as
Digital Angel’s president, chief executive officer and
director. Mr. McGrath continued his employment with Digital
Angel until September 7, 2007, in order to effect a smooth
transition to Mr. Edelstein, the interim president and
chief executive officer. Digital Angel’s board of directors
approved a severance payment for Mr. McGrath in the total
amount of $750,000, which will result in a third quarter charge,
of which $320,000 shall be payable in cash over the next twelve
months in accordance with Digital Angel’s ordinary payroll
practices, less required deductions and withholdings, and
$430,000 shall be payable through the issuance of
307,143 shares of restricted stock, which restrictions
would lapse in one year from the date of issuance. The number of
shares of restricted stock was determined by dividing $430,000
by the closing price of Digital Angel’s common stock at the
close of business on August 8, 2007. Digital Angel paid all
of Mr. McGrath’s accrued benefits through
September 7, 2007, including unused vacation time,
reimbursement of outstanding business expenses, accrued but
unpaid salary or bonus amounts, and the like. In addition,
Digital Angel reimbursed Mr. McGrath the cost of COBRA
contributions through September 7, 2008. In exchange for
the severance payment, Mr. McGrath was required to enter
into a severance agreement with Digital Angel containing a
general release and waiver and non-competition and
non-solicitation provisions.
On August 6, 2007, Digital Angel, with board approval,
appointed Barry Edelstein, as interim president and chief
executive officer. In connection with his appointment,
Mr. Edelstein will receive a salary in the amount of
$40,000 per month, plus incentive bonus of up to $120,000.
Mr. Edelstein received a grant of 100,000 stock options,
exercisable at a strike price equal to $1.29. The stock options
granted have an exercise
177
term of 10 years, and vest and become exercisable as to 10%
per year for eight years, beginning on August 6, 2008, and
20% on August 6, 2016. Mr. Edelstein will be entitled
to participate in such other benefits programs as are made
available to Digital Angel’s officers from time to time.
Effective as of April 1, 2002, Digital Angel entered into
an employment agreement with Mr. James P. Santelli, its
former vice president, finance and chief financial officer. The
agreement provided that Digital Angel pays Mr. Santelli an
initial base salary of $175,000 per year and that he was
entitled to participate in any of its benefit and deferred
compensation plans or programs as are from time to time
available to its officers. The agreement contained
confidentiality, non-compete and assignment of invention
clauses. The agreement also provided that if the board of
directors terminated Mr. Santelli’s employment with
Digital Angel because of his willful and material misconduct or
because he has breached the agreement in any material respect,
or if Mr. Santelli terminated his employment other than for
good reason, as that term is defined in the agreement, he would
be entitled to salary and benefits accrued through the date of
termination of employment. If Mr. Santelli died or became
disabled (as disabled is determined under the agreement), if
Digital Angel terminated his employment for reasons other than
his misconduct or his breach of the agreement, or if he
terminated his employment for good reason, Digital Angel was
required to pay him his accrued compensation and benefits for
the remaining term of the agreement, including any extensions.
The employment agreement provided that upon a change of control,
Mr. Santelli may terminate his employment at any time
within one year after the change of control upon
15 days’ notice. Upon such termination, he would be
entitled to a severance payment equal to the base amount as
defined in Section 280G(b)(3) of the Internal Revenue Code
minus $1.00. Upon a change of control, all unvested stock
options held by Mr. Santelli would immediately vest in full.
Effective January 2, 2007, Mr. Santelli resigned as
Digital Angel’s vice president, finance and chief financial
officer. Mr. Santelli continued his employment with Digital
Angel until January 31, 2007, when he retired in order to
effect a smooth transition to Thomas J. Hoyer, the new chief
financial officer at that time. Digital Angel agreed to pay
Mr. Santelli a retirement package which includes payment of
an amount equal to $222,083, which is the sum of 13 months
of his base salary plus $50,000, which is equal to the larger of
either his 2005 or 2006 bonus, plus continued healthcare
benefits in the amount of $4,944.
Effective January 2, 2007, Mr. Hoyer was appointed as
Digital Angel’s chief financial officer, vice president and
treasurer. In connection with such appointment, Hoyer and
Digital Angel entered into a compensation and change-of-control
agreement on December 18, 2006. Under the agreement, Hoyer
was to receive an annual base salary of $265,000; a targeted
annual bonus of 60% of annual base salary based upon plan
metrics, Digital Angel’s performance and individual
contribution (which bonus will be capped at 120% of the annual
base salary); and a ten-year option to purchase
250,000 shares of common stock. The option would have
vested ratably over a five-year period and had a strike price
equal to the market closing price as of January 2, 2007.
Mr. Hoyer was also entitled to participate in any of
Digital Angel’s benefit plans or programs as are from time
to time available to officers of Digital Angel. The agreement
also provided that Mr. Hoyer would have received a
change-of-control payment if a change of control, as defined in
the agreement, occurred and Hoyer’s employment was
terminated within three months of such event (regardless if
voluntary resignation or involuntary termination). The
change-of-control payment equaled the sum of 200% of the base
salary then in effect, plus 200% of the larger of either
Mr. Hoyer’s target bonus or average annual bonus for
the prior three years. In addition, all unvested stock options
would have immediately vested in full. Mr. Hoyer’s
resignation, dated May 16, 2007, was accepted by Digital
Angel and was effective May 23, 2007.
On May 18, 2007, the board of directors of Digital Angel
appointed Lorraine Breece as acting chief financial officer,
treasurer and vice president of Digital Angel. Digital Angel
agreed to reimburse Applied Digital for the services
Ms. Breece provides to the Digital Angel. It was determined
that the reimbursement to Applied Digital for
Ms. Breece’s services constitutes a related party
transaction pursuant to Digital Angel’s Policy for Related
Party Transactions. On May 18, 2007, the board of directors
and the independent director committee approved the
reimbursement arrangement and found it to be in Digital
Angel’s best interests. On August 15, 2007,
Ms. Breece was granted a ten-year option to purchase
100,000 shares of Digital Angel stock at $1.55 per share.
178
Pursuant to the terms of the reimbursement arrangement, (i)
Digital Angel will reimburse Applied Digital one-half of
Ms. Breece’s current annual salary (one-half currently
representing $75,000) and one-half of Ms. Breece’s
guaranteed annual bonus (one-half currently representing
$16,800); (ii) Ms. Breece will be entitled to
participate in other Digital Angel benefit programs made
available to similarly situated employees; and
(iii) Digital Angel will reimburse Applied Digital one-half
of Ms. Breece’s 2007 incentive compensation bonus,
provided that the incentive compensation plan established for
Ms. Breece will be modified to include Digital Angel-based
incentive targets and performance criteria established by
Digital Angel’s compensation committee. Ms. Breece
shall not earn an amount less than what she would have received
under the plan without the modifications. In such an event,
Digital Angel is responsible for the payment of the additional
amount to meet this minimum threshold. All Digital Angel
payments made under the reimbursement arrangement will be made
on a going-forward basis as of May 18, 2007, and the 2007
incentive bonus will be pro-rated for the year.
Effective as of February 28, 2005, Digital Angel entered
into an employment agreement with Mr. Lasse Nordfjeld, its
president of the Animal Applications Group. The agreement has an
initial term of one year, which automatically renews for
successive one-year terms on each anniversary date of the
agreement, which is added at the end of the then-existing term,
unless either party notifies the other at least 90 days
prior to such anniversary date. The agreement provides that
Digital Angel will pay Mr. Nordfjeld a base salary of
DKK 1,200,000 per year ($201,600 in U.S. dollars,
translated at a rate for 2006 of 0.168), a performance-based
annual bonus up to 50% of his base salary, and a one-time option
to purchase 150,000 shares of Digital Angel’s common
stock. The agreement further provides that he is entitled to
participate in any of the benefit plans or programs as are from
time to time available to officers of DSD Holding A/S, Digital
Angel’s wholly-owned subsidiary. The agreement contains
confidentiality, non-compete and assignment of invention
clauses. The agreement also provides that, if Digital
Angel’s board of directors terminates
Mr. Nordfjeld’s employment with Digital Angel because
of his willful and material misconduct or because he has
breached the agreement in any material respect, or if
Mr. Nordfjeld terminates his employment other than for good
reason, as that term is defined in the agreement, he is entitled
to salary, bonus and benefits accrued through the date of
termination of employment. If Mr. Nordfjeld dies, his
estate is entitled to his salary, bonus and benefits accrued
through the last day of the month in which his death occurs. If
Mr. Nordfjeld becomes disabled (as determined under the
agreement), Mr. Nordfjeld is entitled to salary, bonus and
benefits accrued through 90 days after notice of
termination. If Digital Angel terminates his employment for
reasons other than his misconduct or his breach of the
agreement, or if he terminates his employment for good reason,
then Digital Angel must pay him his accrued compensation, salary
and benefits for the remaining term of the agreement, including
any extensions. The employment agreement provides that, upon a
change of control, Mr. Nordfjeld may terminate his
employment at any time within one year after the change of
control upon 15 days’ notice. Upon such termination,
Digital Angel must pay to Mr. Nordfjeld a severance payment
equal to his accrued compensation, salary and benefits for the
remaining term of the agreement, including any extensions. Upon
a change of control, all outstanding stock options held by
Mr. Nordfjeld would become fully exercisable.
Digital Angel has an employment agreement with David M. Cairnie
effective April 13, 1993. The initial term of the agreement
was one year, until terminated by either party giving six
months’ notice or payment in lieu of such notice expiring
on or at any time one year after the effective date of the
agreement. The agreement provides that Digital Angel will pay
Mr. Cairnie an initial base salary of £75,000 per
year, or a higher rate as to which the parties may from time to
time agree. The agreement also provides for a bonus based on the
achievement of profits, as defined in the agreement. In
addition, under the agreement, Digital Angel will provide an
automobile to Mr. Cairnie. The agreement includes a
six-month non-compete provision.
179
Outstanding
Equity Awards as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Option
|
|
|
|
(#)
|
|
(#)
|
|
Price
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
($)
|
|
Date
|
|
|
|
Kevin N. McGrath
|
|
|
250,000
|
|
|
|
-0-
|
|
|
|
2.08
|
|
|
|
12/17/2013
|
|
|
|
|
|
1,000,000
|
|
|
|
-0-
|
|
|
|
5.07
|
|
|
|
2/24/2015
|
|
|
|
|
|
1,000,000
|
|
|
|
-0-
|
|
|
|
3.92
|
|
|
|
1/12/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James P. Santelli
|
|
|
100,000
|
|
|
|
-0-
|
|
|
|
3.89
|
|
|
|
12/30/2013
|
|
|
|
|
|
150,000
|
|
|
|
-0-
|
|
|
|
3.79
|
|
|
|
3/15/2014
|
|
|
|
|
|
200,000
|
|
|
|
-0-
|
|
|
|
5.07
|
|
|
|
2/24/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Cairnie
|
|
|
16,667
|
|
|
|
-0-
|
|
|
|
3.39
|
|
|
|
6/26/2012
|
|
|
|
|
|
100,000
|
|
|
|
-0-
|
|
|
|
3.79
|
|
|
|
3/15/2014
|
|
|
|
|
|
100,000
|
|
|
|
-0-
|
|
|
|
5.07
|
|
|
|
2/24/2015
|
|
|
|
|
|
|
|
|
|
75,000
|
(1)
|
|
|
3.26
|
|
|
|
6/13/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lasse Nordfjeld
|
|
|
150,000
|
|
|
|
-0-
|
|
|
|
5.07
|
|
|
|
2/27/2015
|
|
|
|
|
|
|
|
|
|
75,000
|
(1)
|
|
|
3.26
|
|
|
|
6/13/2016
|
|
|
|
|
|
|
(1)
|
|
These options vest and become exercisable ratably in five equal
annual installments, beginning on June 14, 2007, the first
anniversary of the grant date.
|
Potential
Payments Upon Termination or Change in Control
A detailed description of the severance and
change-in-control
provisions that affect Digital Angel’s named executive
officers can be found in the section entitled “Employment
Agreements” in the “Narrative Disclosure to Summary
Compensation Table and Grants of Plan-Based Awards Table.”
The estimated payments and benefits that would be provided to
each named executive officer as a result of certain triggering
events are set forth in the table below. Calculations for this
table are based on the following assumptions: (i) the
triggering event took place on December 29, 2006, which is
the last business day of Digital Angel’s last completed
fiscal year; and (ii) and the per share price of Digital
Angel’s common stock is $2.55, the closing price on
December 29, 2006.
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
After Change
|
|
|
|
|
|
|
|
|
|
in Control
|
|
in Control
|
|
|
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
|
|
|
|
|
|
w/o Cause
|
|
w/o Cause
|
|
After
|
|
|
|
|
|
|
|
or for
|
|
or for
|
|
Change in
|
|
Voluntary
|
|
Name
|
|
Benefit
|
|
Good Reason
|
|
Good Reason
|
|
Control
|
|
Termination
|
|
|
|
Kevin N. McGrath
|
|
Salary(1)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
960,000
|
|
|
|
-0-
|
|
|
|
|
Bonus(1)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
474,318
|
|
|
|
-0-
|
|
|
|
|
Vehicle Lease Payments(2)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
Stock Option
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
Acceleration(3)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
James P. Santelli(4)
|
|
Salary
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
222,083
|
|
|
|
|
Bonus
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
50,000
|
|
|
|
|
Health Care Benefits
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
4,944
|
|
|
|
|
Stock Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Cairnie
|
|
Acceleration
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
(5)
|
|
|
-0-
|
|
|
Lasse Nordfjeld
|
|
Salary
|
|
$
|
235,200
|
(6)
|
|
$
|
235,200
|
(7)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
Stock Option Acceleration
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
(5)
|
|
|
-0-
|
|
|
|
|
|
|
(1)
|
|
Amounts will be paid in a lump sum within 10 days of the
change in control. These amounts do not reflect the severance
payment to be made to Mr. McGrath in connection with his
resignation as Digital Angel’s
|
180
|
|
|
|
|
|
|
president and chief executive officer, which resignation
occurred on August 6, 2007. See “Management of Digital
Angel — Narrative Disclosure to Summary Compensation
Table and Grants of Plan-Based Awards Table —
Employment Agreements.”
|
|
|
|
|
|
(2)
|
|
Since Mr. McGrath does not currently lease a vehicle, he
would not be entitled to any benefit.
|
|
|
|
(3)
|
|
Mr. McGrath does not own any unexercisable options.
|
|
|
|
(4)
|
|
As of December 29, 2006, Digital Angel accepted
Mr. Santelli’s resignation as its vice president,
finance and chief financial officer. Based upon this
resignation, Digital Angel and Mr. Santelli agreed upon the
estimated payments and benefits reflected in this table. The
payments will be made in equal installments through
February 28, 2008.
|
|
|
|
|
|
(5)
|
|
The intrinsic value of the unexercisable options as of
December 29, 2006 was $0, because the exercise price of
each option was higher than the stock price.
|
|
|
|
|
|
(6)
|
|
Amount will be paid in installments for the remainder of the
then-existing term of his employment agreement.
|
|
|
|
|
|
(7)
|
|
Amount will be paid in a lump sum.
|
2006 Director
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Option
|
|
|
|
|
|
|
|
in Cash
|
|
|
Awards
|
|
|
Total
|
|
|
Name
|
|
($)
|
|
|
($)(1)(2)
|
|
|
($)
|
|
|
|
|
Kevin N. McGrath
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Scott R. Silverman
|
|
|
-0-
|
|
|
|
49,080
|
|
|
|
49,080
|
|
|
John R. Block
|
|
|
80,000
|
|
|
|
24,540
|
|
|
|
104,540
|
|
|
Barry M. Edelstein
|
|
|
44,000
|
|
|
|
24,540
|
|
|
|
68,540
|
|
|
Howard S. Weintraub, Ph.D.
|
|
|
65,000
|
|
|
|
24,540
|
|
|
|
89,540
|
|
|
Michael S. Zarriello
|
|
|
65,000
|
|
|
|
24,540
|
|
|
|
89,540
|
|
|
|
|
|
|
(1)
|
|
The options in this column vest and become exercisable as to 10%
per year for eight years, beginning on June 14, 2007, the
first anniversary of the grant date, and 20% on June 14,
2015.
|
|
|
|
|
|
(2)
|
|
The SFAS 123R fair value per share is based on certain
assumptions that Digital Angel explains in footnotes 1 and 15 to
its financial statements, which are included in Digital
Angel’s Annual Report on
Form 10-K.
|
Compensation
of Directors
The annual retainer for each non-employee director or
non-affiliate director is $5,000 per quarter. Non-employee
directors are also reimbursed for reasonable expenses associated
with each board of directors meeting. Non-employee or
non-affiliate directors received an annual retainer for each
committee that they served on, as follows: (i) $5,000 per
quarter for the audit committee; (ii) $5,000 per quarter
for the compensation committee; and (iii) $1,000 per
quarter for the government relations committee. In addition, the
chairs of the committees received the following: (i) audit
committee chair and compensation committee chair each received
$1,250 per quarter; and (ii) government relations committee
chair received $4,000 per quarter. No fees were paid for serving
on the independent director committee. Directors who are
employees do not receive any additional compensation for their
services as a director.
On August 14, 2007, the compensation committee approved a
one-time fee to the members of the special committee of $12,000
to each member and an additional $12,000 fee to the chairman of
the special committee.
On August 14, 2007, the compensation committee also granted
the chairman of the board of directors of Digital Angel:
(i) a monthly fee of $7,500, to continue to be paid as long
as the chairman remains the non-executive chairman of the board
of directors of Digital Angel; and (ii) and
25,000 shares of restricted stock
181
that vest in 60 days, as long as the chairman remains the
non-executive chairman of the board of directors of Digital
Angel.
Information
about Corporate Governance, the Board of Directors and
Committees
Independence of the Board.
During fiscal 2006
and again in March 2007, the Digital Angel board of directors
determined that the following four individuals of its six-member
board of directors were independent as defined by the AMEX:
Messrs. Block, Edelstein, Weintraub and Zarriello. As of
August 6, 2007, Mr. McGrath resigned from his position
as Digital Angel’s president, chief executive officer and
director, and Mr. Edelstein was appointed Digital
Angel’s interim president and chief executive officer. As a
result of Mr. Edelstein’s appointment, the board of
directors now consists of five members, of which three are
independent. At the time of his appointment, Mr. Edelstein
resigned as a member of the compensation committee and the
independent director committee.
As of December 31, 2006 and June 30, 2007, Applied
Digital owned approximately 55.2% and 55% of Digital
Angel’s outstanding common stock. As a result, Digital
Angel is a “controlled company” within the meaning of
the corporate governance standards of the AMEX. Digital Angel
has not elected to take advantage of the “controlled
company” exemption, as permitted under Section 801(a)
of the AMEX Company Guide. All of the directors on Digital
Angel’s compensation committee are independent, a majority
of the members of Digital Angel’s board of directors are
independent, and Digital Angel has an independent director
committee.
The board of directors held 10 meetings, including seven
regularly scheduled meetings and three special meetings, during
the year ended December 31, 2006. Each director attended at
least 90% or more of the aggregate number of meetings held by
the board of directors and the committees on which he served. It
is the policy of the board of directors of Digital Angel to
encourage its members to attend Digital Angel’s annual
meeting of stockholders. All members of the board of directors
were present at Digital Angel’s 2006 annual meeting of
stockholders.
Digital Angel’s board of directors has four standing
committees: the audit committee, the compensation committee, the
government relations committee, and the independent director
committee.
Audit Committee.
The audit committee presently
consists of Messrs. Zarriello, Weintraub and Block. Digital
Angel’s board of directors has determined that the members
of the audit committee are independent directors, as defined
under Section 803 of the AMEX Company Guide and SEC
Rule 10A-3.
The audit committee has been assigned the functions of
monitoring the integrity of Digital Angel’s financial
statements, monitoring the independence, qualifications and
performance of its independent auditors, and overseeing its
systems of internal controls. The audit committee’s
responsibilities are set forth in an audit committee charter, a
copy of which can be found on Digital Angel’s website at
www.digitalangelcorp.com
. The board of directors has
designated Mr. Zarriello the “audit committee
financial expert,” as defined by the rules promulgated by
the SEC. The audit committee held four meetings during the year
ended December 31, 2006.
Compensation Committee.
During the year ended
December 31, 2006 and until August 6, 2007, the
compensation committee consisted of Messrs. Weintraub,
Zarriello, Block and Edelstein. Since August 6, 2007, the
compensation committee has consisted of Messrs. Weintraub,
Zarriello and Block. Digital Angel’s board of directors has
determined that the members of the compensation committee are
independent directors, as defined under Section 803 of the
AMEX Company Guide. The compensation committee reviews and
approves base salaries, bonuses, stock compensation and other
forms of compensation for Digital Angel’s executive
officers. The compensation committee also reviews and approves
all forms of compensation for Digital Angel’s directors,
including stock compensation and fees, and stock compensation to
all employees. The compensation committee also administers
Digital Angel’s equity compensation plans. The compensation
committee’s responsibilities are set forth in a written
charter that has been adopted by the compensation committee and
the board of directors. A copy of this charter is available on
Digital Angel’s website at
www.digitalangelcorp.com
.
The compensation committee held two meetings during the year
ended December 31, 2006.
182
At the end of each year, Digital Angel’s chief executive
officer provides the compensation committee with his
recommendations regarding the performance of each named
executive officer (other than the chief executive officer)
against his or her performance targets and the amount of bonus
to be paid to such officer. Digital Angel’s chief executive
officer also presents the compensation committee for its
consideration a self-assessment of his performance during the
applicable fiscal year and his proposed goals for Digital Angel
during the next fiscal year.
The compensation committee chairperson reports to the board of
directors on compensation committee actions and recommendations.
The compensation committee has the authority to engage the
services of outside advisors, experts and others to assist the
compensation committee in fulfilling its duties and
responsibilities. In connection with the compensation
committee’s deliberations for 2006 compensation, the
compensation committee selected and retained Riley,
Dettmann & Kelsey, LLC, an independent compensation
consulting firm, to advise the compensation committee. The
compensation committee received a comprehensive
position-by-position
benchmarking analysis regarding base salary and total
compensation levels at the companies which comprised Digital
Angel’s comparator group, as described in the
“Compensation Discussion and Analysis” section on page
168. Digital Angel believes that the use of an independent
consultant provides additional assurance that its programs are
reasonable and consistent with its objectives.
Government Relations Committee.
The members of
government relations committee are Messrs. Block and
Edelstein. The government relations committee has been assigned
the functions of: (i) assisting with proposed national
identification programs for cattle; (ii) assisting with
other governmental-related matters; and (iii) advising the
board of directors on legislative initiatives relating to
livestock identification tracking and food safety and
traceability. The government relations committee held two
meetings during the year ended December 31, 2006.
Independent Director Committee.
During the
year ended December 31, 2006 and until August 6, 2007,
the independent director committee consisted of
Messrs. Weintraub, Zarriello, Block and Edelstein. Since
August 6, 2007, the independent director committee has
consisted of Messrs. Weintraub, Zarriello and Block. The
independent director committee has been assigned the functions
of: (i) nominating candidates to serve on the board of
directors; (ii) evaluating and approving transactions that
are either not in the purview of the audit or compensation
committees or that require review or approval of the independent
directors only; and (iii) evaluating and determining
whether to approve related party transactions. The independent
director committee’s responsibilities are set forth in an
independent director committee charter. A copy of this charter
is available on Digital Angel’s website at
www.digitalangelcorp.com
. The independent director
committee held one meeting during the year ended
December 31, 2006.
Qualifications
of Candidates for Election to the Board
The independent director committee considers possible candidates
from many sources, including stockholders, as nominees for
directors. The independent director committee solicits,
considers and accepts nominations for candidates to serve as
directors on Digital Angel’s board of directors. The
independent director committee evaluates a potential candidate
based on a variety of factors, including education, work
experience, knowledge of Digital Angel’s industry,
membership on a board of directors of another corporation, civic
involvement, reputation and character. The independent director
committee also evaluates candidates appropriately recommended by
stockholders and will determine whether there are any
differences in the manner in which the committee evaluates the
stockholder-nominated candidates as compared to those candidates
identified by the committee.
If the candidate is being considered for an independent director
position, the independent director committee will evaluate the
candidate’s independence from Digital Angel under the
applicable securities laws and independence requirements set
forth in the rules or listing standards of any exchange or
automated quotation system on which shares of Digital
Angel’s stock are traded. The committee will carefully
review the education and experience of all directors and
director nominees to ensure that at least one director, who will
serve on the audit committee, is a “financial expert,”
as required under the rules promulgated by the SEC. The
committee will meet with each candidate to review the
candidate’s qualifications and will request materials
183
from each candidate that the committee deems necessary. The
committee will review with the full board of directors its
recommendations and nominations.
Stockholder
Nominations
Stockholders may nominate director candidates for consideration
by the independent director committee by writing to the chairman
and providing to the chairman: (i) the candidate’s
name, biographical data and qualifications, including five-year
employment history with employer names and a description of the
employer’s business; (ii) whether such individual can
read and understand fundamental financial statements;
(iii) other board memberships (if any); and (iv) such
other information as is reasonably available and sufficient to
enable the independent director committee to evaluate the
qualifications stated above under the section of this joint
proxy statement/prospectus entitled “Qualifications of
Candidates for Election to the Board.” The submission must
be accompanied by a written consent of the individual to stand
for election if nominated by the independent director committee
and to serve if elected by the stockholders. If a stockholder
nominee is eligible, and if the nomination is proper, the
independent director committee will deliberate and make a
decision as to whether the candidate will be submitted to
Digital Angel’s stockholders for a vote.
Code
of Conduct and Corporate Ethics Policy Statement
The board of directors approved Digital Angel’s Code of
Conduct and Corporate Ethics Policy Statement. The Code of
Conduct and Corporate Ethics Policy Statement sets forth
standards of conduct applicable to its directors, officers and
employees. Digital Angel’s Code of Conduct and Corporate
Ethics Policy Statement is available to view at its website at
www.digitalangelcorp.com
.
Compensation
Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2006,
Messrs. Weintraub, Zarriello, Block and Edelstein served as
members of the compensation committee. On August 6, 2007,
Mr. Edelstein resigned from membership on the compensation
committee and is now Digital Angel’s interim president,
chief executive officer and a director. None of the members of
the compensation committee served as an officer or employee of
Digital Angel or any of Digital Angel’s subsidiaries during
the fiscal year ended December 31, 2006. There were no
material transactions between Digital Angel and any of the
members of the compensation committee during the fiscal year
ended December 31, 2006.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Digital
Angel’s directors and executive officers and persons who
own more than 10% of its outstanding common stock to file with
the SEC reports of changes in their ownership of common stock.
Officers, directors and greater than 10% stockholders are also
required to furnish Digital Angel with copies of all forms they
file under this regulation. To Digital Angel’s knowledge,
based solely on a review of the copies of such reports furnished
to it and representations that no other reports were required,
during the year ended December 31, 2006, all
Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% stockholders were
complied with.
The audit committee monitors the accounting and financial
reporting process of Digital Angel to assist the board of
directors of Digital Angel. Management has primary
responsibility for Digital Angel’s financial statements,
financial reporting processes and internal control over
financial reporting. The independent auditors are responsible
for performing an independent audit of Digital Angel’s
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States) and evaluating the effectiveness of internal
controls and issuing a report thereon. The audit
committee’s responsibility is to select the independent
auditors and monitor and oversee the accounting and financial
reporting processes of Digital Angel, including Digital
Angel’s internal controls over financial reporting, and the
audits of the financial statements of Digital Angel.
184
During the course of 2006 and through 2007 to date, the audit
committee regularly met and held discussions with management and
the independent auditors. In the discussions related to Digital
Angel’s consolidated financial statements for fiscal year
2006, management represented to the audit committee that such
consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles. The
audit committee reviewed and discussed with management and the
independent auditors the audited consolidated financial
statements for fiscal year 2006, management’s annual report
on internal control over financial reporting, the results of the
independent auditor’s testing and evaluation of Digital
Angel’s internal control over financial reporting and the
independent auditor’s attestation report regarding
management’s assessment of internal control over financial
reporting.
In fulfilling its responsibilities, the audit committee
discussed with the independent auditors the matters that are
required to be discussed by Statement on Auditing Standards
No. 61 (as amended) (Communication with Audit Committees).
In addition, the audit committee received from the independent
auditors the written disclosures and letter required by
Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the audit committee
discussed with the independent auditors that firm’s
independence. In connection with this discussion, the audit
committee also considered whether the provision of services by
the independent auditors not related to the audit of Digital
Angel’s financial statements for fiscal year 2006 is
compatible with maintaining the independent auditors’
independence. The audit committee charter states that the audit
committee must approve any audit or permitted non-audit service
proposed to be performed by its independent auditors in advance
of the performance of such service.
Based upon the audit committee’s discussions with
management and the independent auditors, and the audit
committee’s review of the representations of management,
and the report and letter of the independent auditors provided
to the audit committee, the audit committee recommended to the
board of directors that the audited consolidated financial
statements for the year ended December 31, 2006 be included
in Digital Angel’s Annual Report on
Form 10-K
for filing with the SEC.
See the portion of this joint proxy statement/prospectus titled
“Information about Corporate Governance, the Board of
Directors and Committees” beginning on page 182 for
information on the audit committee’s meetings in 2006.
The Audit Committee
Michael S. Zarriello
Howard S. Weintraub, Ph.D.
John R. Block
185
Independent
Registered Certified Public Accountants
Eisner LLP served as Digital Angel’s independent registered
certified public accountant for the fiscal year ended
December 31, 2006. Representatives from Eisner LLP are
expected to be present in person or telephonically at the
special and annual meeting, will have the opportunity to make a
statement if they desire, and will be available to answer
questions.
Digital Angel’s audit committee has selected Eisner LLP to
serve as its independent registered certified public accountant
for the fiscal year ending December 31, 2007.
Independent
Auditor’s Fees
The aggregate fees billed to Digital Angel for the years ended
December 31, 2006 and 2005, by Digital Angel’s
principal accounting firm, Eisner LLP, are as follows:
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2006
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2005
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Audit Fees:
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$
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405,442
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$
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427,769
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Audit-Related Fees:
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$
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6,500
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$
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22,900
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Tax Fees:
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-0-
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-0-
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All Other Fees:
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-0-
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-0-
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Audit Fees.
The aggregate fees billed for the
audit of Digital Angel’s annual financial statements for
the fiscal years ended December 31, 2006 and
December 31, 2005, for the reviews of the financial
statements included in Digital Angel’s Quarterly Reports on
Form 10-Q,
and for other services that generally only an independent
auditor reasonably can provide, such as comfort letters,
statutory audits, attest services, consents and assistance with
and review of documents filed with the SEC, were $405,442 in
2006 and $427,769 in 2005.
Audit-Related Fees.
The aggregate fees billed
by Eisner LLP for audit-related services for the fiscal years
ended December 31, 2006 and December 31, 2005 were
$6,500 and $22,900, respectively. These fees included any
employee benefit plan audit, due diligence related to mergers
and acquisitions, accounting consultations and audits in
connection with acquisitions, internal control reviews, attest
services not required by statute or regulation, and consultation
concerning accounting and reporting standards for the fiscal
years ended December 31, 2006 and December 31, 2005.
Financial Information Systems Design and Implementation
Fees.
Digital Angel did not compensate Eisner LLP
for any amounts for financial information systems design and
implementation services for the fiscal years ended
December 31, 2006 and December 31, 2005. These fees
would have included any services regarding operating, or
supervision of the operating of, Digital Angel’s
information system or managing Digital Angel’s local area
network, or designing or implementing a hardware or software
system that aggregates source data underlying the financial
statements or generates information that is significant to
Digital Angel’s financial statements or other financial
information systems taken as a whole for the fiscal years ended
December 31, 2006 and December 31, 2005.
Tax Fees.
Digital Angel did not compensate
Eisner LLP for any amounts for tax services for the fiscal years
ended December 31, 2006 and December 31, 2005. These
fees would have related to tax compliance, tax planning and tax
advice for the fiscal years ended December 31, 2006 and
December 31, 2005. Tax compliance generally involves
preparation of original and amended tax returns, claims for
refund and tax payment and planning services. Tax planning and
tax advice encompass a diverse range of services, including
assistance with tax audits and appeals, tax advice related to
mergers and acquisitions, employee benefit plans and requests
for rulings or technical advice from taxing authorities.
All Other Fee
s. Digital Angel did not
compensate Eisner LLP for any amounts not included above for the
fiscal years ended December 31, 2006 and 2005. These fees
would have related to services that do not meet the above
category descriptions.
186
Pre-Approval
Policies and Procedures for Audit and Permitted Non-Audit
Services
The audit committee approves, on a case-by-case basis, any audit
or permitted non-audit service proposed to be performed by
Eisner LLP in advance of the performance of such service. These
services may include audit services, audit-related services, tax
services and other services. The audit committee may form, and
delegate authority to, subcommittees consisting of one or more
members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services;
provided, however, that decisions of such subcommittee to grant
pre-approvals are presented to the full audit committee for
final approval at its next meeting. In connection with making
any pre-approval decision, the audit committee must consider
whether the provision of such permitted non-audit services by
Eisner LLP is consistent with maintaining Eisner LLP’s
status as Digital Angel’s independent auditors.
Consistent with these procedures, the audit committee approved
all of the services rendered by Eisner LLP during fiscal year
2006, as described above.
187
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On August 31, 2007, Applied Digital closed a
$7.0 million, non-convertible debt financing transaction
with Kallina, pursuant to the terms of a securities purchase
agreement dated August 31, 2007, between Applied Digital
and Kallina, or the Applied Digital financing transaction.
Kallina is a wholly-owned subsidiary of Applied Digital’s
current senior secured lender, Laurus.
Under the terms of the securities purchase agreement, Kallina
extended financing to Applied Digital in the form of a
$7.0 million, secured term note, or the Applied Digital
note. The Applied Digital note accrues interest at a rate per
annum equal to the “prime rate” published in The Wall
Street Journal from time to time, plus 3.0% (but such rate shall
not at any time be less than 11.0%), and which will mature on
August 31, 2009.
Applied Digital is obligated to make monthly principal payments
of $166,666.67, plus interest, beginning on March 1, 2008.
The terms of the Applied Digital note allow for optional
redemption by paying 103% of the principal amount. The Applied
Digital note also contains certain events of default, including,
among other things, failure to pay, violation of non-financial
covenants, and certain other expressly enumerated events. In the
event of default, Kallina is entitled to additional interest on
the outstanding principal balance of the Applied Digital note
and on all outstanding obligations under the Applied Digital
note and the related agreements entered into in conjunction with
the Applied Digital note in an amount equal to 1% per month.
To secure Applied Digital’s obligations under the
securities purchase agreement, Applied Digital has granted
Kallina a security interest in substantially all of Applied
Digital’s assets, and Applied Digital has pledged all of
the issued and outstanding capital stock owned by Applied
Digital in InfoTech and certain other wholly-owned subsidiaries
of Applied Digital, and a portion of the issued and outstanding
stock owned by Applied Digital in VeriChip and Digital Angel.
The securities purchase agreement contains various customary
representations and warranties of Applied Digital and certain of
its subsidiaries, as well as customary affirmative and negative
covenants. Digital Angel and certain of its subsidiaries agreed
to guarantee the obligations of Applied Digital under the
Applied Digital financing transaction. In connection with the
Applied Digital financing transaction, Kallina assigned certain
of its rights and obligations to each of Valens Offshore and
Valens U.S., pursuant to an amendment and partial
assignment of loans, liens and documents. Applied Digital,
Kallina, Valens Offshore, Valens U.S. and Laurus also
entered into an intercreditor agreement regarding the rights and
priorities of the parties to Applied Digital’s collateral.
In connection with the execution of the securities purchase
agreement, Applied Digital transferred to Kallina
200,000 shares of VeriChip common stock that it owned and
reduced the exercise price on existing warrants to purchase
approximately 1.7 million shares of its common stock held
by Laurus, from $1.88 to $1.35. VeriChip has agreed to enter
into a registration rights agreement with Kallina to register
the 200,000 shares.
Effective August 31, 2007, Digital Angel closed a
$6.0 million, revolving asset-based financing transaction
with Kallina, pursuant to the terms of a security agreement,
among Digital Angel and Digital Angel Technology Corporation,
Fearing Manufacturing Co., Inc., Digital Angel International,
Inc., which are referred to as the eligible subsidiaries, and
Kallina. Under the terms of the security agreement, Digital
Angel may borrow, from time to time, under a revolving facility,
an amount equal to the lesser of the amount of availability
under the borrowing base and $6.0 million, subject to
certain reserves that Kallina is authorized to take in its
reasonable commercial judgment. Under the terms of the security
agreement, the borrowing base is calculated as a percentage of
the total amount of eligible accounts and inventory owned by
Digital Angel and the eligible subsidiaries. Amounts outstanding
under the revolving facility accrue interest at a rate per year
equal to the “prime rate” published in The Wall Street
Journal from time to time, plus 2.0% (but such rate cannot at
any time be less than 10.0%), and which matures on
August 31, 2010. Digital Angel and the eligible
subsidiaries have pledged, in support of the obligations under
the revolving facility, all of their respective assets,
excluding the stock of all foreign subsidiaries other than stock
held by Digital Angel in Signature Industries Limited. Digital
Angel used a portion of the proceeds from the revolving facility
to terminate and
188
pay off all obligations under a revolving invoice funding
facility with Greater Bay Business Funding, a division of
Greater Bay Bank, N.A., and the remaining proceeds for working
capital purposes.
In connection with the financing transaction, Digital Angel
issued warrants that represent the ability to purchase
967,742 shares of Digital Angel’s common stock at an
exercise price of $1.69 per share. The warrants can be exercised
at any time prior to August 31, 2014. Digital Angel also
entered into a registration rights agreement with Kallina,
pursuant to which Digital Angel has agreed to file a shelf
registration statement no later than December 31, 2007
covering the resale by Kallina of those shares received upon
exercise of the warrants.
Effective August 31, 2007, Digital Angel and Applied
Digital entered into a secured term note in the amount of
$7.0 million, on terms substantially similar to those in
the note issued by Applied Digital to Kallina in the Applied
Digital financing transaction, or the intercompany loan. As part
of the consideration for the intercompany loan, Digital Angel
agreed to pay Applied Digital a structuring fee of $100,000,
payable at Digital Angel’s election in stock or cash,
reimburse Applied Digital for any other out-of-pocket fees
required to be paid by Applied Digital in connection with
Digital Angel’s financing transaction or the Applied
Digital financing transaction, and issue to Applied Digital
921,402 shares of Digital Angel common stock.
Digital Angel used the proceeds from the intercompany loan to
repay all amounts due under its $6.0 million,
10.25% senior secured debenture and intends to use the
remaining proceeds for working capital purposes. Pursuant to the
terms of the debenture, in connection with the prepayment,
Digital Angel paid 102% of the outstanding principal amount of
the debenture, plus all accrued and unpaid interest.
Digital Angel has a distribution and licensing agreement, dated
March 4, 2002, and amended December 28, 2005 and
May 9, 2007, with VeriChip, a majority-owned subsidiary of
Applied Digital, covering the manufacturing, purchasing and
distribution of Digital Angel’s implantable microchip and
the maintenance of the VeriChip registry by Digital Angel. The
amended agreement contains, among other things, minimum purchase
requirements in order to maintain exclusivity, whereby VeriChip
is required to purchase $0, $875,000, $1,750,000 and $2,500,000
for each of 2007, 2008, 2009 and 2010, respectively, and
$3,750,000 for 2011 and each year thereafter. The agreement
continues until March 2014 and, as long as VeriChip continues to
meet the minimum purchase requirements, will automatically renew
annually under its terms. The distribution and licensing
agreement includes a license for the use of Digital Angel’s
technology in VeriChip’s identified markets. Under the
distribution and licensing agreement, Digital Angel is the sole
manufacturer and supplier to VeriChip. The existing terms with
Digital Angel’s sole supplier of implantable microchips,
RME, expire on June 30, 2010.
Revenue recognized under the distribution and licensing
agreement was $35,000 and $14,000 for the three months ended
June 30, 2007 and 2006, respectively, and $39,000 and
$173,000 for the six months ended June 30, 2007 and 2006,
respectively. Amounts due from VeriChip as of June 30, 2007
and December 31, 2006 were $35,000 and $425,000,
respectively.
On March 1, 2004, Digital Angel issued
3,000,000 shares of its common stock to Applied Digital
pursuant to a stock purchase agreement with Applied Digital
dated August 14, 2003. The stock purchase agreement
provided for Applied Digital to purchase 3,000,000 shares
of Digital Angel’s common stock at a price of $2.64 per
share and a warrant to purchase up to 1,000,000 shares of
Digital Angel’s common stock, which is exercisable for five
years beginning February 1, 2004, at a price per share of
$3.74, payable in cash or shares of common stock of Applied
Digital. The consideration for the sale of Digital Angel’s
3,000,000 shares and the warrant was 1,980,000 shares
of Applied Digital common stock. As of December 31, 2004,
Digital Angel had sold all of the 1,980,000 shares of
Applied Digital common stock for $6.7 million. In December
2004, Applied Digital exercised its warrant for
1,000,000 shares of our common stock. Net proceeds to
Digital Angel upon exercise of the warrant were
$3.74 million.
On February 25, 2005, Digital Angel entered into a stock
purchase agreement with Applied Digital. The purpose of the
February 25, 2005 stock exchange with Applied Digital was
to use the shares as partial consideration for the acquisition
of DSD Holding A/S and its wholly-owned subsidiaries, Daploma
International A/S and Digitag A/S. Digital Angel and Applied
Digital entered into the share exchange because of the selling
shareholders’ desire, at the time the transaction was
negotiated, to receive their consideration in
189
Applied Digital common stock as opposed to Digital Angel’s
common stock. Pursuant to the agreement, Digital Angel issued
644,140 shares of its common stock to Applied Digital.
Digital Angel received 684,543 shares of Applied Digital
common stock as consideration. The exchange ratio of shares was
based upon the average of the volume-weighted-average price of
Digital Angel’s common stock and Applied Digital’s
common stock for the ten trading days immediately preceding, and
not including, the transaction closing date, which was $5.434
for Digital Angel’s common stock and $5.113 for Applied
Digital’s common stock. The value of the stock exchanged
was $3.5 million.
Applied Digital and the former shareholders of DSD agreed to
exchange, per the terms of a share exchange agreement dated
April 12, 2006, registered shares of Applied Digital’s
common stock for the unregistered shares of the Digital
Angel’s common stock paid by Digital Angel to the former
shareholders of DSD Holding A/S, pursuant to the buy-out
agreement. Pursuant to the share exchange agreement, Applied
Digital issued to the former shareholders of DSD Holding A/S
454,545 shares of Applied Digital’s common stock,
valued at $972,249 and $27,751 in cash, in exchange for the
282,115 shares of Digital Angel common stock that the
former shareholders of DSD Holding A/S received from Digital
Angel in partial payment of the buy-out. The number of shares of
Applied Digital common stock that were exchanged was determined
based upon the average of the volume-weighted-average price of
our common stock for the two trading days immediately preceding,
and not including, the transaction closing date of June 8,
2006, which was $2.14 per share.
Digital Angel’s subsidiary, DSD Holding A/S, leases a
13,600 square foot building located in Hvidovre, Denmark.
The building is occupied by DSD Holding A/S’s
administrative and production operations. The lease agreement
has no expiration, but includes a three-month termination notice
requirement that can be utilized by the owner or DSD Holding
A/S. DSD Holding A/S leases the building from LANO Holding ApS,
which is 100%-owned by Lasse Nordfjeld, president of Digital
Angel’s Animal Applications Group. For the fiscal year
2006, DSD Holding A/S paid to LANO Holding ApS the aggregate
amount of DKK 841,074 ($141,300 at December 31, 2006, based
on an exchange rate of DKK 1.0 = U.S.$0.168) for lease payments
and utilities.
Policy
for Related Party Transactions
Digital Angel’s board of directors has adopted a written
policy for related party transactions. This policy establishes
procedures to ensure that all related party transactions are
prudently and properly evaluated, authorized, executed, and
disclosed in accordance with all applicable legal and
contractual requirements. For purposes of the policy, a
“related party transaction” means any transaction
between Digital Angel and any of its affiliates (other than
transactions available to all employees generally) that involve
more than $10,000 when aggregated with all similar transactions,
and includes any related party transactions, as defined in
Item 404 of
Regulation S-K.
For purposes of the policy, “affiliates” include:
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Digital Angel’s directors;
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Digital Angel’s executive officers;
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stockholders who own more than 5% of Digital Angel’s voting
securities.
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Affiliates include members of the immediate family of the above
persons and entities in which any of the above persons is
employed or is a general partner, director, principal, or holder
of a similar position, or in which such person has more than 5%
beneficial ownership interest. An affiliate also includes any
“related person,” as defined by Item 404 of
Regulation S-K.
Under the policy, every related party transaction must be
approved or ratified by the independent director committee. The
independent director committee will only approve those proposed
related party transactions that comply with all applicable legal
and contractual requirements and that the independent director
committee reasonably believes to be in the best interests of
Digital Angel. In approving a proposed related party
transaction, the independent director committee will consider:
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the interest of the affiliate in the proposed transaction;
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how the proposed transaction compares to a comparable
arm’s-length transaction with a person who is not an
affiliate of Digital Angel;
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whether the transaction is to be effected at fair market
value; and
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whether any terms of the transaction are not ordinary and
customary for commercial transactions of the type.
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All related person transactions shall be disclosed in Digital
Angel’s applicable SEC filings, as required under SEC rules.
191
PERFORMANCE
GRAPH OF DIGITAL ANGEL
Notwithstanding anything to the contrary set forth in any of
Digital Angel’s previous filings under the Securities Act
or the Exchange Act that might incorporate future filings or
this joint proxy statement/prospectus, the following performance
graph and accompanying data shall not be deemed to be
incorporated by reference into any such filings. In addition,
they shall not be deemed to be “soliciting material”
or “filed” with the SEC.
The following graph shows the total return to stockholders of an
investment in our common stock as compared to (i) an
investment in The AMEX Composite Index and (ii) an
investment in The AMEX Consumer Manufacturing Index.
Total stockholder return is determined by dividing (i) the
sum of (A) the cumulative amount of dividends for a given
period (assuming dividend reinvestment) and (B) the change
in share price between the beginning and end of the measurement
period, by (ii) the share price at the beginning of the
measurement period.
COMPARISON
OF 6 YEAR CUMULATIVE TOTAL RETURN*
Among Digital Angel Corporation, The AMEX Composite Index
And The AMEX Consumer Manufacturing Index
* $100
invested on 12/31/01 in stock or Index-including reinvestment of
dividends.
Fiscal year ending December 31.
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12/01
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12/02
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12/03
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12/04
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12/05
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12/06
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Digital Angel Corporation
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100.00
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52.04
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96.73
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157.76
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62.86
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52.04
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AMEX Composite
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100.00
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100.08
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144.57
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178.46
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220.35
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262.17
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AMEX Consumer Manufacturing
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100.00
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100.77
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129.27
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150.15
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154.52
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|
|
|
|
185.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
192
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF DIGITAL ANGEL
The following table sets forth certain information regarding the
beneficial ownership of Digital Angel’s common stock as of
September 28, 2007 by (i) each of Digital Angel’s
directors, (ii) each named executive officer,
(iii) all of Digital Angel’s current directors and
executive officers as a group, and (iv) each person known
by Digital Angel to be the beneficial owner of more than five
percent (5%) of the shares outstanding of common stock. Unless
otherwise indicated, each stockholder has sole voting and
investment power with respect to the indicated shares.
As of September 28, 2007, Digital Angel had
45,869,933 shares of common stock outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Percent of
|
|
|
|
|
Beneficially
|
|
|
Common
|
|
|
Name
|
|
Owned(1)
|
|
|
Stock
|
|
|
|
|
Kevin N. McGrath
|
|
|
2,350,000
|
(2)
|
|
|
5.1
|
%
|
|
Scott R. Silverman
|
|
|
1,533,450
|
(3)
|
|
|
3.3
|
%
|
|
John R. Block
|
|
|
445,000
|
(4)
|
|
|
1.0
|
%
|
|
Barry M. Edelstein
|
|
|
120,000
|
(4)
|
|
|
|
*
|
|
Howard S. Weintraub, Ph.D.
|
|
|
545,000
|
(4)
|
|
|
1.2
|
%
|
|
Michael S. Zarriello
|
|
|
545,000
|
(4)
|
|
|
1.2
|
%
|
|
James P. Santelli
|
|
|
214,875
|
(5)
|
|
|
|
*
|
|
Lorraine M. Breece
|
|
|
13,113
|
(4)
|
|
|
|
*
|
|
David Cairnie
|
|
|
231,667
|
(4)
|
|
|
|
*
|
|
Lasse Nordfjeld
|
|
|
165,000
|
(4)
|
|
|
|
*
|
|
All current officers and directors as a group (9 persons)
|
|
|
3,618,230
|
(6)
|
|
|
7.9
|
%
|
|
Applied Digital Solutions, Inc.
|
|
|
25,495,190
|
(7)
|
|
|
55.6
|
%
|
|
|
|
|
|
*
|
|
Less than 1% of outstanding shares.
|
Except as otherwise indicated, the address of each person named
in this table is
c/o Digital
Angel Corporation, 1690 South Congress Avenue, Suite 201,
Delray Beach, Florida 33445.
|
|
|
|
|
(1)
|
|
In determining the number and percentage of shares beneficially
owned by each person, shares that may be acquired by such person
pursuant to options exercisable within 60 days after
September 28, 2007 are deemed outstanding for purposes of
determining the total number of outstanding shares for such
person, but are not deemed outstanding for such purposes with
respect to all other stockholders. To our knowledge, except as
otherwise indicated, beneficial ownership includes sole voting
and dispositive power with respect to all shares.
|
|
|
|
|
|
(2)
|
|
This number includes options to purchase 2,350,000 shares
of common stock that are exercisable within 60 days after
September 28, 2007.
|
|
|
|
|
|
(3)
|
|
This number includes options to purchase 1,430,000 shares
of common stock that are exercisable within 60 days after
September 28, 2007, and 25,000 shares of restricted stock
units that vest within 60 days after September 28, 2007.
|
|
|
|
|
|
(4)
|
|
This number consists solely of options to purchase shares of
common stock that are exercisable within 60 days after
September 28, 2007.
|
|
|
|
|
|
(5)
|
|
This number includes options to purchase 100,000 shares of
common stock that are exercisable within 60 days after
September 28, 2007. This number also includes
114,875 shares of common stock, based on a Form 4
filed with the SEC on August 9, 2004.
|
|
|
|
|
|
(6)
|
|
This number includes options to purchase 3,618,230 shares
of common stock that are exercisable within 60 days after
September 28, 2007.
|
|
|
|
|
|
(7)
|
|
This number includes 1,000,000 shares held in the Digital
Angel Share Trust, Wilmington Trust Company as trustee.
|
193
As of September 28, 2007, Scott R. Silverman beneficially
owns 3,510,296 shares of common stock of Applied Digital,
which includes 2,142,500 options that are exercisable within 60
days of September 28, 2007. Michael S. Zarriello
beneficially owns approximately 134,051 shares of common
stock of Applied Digital, which includes 125,000 options
that are exercisable within 60 days of September 28,
2007. Lorraine M. Breece beneficially owns approximately
118,024 shares of common stock of Applied Digital, which
includes 116,500 options that are exercisable within
60 days of September 28, 2007.
194
DESCRIPTION
OF APPLIED DIGITAL’S CAPITAL STOCK
As of September 28, 2007, Applied Digital’s authorized
capital stock consisted of 125,000,000 shares of common
stock, $0.01 par value per share, and 5,000,000 shares
of preferred stock, $10.00 par value per share. At the
Applied Digital special meeting, stockholders will be asked to
approve and adopt an amendment to Applied Digital’s
certificate of incorporation to increase the total number of
authorized shares of Applied Digital capital stock to
170,000,000 shares, of which 165,000,000 shall be common
stock.
The following is a summary of the material terms of Applied
Digital’s common stock and preferred stock. This summary
does not purport to describe all the terms of the common stock
and preferred stock, and such description is subject to, and
qualified by reference to, the certificate of incorporation and
amended and restated bylaws, all of which have been filed with
the SEC, and by applicable law.
As of September 28, 2007, there were 70,870,866 shares
of Applied Digital common stock outstanding and held of record
by 2,181 stockholders. The holders of Applied Digital
common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders.
Subject to preferences that may be applicable to any
then-outstanding preferred stock, holders of Applied Digital
common stock are entitled to receive ratably such dividends as
may be declared by its board of directors, out of funds legally
available therefor. In the event of a liquidation, dissolution
or winding up of Applied Digital, holders of its common stock
are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any
then-outstanding preferred stock.
Holders of Applied Digital common stock have no preemptive
rights and no right to convert their common stock into any other
securities. There are no redemption or sinking-fund provisions
applicable to Applied Digital common stock. All outstanding
shares of Applied Digital common stock are, and all shares of
Applied Digital common stock issuable upon conversion of the
preferred stock, when and if issued, will be, fully paid and
nonassessable.
Applied Digital’s board of directors has the authority,
without further action by the stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series,
and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the
number of shares constituting any series or the designation of
such series, without any further vote or action by the
stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of Applied Digital common
stock and could have the effect of delaying, deferring or
preventing a change in control of Applied Digital.
Certain provisions of Delaware law and the Applied Digital
certificate of incorporation and amended and restated bylaws
could make the acquisition of Applied Digital by means of a
tender offer, or the acquisition of control of Applied Digital
by means of a proxy contest or otherwise, more difficult. These
provisions, summarized below, are intended to discourage certain
types of coercive takeover practices and inadequate takeover
bids, and are designed to encourage persons seeking to acquire
control of Applied Digital to negotiate with the Applied Digital
board of directors. Applied Digital believes that the benefits
of increased protection against an unfriendly or unsolicited
proposal to acquire or restructure Applied Digital outweigh the
disadvantages of discouraging such proposals. Among other
things, negotiation of such proposals could result in an
improvement of their terms.
Delaware Anti-Takeover Law.
Applied Digital is
subject to Section 203 of the DGCL, an anti-takeover law.
In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a “business combination”
with an “interested stockholder” for a period of three
years following the date the person became an interested
stockholder, unless the “business combination” or the
transaction in which the person became an
195
interested stockholder is approved by Applied Digital’s
board of directors in a prescribed manner. Generally, a
“business combination” includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an
“interested stockholder” is a person who, together
with affiliates and associates, owns or, within three years
prior to the determination of interested stockholder status, did
own, 15% or more of a corporation’s voting stock. The
existence of this provision may have an anti-takeover effect
with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of
common stock held by stockholders.
Other provisions in the Applied Digital certificate of
incorporation and amended and restated
bylaws.
The Applied Digital certificate of
incorporation and amended and restated bylaws provide other
mechanisms that may help to delay, defer or prevent a change in
control. For example, the Applied Digital certificate of
incorporation does not provide for cumulative voting in the
election of directors. Cumulative voting provides for a
stockholder to vote a portion or all of its shares for one or
more candidates for seats on the board of directors. Without
cumulative voting, a minority stockholder will not be able to
gain as many seats on Applied Digital’s board of directors
based on the number of shares of Applied Digital stock that such
stockholder holds than it would if cumulative voting were
permitted. The elimination of cumulative voting makes it more
difficult for a minority stockholder to gain a seat on Applied
Digital’s board of directors to influence the board’s
decision regarding a takeover.
Under the Applied Digital certificate of incorporation,
5,000,000 shares of preferred stock remain undesignated.
The authorization of undesignated preferred stock makes it
possible for the board of directors, without stockholder
approval, to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to
obtain control of Applied Digital.
The Applied Digital amended and restated bylaws contain
advance-notice procedures that apply to stockholder proposals
and the nomination of candidates for election as directors by
stockholders, other than nominations made pursuant to the notice
given by Applied Digital with respect to such meetings or
nominations made by or at the direction of the board of
directors.
These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management
of Applied Digital.
Transfer
Agent and Registrar
The transfer agent and registrar for Applied Digital’s
common stock is Registrar and Transfer Company, located at 10
Commerce Drive, Cranford, New Jersey 07016-3572, and its
telephone number is 800-368-5948.
196
COMPARISON
OF THE RIGHTS OF STOCKHOLDERS OF
APPLIED DIGITAL AND DIGITAL ANGEL
Digital Angel and Applied Digital are each organized under the
laws of the State of Delaware and subject to the DGCL. Any
differences, therefore, in the rights of holders of capital
stock in Digital Angel and Applied Digital arise primarily from
differences in their respective certificates of incorporation
and bylaws. Upon completion of the merger, holders of Digital
Angel common stock will become holders of Applied Digital common
stock, and their rights will be governed by Delaware law,
Applied Digital’s certificate of incorporation, as amended,
and Applied Digital’s amended and restated bylaws.
The following discussion summarizes the material differences
between the rights of Digital Angel stockholders and Applied
Digital stockholders, as described in the applicable provisions
of their respective certificates of incorporation and bylaws.
This section does not include a complete description of all the
differences between the rights of these stockholders or the
specific rights of these stockholders. All Digital Angel
stockholders and Applied Digital stockholders are urged to read
carefully the relevant provisions of Delaware law, as well as
the restated certificate of incorporation and bylaws of Digital
Angel, as amended, and the certificate of incorporation and
amended and restated bylaws of Applied Digital.
Capitalization
Applied
Digital
:
The aggregate number of shares of all classes of stock that
Applied Digital has the authority to issue is
130,000,000 shares, of which 5,000,000 shares are
preferred stock having a par value of $10.00 per share, and
125,000,000 shares are common stock having a par value of
$0.01 per share.
At the Applied Digital special meeting, stockholders will be
asked to approve and adopt an amendment to Applied
Digital’s certificate of incorporation to increase the
total number of authorized shares of Applied Digital capital
stock to 170,000,000 shares, of which 165,000,000 are to be
common stock.
Digital
Angel
:
The total number of shares of capital stock that Digital Angel
has the authority to issue is 96,000,000 shares, consisting
of 95,000,000 shares of common stock having a par value of
$0.005 per share, and 1,000,000 shares of preferred stock
having a par value of $1.75 per share.
Preferred
Stock
Applied
Digital and Digital
Angel
:
Subject to the laws of the State of Delaware, the board of
directors of each of Applied Digital and Digital Angel has the
authority to issue preferred stock, from time to time, in one or
more series, and to set the relative rights and preferences of
the shares of each series.
Voting
Rights
Applied
Digital
:
Each share of common stock is identical with each other share of
common stock, except as the holders of the common stock
otherwise expressly agree in writing. Subject to the voting
rights of any holders of preferred stock, each outstanding share
of common stock entitled to vote under the provisions of Applied
Digital’s certificate of incorporation is entitled to one
vote on each matter submitted to a vote at a meeting of
stockholders.
197
Digital
Angel
:
The holders of common stock have one vote per share and are
entitled, voting as a class, to elect all members of the board
of directors, except for the number of directors that the
holders of preferred stock are entitled, voting as a class, to
elect. However, in any case, the holders of the common stock are
entitled to elect at least a majority of the members of the
board of directors.
Digital Angel must not take any of the following actions without
the approval of the holders of 66.6% of the issued and
outstanding common stock of Digital Angel:
(i) implementing a bankruptcy decision with respect to the
corporation or any of its direct or indirect subsidiaries if, at
the time such bankruptcy decision is implemented or is to be
implemented, (A) a bankruptcy decision has been made with
respect to Applied Digital, or any of its direct or indirect
subsidiaries, or (B) Applied Digital is in default under,
or with respect to, any obligation for borrowed money, including
certain credit documents, regardless of whether such default has
been declared; and
(ii) approving any issuance of corporation stock (or
securities of any of its direct or indirect subsidiaries) or
securities convertible into or exercisable for corporation stock
(or securities of any of its direct or indirect subsidiaries),
including options or warrants for corporation stock (or
securities of any of its direct or indirect subsidiaries), for
(A) non-cash consideration or (B) cash consideration
of less than fair market value.
However, if an amendment to the restated certificate of
incorporation, as described in Digital Angel’s
proposal 3, is approved, then provision (ii) above
which requires that 66.6% of the issued and outstanding shares
of Digital Angel approve the issuance of common stock (including
options or warrants) for non-cash consideration or for less than
fair market value, will be removed from the restated certificate
of incorporation.
Preemptive
Rights
Applied
Digital and Digital
Angel
:
No Digital Angel stockholder has preemptive or preferential
rights. No Applied Digital stockholder has preemptive or
preferential rights other than such right, if any, as the board
of directors of Applied Digital in its discretion may from time
to time determine, and at such prices as the Applied Digital
board of directors may from time to time fix.
Dividends
Applied
Digital and Digital
Angel
:
Subject to the prior rights of the preferred stock of Applied
Digital and Digital Angel, holders of Applied Digital and
Digital Angel common stock may receive dividends.
Closing
of Transfer Books and Fixing of Record Date
Applied
Digital
:
The board of directors may close the transfer books of Applied
Digital for a period not exceeding 60, nor less than
10, days prior to the date of any stockholders meeting. In
lieu of so closing the transfer books, the board of directors
may fix in advance a record date for the determination of the
stockholders entitled to notice of, and to vote at, any meeting
and any adjournment thereof, not exceeding 60, nor less than
10, days prior to the date of any stockholders meeting. If
the board of directors does not close the transfer books or set
a record date for the determination of the stockholders entitled
to notice of, and to vote at, any stockholders meeting, the
record date for determining stockholders entitled to notice of,
or to vote at, a stockholders meeting is the close of business
on the day next preceding the day on which notice is given, or,
if notice is waived, at the close of business on the day next
preceding the day on which the stockholders meeting is held. A
determination of stockholders of record entitled to notice of,
or to vote at, a stockholders meeting will apply
198
to any adjournment of the meeting, but the board of directors
may fix a new record date for the adjourned meeting.
Digital
Angel
:
The board of directors may fix a record date, which will not be
more than 60, nor less than 10, days before the date of any
stockholders meeting, nor more than 60 days prior to the
time for the other action hereinafter described, as of which
there shall be determined the stockholders who are entitled: to
notice of, or to vote at, any stockholders meeting or any
adjournment thereof; to express consent to corporate action in
writing without a meeting; to receive payment of any dividend or
other distribution or allotment of any rights; or to exercise
any rights with respect to an change, conversion or exchange of
stock or with respect to any other lawful action.
Special
Stockholder Meetings
Applied
Digital
:
Only the affirmative vote of a majority of the entire board of
directors, the chairman of the board of directors, or the
president may call a special meeting of the stockholders or of
the holders of any special class of stock of Applied Digital by
request of such meeting in writing, unless otherwise prescribed
by statute. Such request is required to be delivered to the
secretary of Applied Digital and state the purpose(s) of the
proposed meeting. Upon such direction or request, subject to any
requirements or limitations imposed by the Applied Digital
certificate of incorporation, the Applied Digital amended and
restated bylaws, or by law, it is the duty of the secretary to
call a special meeting of the stockholders to be held at such
time as is specified in the request.
Digital
Angel
:
The board of directors or the chief executive officer of Digital
Angel may call a special meeting of the stockholders for any
purpose(s) prescribed in the notice of the meeting, and such
meeting will be held at such place, on such date, and at such
time as the board of directors or the chief executive officer
fix.
Stockholder
Action by Written Consent
Applied
Digital and Digital
Angel
:
Unless otherwise provided in the Applied Digital or Digital
Angel certificate of incorporation, as applicable, any action
required or permitted to be taken by the Applied Digital or
Digital Angel stockholders may be taken without a stockholders
meeting only if a consent in writing, setting forth the action
so taken, is signed by the holders of the outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Cumulative
Voting
Applied
Digital and Digital
Angel
:
Applied Digital and Digital Angel stockholders do not have any
right to cumulative voting.
Advance
Notice of Nominations and Stockholder Proposals
Applied
Digital
:
For nominations or other business to be properly brought before
an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the secretary. To be
timely, a stockholder’s notice must be delivered to the
secretary at the principal executive offices of Applied Digital
not less than 60 days, nor more than 90 days, prior to
the first anniversary of the preceding year’s annual
meeting; provided, however, that, if the date of the annual
meeting is advanced by more than 30 days, or delayed by
more than
199
60 days, from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than
the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such meeting is
first made.
Digital
Angel
:
Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting will be
given. The written notice of any meeting must be given not less
than 10, nor more than 60, days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Number;
Election and Term
Applied
Digital
:
The board of directors will consist of seven persons, but in no
event will the number of directors be less than three. The
number of directors provided in the Applied Digital amended and
restated bylaws may be amended from time to time only by the
affirmative vote of a majority of the board of directors.
The board of directors must be divided into three classes, as
nearly equal in number as possible. The first class of directors
will hold office until the annual meeting of stockholders in
2008, the second class of directors will hold office until the
annual meeting of stockholders in 2009, and the third class of
directors will hold office until the annual meeting of
stockholders in 2010, or, in each case, until his or her
successor is elected and qualified. Thereafter, directors will
be elected to hold office for a term of three years or, in each
case, until his or her successor is elected and qualified, and,
at each annual stockholders meeting, the successors to the class
of directors whose terms then expire will be elected for a term
expiring at the third succeeding annual meeting after that
election.
Digital
Angel
:
Except as otherwise authorized by the Digital Angel certificate
of incorporation, the number of directors who constitute the
whole board will not be less than three. Each director will be
elected for a term of one year and until his successor is
elected and qualified, except as otherwise provided in the
Digital Angel bylaws or required by law. Whenever the authorized
number of directors is increased between annual stockholders
meetings, a majority of the directors then in office have the
power to elect such new directors for the balance of a term and
until their successors are elected and qualified. Any decrease
in the authorized number of directors will not become effective
until the expiration of the term of the directors then in
office, unless, at the time of such decrease, there are
vacancies on the board that are being eliminated by the decrease.
Vacancy
and Removal of Directors
Applied
Digital and Digital
Angel
:
A majority of the directors in office can fill any vacancy or
newly created directorship. A Digital Angel director may be
removed with or without cause by a majority of the shares
entitled to vote at an election of the directors. An Applied
Digital director may be removed only for cause by a majority of
the shares entitled to vote at an election of the directors.
Certificate
of Incorporation
Applied
Digital and Digital
Angel
:
An amendment to the articles or certificate of incorporation
requires approval by both the board of directors and a majority
of the outstanding stock. Any proposed amendment to the
certificate of incorporation that would increase or decrease the
authorized shares of a class of stock, increase or decrease the
par value of
200
the shares of a class of stock, or alter or change the powers,
preferences or special rights of the shares of a class of stock
(so as to affect them adversely) requires approval of the
holders of a majority of the outstanding shares of the affected
class, voting as a separate class, in addition to the approval
of a majority of the shares entitled to vote on that proposed
amendment. If any proposed amendment would alter or change the
powers, preferences or special rights of any series of a class
of stock so as to affect them adversely, but does not affect the
entire class, then only the shares of the series affected by the
proposed amendment is considered a separate class for purposes
of the immediately preceding sentence.
Bylaws
Applied
Digital and Digital
Angel
:
The board of directors of each of Applied Digital and Digital
Angel is authorized to make, amend, alter and rescind the
Applied Digital amended and restated bylaws and the Digital
Angel bylaws, as applicable. In addition, the Digital Angel
bylaws may be amended or repealed by the board of directors at
any meeting or by the stockholders at any meeting.
Indemnification
General
Applied
Digital
:
Applied Digital will indemnify each person (other than a party
plaintiff suing on his or her own behalf or in the right of the
corporation) who at any time is serving, or has served, as a
director or officer of Applied Digital and may indemnify any
person (other than a party plaintiff suing on his or her own
behalf or in the right of the corporation) who at any time is
serving, or has served, as an employee or agent of Applied
Digital against any claim, liability or expense incurred as a
result of such service, or as a result of any other service on
behalf of Applied Digital, or service at the request of Applied
Digital as a director, officer, employee, member or agent of
another corporation, partnership, joint venture, trust, trade or
industry association, or other enterprise (whether incorporated
or unincorporated, for-profit or not-for-profit), to the maximum
extent permitted by law. Without limiting the generality of the
foregoing, Applied Digital will indemnify any such director or
officer and may indemnify any such employee or agent who was or
is a party (other than a party plaintiff suing on his or her
behalf or in the right of Applied Digital), or is threatened to
be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (including, but not limited to, an action by or in
the right of Applied Digital) by reason of such service against
expenses (including, without limitation, attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such
action, suit or proceeding.
To the extent that an employee or agent of Applied Digital has
been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the Applied Digital
amended and restated bylaws, or in defense of any claim, issue
or matter therein, he or she will be indemnified against
expenses (including attorneys’ fees) actually and
reasonably incurred by him or her in connection with the action,
suit or preceding.
Digital
Angel
:
Digital Angel will, to the fullest extent permitted by
Section 145 of the DGCL, indemnify any and all persons whom
it will have the power to indemnify under said section from and
against any and all of the expenses, liabilities or other
matters referred to in or covered by said section, and the
indemnification provided for herein will not be deemed exclusive
of any other rights to which those indemnified may be entitled
under any bylaw, agreement, vote of stockholders, disinterested
directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such
office, and will continue as to a person who has ceased to be a
director, officer, employee or agent and will inure to the
benefit of the heirs, executors and administrators of such a
person.
201
Digital Angel will indemnify any person who was or is a party,
or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including any action
or suit by or in the right of the corporation), by reason of the
fact that he or she is or was a director, officer, employee or
agent of Digital Angel, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with such suit, action or proceeding if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of Digital Angel, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful; provided,
however, that in the case of an action or suit by or in the
right of Digital Angel:
(a) such person will be indemnified only to the extent of
his or her expenses (including attorneys’ fees) actually
and reasonably incurred by him or her in connection with the
defense or settlement thereof, and not for any judgments, fines
or amounts paid in settlement; and
(b) no indemnification will be made in respect of any
claim, issue or matter as to which such person was adjudged to
be liable for negligence or misconduct in the performance of his
duty to Digital Angel, unless, and only to the extent that, the
Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application
that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court deems proper.
Any indemnification (unless required by law or ordered by a
court) will be made by Digital Angel, only as authorized in the
specific case, upon a determination that the indemnification of
the director, officer, employee or agent is proper in the
circumstances, because he or she has met the applicable standard
of conduct. Such determination will be made:
(1) by the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such
action, suit or proceeding;
(2) if such a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion; or
(3) by the stockholders of Digital Angel.
Insurance
Applied
Digital
:
Applied Digital may purchase and maintain insurance, on behalf
of any person who is or was a director, officer, employee or
agent of Applied Digital, or who is or was otherwise serving on
behalf or at the request of the corporation in any capacity,
against any claim, liability or expense asserted against him or
her and incurred by him or her in any such capacity, or arising
out of his or her status as such, whether or not Applied Digital
would have the power to indemnify him or her against such
liability under the provisions of the Applied Digital amended
and restated bylaws.
Digital
Angel
:
Digital Angel may purchase and maintain insurance, on behalf of
any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of
Digital Angel as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him or her
and incurred by him or her in any such capacity, or arising out
of his or her status as such, whether or not Digital Angel would
have the power to indemnify him or her against such liability
under the provisions of the DGCL or of the Digital Angel bylaws.
Digital Angel’s indemnity of any person who is or was a
director, officer, employee or agent of Digital Angel will be
reduced by any amounts that such person may collect as
indemnification under any policy of insurance purchased and
maintained on his or her behalf by Digital Angel.
202
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Subject to the limitations and qualifications set forth in this
section, the discussion in this section represents the opinion
of Holland & Knight LLP, or H&K, counsel to
Applied Digital as to the material United States federal income
tax consequences of the merger generally applicable to Digital
Angel stockholders who hold their shares of Digital Angel common
stock as capital assets at the effective time of the merger and
who exchange their shares for shares of Applied Digital common
stock in the merger. H&K has delivered these opinions,
dated as of September 6, 2007, to Applied Digital and
Digital Angel, respectively. The discussion set forth below does
not address all United States federal income tax considerations
that may be relevant to Digital Angel stockholders in light of
their particular circumstances, and does not apply to the
treatment of stock options or warrants in the merger or the
treatment of Digital Angel stockholders that are subject to
special rules under U.S. federal income tax laws, such as:
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foreign persons;
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financial institutions, insurance companies, mutual funds,
dealers in securities or foreign currencies, tax-exempt
organizations and stockholders subject to the alternative
minimum tax;
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stockholders who hold Digital Angel common stock as part of a
hedge, straddle, constructive sale or conversion transaction, or
other risk-reduction arrangement;
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stockholders who acquired their Digital Angel common stock
through stock option or stock purchase programs or otherwise as
compensation; and
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stockholders whose functional currency is not the
U.S. dollar.
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In addition, this discussion does not consider the tax treatment
of Digital Angel stockholders who hold their Digital Angel
shares through a partnership or other pass-through entity, and
it does not address the tax consequences of the merger under
foreign, state or local tax laws or U.S. federal estate tax
laws.
Digital Angel stockholders are urged to consult their own tax
advisors regarding the tax consequences of the merger to them
based on their own circumstances, including the application and
effect of U.S. federal, state, local and foreign tax
laws.
The following discussion is based on interpretations of the
Internal Revenue Code, applicable Treasury Regulations, judicial
decisions and administrative rulings and practice, all as of the
date of this joint proxy statement/prospectus, and all of which
are subject to change. Any such change could affect the accuracy
of the statements and conclusions set forth in this discussion
and the tax consequences of the merger to Applied Digital,
Digital Angel
and/or
their
respective stockholders. The following discussion is not binding
on the Internal Revenue Service or a court, and neither one is
precluded from asserting a contrary position.
Neither Applied Digital nor Digital Angel has requested, nor
will either request, a ruling from the Internal Revenue Service
with regard to any of the tax consequences of the merger.
Digital Angel has received an opinion from H&K that the
merger will constitute a “reorganization” within the
meaning of Section 368(a) of the Internal Revenue Code.
Applied Digital has received an opinion from H&K that the
merger will constitute a “reorganization” within the
meaning of Section 368(a) of the Internal Revenue Code. The
opinion is based upon the assumption that the merger will take
place in the manner described in the merger agreement, and also
assumes the truth and accuracy of certain factual
representations made by Applied Digital and Digital Angel to
H&K that are customarily given in transactions of this kind.
Qualification as a “reorganization” means that,
subject to the limitations and qualifications set forth in this
discussion, the following U.S. federal income tax
consequences will result from the merger:
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A Digital Angel stockholder will not recognize gain or loss on
the exchange of Digital Angel common stock for Applied Digital
common stock pursuant to the merger, except as discussed below;
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The total initial tax basis of any Applied Digital stock
received by a Digital Angel stockholder in the merger will be
equal to the total tax basis of the Digital Angel common stock
exchanged therefor; and
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The holding period of the Applied Digital common stock received
by a Digital Angel stockholder in the merger will include the
holding period of the Digital Angel common stock surrendered
therefor.
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Even if the merger did qualify as a reorganization, the receipt
of Applied Digital common stock could be a taxable transaction
if the Internal Revenue Service were to successfully assert that
such stock was being issued in whole or in part in exchange for
consideration other than Digital Angel stock. In addition,
opinions of counsel are not binding on the Internal Revenue
Service or the courts. As a result, neither Applied Digital nor
Digital Angel can assure you that the conclusions contained in
this discussion will not be challenged by the Internal Revenue
Service or sustained by a court if challenged. If the Internal
Revenue Service were to assert successfully that the merger is
not a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, then each Digital Angel
stockholder would be required to recognize gain or loss equal to
the difference between (i) the fair market value of the
Applied Digital common stock received in the exchange and
(ii) the stockholder’s tax basis in the Digital Angel
stock surrendered therefor. In such event, a Digital Angel
stockholder’s total initial tax basis in the Applied
Digital common stock received would be equal to its fair market
value at the effective time of the merger, and the
stockholder’s holding period for the Applied Digital common
stock would begin on the day after the merger. The gain or loss
recognized would be long-term capital gain or loss if the
Digital Angel stockholder’s holding period for the Digital
Angel common stock was more than one year.
Backup
Withholding of U.S. Federal Income Tax
A non-corporate holder of Digital Angel shares may be subject to
backup withholding, unless the stockholder (i) provides a
correct taxpayer identification number (which, for an individual
stockholder, generally is the stockholder’s social security
number) and certifies that he, she or it is not subject to
backup withholding on the substitute
W-9
that is
included as part of the transmittal letter or
(ii) otherwise is exempt from backup withholding. Backup
withholding will not apply to a Digital Angel stockholder who
completes and signs the substitute
Form W-9
that is included as part of the transmittal letter, or who
otherwise proves to Applied Digital and its exchange agent that
it is exempt from backup withholding. A Digital Angel
stockholder who does not provide a correct taxpayer
identification number may be subject to penalties imposed by the
Internal Revenue Service. Backup withholding is not an
additional tax and may be claimed as a credit against a Digital
Angel stockholder’s federal income tax liability, provided
that the required information is furnished to the Internal
Revenue Service.
Reporting
and Record Keeping
A Digital Angel stockholder is required to retain records of the
transaction. At a minimum, the information retained must
include: (i) the amount of, and the stockholder’s tax
basis in, the Digital Angel common stock surrendered, and
(ii) the fair market value, as of the time of the effective
date of the merger, of the Applied Digital common stock received
in the exchange therefor.
In addition, a significant holder of Digital Angel common stock
must attach, to the stockholder’s federal income tax return
for the year of the merger, a statement meeting the requirements
of Temporary Treasury Reg. § 1.368-3T(b). For this
purpose, a significant holder is any person who, immediately
before the merger, held: (i) at least 5% (by vote or value)
of Digital Angel’s outstanding stock, if the stock held by
such stockholder is publicly traded; or (ii) at least 1%
(by vote or value) of Digital Angel’s outstanding stock, if
the stock held by such stockholder is not publicly traded.
The preceding discussion does not purport to be a complete
analysis of all potential tax consequences of the merger that
may be relevant to a particular Digital Angel stockholder.
Holders of Digital Angel common stock are urged to consult their
own tax advisors regarding the specific tax consequences to them
of the merger, including the applicability and effect of
foreign, state, local and other tax laws.
204
The validity of the shares of Applied Digital common stock
offered in connection with the merger will be passed upon by
Holland & Knight LLP, One East Broward Blvd., Suite
1300, Fort Lauderdale, Florida 33301. Holland & Knight
LLP will render an opinion that the description of the
U.S. federal income tax consequences described under the
caption “The Merger — Material United States
Federal Income Tax Consequences” is true and correct in all
material respects.
The consolidated financial statements and related financial
statement schedule of Applied Digital, incorporated by reference
in this prospectus from Applied Digital’s Current Report on
Form 8-K
filed with the SEC on September 10, 2007, and
management’s report on the effectiveness of internal
control over financial reporting, incorporated by reference in
this prospectus from Applied Digital’s Annual Report on
Form 10-K/A
for the year ended December 31, 2006 filed with the SEC on
April 6, 2007, have been audited by Eisner LLP, an
independent registered public accounting firm, as stated in
their reports which are incorporated herein by reference, which
reports (1) express an unqualified opinion on the financial
statements and financial statement schedule, (2) express an
unqualified opinion on management’s assessment regarding
the effectiveness of internal control over financial reporting,
and (3) express an unqualified opinion on the effectiveness
of internal control over financial reporting and have been
incorporated herein by reference in reliance upon the reports of
such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of Digital Angel and
related financial statement schedule included in this joint
proxy statement/prospectus and management’s report on the
effectiveness of internal control over financial reporting
included in Digital Angel’s Annual Report on
Form 10-K
for the year ended December 31, 2006 filed with the SEC on
March 8, 2007 have been audited by Eisner LLP, an
independent registered public accounting firm, as stated in
their reports, which reports (1) express an unqualified
opinion on the financial statements and financial statement
schedule, (2) express an unqualified opinion on
management’s assessment regarding the effectiveness of
internal control over financial reporting, and (3) express
an unqualified opinion on the effectiveness of internal control
over financial reporting, have been so included herein in
reliance on such firm’s reports given upon their authority
as experts in accounting and auditing.
205
WHERE
YOU CAN FIND MORE INFORMATION
Each of Applied Digital and Digital Angel files reports, proxy
statements and other information with the SEC. You may read and
copy any of this information at the SEC’s public reference
room at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. The SEC
also maintains an internet website that contains reports, proxy
statements and other information regarding issuers, including
Applied Digital and Digital Angel, who file electronically with
the SEC. The address of that site is
http://www.sec.gov.
The information contained on the SEC’s website is expressly
not incorporated by reference in this joint proxy
statement/prospectus. You can obtain any of the materials that
Applied Digital or Digital Angel files with the SEC from the
SEC, through the SEC’s website at the address described
above, or from Applied Digital or Digital Angel, as applicable,
by requesting them in writing or by telephone at the following
addresses:
Applied
Digital Solutions, Inc.
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Telephone:
(561) 805-8000
Attention: Investor Relations
Digital
Angel Corporation
490 Villaume Avenue
South St. Paul, Minnesota 55075
Telephone:
(651) 455-1621
Attention: Investor Relations
These documents are available from Applied Digital or Digital
Angel, as applicable, without charge, excluding any exhibits to
the documents, unless the exhibit is specifically listed as an
exhibit to the registration statement of which this joint proxy
statement/prospectus forms a part. Copies of materials related
to Applied Digital may also be inspected at the offices of the
Nasdaq Stock Market, Inc., One Liberty Plaza,
50
th
Floor,
New York, New York 10006. Stockholders may also consult Applied
Digital’s and Digital Angel’s websites for more
information concerning the merger described in this joint proxy
statement/prospectus. Information included in Applied
Digital’s and Digital Angel’s websites is not
incorporated by reference in this joint proxy
statement/prospectus.
IN ORDER FOR YOU TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS
BEFORE THE APPLIED DIGITAL SPECIAL MEETING OR THE DIGITAL ANGEL
SPECIAL AND ANNUAL MEETING, APPLIED DIGITAL OR DIGITAL ANGEL
SHOULD RECEIVE YOUR REQUEST NO LATER THAN NOVEMBER 19,
2007.
Applied Digital has filed a registration statement under the
Securities Act with the SEC with respect to Applied
Digital’s common stock to be issued to Digital Angel
stockholders in the merger. This joint proxy
statement/prospectus constitutes the prospectus of Applied
Digital filed as part of the registration statement. You may
inspect and copy the registration statement at the address
listed above.
You should rely only on information contained in this joint
proxy statement/prospectus or any supplement we provide to you.
Neither Applied Digital nor Digital Angel has authorized any
other person to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. Applied Digital is not making an
offer to sell the Applied Digital common stock in any
jurisdiction where the offer or sale is not permitted.
You should not assume that the information appearing in this
joint proxy statement/prospectus or any supplement is accurate
as of any date other than the date on the front of the
documents. Applied Digital’s and Digital Angel’s
business, financial condition, results of operations and other
information may have changed since that date.
206
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows Applied Digital to “incorporate by
reference” business and financial information that is not
included in, or delivered with, this joint proxy
statement/prospectus, which means that Applied Digital can
disclose important information to you by referring to another
document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this joint
proxy statement/prospectus, except for any information
superseded by information in this joint proxy
statement/prospectus. Applied Digital incorporates by reference
the documents listed below.
The following documents previously filed with the SEC are hereby
incorporated by reference in this joint proxy
statement/prospectus (other than filings, or portions of
filings, that are furnished under applicable SEC rules rather
than filed):
Applied
Digital Filings
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Applied Digital’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 filed with the
SEC on March 15, 2007;
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Amendment No. 1 to Applied Digital’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 filed with the
SEC on April 6, 2007;
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Applied Digital’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007 filed with the SEC on
May 10, 2007;
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Applied Digital’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 filed with the SEC on
August 9, 2007;
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Applied Digital’s Current Reports on
Form 8-K
filed with the SEC on January 24, 2007, February 12,
2007, February 14, 2007, March 1, 2007, March 8,
2007, April 25, 2007, May 21, 2007, June 20,
2007, June 29, 2007, July 5, 2007, July 10, 2007,
August 9, 2007, August 10, 2007, August 30, 2007,
September 4, 2007, September 5, 2007, September 10,
2007, September 24, 2007 and October 4, 2007; and
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The description of Applied Digital’s common stock contained
in the registration statement on
Form 8-A
filed with the SEC on May 5, 1995, including any amendments
or reports filed for the purposes of updating the description of
the common stock.
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All documents and reports that Applied Digital files pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
(other than filings, or portions of filings, that are furnished
under applicable SEC rules rather than filed) after the date of
this joint proxy statement/prospectus and up to the date of the
Applied Digital special meeting shall be deemed to be
incorporated by reference into this joint proxy
statement/prospectus and to be a part of it from the date of
filing of those documents. Further, all documents and reports
that Applied Digital files pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this
joint proxy statement/prospectus and prior to the effectiveness
of the registration statement, of which this joint proxy
statement/prospectus is a part, shall be deemed to be
incorporated by reference into this joint proxy
statement/prospectus and to be a part of it from the date of
filing of these documents. Any statement contained in a document
incorporated into this joint proxy statement/prospectus by
reference shall be deemed to be modified or superseded for
purposes of this joint proxy statement/prospectus, to the extent
that a statement contained in this joint proxy
statement/prospectus or in any other subsequently filed document
which also is, or is deemed to be, incorporated by reference in
this joint proxy statement/prospectus modifies or supersedes
such earlier statement. Any statement modified or superseded
shall not be deemed, except as modified or superseded, to
constitute a part of this joint proxy statement/prospectus.
207
You can obtain any of the documents listed above from the
appropriate company or the SEC. Documents listed above are
available from the appropriate company without charge, excluding
all exhibits, unless the exhibits have specifically been
incorporated by reference in this joint proxy
statement/prospectus. Holders of this joint proxy
statement/prospectus may obtain documents listed above by
requesting them upon written or oral request from the
appropriate company at the addresses listed under the section
“Where You Can Find More Information.”
208
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL
STATEMENTS
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Condensed Consolidated Balance Sheets — As of
June 30, 2007 (unaudited) and December 31, 2006
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FS-2
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Condensed Consolidated Statements of Operations
(unaudited) — Three months and six months ended
June 30, 2007 and 2006
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FS-3
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Condensed Consolidated Statement of Changes in
Stockholders’ Equity (unaudited) — Six Months
Ended June 30, 2007
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FS-4
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Condensed Consolidated Statements of Cash Flows
(unaudited) — Six months ended June 30, 2007 and
2006
|
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FS-5
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Notes to Condensed Consolidated Financial Statements (unaudited)
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FS-6
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Reports of Independent Registered Public Accounting Firm
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FS-21
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Consolidated Balance Sheets — December 31, 2006
and December 31, 2005
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FS-23
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Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004
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FS-24
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Statements of Changes in Stockholders’ Equity for the Years
Ended December 31, 2006, 2005 and 2004
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FS-25
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Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004
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FS-26
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Notes to Consolidated Financial Statements
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FS-27
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Schedule II — Valuation and Qualifying Accounts
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FS-57
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FS-1
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(in
thousands, except par values)
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June 30,
|
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December 31,
|
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2007
|
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2006
|
|
|
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(unaudited)
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Assets
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,004
|
|
|
$
|
1,521
|
|
|
Restricted cash
|
|
|
127
|
|
|
|
81
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$183 and $203 at June 30, 2007 and December 31, 2006,
respectively
|
|
|
10,816
|
|
|
|
9,609
|
|
|
Accounts receivable from VeriChip Corporation
|
|
|
35
|
|
|
|
425
|
|
|
Inventories
|
|
|
13,294
|
|
|
|
9,897
|
|
|
Other current assets
|
|
|
2,076
|
|
|
|
2,016
|
|
|
Current assets from discontinued operations
|
|
|
3,069
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,421
|
|
|
|
25,884
|
|
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Property and equipment, net
|
|
|
11,040
|
|
|
|
9,985
|
|
|
Goodwill
|
|
|
53,276
|
|
|
|
51,244
|
|
|
Other intangible assets, net
|
|
|
1,589
|
|
|
|
1,633
|
|
|
Other assets, net
|
|
|
615
|
|
|
|
619
|
|
|
Other assets from discontinued operations
|
|
|
1,040
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
97,981
|
|
|
$
|
89,896
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
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Current liabilities
|
|
|
|
|
|
|
|
|
|
Line of credit and current maturities of long-term debt
|
|
$
|
9,294
|
|
|
$
|
4,127
|
|
|
Accounts payable
|
|
|
11,666
|
|
|
|
6,024
|
|
|
Due to Applied Digital Solutions, Inc.
|
|
|
67
|
|
|
|
11
|
|
|
Accrued expenses and other current liabilities
|
|
|
3,609
|
|
|
|
2,793
|
|
|
Current liabilities from discontinued operations
|
|
|
2,266
|
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,902
|
|
|
|
15,403
|
|
|
Long-term debt
|
|
|
3,790
|
|
|
|
4,036
|
|
|
Other long term liabilities
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability
|
|
|
958
|
|
|
|
—
|
|
|
Other long term liabilities
|
|
|
373
|
|
|
|
386
|
|
|
Other liabilities from discontinued operations
|
|
|
2,585
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long term liabilities
|
|
|
3,916
|
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
34,608
|
|
|
|
20,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
409
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Preferred stock ($1.75 par value; shares authorized, 1,000;
shares issued, nil)
|
|
|
—
|
|
|
|
—
|
|
|
Common stock ($0.005 par value: shares authorized, 95,000:
shares issued, 45,019 and 44,894: shares outstanding, 44,641 and
44,516)
|
|
|
226
|
|
|
|
226
|
|
|
Additional paid-in capital
|
|
|
215,027
|
|
|
|
214,509
|
|
|
Accumulated deficit
|
|
|
(150,962
|
)
|
|
|
(144,753
|
)
|
|
Treasury stock (carried at cost, 378 shares)
|
|
|
(1,580
|
)
|
|
|
(1,580
|
)
|
|
Accumulated other comprehensive income
|
|
|
253
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
62,964
|
|
|
|
68,546
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
97,981
|
|
|
$
|
89,896
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
FS-2
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations (Unaudited)
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Total net revenue
|
|
$
|
19,533
|
|
|
$
|
12,428
|
|
|
$
|
34,831
|
|
|
$
|
27,747
|
|
|
Cost of sales
|
|
|
11,855
|
|
|
|
7,562
|
|
|
|
21,509
|
|
|
|
16,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,678
|
|
|
|
4,866
|
|
|
|
13,322
|
|
|
|
11,472
|
|
|
Selling, general and administrative expenses
|
|
|
7,763
|
|
|
|
5,685
|
|
|
|
15,277
|
|
|
|
11,631
|
|
|
Research and development expenses
|
|
|
1,585
|
|
|
|
727
|
|
|
|
2,804
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,670
|
)
|
|
|
(1,546
|
)
|
|
|
(4,759
|
)
|
|
|
(1,681
|
)
|
|
Interest income
|
|
|
8
|
|
|
|
81
|
|
|
|
46
|
|
|
|
174
|
|
|
Interest expense
|
|
|
(674
|
)
|
|
|
(110
|
)
|
|
|
(998
|
)
|
|
|
(206
|
)
|
|
Change in derivative warranty liability
|
|
|
(105
|
)
|
|
|
—
|
|
|
|
296
|
|
|
|
—
|
|
|
Other income
|
|
|
30
|
|
|
|
27
|
|
|
|
62
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes and minority
interest
|
|
|
(2,411
|
)
|
|
|
(1,548
|
)
|
|
|
(5,353
|
)
|
|
|
(1,668
|
)
|
|
Income tax (provision) benefit
|
|
|
(13
|
)
|
|
|
(11
|
)
|
|
|
(38
|
)
|
|
|
72
|
|
|
Minority interest share of loss (income)
|
|
|
10
|
|
|
|
(19
|
)
|
|
|
15
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(2,414
|
)
|
|
|
(1,578
|
)
|
|
|
(5,376
|
)
|
|
|
(1,654
|
)
|
|
Loss from discontinued operations
|
|
|
(313
|
)
|
|
|
(546
|
)
|
|
|
(833
|
)
|
|
|
(1,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,727
|
)
|
|
$
|
(2,124
|
)
|
|
$
|
(6,209
|
)
|
|
$
|
(2,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic and
diluted
|
|
|
44,562
|
|
|
|
44,286
|
|
|
|
44,539
|
|
|
|
44,097
|
|
See Notes to Condensed Consolidated Financial Statements.
FS-3
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in
Stockholders’ Equity (Unaudited)
For the Six Months Ended June 30, 2007
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
Balance, December 31, 2006
|
|
|
—
|
|
|
$
|
—
|
|
|
|
44,894
|
|
|
$
|
226
|
|
|
$
|
214,509
|
|
|
$
|
(144,753
|
)
|
|
$
|
(1,580
|
)
|
|
$
|
144
|
|
|
$
|
68,546
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,209
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,209
|
)
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
125
|
|
|
|
—
|
|
|
|
518
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
|
45,019
|
|
|
$
|
226
|
|
|
$
|
215,027
|
|
|
$
|
(150,962
|
)
|
|
$
|
(1,580
|
)
|
|
$
|
253
|
|
|
$
|
62,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
FS-4
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
|
Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,209
|
)
|
|
$
|
(2,710
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
Equity-based compensation
|
|
|
518
|
|
|
|
288
|
|
|
Depreciation and amortization
|
|
|
1,150
|
|
|
|
925
|
|
|
Amortization of debt discount and financing costs
|
|
|
339
|
|
|
|
—
|
|
|
Reduction in derivative warrant liability
|
|
|
(296
|
)
|
|
|
—
|
|
|
Minority interest
|
|
|
(15
|
)
|
|
|
58
|
|
|
Loss on disposal of equipment
|
|
|
8
|
|
|
|
4
|
|
|
Loss from discontinued operations
|
|
|
833
|
|
|
|
1,056
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
(46
|
)
|
|
|
195
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(1,073
|
)
|
|
|
3,383
|
|
|
Decrease (increase) in accounts receivable from VeriChip
Corporation
|
|
|
391
|
|
|
|
(45
|
)
|
|
Increase in inventories
|
|
|
(1,074
|
)
|
|
|
(1,662
|
)
|
|
Increase in other current assets
|
|
|
(78
|
)
|
|
|
(390
|
)
|
|
Decrease in deferred tax liability
|
|
|
(12
|
)
|
|
|
(132
|
)
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
6,265
|
|
|
|
(2,905
|
)
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(295
|
)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
406
|
|
|
|
(1,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
Decrease in other assets
|
|
|
66
|
|
|
|
214
|
|
|
Payments for property and equipment
|
|
|
(886
|
)
|
|
|
(672
|
)
|
|
Net cash paid for acquisition
|
|
|
(4,215
|
)
|
|
|
(1,000
|
)
|
|
Net cash used in discontinued operations
|
|
|
(438
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(5,473
|
)
|
|
|
(1,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
2,458
|
|
|
|
2,427
|
|
|
Payments on line of credit
|
|
|
(2,413
|
)
|
|
|
(2,004
|
)
|
|
Borrowings on debt
|
|
|
6,000
|
|
|
|
—
|
|
|
Payments on notes payable and long-term debt
|
|
|
(764
|
)
|
|
|
(355
|
)
|
|
Exercise of stock options and warrants
|
|
|
—
|
|
|
|
563
|
|
|
Payments of dividends to minority shareholder in subsidiary
|
|
|
(53
|
)
|
|
|
(140
|
)
|
|
Payments for financing costs
|
|
|
(686
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
4,542
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
8
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Decrease In Cash
|
|
|
(517
|
)
|
|
|
(2,890
|
)
|
|
Cash — Beginning of Period
|
|
|
1,521
|
|
|
|
9,949
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash — End of Period
|
|
$
|
1,004
|
|
|
$
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
FS-5
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
The accompanying condensed consolidated financial statements of
Digital Angel Corporation and its subsidiaries (the
“Company”) have been prepared in accordance with
U.S. generally accepted accounting principles
(“GAAP”) and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X
under the Securities Exchange Act of 1934, as amended.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
The interim financial information in this report has not been
audited. In the opinion of the Company’s management, all
adjustments (consisting of normal recurring adjustments)
considered necessary for fair financial statement presentation
have been made. Results of operations reported for interim
periods may not be indicative of the results for the entire
year. These condensed consolidated financial statements and
notes should be read in conjunction with the consolidated
financial statements and notes included elsewhere in this joint
proxy statement/prospectus.
The preparation of financial statements in conformity with GAAP
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 that we may undertake in
the future, they may ultimately differ from actual results.
Included in these estimates are assumptions about allowances for
inventory obsolescence, bad debt reserves, lives of long-lived
assets and intangible assets, assumptions used in Black-Scholes
valuation models, estimates of the fair value of acquired assets
and the determination of whether any impairment is to be
recognized on long-lived and intangible assets, among others.
The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned
subsidiaries from the date of acquisition. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The Company is engaged in the business of
developing and bringing to market proprietary technology used to
identify, locate and monitor people, animals, and objects. The
Company operates in two business segments: (1) Animal
Applications and (2) GPS and Radio Communications, which
are discussed further in Note 9.
The condensed consolidated financial statements have been
prepared on a going concern basis. See Note 5 for a
discussion of the Company’s debt obligations and the impact
on its liquidity.
As of June 30, 2007, Applied Digital Solutions, Inc.
(“Applied Digital”) owned 24,573,788 shares or
approximately 55% of the Company’s common stock.
On April 5, 2007, the Company acquired certain assets and
customer contracts of McMurdo Limited (“McMurdo”), a
United Kingdom based subsidiary of Chemring Group Plc
(“Chemring”), and manufacturer of emergency location
beacons. Pursuant to the agreement, Signature Industries Limited
(“Signature”), the Company’s London based
subsidiary operating in the GPS and Radio Communication business
segment, acquired certain assets of McMurdo’s marine
electronics business, including fixed assets, inventory,
customer lists, customer and supplier contracts and relations,
trade and business names, and associated assets. For further
discussion of the acquisition see Note 3.
On July 2, 2007, the Company completed the sale of its
wholly-owned subsidiary, OuterLink Corporation
(“OuterLink”) to Newcomb Communications, Inc.
(“Newcomb”). OuterLink provides satellite-based mobile
asset tracking and data messaging systems used to manage the
deployment of aircraft and land vehicles. Pursuant to the
agreement, the Company sold all of the issued and outstanding
shares of stock of OuterLink. As a result, its operations are
included as part of the Company’s discontinued operations
for all periods presented. For further discussion of the sale
see Note 4.
FS-6
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
|
|
|
|
2.
|
Recent
and Not Yet Adopted Accounting Pronouncements
|
In September 2006, FASB issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. Earlier application is encouraged provided that the
reporting entity has not yet issued financial statements for
that fiscal year including financial statements for an interim
period within that fiscal year. The Company is currently
assessing SFAS 157 and has not yet determined the impact
that the adoption of SFAS 157 will have on the
Company’s results of operations or financial position.
In September 2006, FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R),”
(“SFAS 158”), which requires employers to:
(a) recognize in its statement of financial position an
asset for a plan’s overfunded status or a liability for a
plan’s underfunded status; (b) measure a plan’s
assets and its obligations that determine its funded status as
of the end of the employer’s fiscal year; and
(c) recognize changes in the funded status of a defined
benefit postretirement plan in the year in which the changes
occur. Those changes will be reported in comprehensive income of
a business entity. The requirement to recognize the funded
status of a benefit plan and the disclosure requirements are
effective as of the end of the fiscal year ending after
December 15, 2006, for entities with publicly-traded equity
securities. The initial adoption did not have an impact on the
Company’s consolidated financial position, results of
operations, cash flows or financial statement disclosures. The
requirement to measure plan assets and benefit obligations as of
the date of the employer’s fiscal year-end statement of
financial position is effective for fiscal years ending after
December 15, 2008. The Company has not yet determined the
impact that this requirement will have on the Company’s
consolidated financial position, results of operations, cash
flows or financial statement disclosures.
In February 2007, FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
Liabilities — including an amendment of FASB Statement
115,” (“SFAS 159”). This statement provides
companies with an option to report selected financial assets and
liabilities at fair value. This statement is effective for
fiscal years beginning after November 15, 2007 with early
adoption permitted. The Company is currently assessing
SFAS 159 and has not yet determined the impact that the
adoption of SFAS 159 will have on the Company’s
results of operations or financial position.
In April 2007, the Company, through its wholly-owned subsidiary
Signature, acquired certain assets and customer contracts of
McMurdo, a United Kingdom based subsidiary of Chemring and
manufacturer of emergency location beacons. McMurdo develops and
manufactures safety equipment technology. Its products,
including the original EPIRB (Emergency Position Indicating
Radio Beacon) and the first GMDSS (Global Maritime Distress and
Safety System) and the approved Search and Rescue Transponder,
have become standard lifesaving equipment on many recreational,
commercial and military marine vehicles. This acquisition was
made to broaden the Company’s emergency location beacon
product offering to serve the military and commercial maritime
sectors and provide stability to the Company’s revenue base.
Pursuant to the Asset Sale and Purchase Agreement (the
“Agreement”), entered into in December 2006, Signature
acquired certain assets and customer contracts of McMurdo’s
marine electronics business including fixed assets, inventory,
customer lists, customer and supplier contracts and relations,
trade and business names, and associated assets. The assets
excluded certain accrued liabilities and obligations and real
property, including the plant facility which Signature has a
license to occupy for a period of nine months from the
Completion Date (as defined in the Agreement). Under the terms
of the Agreement, Signature retained McMurdo’s employees
related to the marine electronics business. In addition,
pursuant to the terms of the Agreement, the Company guaranteed
to McMurdo, Signature’s obligations and liabilities to
McMurdo under
FS-7
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
the Guaranteed Agreements (as defined in the Agreement) and
Chemring guaranteed to Signature, McMurdo’s obligations and
liabilities under the Guaranteed Agreements. The Company paid
consideration of approximately $4.7 million in cash, which
included a payment of $0.5 million in the fourth quarter of
2006 and net of a purchase price adjustment of $0.9 million
paid by Chemring in July 2007, and will make one additional
deferred payment of up to $3 million. The deferred payment
will be determined on a threshold basis with a minimum
threshold, calculated on the basis of the invoiced value of
specific products sold between November 1, 2006 and
October 31, 2007 and payable when the parties finalize a
statement of the sales.
The estimated fair values of assets acquired at the date of
acquisition are as follows:
|
|
|
|
|
|
|
|
|
April 5, 2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
Inventory
|
|
$
|
592
|
|
|
Fixed assets
|
|
|
2,178
|
|
|
Goodwill and other intangibles
|
|
|
1,972
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
4,742
|
|
|
|
|
|
|
|
The required purchase accounting adjustments, including the
allocation of the purchase price based on the fair values of the
assets acquired have been made based upon preliminary
valuations, which are still in review and are subject to change.
Based upon the Company’s final valuation and review it may
determine that additional tangible assets or their estimated
useful lives require revision. The Company anticipates that it
will finalize the purchase price allocation within the next
several months. Any adjustments to the purchase price allocation
will be recorded as an increase or decrease in goodwill.
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the condensed consolidated
financial statements reflect the results of operations of
McMurdo from the date of acquisition. Unaudited pro forma
results of operations for the three and six months ended
June 30, 2007 and the three and six months ended
June 30, 2006 are included below. Such pro forma
information assumes that the above acquisition had occurred as
of January 1, 2007 and 2006, respectively, and revenue is
presented in accordance with the Company’s accounting
policies. These unaudited pro forma statements have been
prepared for comparative purposes only and are not intended to
be indicative of what the Company’s results would have been
had the acquisition occurred at the beginning of the periods
presented or the results which may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma For the
|
|
|
Pro Forma For the
|
|
|
Pro Forma For the
|
|
|
|
|
Three Months
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Ended June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited, in thousands)
|
|
|
|
|
Net operating revenue
|
|
$
|
15,265
|
|
|
$
|
39,009
|
|
|
$
|
33,186
|
|
|
Net loss from continuing operations
|
|
|
(1,957
|
)
|
|
|
(5,032
|
)
|
|
|
(2,587
|
)
|
|
Net loss from continuing operations per common share —
basic and diluted
|
|
|
(0.04
|
)
|
|
|
(0.11
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
4.
|
Discontinued
Operations
|
In May 2007, the Company entered into a Stock Purchase Agreement
with Newcomb to sell 100% of the issued and outstanding shares
of stock of OuterLink. OuterLink, which operated in the
Company’s GPS and Radio Communications business segment,
provides satellite-based mobile asset tracking and data
messaging systems used to manage the deployment of aircraft and
land vehicles. On July 2, 2007, the Company completed the
sale of OuterLink. Consideration, which is subject to certain
adjustments based on OuterLink’s closing balance sheet,
initially consisted of a cash payment of $800,000 and a
promissory note of $200,000
FS-8
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
which matures on December 31, 2007. In connection with the
closing, the Company also executed a one-year non-competition
agreement with OuterLink. Mr. Paul F. Newcomb, President of
Newcomb, was the founder and President of the predecessor
company to OuterLink, which the Company acquired in January 2004.
In June 2007, in connection with the Company’s planned sale
of OuterLink, the Company entered into an amendment of the
Securities Purchase Agreement and the Registration Rights
Agreement between the Company and Imperium Master Fund, Ltd.
(“Imperium”) and Gemini Master Fund, Ltd.
(“Gemini,” and together with Imperium, the
“Investors”) and received a waiver letter from the
Investors waiving certain of their rights under the Subsidiary
Guaranty executed by OuterLink in favor of the Investors and the
Security Agreement executed by the Company and OuterLink in
favor of the Investors (collectively, the amendments and the
waiver letter, the “OuterLink Amendments”). Pursuant
to the terms of the OuterLink Amendments, the Investors
consented to the sale of OuterLink, waived all existing
defaults, if any, under Section 4.10(b) of the Securities
Purchase Agreement, released the outstanding shares of OuterLink
owned by the Company from the pledge and security interest
granted to the Investors, and released OuterLink from its
obligations arising under the Subsidiary Guaranty. As
consideration, the Company exchanged the 699,600 existing
warrants for 841,000 newly issued seven-year warrants with an
exercise price of $1.701.
As a result of the sale of OuterLink, its operations are
included as part of the Company’s discontinued operations
for all periods presented. The following discloses the operating
losses from discontinued operations for the three and six months
ended June 30, 2007 and 2006, attributable to OuterLink:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
Total net revenue
|
|
$
|
716
|
|
|
$
|
528
|
|
|
$
|
1,417
|
|
|
$
|
1,031
|
|
|
Cost of sales
|
|
|
401
|
|
|
|
332
|
|
|
|
853
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
315
|
|
|
|
196
|
|
|
|
564
|
|
|
|
366
|
|
|
Selling, general and administrative expenses
|
|
|
354
|
|
|
|
318
|
|
|
|
730
|
|
|
|
604
|
|
|
Research and development expenses
|
|
|
274
|
|
|
|
425
|
|
|
|
667
|
|
|
|
819
|
|
|
Interest income
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(313
|
)
|
|
$
|
(546
|
)
|
|
$
|
(833
|
)
|
|
$
|
(1,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
The results above do not include any allocated or common
overhead expenses and do not reflect the gain on the sale of
OuterLink, which is expected to be approximately
$1.7 million, after taking into account potential future
purchase price adjustments. Given the Company’s current tax
status, the gain is not expected to result in a provision from
income taxes due to federal and state net operating losses and
carryforwards. This gain is expected to be recorded in the
Company’s actual results of operations in the three months
ended September 30, 2007.
FS-9
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
The net assets of discontinued operations as of June 30,
2007 and December 31, 2006 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
152
|
|
|
$
|
2
|
|
|
Accounts receivable
|
|
|
1,645
|
|
|
|
956
|
|
|
Inventory
|
|
|
608
|
|
|
|
503
|
|
|
Other current assets
|
|
|
664
|
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,069
|
|
|
|
2,335
|
|
|
Property and equipment, net
|
|
|
345
|
|
|
|
274
|
|
|
Other assets, net
|
|
|
695
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
1,040
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,109
|
|
|
$
|
2,866
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
274
|
|
|
|
408
|
|
|
Accrued expenses and other current liabilities
|
|
|
439
|
|
|
|
270
|
|
|
Deferred revenue
|
|
|
1,553
|
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,266
|
|
|
|
2,448
|
|
|
Other long-term liabilities
|
|
|
2,585
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
4,851
|
|
|
$
|
3,508
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities from discontinued operations
|
|
$
|
742
|
|
|
$
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Financing
Arrangements and Liquidity
|
On February 6, 2007, the Company entered into a Securities
Purchase Agreement pursuant to which the Company sold a
10.25% senior secured debenture (“debenture”) in
the original principal amount of $6,000,000 and issued five-year
warrants to purchase 699,600 shares of the Company’s
common stock at a per share exercise price of $2.973.
Concurrently with the Securities Purchase Agreement, the Company
executed a Registration Rights Agreement (the “Registration
Agreement”), pursuant to which the Company is obligated to
register for resale shares of the Company’s common stock
sufficient to cover the shares necessary to pay the principal
and interest payments due on the debenture and the shares
underlying the warrants. If the Company does not comply with the
registration deadlines set forth in the registration agreement,
the Company will be obligated to pay each Investor, pro rata, a
default payment equal to 1% of the aggregate purchase price of
the debenture for each month the registration default is not
cured, capped at 9% and the exercise price is subject to certain
reset provisions.
In connection with the debenture, the Company and its direct
subsidiaries entered into the Security Agreement, whereby the
Investors were granted a security interest in certain assets and
properties of Digital Angel and its direct subsidiaries. In
addition, Digital Angel’s direct subsidiaries entered into
a subsidiary guarantee, under which the subsidiaries guaranteed
Digital Angel’s obligations.
On June 28, 2007, the Company entered into amendments of
each of the Securities Purchase Agreement and the Registration
Rights Agreement in connection with the planned sale of
OuterLink and the Investors delivered a waiver letter to the
Company waiving certain of their rights under the Subsidiary
Guaranty
FS-10
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
executed by OuterLink in favor of the Investors and the Security
Agreement executed by the Company and OuterLink in favor of the
Investors (collectively, the amendments and the waiver letter
are referred to as the “OuterLink Amendments”).
Pursuant to the terms of the OuterLink Amendments, the Investors
(1) consented to the sale of OuterLink, (2) waived all
existing defaults, if any, under Section 4.10(b) of the
Securities Purchase Agreement, (3) released the outstanding
shares of OuterLink owned by the Company from the pledge and
security interest granted to the Investors and (4) released
OuterLink from its obligations arising under the Subsidiary
Guaranty. In addition, the parties agreed to extend the
registration deadline provided in the Registration Rights
Agreement to October 1, 2007. As consideration, the Company
exchanged the 699,600 existing warrants for 841,000 newly issued
seven-year warrants with an exercise price to $1.701.
The warrants contain certain anti-dilution provisions and,
accordingly, the Company has accounted for the fair value of the
warrants as a derivative liability subject to
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” At issuance, the fair
value of the 699,600 five-year warrants, as calculated using the
Black-Scholes valuation model, was $1,253,000 using the
following assumptions: volatility of 83.13%, risk free interest
rate of 4.6%, dividend rate of 0.0% and expected life of
5 years. The fair value of the warrants was recorded as a
discount to the debenture and is being amortized to interest
expense over the life of the debenture. The warrant fair value
is revalued at each balance sheet date using the Black-Scholes
valuation model with changes in value recorded in the condensed
consolidated statement of operations as income or expense. At
June 30, 2007, the warrant derivative fair value for the
841,000 seven-year warrants then outstanding was $958,000 using
the following assumptions: volatility of 73.91%, risk free
interest rate of 4.6%, dividend rate of 0.0% and expected life
of 7 years. Approximately $105,000 of expense and
approximately $296,000 of income is included in the condensed
consolidated statement of operations for the three and six
months ended June 30, 2007, respectively, as a result of
the changes in the fair value of the warrant.
The debenture was originally scheduled to mature on
February 6, 2010, but the Company, at its option, had the
right to prepay the debenture in cash at any time by paying a
premium of 2% of the outstanding principal amount of the
debenture. The Company was obligated to make monthly payments of
principal plus accrued, but unpaid interest (including default
interest, if any) beginning on September 4, 2007. On
June 28, 2007, the Company delivered its
sixty-day
prepayment notice to the Investors pursuant to Section 4 of
the debenture(s). Pursuant to the terms of the debenture, the
Company is required to pay 102% of the outstanding principal
amount of the debenture on the date of its repayment plus all
accrued and unpaid interest. Based on the Company’s
election to prepay the debenture, the Company will be required
to write off $1.5 million of deferred financing costs and
debt discount in the third quarter of 2007.
As long as the debenture is outstanding, the Company and its
subsidiary, Signature, are required to comply with certain
financial covenants including minimum net tangible asset ratios
and limits on the total amount of liabilities that exist at each
entity and on a combined basis. As of June 30, 2007, the
Company and its subsidiary, Signature, were in compliance with
each of the financial covenants. A breach of any of these
covenants, after notice from the Investors and if not remedied
within the specified period, could result in an event of
default. Upon the occurrence of any default, the Investors can
elect to declare all amounts of principal outstanding under such
debenture, together with all accrued interest, to be immediately
due and payable. Furthermore, if such an event of default or a
change of control occurs, the Investors have the right to
require the Company to redeem the debenture for a cash amount
equal to 110% of the outstanding principal plus interest.
In addition to the financings discussed above, the Company has
additional loans and credit facilities, which are discussed in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations of Digital Angel” and
“Liquidity and Capital Resources from Continuing
Operations” which is included elsewhere in this joint proxy
statement/prospectus.
FS-11
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
The Company will be required to generate funds to repay the
debentures through a combination of operating cash flow,
borrowings under the existing invoice discounting agreement and
other financing arrangements
and/or
third
party financings. The Company’s historical sources of
liquidity have included proceeds from the sale of common stock,
proceeds from the issuance of debt, proceeds from the sale of
one of its businesses, proceeds from the sale of shares of
Applied Digital’s common stock under share exchange
agreements, and proceeds from the exercise of stock options and
warrants. In addition to these sources, other sources of
liquidity may include the raising of capital through additional
private placements or public offerings of debt or equity
securities and proceeds from the sale of additional businesses.
However, going forward some of these sources may not be
available, or if available, they may not be on favorable terms.
Accordingly, these conditions indicate that the Company may be
unable to continue as a going concern. The accompanying
financial statements have been prepared on a going concern basis
and do not reflect any adjustments that might result from the
outcome of this uncertainty.
|
|
|
|
6.
|
Factored
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
|
|
Receivables assigned to factor
|
|
$
|
4,490
|
|
|
$
|
1,094
|
|
|
Advances from factor
|
|
|
(3,592
|
)
|
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from factor
|
|
|
898
|
|
|
|
219
|
|
|
Unfactored accounts receivable
|
|
|
10,101
|
|
|
|
9,593
|
|
|
Allowance for doubtful accounts
|
|
|
(183
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,816
|
|
|
$
|
9,609
|
|
|
|
|
|
|
|
|
|
|
|
On March 23, 2007, the Company entered into a revolving
invoice funding facility (“Greater Bay facility”) with
Greater Bay Business Funding, a division of Greater Bay Bank N.A
(“Greater Bay”). The Greater Bay facility provides
that the Company sell and assign to Greater Bay, all rights,
title, and interest in the accounts receivable of Digital Angel
Technology Corporation. Under the Greater Bay facility, Greater
Bay advances 80% of the eligible receivables, as defined, not to
exceed a maximum of $5,000,000 at any given time. Greater Bay
pays the remainder of the receivable upon collection. Interest
is payable on the daily outstanding balance of funds drawn and
is equal to the Greater Bay Bank N.A. prime rate (8.25% at
June 30, 2007) plus 3.00%. The Greater Bay facility
has an initial term of 12 months and is guaranteed by
security interests covering all accounts, contract rights, and
general intangibles relating to the Company’s accounts
receivable. As of June 30, 2007, $2.1 million of
receivables were financed under the Greater Bay facility. The
Company had $0.4 million of advances available under the
Greater Bay facility at June 30, 2007.
Signature has entered into an Invoice Discounting Agreement, (as
amended, the “RBS Invoice Discounting Agreement”) with
The Royal Bank of Scotland Commercial Services Limited
(“RBS”). The RBS Invoice Discounting Agreement
provides for Signature to sell with full title guarantee most of
its receivables, as defined in the RBS Invoice Discounting
Agreement. Under the agreement, RBS prepays 80% of the
receivables sold in the United Kingdom and 80% of the
receivables sold in the rest of the world, not to exceed an
outstanding balance of £2,000,000 (approximately
$4.0 million at June 30, 2007) at any given time.
RBS pays Signature the remainder of the receivable upon
collection of the receivable. Receivables which remain
outstanding 90 days from the end of the invoice month
become ineligible and RBS may require Signature to repurchase
the receivable. The discounting charge accrues at an annual rate
of 1.5% above the base rate as defined in the RBS Invoice
Discounting Agreement (5.75% at June 30, 2007). Signature
pays a commission charge to RBS of 0.16% of each receivable
balance sold. The RBS Invoice Discounting Agreement requires a
minimum commission charge of £833 (approximately $1,700)
per month. Discounting charges of $33,000 and
FS-12
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
$57,000 are included in interest expense for the three and six
months ended June 30, 2007, respectively. As of
June 30, 2007, $1.5 million of receivables were
financed under the RBS Invoice Discounting Agreement.
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
|
|
Raw materials
|
|
$
|
5,470
|
|
|
$
|
3,291
|
|
|
Work in process
|
|
|
1,024
|
|
|
|
402
|
|
|
Finished goods
|
|
|
7,953
|
|
|
|
7,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,447
|
|
|
|
10,908
|
|
|
Allowance for excess and obsolescence
|
|
|
(1,153
|
)
|
|
|
(1,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net inventory
|
|
$
|
13,294
|
|
|
$
|
9,897
|
|
|
|
|
|
|
|
|
|
|
|
Inventory located in Europe and Asia amounted to
$8.3 million and $5.7 million as of June 30, 2007
and December 31, 2006, respectively.
|
|
|
|
8.
|
Stock
Options and Restricted Stock
|
Stock
Option Plans
As of June 30, 2007, the Company maintained the Amended and
Restated Digital Angel Corporation Transition Stock Option Plan
(“DAC Stock Option Plan”), which is described below,
and has outstanding stock options which were issued pursuant to
another plan that was terminated on February 23, 2006. On
January 1, 2006, the Company adopted SFAS 123R,
“Share-Based Payment” (“SFAS 123R”),
using the modified prospective transition method. Accordingly,
during the six month period ended June 30, 2006, the
Company recorded stock-based compensation expense for awards
granted in 2006 and awards granted prior to, but not yet vested
as of January 1, 2006, as if the fair value method required
for pro forma disclosure under SFAS 123 were in effect for
expense recognition purposes. Upon adoption of SFAS 123R,
the Company elected to continue using the Black-Scholes
valuation model and has recognized compensation expense using a
straight-line amortization method. During the three and six
month periods ended June 30, 2007, the Company recorded
$227,000 and $518,000, respectively, in stock-based employee
compensation expense (including compensation for options granted
to non-employees and for restricted stock grants). During the
three and six month periods ending June 30 2006, the Company
recorded $137,000 and $288,000, respectively, of stock-based
compensation expense.
Prior to the adoption of SFAS 123R, the Company presented
all tax benefits related to stock-based compensation as an
operating cash inflow. SFAS 123R requires the cash flows
resulting from tax deductions in excess of compensation cost
recognized for those options (excess tax benefits) to be
classified as financing cash flows. The Company did not record
any excess income tax benefits relating to SFAS 123R during
the six months ended June 30, 2007 and June 30, 2006.
As of June 30, 2007, the DAC Stock Option Plan, which is
stockholder-approved, has 18,195,312 shares of common stock
reserved for issuance, of which 16,641,333 shares have been
issued and 1,553,979 remain available for issuance. As of
June 30, 2007, awards consisting of options to purchase
8,766,531 shares were outstanding under the DAC Stock
Option Plan and awards consisting of options to purchase
472,820 shares were outstanding under the Company’s
terminated stock option plan. Additionally, restricted stock
awards for 213,526 shares of common stock have been granted
under the DAC Stock Option Plan. Option awards are generally
granted with exercise prices between market price and 110% of
the market price of the Company’s
FS-13
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
stock at the date of grant; option awards generally vest over 3
to 9 years and have
10-year
contractual terms. Certain option and share awards provide for
accelerated vesting if there is a change in control (as defined
in the DAC Stock Option Plan).
Stock
Option Activity
The fair value of each option award is estimated on the date of
grant using the Black-Scholes valuation model. The following
assumptions were used for options granted during the six month
period ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Risk-free interest rate
|
|
|
5.18-4.62
|
%
|
|
|
4.89
|
%
|
|
Expected life (in years)
|
|
|
5
|
|
|
|
4 - 10
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected volatility
|
|
|
81.00-83.78
|
%
|
|
|
87.19
|
%
|
|
Weighted-average volatility
|
|
|
83.57
|
%
|
|
|
87.19
|
%
|
The Company’s computation of expected volatility is
determined based on historical volatility. The computation of
expected life is determined based on historical experience of
similar awards, giving consideration to the contractual terms of
the stock-based awards, vesting schedules and expectations of
future employee behavior. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of
grant.
A summary of the Company’s stock option activity as of
June 30, 2007, and changes during the six months then ended
is presented below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
Stock
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Outstanding at January 1, 2007
|
|
|
11,705
|
|
|
$
|
3.84
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
280
|
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,246
|
)
|
|
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007
|
|
|
10,739
|
|
|
$
|
3.81
|
|
|
|
7.04
|
|
|
$
|
596
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at June 30, 2007
|
|
|
10,235
|
|
|
$
|
3.83
|
|
|
|
6.94
|
|
|
$
|
591
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007
|
|
|
8,858
|
|
|
$
|
3.94
|
|
|
|
6.63
|
|
|
$
|
596
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The intrinsic value of a stock option is the amount by which the
market value of the underlying stock exceeds the exercise price
of the option. The market value of the Company’s common
stock was $1.60 per share at June 30, 2007.
|
The weighted average grant-date fair value of options granted
during the six month periods ended June 30, 2007 and 2006
was $1.81 and $2.73, respectively. The total intrinsic value of
options exercised during the six month periods ended
June 30, 2007 and 2006 was nil and $644,000, respectively.
FS-14
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
A summary of the status of the Company’s nonvested stock
options as of June 30, 2007 and changes during the six
month period ended June 30, 2007, is presented below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
Stock Options
|
|
|
Fair Value
|
|
|
|
|
Nonvested at January 1, 2007
|
|
|
2,458
|
|
|
$
|
2.64
|
|
|
Granted
|
|
|
280
|
|
|
|
1.81
|
|
|
Vested
|
|
|
(283
|
)
|
|
|
2.22
|
|
|
Forfeited or expired
|
|
|
(574
|
)
|
|
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2007
|
|
|
1,881
|
|
|
$
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, there was $3.7 million of total
unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the DAC Stock Option
Plan. That cost is expected to be recognized over a
weighted-average period of 6.2 years.
Cash received from option exercises under all share-based
payment arrangements for the six month periods ended
June 30, 2007 and 2006, was nil and $0.6 million,
respectively.
On January 13, 2004, the Company granted its Chief
Executive Officer a ten-year option to purchase
1,000,000 shares of the Company’s common stock at
$3.92 per share. This option was granted outside the
Company’s stock plans and approved by the Company’s
stockholders on May 6, 2004. The option became exercisable
on December 30, 2005. As of June 30, 2007, the option
remains outstanding.
On February 18, 2004, the Company granted its Chairman of
the Board of Directors a ten-year option to purchase
500,000 shares of the Company’s common stock at $3.43
per share. This option was granted outside the Company’s
stock plans and approved by th
e
Company’s
stockholders on May 6, 2004. The option became exercisable
on February 18, 2005. As of June 30, 2007, the option
remains outstanding.
Restricted
Stock
In March 2005, the Company granted its Chairman of the Board
100,000 shares of the Company’s restricted stock. The
restricted stock vested 50% on March 7, 2006 and 50% on
March 7, 2007. The Company determined the value of the
stock to be $506,000 based on the closing price of the
Company’s stock on the date of grant. The value of the
restricted stock was recorded as deferred compensation and was
amortized to compensation expense over the two year vesting
period. In the six month periods ended June 30, 2007 and
2006, $42,000 and $125,000, respectively, was recognized as
compensation expense in the Company’s results of operations
related to the restricted stock.
In February 2005, the Company granted an employee
54,230 shares of the Company’s restricted stock. The
restricted stock vested 30% on February 25, 2006, 30% on
February 25, 2007 and will vest 40% on February 25,
2008. The Company determined the value of the stock to be
$250,000 based on the closing price of the Company’s stock
on the date of grant. The value of the restricted stock has been
recorded as deferred compensation and is being amortized to
compensation expense over the vesting period. In the six month
periods ended June 30, 2007 and 2006, $44,000 and $37,000,
respectively, was recognized as compensation expense in the
Company’s results of operations related to the restricted
stock.
The Company develops and deploys sensor and communication
technologies that enable rapid and accurate identification,
location tracking, and condition monitoring of high-value
assets. The Company’s two
FS-15
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
main operating segments are: (1) Animal Applications and
(2) GPS and Radio Communications. Previously, the Company
combined its Corporate functions with its Animal Applications
segment. Beginning April 1, 2007, Corporate has been
reclassified and presented separately for the six-month periods
ended June 30, 2006 and 2007. All other periods have not
been reclassified as it is not practicable to do so.
Animal Applications — develops, manufactures, and
markets electronic radio frequency and visual identification
devices for the companion animal, equine, fish and wildlife, and
livestock markets worldwide.
The Animal Applications segment’s radio frequency
identification products consist of miniature electronic
microchips, scanners, and for some applications, injection
systems. The Company holds patents on its syringe-injectable
microchip, which is encased in a glass or glass-like material
capsule and incorporates an antenna and a microchip with a
unique permanent identification code. The microchip is typically
injected under the skin using a hypodermic syringe, without
requiring surgery. An associated scanner device uses radio
frequency to interrogate the microchip and read the code.
The Animal Applications segment’s companion pet
identification system involves the insertion of a microchip with
identifying information into the animal. Scanners at animal
shelters, veterinary clinics and other locations can read the
microchip’s unique identification number. Through the use
of a database, the unique identification number identifies the
animal, the animal’s owner and other information. This pet
identification system is marketed in the United States by
Schering-Plough under the brand name “Home
Again
tm
,”
pursuant to a multi-year exclusive license, in Europe by Merial
Pharmaceutical, and in Japan by Dainippon Pharmaceutical. The
Company has distribution agreements with a variety of other
companies outside the United States to market its products.
The Animal Applications segment’s miniature electronic
microchips are also used for the tagging of fish, especially
salmon, for identification in migratory studies and other
purposes. The electronic microchips are accepted as a safe,
reliable alternative to traditional identification methods
because the fish, once implanted, can be identified without
being captured or sacrificed.
In addition to pursuing the market for permanent identification
of companion animals and tracking microchips for fish, the
Animal Applications segment also produces visual and electronic
identification products for livestock producers. Visual
identification products for livestock are typically numbered ear
tags, which the Company has marketed since the 1940s. Currently,
sales of visual products represent a substantial percentage of
the Company’s sales to livestock producers.
In addition, the Company’s implantable radio frequency
microchip was cleared by the U.S. Food and Drug
Administration for medical applications in humans in the United
States in October 2004. The Company has a long-term exclusive
distribution and licensing agreement with VeriChip Corporation
(“VeriChip”), an affiliated, majority-owned subsidiary
of Applied Digital, covering the manufacturing, purchasing and
distribution of the human implantable microchip, which is more
fully described in Note 12.
GPS and Radio Communications — designs, manufactures
and supports GPS enabled equipment. The GPS and Radio
Communications segment consists of the operations of the
Company’s subsidiary, Signature (90.9% owned), which is
located in the United Kingdom, and includes the operations of
the McMurdo business acquired in April 2007. Applications for
the segment’s products include location tracking and
message monitoring of marine vehicles, aircraft and people in
remote locations through systems that integrate geosynchronous
satellite communications and GPS enabled equipment and
intelligent communications products and services for telemetry,
mobile data and radio communications applications serving
commercial and military markets. Signature’s businesses
also include communication equipment leasing and complementary
data systems that customers can use to locate and monitor their
assets and alarm sounder manufacturing. Technology development
in this segment includes the integration and miniaturization
into marketable products of two technologies: wireless
communications and position location technology (including
global positioning systems (“GPS”) and other systems).
FS-16
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
The Corporate category includes general and administrative
expenses, interest expense and income and other expenses
associated with corporate activities and functions.
It is on this basis that the Company’s management utilizes
the financial information to assist in making internal operating
decisions. The Company evaluates performance based on
stand-alone segment operating performance as presented below.
The following is the selected segment data as of and for the
periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total From
|
|
|
|
|
Animal
|
|
|
GPS and Radio
|
|
|
|
|
|
Continuing
|
|
|
As of and For the Three Months Ended June 30,
|
|
Applications
|
|
|
Communications
|
|
|
Corporate
|
|
|
Operations
|
|
|
|
|
(In thousands)
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
11,029
|
|
|
$
|
8,504
|
|
|
$
|
—
|
|
|
$
|
19,533
|
|
|
Operating loss
|
|
|
(504
|
)
|
|
|
(510
|
)
|
|
|
(656
|
)
|
|
|
(1,670
|
)
|
|
Operating loss from continuing operations before income taxes
and minority interest
|
|
|
(560
|
)
|
|
|
(562
|
)
|
|
|
(1,289
|
)
|
|
|
(2,411
|
)
|
|
Segment assets from continuing operations
|
|
$
|
77,103
|
|
|
$
|
18,301
|
|
|
$
|
(1,532
|
)
|
|
$
|
93,872
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
8,375
|
|
|
$
|
4,053
|
|
|
$
|
—
|
|
|
$
|
12,428
|
|
|
Operating loss
|
|
|
(718
|
)
|
|
|
(218
|
)
|
|
|
(610
|
)
|
|
|
(1,546
|
)
|
|
Operating loss from continuing operations before income taxes
and minority interest
|
|
|
(743
|
)
|
|
|
(229
|
)
|
|
|
(576
|
)
|
|
|
(1,548
|
)
|
|
Segment assets from continuing operations
|
|
$
|
79,180
|
|
|
$
|
7,840
|
|
|
$
|
10
|
|
|
$
|
87,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total From
|
|
|
|
|
Animal
|
|
|
GPS and Radio
|
|
|
|
|
|
Continuing
|
|
|
As of and For the Six Months Ended June 30,
|
|
Applications
|
|
|
Communications
|
|
|
Corporate
|
|
|
Operations
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
21,289
|
|
|
$
|
13,542
|
|
|
$
|
—
|
|
|
$
|
34,831
|
|
|
Operating loss
|
|
|
(2,070
|
)
|
|
|
(1,083
|
)
|
|
|
(1,606
|
)
|
|
|
(4,759
|
)
|
|
Operating loss from continuing operations before income taxes
and minority interest
|
|
|
(2,153
|
)
|
|
|
(1,160
|
)
|
|
|
(2,040
|
)
|
|
|
(5,353
|
)
|
|
Segment assets from continuing operations
|
|
$
|
77,103
|
|
|
$
|
18,301
|
|
|
$
|
(1,532
|
)
|
|
$
|
93,872
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
19,877
|
|
|
$
|
7,870
|
|
|
$
|
—
|
|
|
$
|
27,747
|
|
|
Operating income (loss)
|
|
|
163
|
|
|
|
(355
|
)
|
|
|
(1,488
|
)
|
|
|
(1,681
|
)
|
|
Operating income (loss) from continuing operations before income
taxes and minority interest
|
|
|
119
|
|
|
|
(376
|
)
|
|
|
(1,411
|
)
|
|
|
(1,668
|
)
|
|
Segment assets from continuing operations
|
|
$
|
79,180
|
|
|
$
|
7,840
|
|
|
$
|
10
|
|
|
$
|
87,030
|
|
FS-17
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
|
|
|
|
10.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
|
|
Interest paid
|
|
$
|
232
|
|
|
$
|
199
|
|
|
Taxes paid
|
|
|
55
|
|
|
|
59
|
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to former shareholders of DSD Holding
A/S
|
|
|
—
|
|
|
|
1,000
|
|
|
Reclass of other assets to acquisition cost
|
|
|
494
|
|
|
|
—
|
|
|
Financing of equipment through capital lease
|
|
|
546
|
|
|
|
352
|
|
Effective January 1, 2007, the Company adopted FASB
Interpretation No. 48, “Accounting for Uncertainties
in Income Taxes — an interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The impact of adoption was
immaterial to the Company’s condensed consolidated results
of operations and financial position and, therefore, no
FIN 48 liability was recorded. In addition, the Company did
not record any liability for income tax-related interest and
penalties. Any future expense for income tax-related interest
and penalties will be classified as a component of income taxes.
|
|
|
|
12.
|
Related
Party Activity
|
The Company has a Distribution and Licensing Agreement dated
March 4, 2002, amended December 28, 2005 and
May 9, 2007, with VeriChip, a majority-owned subsidiary of
Applied Digital at March 31, 2007, covering the
manufacturing, purchasing and distribution of the Company’s
implantable microchip and the maintenance of the VeriChip
Registry by us. The amended agreement contains, among other
things, minimum purchase requirements in order to maintain
exclusivity, whereby VeriChip is required to purchase $0,
$875,000, $1,750,000 and $2,500,000 for each of 2007, 2008, 2009
and 2010, respectively, and $3,750,000 for 2011 and each year
thereafter. The agreement continues until March 2014 and, as
long as VeriChip continues to meet the minimum purchase
requirements, will automatically renew annually under its terms.
The Distribution and Licensing agreement includes a license for
the use of the Company’s technology in VeriChip’s
identified markets. Under the Distribution and Licensing
Agreement, the Company is the sole manufacturer and supplier to
VeriChip. The existing terms with the Company’s sole
supplier of implantable microchips, Raytheon Microelectronics
España, SA, expire on June 30, 2010.
Revenue recognized under the Distribution and Licensing
Agreement was $35,000 and $14,000 for the three months ended
June 30, 2007 and 2006, respectively, and $39,000 and
$173,000 for the six months ended June 30, 2007 and 2006,
respectively. Amounts due from VeriChip as of June 30, 2007
and December 31, 2006 were $35,000 and $425,000,
respectively.
FS-18
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
Digital
Angel Corporation v. Datamars, Inc., Datamars, S.A., The
Crystal Import Corporation and Medical Management International,
Inc.
On October 20, 2004, the Company commenced an action in the
United States District Court for the District of Minnesota
against Datamars, Inc., Datamars, S.A., The Crystal Import
Corporation, (“Crystal”), and Medical Management
International, Inc. This suit claims that the defendants are
marketing and selling syringe implantable identification
transponders manufactured by Datamars that infringe the
Company’s 1993 patent for syringe implantable
identification transponders previously found by the United
States District Court for the District of Colorado to be
enforceable. The suit seeks, among other things, an adjudication
of infringement, injunctive relief, and actual and punitive
damages. On February 28, 2006, the Court conducted a
hearing (the “Markman Hearing”) in which each of the
parties presented the Court with their views regarding the scope
of the claims set forth in the subject patent. On May 22,
2006, the Court issued its order on the Markman Hearing, largely
adopting the Company’s views on the scope of the claims in
the subject patent.
The
Crystal Import Corporation v. Digital Angel, et
al.
On or about December 29, 2004, Crystal filed an action
against AVID Identification Systems, Inc. and the Company in the
United States District Court for the Northern District of
Alabama. Crystal’s complaint primarily asserted federal and
state antitrust and related claims against AVID, though it also
asserted similar claims against the Company. On October 12,
2005, the Alabama Court transferred the action to Minnesota.
Following the docketing of the action in Minnesota, the Company
and AVID filed a motion seeking to stay the case until the
corresponding patent infringement actions have been resolved.
Settlement
Negotiations
On July 27, 2007, pursuant to the Court’s settlement
conference procedures, the parties in the above described legal
proceedings reached agreement on the terms of a global
settlement, which settlement would, among other things, result
in a dismissal of all claims with prejudice. Such final
settlement is subject to execution of definitive settlement
documentation and entry of appropriate orders with the Court.
On July 2, 2007, the Company completed the sale of its
wholly-owned subsidiary, OuterLink, to Newcomb. The sale is more
fully described in Note 4.
On August 8, 2007, the Company and Applied Digital entered
into an Agreement and Plan of Reorganization by and among the
Company, Applied Digital, and Digital Angel Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Applied
Digital (the “Acquisition Subsidiary”), pursuant to
which the Acquisition Subsidiary will be merged with and into
us, with the Company surviving and becoming a wholly-owned
subsidiary of Applied Digital (the “Merger”). Upon the
consummation of the Merger, each outstanding share of our common
stock not currently owned by Applied Digital will be converted
into 1.4 shares of Applied Digital’s common stock.
This amount represents a premium for our common stock of 21%
over the closing price of Applied Digital’s and our stock
as of the twenty trading days ending on August 7, 2007. The
acquisition will be accounted for under purchase accounting.
Effective August 6, 2007, Kevin McGrath resigned as the
Company’s president, chief executive officer and director.
The Company’s board of directors approved a severance
payment for Mr. McGrath in the total amount of $750,000,
which will result in a third quarter charge, of which $320,000
shall be payable in cash over the next twelve months in
accordance with the Company’s ordinary payroll practices,
less required deductions and withholdings, and $430,000 shall be
payable through the issuance of 307,143 shares of
restricted stock, which restrictions would lapse in one year
from the date of issuance. The Company will pay
FS-19
DIGITAL
ANGEL CORPORATION
Notes to
Condensed Consolidated Financial Statements
(Unaudited) — (Continued)
all of Mr. McGrath’s accrued benefits through
September 7, 2007, including unused vacation time,
reimbursement of outstanding business expenses, accrued but
unpaid salary or bonus amounts, and the like. In addition, the
Company will reimburse Mr. McGrath the cost of COBRA
contributions through September 7, 2008. In exchange for
the severance payment, Mr. McGrath was required to enter
into a severance agreement with the Company containing a general
release and waiver and non-competition and non-solicitation
provisions.
On August 6, 2007, the Company, with Board approval,
appointed Barry Edelstein, as President and Chief Executive
Officer. In connection with his appointment, Mr. Edelstein
will receive a salary in the amount of $40,000 per month, plus
incentive bonus of up to $120,000. Mr. Edelstein will also
receive a grant of 100,000 stock options, exercisable at a
strike price equal to the closing market price of the
Company’s common stock on the AMEX as of August 6,
2007. The stock options granted shall have an exercise term of
10 years, and shall vest and become exercisable as to 10%
per year for eight years, beginning on August 6, 2008, and
20% on August 6, 2016. Mr. Edelstein will be entitled
to participate in such other benefits programs as are made
available to the Company’s officers from time to time.
FS-20
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Digital Angel Corporation
We have audited the accompanying consolidated balance sheets of
Digital Angel Corporation and subsidiaries (the
“Company”) as of December 31, 2006 and 2005 and
the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for each of the years
in the three-year period ended December 31, 2006. Our
audits also included the financial statement
schedule II — Valuation and Qualifying Accounts.
These consolidated financial statements and schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above
present fairly, in all material respects, the consolidated
financial position of Digital Angel Corporation and subsidiaries
as of December 31, 2006 and 2005, and the consolidated
results of their operations and their consolidated cash flows
for each of the years in the three-year period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the financial statement schedule referred to above,
when considered in relation to the financial statements taken as
a whole, presents fairly, in all material respects, the
information stated therein.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment”, applying the
modified-prospective method.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Digital Angel Corporation and subsidiaries
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 5, 2007 (with respect to
the internal controls over financial reporting related to the
reclassification of OuterLink Corporation as discontinued
operations as described in Notes 1 and 24, August 31,
2007) expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control
over financial reporting.
/s/ Eisner LLP
New York, New York
March 5, 2007
With respect to the reclassification of
OuterLink Corporation as discontinued operations, as
described in Notes 1 and 24,
August 31, 2007
FS-21
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Digital Angel Corporation
We have audited management’s assessment, included in
Management’s Annual Report on Internal Controls over
Financial Reporting included in Digital Angel Corporation’s
Annual Report on Form 10-K for the year ended
December 31, 2006, that Digital Angel Corporation and
subsidiaries maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Digital Angel Corporation’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Digital Angel
Corporation and subsidiaries maintained effective internal
control over financial reporting as of December 31, 2006,
is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Digital Angel Corporation and
subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2006, based on COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Digital Angel Corporation and
subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2006, and our
report dated March 5, 2007 (with respect to the
reclassification of OuterLink Corporation as discontinued
operations as described in Notes 1 and 24, August 31,
2007) expressed an unqualified opinion on those
consolidated financial statements. Our report on the
December 31, 2006 financial statements included an
explanatory paragraph regarding the Company’s change in
accounting principle for transactions in which the Company
exchanges its equity instruments for goods or services.
/s/ Eisner LLP
New York, New York
March 5, 2007
With respect to internal controls over financial
reporting related to the reclassification of OuterLink
Corporation as discontinued operations, as
described in Notes 1 and 24, August 31, 2007
FS-22
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(As
revised, See Notes 1 and 24)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands, except par value)
|
|
|
|
|
ASSETS
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,521
|
|
|
$
|
9,949
|
|
|
Restricted cash
|
|
|
81
|
|
|
|
310
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$203 and $194 in 2006 and 2005, respectively
|
|
|
9,609
|
|
|
|
9,856
|
|
|
Accounts receivable from VeriChip Corporation
|
|
|
425
|
|
|
|
232
|
|
|
Inventories
|
|
|
9,897
|
|
|
|
8,469
|
|
|
Other current assets
|
|
|
2,016
|
|
|
|
1,013
|
|
|
Current assets from discontinued operations
|
|
|
2,335
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,884
|
|
|
|
30,818
|
|
|
Property and equipment, net
|
|
|
9,985
|
|
|
|
8,444
|
|
|
Goodwill
|
|
|
51,244
|
|
|
|
48,491
|
|
|
Other intangible assets, net
|
|
|
1,633
|
|
|
|
1,813
|
|
|
Other assets, net
|
|
|
619
|
|
|
|
348
|
|
|
Other assets from discontinued operations
|
|
|
531
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
89,896
|
|
|
$
|
90,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Line of credit and current maturities of long-term debt
|
|
$
|
4,127
|
|
|
$
|
2,380
|
|
|
Accounts payable
|
|
|
6,024
|
|
|
|
5,131
|
|
|
Due to Applied Digital Solutions, Inc.
|
|
|
11
|
|
|
|
—
|
|
|
Accrued expenses and other current liabilities
|
|
|
2,793
|
|
|
|
2,880
|
|
|
Deferred revenue
|
|
|
—
|
|
|
|
21
|
|
|
Current liabilities from discontinued operations
|
|
|
2,448
|
|
|
|
1,989
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,403
|
|
|
|
12,401
|
|
|
Long term debt
|
|
|
4,036
|
|
|
|
3,656
|
|
|
Other long term liabilities
|
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
386
|
|
|
|
550
|
|
|
Other liabilities from discontinued operations
|
|
|
1,060
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long term liabilities
|
|
|
1,446
|
|
|
|
1,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
20,885
|
|
|
|
17,143
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
465
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock ($1.75 par value; shares authorized, 1,000;
shares issued, nil)
|
|
|
—
|
|
|
|
—
|
|
|
Common stock ($0.005 par value; shares authorized, 95,000;
shares issued, 44,894 and 44,225; shares outstanding, 44,516 and
43,847)
|
|
|
226
|
|
|
|
223
|
|
|
Additional paid-in capital
|
|
|
214,509
|
|
|
|
212,083
|
|
|
Accumulated deficit
|
|
|
(144,753
|
)
|
|
|
(137,950
|
)
|
|
Treasury stock (carried at cost, 378 shares)
|
|
|
(1,580
|
)
|
|
|
(1,580
|
)
|
|
Accumulated other comprehensive income (loss)
|
|
|
144
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
68,546
|
|
|
|
72,446
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
89,896
|
|
|
$
|
90,207
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
FS-23
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(As
revised, See Notes 1 and 24)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Revenue
|
|
$
|
54,410
|
|
|
$
|
54,550
|
|
|
$
|
44,549
|
|
|
Cost of sales
|
|
|
31,919
|
|
|
|
29,930
|
|
|
|
24,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22,491
|
|
|
|
24,620
|
|
|
|
19,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
24,228
|
|
|
|
21,217
|
|
|
|
16,712
|
|
|
Research and development expenses
|
|
|
3,442
|
|
|
|
3,343
|
|
|
|
2,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(5,179
|
)
|
|
|
60
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(270
|
)
|
|
|
(347
|
)
|
|
|
(32
|
)
|
|
Interest expense
|
|
|
465
|
|
|
|
364
|
|
|
|
1,337
|
|
|
Realized losses on Applied Digital Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,231
|
|
|
Other income
|
|
|
(97
|
)
|
|
|
(63
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit and
minority interest
|
|
|
(5,277
|
)
|
|
|
106
|
|
|
|
(1,492
|
)
|
|
Income tax benefit
|
|
|
72
|
|
|
|
41
|
|
|
|
—
|
|
|
Minority interest share of income
|
|
|
(5
|
)
|
|
|
(351
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(5,210
|
)
|
|
|
(204
|
)
|
|
|
(1,741
|
)
|
|
Loss from discontinued operations, including net gain on sale of
assets of $163 and $260 in 2005 and 2004 and an impairment of
intangible asset charge of $7,141 in 2005
|
|
|
(1,593
|
)
|
|
|
(9,272
|
)
|
|
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,803
|
)
|
|
$
|
(9,476
|
)
|
|
$
|
(4,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
Loss from discontinued operations
|
|
|
(0.03
|
)
|
|
|
(0.21
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.15
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic and
diluted
|
|
|
44,308
|
|
|
|
43,820
|
|
|
|
33,173
|
|
See Notes to Consolidated Financial Statements.
FS-24
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
(As
revised, See Notes 1 and 24)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Income
|
|
|
Stockholders’
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
(Loss)
|
|
|
Equity
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance — December 31, 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
28,891
|
|
|
|
144
|
|
|
|
171,909
|
|
|
|
(123,517
|
)
|
|
|
(43
|
)
|
|
|
(10
|
)
|
|
|
48,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,957
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,957
|
)
|
|
Comprehensive income-foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
196
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,957
|
)
|
|
|
—
|
|
|
|
196
|
|
|
|
(4,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger consideration-OuterLink Corporation
|
|
|
100
|
|
|
|
175
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,300
|
|
|
Issuance of common stock to Applied Digital
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
15
|
|
|
|
7,905
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,920
|
|
|
Conversion of debt into stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,181
|
|
|
|
6
|
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,930
|
|
|
Conversion of Series A Preferred Stock
|
|
|
(100
|
)
|
|
|
(174
|
)
|
|
|
3,985
|
|
|
|
20
|
|
|
|
154
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Shares cancelled on settlement with vendor
|
|
|
—
|
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
4,426
|
|
|
|
22
|
|
|
|
12,665
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,687
|
|
|
Exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
1,955
|
|
|
|
10
|
|
|
|
4,162
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2004
|
|
|
—
|
|
|
|
1
|
|
|
|
43,425
|
|
|
|
217
|
|
|
|
207,875
|
|
|
|
(128,474
|
)
|
|
|
(43
|
)
|
|
|
186
|
|
|
|
79,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,476
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,476
|
)
|
|
Comprehensive loss-foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(516
|
)
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,476
|
)
|
|
|
—
|
|
|
|
(516
|
)
|
|
|
(9,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,537
|
)
|
|
|
—
|
|
|
|
(1,537
|
)
|
|
Exchange of common stock with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied Digital (See Note 11)
|
|
|
—
|
|
|
|
—
|
|
|
|
644
|
|
|
|
3
|
|
|
|
3,497
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,500
|
|
|
Conversion of Series A Preferred Stock
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
14
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Non employee stock grant
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
|
|
35
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
|
Exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
115
|
|
|
|
1
|
|
|
|
302
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
303
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
|
55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
Restricted stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of deferred compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
275
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
275
|
|
|
Issuance of stock options to non-employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2005
|
|
|
—
|
|
|
$
|
—
|
|
|
|
44,225
|
|
|
$
|
223
|
|
|
$
|
212,083
|
|
|
$
|
(137,950
|
)
|
|
$
|
(1,580
|
)
|
|
$
|
(330
|
)
|
|
$
|
72,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,803
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,803
|
)
|
|
Comprehensive income-foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
474
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,803
|
)
|
|
|
—
|
|
|
|
474
|
|
|
|
(6,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
320
|
|
|
|
2
|
|
|
|
559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
561
|
|
|
Restricted stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of stock to DSD shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
282
|
|
|
|
1
|
|
|
|
999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
Compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
868
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2006
|
|
|
—
|
|
|
$
|
—
|
|
|
|
44,894
|
|
|
$
|
226
|
|
|
$
|
214,509
|
|
|
$
|
(144,753
|
)
|
|
$
|
(1,580
|
)
|
|
$
|
144
|
|
|
$
|
68,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
FS-25
DIGITAL
ANGEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(As
revised, See Notes 1 and 24)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,803
|
)
|
|
$
|
(9,476
|
)
|
|
$
|
(4,957
|
)
|
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Applied Digital common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
6,689
|
|
|
Equity-based compensation
|
|
|
868
|
|
|
|
355
|
|
|
|
31
|
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
Depreciation and amortization
|
|
|
1,883
|
|
|
|
1,629
|
|
|
|
1,246
|
|
|
Amortization of debt discount and financing costs
|
|
|
—
|
|
|
|
—
|
|
|
|
777
|
|
|
Minority interest
|
|
|
5
|
|
|
|
351
|
|
|
|
249
|
|
|
Loss on Applied Digital common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,231
|
|
|
Loss (gain) on disposal of assets
|
|
|
24
|
|
|
|
15
|
|
|
|
(3
|
)
|
|
Loss from discontinued operations
|
|
|
1,593
|
|
|
|
9,272
|
|
|
|
3,216
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
251
|
|
|
|
—
|
|
|
|
438
|
|
|
(Increase) in accounts receivable
|
|
|
566
|
|
|
|
(937
|
)
|
|
|
(4,561
|
)
|
|
(Increase) in accounts receivable from VeriChip
|
|
|
(193
|
)
|
|
|
(232
|
)
|
|
|
—
|
|
|
(Increase) decrease in inventories
|
|
|
(913
|
)
|
|
|
(1,337
|
)
|
|
|
533
|
|
|
(Increase) in other current assets
|
|
|
(883
|
)
|
|
|
(63
|
)
|
|
|
(56
|
)
|
|
(Increase) in deferred tax asset
|
|
|
(159
|
)
|
|
|
(155
|
)
|
|
|
—
|
|
|
(Decrease) in due to Applied Digital
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
(324
|
)
|
|
Increase (decrease) in accounts payable, accrued expenses and
deferred revenue
|
|
|
(1,854
|
)
|
|
|
(3,102
|
)
|
|
|
(1,012
|
)
|
|
Net cash (used in) provided by discontinued operations
|
|
|
222
|
|
|
|
412
|
|
|
|
(995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used In) Provided By Operating Activities
|
|
|
(5,393
|
)
|
|
|
(3,291
|
)
|
|
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of assets
|
|
|
39
|
|
|
|
—
|
|
|
|
18
|
|
|
Decrease (increase) in other assets
|
|
|
(294
|
)
|
|
|
394
|
|
|
|
(318
|
)
|
|
Payments for property and equipment
|
|
|
(2,880
|
)
|
|
|
(1,222
|
)
|
|
|
(549
|
)
|
|
Acquisition, net of cash acquired
|
|
|
(1,000
|
)
|
|
|
(1,401
|
)
|
|
|
—
|
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(307
|
)
|
|
|
(122
|
)
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used In) Provided By Investing Activities
|
|
|
(4,442
|
)
|
|
|
(2,351
|
)
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts borrowed under line of credit
|
|
|
4,789
|
|
|
|
4,125
|
|
|
|
50,885
|
|
|
Amounts paid on line of credit
|
|
|
(3,762
|
)
|
|
|
(3,977
|
)
|
|
|
(53,261
|
)
|
|
Amounts borrowed on debt
|
|
|
854
|
|
|
|
—
|
|
|
|
—
|
|
|
Amounts paid on long-term debt
|
|
|
(893
|
)
|
|
|
(545
|
)
|
|
|
(395
|
)
|
|
Proceeds from exercise of stock options and warrants
|
|
|
561
|
|
|
|
358
|
|
|
|
16,859
|
|
|
Payment of dividends to minority shareholder in subsidiary
|
|
|
(190
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Amounts paid for treasury stock
|
|
|
—
|
|
|
|
(1,537
|
)
|
|
|
—
|
|
|
Payments for financing costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(101
|
)
|
|
Net cash used in discontinued operations
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used in) Financing Activities
|
|
|
1,359
|
|
|
|
(1,598
|
)
|
|
|
13,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
48
|
|
|
|
(279
|
)
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase In Cash
|
|
|
(8,428
|
)
|
|
|
(7,519
|
)
|
|
|
16,574
|
|
|
Cash — Beginning Of Year
|
|
|
9,949
|
|
|
|
17,468
|
|
|
|
894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash — End Of Year
|
|
$
|
1,521
|
|
|
$
|
9,949
|
|
|
$
|
17,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
FS-26
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial Statements
(As
revised, See Notes 1 and 24)
|
|
|
|
1.
|
The
Company and Basis of Presentation
|
The Company is engaged in the business of developing and
bringing to market proprietary technology used to identify,
locate and monitor people, animals and objects. The Company
operates in two segments: (1) Animal Applications and
(2) GPS and Radio Communications.
On July 2, 2007, the Company sold its subsidiary, OuterLink
Corporation (“OuterLink”). As a result, OuterLink is
now classified as discontinued operations for all periods
presented herein. Discontinued operations are more fully
discussed in Note 24.
Animal Applications
— develops, manufactures
and markets electronic radio frequency and visual identification
devices for the companion animals, fish and wildlife, and
livestock markets worldwide.
The Animal Applications segment’s radio frequency
identification products consist of miniature electronic
microchips, scanners, and for some applications, injection
systems. The Company holds patents on its syringe-injectable
microchip, which is encased in a glass or glass-like material
capsule and incorporates an antenna and a microchip with a
unique permanent identification code. The microchip is typically
injected under the skin using a hypodermic syringe, without
requiring surgery. An associated scanner device uses radio
frequency to interrogate the microchip and read the code.
The Animal Applications segment’s companion pet
identification system involves the insertion of a microchip with
identifying information into the animal. Scanners at animal
shelters, veterinary clinics and other locations can read the
microchip’s unique identification number. Through the use
of a database, the unique identification number identifies the
animal, the animal’s owner and other information. This pet
identification system is marketed in the United States by
Schering-Plough under the brand name “Home
Again
tm
,”
pursuant to a multi-year exclusive license, in Europe by Merial
Pharmaceutical, and in Japan by Dainippon Pharmaceutical. The
Company has distribution agreements with a variety of other
companies outside the United States to market its products.
The Animal Applications segment’s miniature electronic
microchips are also used for the tagging of fish, especially
salmon, for identification in migratory studies and other
purposes. The electronic microchips are accepted as a safe,
reliable alternative to traditional identification methods
because the fish, once implanted, can be identified without
capturing or sacrificing the fish.
In addition to pursuing the market for permanent identification
of companion animals and tracking microchips for fish, the
Animal Applications segment also produces visual and electronic
identification products for livestock producers. Visual
identification products for livestock are typically numbered ear
tags, which the Company has marketed since the 1940s. Currently,
sales of visual and electronic identification products represent
a substantial percentage of the Company’s sales to
livestock producers.
On February 28, 2005, the Company acquired Denmark-based
DSD Holding A/S (“DSD”), its wholly-owned subsidiaries
and their majority position in Daploma Polska. Denmark-based DSD
through its subsidiaries manufactures and markets visual and
electronic RFID tags for livestock. DSD has an automated
manufacturing facility and presence in markets in Europe, the
Middle East and Asia.
In addition, the Company’s implantable radio frequency
microchip was cleared by the FDA for medical applications in
humans in the United States in October 2004. The Company has a
long-term exclusive distribution and licensing agreement with
Verichip Corporation, an affiliated, wholly-owned subsidiary of
Applied Digital, covering the manufacturing, purchasing and
distribution of the human implantable microchip. Sales to
Verichip Corporation under an amended and restated agreement
dated December 27, 2005, were $0.4 million,
$0.7 million, and $0.1 million in the years ended
December 31, 2006, 2005 and 2004, respectively.
FS-27
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
1.
|
The Company and Basis of Presentation (continued)
|
GPS and Radio Communications
— designs,
manufactures and supports GPS enabled equipment. The GPS and
Radio Communications segment consists of the Company’s
subsidiary Signature Industries Limited (90.9% owned), which is
located in the United Kingdom. Applications for the
segment’s products include location tracking and message
monitoring of vehicles, aircraft and people in remote locations
through systems that integrate geosynchronous satellite
communications and GPS enabled equipment and intelligent
communications products and services for telemetry, mobile data
and radio communications applications serving commercial and
military markets. Signature Industries Limited’s businesses
also include high grade communication equipment leasing and
complementary data systems that customers can use to locate and
monitor their assets and alarm sounder manufacturing. Technology
development in this segment includes the integration and
miniaturization into marketable products of two technologies:
wireless communications and position location technology
(including global positioning systems (GPS) and other systems).
As of December 31, 2006, Applied Digital Solutions, Inc.
owned 24,573,788 shares or 55.2% of the Company’s
common stock.
Certain items in the consolidated financial statements for 2005
and 2004 have been reclassified for comparative purposes.
Summary
of Significant Accounting Policies
Described below are significant accounting policies, which
conform to accounting principles generally accepted in the
United States and, except for recently issued accounting
standards adopted, are applied on a consistent basis among all
years presented.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries
from the date of acquisition. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions
that affect the amounts and disclosures included in the
financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and
actions that the Company may undertake in the future, they may
ultimately differ from actual results. The Company uses
estimates, among others, to determine whether any impairment is
to be recognized to long-lived and intangible assets.
Foreign
Currencies
The Company’s foreign subsidiaries’ functional
currencies are their local currencies. Results of operations and
cash flows are translated at average exchange rates prevailing
throughout 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 (loss) which is a component of
stockholders’ equity. Translation 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.
FS-28
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
1.
|
The Company and Basis of Presentation (continued)
|
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 inventory turns by product.
Inventory items designated as obsolete or slow-moving are
reduced to net realizable value.
Property
and Equipment, net
Property and equipment are stated at cost, less accumulated
depreciation computed using the straight-line method. Building
and leasehold improvements are depreciated over periods ranging
from 10 to 30 years and software and equipment is
depreciated over periods ranging from 2 to 10 years.
Additions, improvements or major renewals are capitalized while
repairs and maintenance, which do not extend the useful life of
the asset, are charged to expense as incurred. Gains and losses
on sales and retirements are reflected in results of operations.
Goodwill
Goodwill is carried at cost, net of previously accumulated
amortization. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets,” the Company tests goodwill for
impairment at least annually by applying a fair value based
test. Based on the annual review for impairment, the Company
recorded an impairment charge of $3.8 million in the fourth
quarter of 2005 related to the goodwill at OuterLink
Corporation. The impairment charge is included in the loss from
discontinued operations.
In accordance with SFAS 142, the Company is required to
allocate goodwill to the various reporting units. As of
December 31, 2006, the Company’s reporting units
consisted of the following (the reporting units listed below are
those businesses which have goodwill and for which discrete
financial information is available and upon which management
makes operating decisions):
|
|
|
|
|
|
•
|
Animal Applications (goodwill of $44.0 million as of
December 31, 2006);
|
|
|
|
|
|
|
•
|
Signature Industries Limited (goodwill of $1.1 million as
of December 31, 2006); and
|
|
|
|
|
|
|
•
|
DSD Holding A/S (goodwill of $6.1 million as of
December 31, 2006).
|
The Company assesses the fair value of its goodwill annually or
earlier if events occur or circumstances change that would more
likely than not reduce the fair value of goodwill below its
carrying value. These events or circumstances would include a
significant change in business climate, including a significant,
sustained decline in an entity’s market value, legal
factors, operating performance indicators, competition, sale or
disposition of a significant portion of the business, or other
factors. If the Company determines that significant impairment
has occurred, it would be required to write off the impaired
portion of goodwill. Impairment charges could have a material
adverse effect on the Company’s financial condition and
results of operations.
Other
Intangible Assets, net
Other intangible assets are carried at cost net of accumulated
amortization. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets,” the Company tests intangible
assets for impairment at least annually by applying a fair value
based test. Based on the annual
FS-29
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
1.
|
The Company and Basis of Presentation (continued)
|
review for impairment, the Company recorded an impairment charge
of $3.3 million in the fourth quarter of 2005 related to
the intangible assets at OuterLink Corporation. The impairment
charge is included in the loss from discontinued operations.
Long-Lived
Assets
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” the
Company continually evaluates whether events or circumstances
have occurred that indicate the remaining estimated useful lives
of its intangible assets, excluding goodwill, and other
long-lived assets may warrant revision or that the remaining
balance of such assets may not be recoverable. The Company uses
an estimate of the related undiscounted cash flows over the
remaining life of the asset in measuring whether the asset is
recoverable. There were no write downs of any long-lived assets
in 2006, 2005, and 2004.
Revenue
Recognition
The Company recognizes product revenue at the time product is
shipped and title has transferred, provided that a purchase
order has been received or a contract has been executed, there
are no uncertainties regarding customer acceptance, the sales
price is fixed and determinable and collectibility is deemed
probable. If uncertainties regarding customer acceptance exist,
revenue is recognized when such uncertainties are resolved.
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
revenue is recognized upon occurrence of the post-sale support.
Costs of products sold and services provided are recorded as the
related revenue is recognized. The Company offers a warranty on
its products. For non-fixed and fixed fee jobs, service revenue
is recognized based on the actual direct labor hours in the job
multiplied by the standard billing rate and adjusted to net
realizable value, if necessary. Other revenue is recognized at
the time service or goods are provided. It is the Company’s
policy to record contract losses in their entirety in the period
in which such losses are foreseeable.
OuterLink Corporation earns revenue from location and messaging
services, which generally provide for service on a
month-to-month basis and from the sale of related products to
customers (communication terminals and software). OuterLink
Corporation’s services are only available through use of
its products; such products have no alternative use.
Accordingly, service revenue is recognized as the services are
performed. OuterLink Corporation’s product revenue, for
which title and risk of loss transfers to the customer on
shipment, is deferred upon shipment and is recognized ratably
over the estimated customer service period, which has
historically been 30 to 42 months. The Company recently
reassessed the estimated customer service period based on
additional experience and will begin recognizing revenue over
54 months in 2007.
It is the Company’s policy to approve all customer returns
before issuing credit to the customer. The Company incurred
returns of $0.2 million for 2006, 2005 and 2004.
The Company records a liability for product warranties at the
time it is probable that a warranty liability has been incurred
and the amount of loss can reasonably be estimated. The
Company’s warranty liability was
FS-30
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
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1.
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The Company and Basis of Presentation (continued)
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$34,000, $34,000 and $47,000 as of December 31, 2006, 2005
and 2004, respectively. Following is a reconciliation of the
Company’s product warranties (in thousands):
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Amount of
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Liability
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Balance as of December 31, 2005
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$
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34
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Accruals for warranties issued during the period
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—
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Accruals related to pre-existing warranties (including changes
in estimates)
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—
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Settlements made (in cash or in kind) during the period
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—
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Balance as of December 31, 2006
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$
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34
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Research
and Development
Research and development expense consists of personnel costs,
supplies, other direct costs and incremental indirect costs,
primarily, rent of developing new products and technologies and
are charged to expense as incurred.
Advertising
The Company expenses advertising costs when incurred.
Advertising expense, included in selling, general and
administrative expense, was $0.4 million, $0.4 million
and $0.3 million for each of the years ended
December 31, 2006, 2005 and 2004.
Income
Taxes
The Company accounts for income taxes under the asset and
liability approach. Deferred tax assets and liabilities are
recognized for the expected future tax consequences attributed
to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to
reverse. A valuation allowance is provided against net deferred
tax assets when it is more likely than not that a tax benefit
will not be realized. Income taxes include U.S. and foreign
taxes.
Stock-Based
Compensation
On January 1, 2006 the Company adopted
SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”). SFAS 123R
replaced SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under
SFAS 123 are no longer an alternative to financial
statement recognition. The Company adopted SFAS 123R using
the modified prospective method which required the application
of the accounting standard as of January 1, 2006. The
Company’s consolidated financial statements as of and for
the twelve month period ended December 31, 2006 reflect the
impact of adopting SFAS 123R. In accordance with the
modified prospective method, the consolidated financial
statements for prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123R.
Effective December 30, 2005, the Company’s Board of
Directors approved the acceleration of the vesting of
out-of-the-money, unvested stock options issued to current
employees, officers and directors prior to November 15,
2005 so that such options vest immediately, provided, however,
that the grantee that acquires
FS-31
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
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1.
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The Company and Basis of Presentation (continued)
|
any shares pursuant to such an option (the vesting of which has
been accelerated) will not be permitted to sell such shares
until the earlier of (i) the original vesting date
applicable to such option or (ii) the date on which such
grantee’s employment terminates.
The purpose of the accelerated vesting was to enable the Company
to avoid recognizing in its statements of operations
compensation expense associated with the options in future
periods. As a result of the acceleration, the Company avoided
recognition of up to approximately $8.6 million of
compensation expense in its statement of operations over the
course of the original vesting periods. Such expense is included
in the Company’s pro forma stock-based footnote disclosure
for the year ended December 31, 2005.
The Company is unable to estimate the number of options that
will ultimately be retained that otherwise would have been
forfeited, absent the acceleration.
Loss
Per Share
The Company’s basic and diluted net loss per share is
computed by dividing the net loss by the weighted average number
of outstanding common shares. Potential common shares are
excluded from the computation of diluted loss per share because
their inclusion would be anti-dilutive. Potential common shares
are as follows:
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As of December 31,
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2006
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2005
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2004
|
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(In thousands)
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Stock options and restricted stock
|
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11,793
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10,109
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|
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6,528
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Warrants
|
|
|
530
|
|
|
|
530
|
|
|
|
720
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Series A Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
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15
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
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12,323
|
|
|
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10,639
|
|
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7,263
|
|
|
|
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|
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Treasury
Stock
Repurchased common stock is stated at cost and is presented as a
separate reduction of stockholders’ equity.
Comprehensive
Loss
Comprehensive loss consists of net loss and foreign currency
translation adjustments and is reported in the statement of
changes in stockholders’ equity.
Recently
Issued Accounting Standards
In December 2004, SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”) was
issued. SFAS 123R replaced SFAS No. 123 and
supersedes APB Opinion No. 25. The provisions of
SFAS 123R became effective for the Company beginning
January 1, 2006. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. All of the Company’s
out-of-the-money, unvested stock options issued to current
employees, officers and directors prior to November 15,
2005 were vested on December 30, 2005, and, therefore the
initial adoption of SFAS 123R did not have a material
impact on the Company’s consolidated results of operations
and earnings (loss) per share. However, going forward, as the
Company
FS-32
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
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1.
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The Company and Basis of Presentation (continued)
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grants more options or other share based compensation to
employees, it expects that the impact may be material.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4.” SFAS No. 151 amends Accounting
Research Bulletin (“ARB”) No. 43, Chapter 4,
to clarify that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage) should
be recognized as current-period charges. In addition,
SFAS No. 151 requires that allocation of fixed
production overhead to inventory be based on the normal capacity
of the production facilities. The Company adopted SFAS 151
beginning January 1, 2006. The adoption of SFAS 151
did not have a material impact on the consolidated results of
operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets”
(“SFAS 153”). This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of
SFAS 153 did not have a material impact on the consolidated
results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections a replacement of
APB No. 20 and FAS No. 3”
(“SFAS 154”). SFAS 154 changes the
requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 also applies to all
voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
SFAS 154 is effective for all accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company’s adoption of
SFAS 154 did not have a material impact on the consolidated
results of operations or financial position.
In September 2006, FASB issued SFAS No. 157,
“Fair Value Measurements”
which defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. This Statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. Earlier application is encouraged provided that the
reporting entity has not yet issued financial statements for
that fiscal year including financial statements for an interim
period within that fiscal year. The Company is assessing
SFAS No. 157 and has not determined yet the impact
that the adoption of SFAS No. 157 will have on its
consolidated result of operations or financial position.
In June 2006, FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FAS No. 109”
(“FIN 48”), which clarifies the accounting for
uncertainty in income taxes. Currently, the accounting for
uncertainty in income taxes is subject to significant and varied
interpretations that have resulted in diverse and inconsistent
accounting practices and measurements. Addressing such
diversity, FIN 48 prescribes a consistent recognition
threshold and measurement attribute, as well as clear criteria
for subsequently recognizing, derecognizing and measuring
changes in such tax positions for financial statement purposes.
FIN 48 also requires expanded disclosure with respect to
the uncertainty in income taxes. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company
has not yet determined the impact of FIN 48 on its
consolidated results of operations or financial position.
FS-33
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
The following describes the acquisitions by the Company (in
thousands) in the three years ended December 31, 2006:
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Goodwill
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and
|
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|
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Other
|
|
Other Net
|
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|
|
|
|
Date
|
|
Acquisition
|
|
Intangibles
|
|
Assets and
|
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|
|
Company Acquired
|
|
Acquired
|
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Price
|
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Acquired
|
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Liabilities
|
|
Business Description
|
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DSD Holding A/S
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2/28/05
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$
|
5,902
|
|
|
$
|
8,008
|
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|
$
|
(2,106
|
)
|
|
Manufactures and markets visual and electronic RFID tags for
livestock.
|
|
OuterLink Corporation
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1/22/04
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$
|
8,501
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|
$
|
8,522
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|
$
|
(21
|
)
|
|
Provider of real-time, satellite-based automated tracking,
wireless data transfer and two-way messaging with large fleets
of vehicles.
|
On February 28, 2005, the Company acquired DSD Holding A/S
and its wholly-owned subsidiaries, Daploma International A/S and
Digitag A/S, and 70%-owned subsidiary Daploma Polska. DSD
Holding A/S became a wholly-owned subsidiary. The acquisition
was accounted for under the purchase method of accounting. The
excess of the purchase price over the fair value of the assets
and liabilities of DSD Holding A/S was recorded as goodwill of
$6.0 million and intangible assets of $2.0 million.
The intangible assets are customer relationships, trade name,
non-patented proprietary trade secrets, and a non-compete
agreement. The intangible assets acquired are being amortized
over lives ranging from 3 to 15 years. Amortization
recorded in the years ended December 31, 2006 and 2005 was
$0.2 million and $0.1 million, respectively.
Denmark-based DSD Holding A/S, through its subsidiaries,
manufactures and markets visual and electronic RFID tags for
livestock. In considering the benefits of the DSD acquisition,
our management recognized the synergies available with
DSD’s highly automated and efficient manufacturing
facility, as well as DSD’s presence in successfully
developed markets in Europe, the Middle East and Asia. The
acquisition provides us with expansion of our business in Europe.
Under the terms of the DSD Holding A/S acquisition, the Company
purchased all of the outstanding capital stock of DSD Holding
A/S in consideration for a purchase price of seven times DSD
Holding A/S’s average annual EBITDA over the next three
years, less outstanding indebtedness at the end of the time
period. An initial payment of $3.5 million was made at
closing through the delivery of Applied Digital common stock
valued at $3.5 million, which the Company acquired from
Applied Digital in exchange for $3.5 million of our common
stock. To account for pre-closing pricing fluctuations, the
Company paid additional consideration of $195,000 to the
shareholders of DSD Holding A/S on June 7, 2005.
In addition, on February 28, 2005, the Company entered into
employment agreements with the Chief Executive Officer of DSD
Holding A/S and its subsidiaries, Lasse Nordfjeld and his son,
the president of Daploma, Torsten Nordfjeld.
Pursuant to the terms of the stock purchase agreement, at any
time between the closing date of the acquisition and
December 31, 2006, the Company had the right to buy-out the
remaining purchase price. On April 13, 2006, the Company
exercised our right to buy-out the remaining purchase price by
electing to pay the set amount of $2.0 million. The
$2.0 million buy-out price was satisfied by a cash payment
of $1.0 million made on April 13, 2006 and the
issuance on June 8, 2006 of $1.0 million worth of our
unregistered common stock, or 282,115 shares. The number of
shares of our common stock that were exchanged was determined
FS-34
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
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|
2.
|
Acquisition (continued)
|
based upon the average of the volume-weighted-average price of
our common stock for the 10 trading days prior to the closing
date of the share exchange agreement, or $3.545 per share. LANO
Holdings ApS, wholly owned by Lasse Nordfjeld, and Torsten
Nordfjeld received 174,403 shares and 28,268 shares,
respectively, of the 282,115 shares issued to the former
shareholders of DSD. The $2.0 million buy-out price was
recorded as additional goodwill.
Applied Digital and the former shareholders of DSD agreed to
exchange, per the terms of a share exchange agreement dated
April 12, 2006, registered shares of Applied Digital’s
common stock for the unregistered shares of our common stock
paid by us to the former shareholders of DSD pursuant to the
buy-out agreement. Pursuant to the share exchange agreement,
Applied Digital issued to the former shareholders of DSD,
454,545 shares of Applied Digital’s common stock,
valued at $972,249, plus $27,751 in cash, in exchange for the
282,115 shares of our common stock that the former
shareholders of DSD received from us in partial payment of the
buy-out, as more fully discussed above. The number of shares of
Applied Digital common stock that were exchanged was determined
based upon the average of the volume-weighted-average price of
our common stock for the two trading days immediately preceding,
and not including, the transaction closing date of June 8,
2006, which was $2.14 per share.
The Company operates DSD Holding A/S and its operating
subsidiaries from their current headquarters near Copenhagen,
Denmark.
The following table summarizes the estimated fair values of the
tangible assets acquired and liabilities assumed in this
acquisition.
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(In thousands)
|
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|
|
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Current assets
|
|
$
|
2,631
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,864
|
|
|
|
|
|
|
Other assets
|
|
|
33
|
|
|
|
|
|
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|
|
|
|
|
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|
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Total assets acquired
|
|
|
4,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Current liabilities
|
|
|
3,371
|
|
|
|
|
|
|
Long-term debt and other liabilities
|
|
|
3,263
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|
|
|
|
|
|
|
|
|
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|
|
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|
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Total liabilities assumed
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6,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities acquired
|
|
$
|
(2,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 22, 2004, the Company acquired OuterLink
Corporation, which became a wholly-owned subsidiary of ours. The
acquisition was accounted for under the purchase method of
accounting. The excess of the purchase price over the fair value
of the assets and liabilities of OuterLink Corporation was
recorded as goodwill of $3.8 million and intangible assets
of $4.7 million. The intangible assets are customer
relationships, trademarks and core technology. The customer
relationships and core technology were being amortized over
periods ranging from 4 to 8 years. Amortization recorded in
the years ended December 31, 2005 and 2004 was
$0.7 million and $0.7 million, respectively. The
trademark has an indefinite life. In the fourth quarter of 2005,
the Company determined that the value of OuterLink
Corporation’s goodwill and intangible assets were impaired.
Accordingly, the Company recorded a $7.1 million asset
impairment charge in the fourth quarter of 2005. OuterLink
Corporation is now accounted for as discontinued operations.
(See Note 24).
The cost of the acquisition consisted of 100,000 shares of
Series A preferred stock valued at $8.3 million and
acquisition costs of $0.2 million. The Series A
preferred stock became convertible into four million shares of
our common stock when the volume weighted average price of our
common stock was greater than or equal
FS-35
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
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2.
|
Acquisition (continued)
|
to $4.00 per share for ten consecutive trading days. As of
December 31, 2005, 99,976 preferred shares had been
converted into 3.9 million shares of our common stock.
The valuation of the stock was primarily based on historical
trading history and stock prices of our common stock and a
marketability discount of 30%. The acquisition costs consist of
legal and accounting related services that were direct costs of
the acquisition.
In considering the benefits of the OuterLink Corporation
acquisition, management recognized the strategic complement of
OuterLink Corporation’s technologies and customer base with
our existing animal applications and military GPS business lines.
The following table summarizes the estimated fair values of the
tangible assets acquired and liabilities assumed at the date of
acquisition.
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(In thousands)
|
|
|
|
|
Current assets
|
|
$
|
1,225
|
|
|
Property, plant and equipment
|
|
|
116
|
|
|
Other assets
|
|
|
73
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,414
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
1,415
|
|
|
|
|
|
|
|
|
Long-term debt and other liabilities
|
|
|
20
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,435
|
|
|
|
|
|
|
|
|
Net liabilities acquired
|
|
$
|
(21
|
)
|
|
|
|
|
|
|
The results of DSD Holding A/S and OuterLink Corporation have
been included in the consolidated financial statements since the
date of acquisition, February 28, 2005 and January 22,
2004, respectively. Unaudited pro forma results of operations
for the years ended December 31, 2005 and 2004 are included
below. Such pro forma information assumes that DSD Holding A/S
was acquired on January 1, 2005 and 2004 and OuterLink
Corporation was acquired on January 1, 2004, and revenue is
presented in accordance with our accounting policies. This
summary is not necessarily indicative of what the results of our
operations would have been had it been a combined entity during
such periods, nor does it purport to represent results of
operations for any future periods.
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|
|
|
|
|
|
Pro Forma
|
|
|
|
|
For The Year Ended December 31,
|
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|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
(unaudited)
|
|
|
|
|
Net operating revenue
|
|
$
|
57,709
|
|
|
$
|
50,159
|
|
|
Net loss
|
|
$
|
(9,507
|
)
|
|
$
|
(6,599
|
)
|
|
Net loss per common share — basic and diluted
|
|
$
|
(0.22
|
)
|
|
$
|
(0.20
|
)
|
FS-36
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
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|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Raw materials
|
|
$
|
3,291
|
|
|
$
|
3,198
|
|
|
Work in process
|
|
|
402
|
|
|
|
109
|
|
|
Finished goods
|
|
|
7,215
|
|
|
|
6,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,908
|
|
|
|
10,138
|
|
|
Allowance for excess and obsolescence
|
|
|
(1,011
|
)
|
|
|
(1,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net inventory
|
|
$
|
9,897
|
|
|
$
|
8,469
|
|
|
|
|
|
|
|
|
|
|
|
Inventory of $5.7 million and $4.1 million was located
in Europe and Asia as of December 31, 2006 and
December 31, 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
1,833
|
|
|
$
|
837
|
|
|
Deferred tax asset
|
|
|
176
|
|
|
|
155
|
|
|
Deposits
|
|
|
7
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,016
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Land
|
|
$
|
278
|
|
|
$
|
278
|
|
|
Building and leasehold improvements
|
|
|
5,937
|
|
|
|
4,842
|
|
|
Equipment and furniture
|
|
|
11,387
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,602
|
|
|
|
13,620
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(7,617
|
)
|
|
|
(5,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,985
|
|
|
$
|
8,444
|
|
|
|
|
|
|
|
|
|
|
|
Included above are vehicles and equipment acquired under capital
lease obligations in the amount of $1.5 million and
$0.5 million at December 31, 2006 and 2005,
respectively. Related accumulated depreciation amounted to
$0.2 million and $0.1 million at December 31,
2006 and 2005, respectively.
Depreciation charged against income amounted to
$1.7 million, $1.5 million, and $1.3 million for
the years ended December 31, 2006, 2005, and 2004
respectively.
FS-37
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
The components of goodwill are as follows at December 31,
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
Original
|
|
Cumulative
|
|
|
|
Net
|
|
Original
|
|
Cumulative
|
|
|
|
Net
|
|
|
|
Carrying
|
|
Impairment
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Impairment
|
|
Accumulated
|
|
Carrying
|
|
|
|
Value
|
|
Charges
|
|
Amortization
|
|
Value
|
|
Value
|
|
Charges
|
|
Amortization
|
|
Value
|
|
|
|
Goodwill
|
|
$
|
98,157
|
|
|
$
|
(35,314
|
)
|
|
$
|
(11,599
|
)
|
|
$
|
51,244
|
|
|
$
|
95,404
|
|
|
$
|
(35,314
|
)
|
|
$
|
(11,599
|
)
|
|
$
|
48,491
|
|
Goodwill consists of the excess of cost over fair value of net
tangible and identifiable intangible assets of companies
purchased.
|
|
|
|
7.
|
Other
Intangible Assets, net
|
The components of other intangible assets are as follows at
December 31, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
Original
|
|
Cumulative
|
|
|
|
Net
|
|
Original
|
|
Cumulative
|
|
|
|
Net
|
|
|
|
Carrying
|
|
Impairment
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Impairment
|
|
Accumulated
|
|
Carrying
|
|
|
|
Value
|
|
Charges
|
|
Amortization
|
|
Value
|
|
Value
|
|
Charges
|
|
Amortization
|
|
Value
|
|
|
|
Other Intangible Assets
|
|
$
|
6,638
|
|
|
$
|
(3,287
|
)
|
|
$
|
(1,718
|
)
|
|
$
|
1,633
|
|
|
$
|
6,638
|
|
|
$
|
(3,287
|
)
|
|
$
|
(1,538
|
)
|
|
$
|
1,813
|
|
Other intangibles represent assets recognized separately from
goodwill and consist primarily of trade name, non-patented
proprietary trade secrets, non-compete agreements and customer
relationships. Other intangibles are being amortized over lives
ranging from 3 to 15 years.
Amortization expense amounted to $0.2 million for the years
ended December 31, 2006 and 2005.
|
|
|
|
8.
|
Accrued
Expenses and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Accrued wages and wage related costs
|
|
$
|
1,538
|
|
|
$
|
2,390
|
|
|
Accrued professional fees
|
|
|
302
|
|
|
|
199
|
|
|
Deposits
|
|
|
235
|
|
|
|
77
|
|
|
Rebates
|
|
|
128
|
|
|
|
20
|
|
|
Other
|
|
|
590
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,793
|
|
|
$
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
FS-38
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
9.
|
Notes
Payable, Line of Credit and Long-Term Debt
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Mortgage notes payable-Animal Applications and Corporate
facilities
|
|
$
|
2,226
|
|
|
$
|
2,281
|
|
|
Line of Credit — DSD Holding A/S
|
|
|
3,013
|
|
|
|
1,722
|
|
|
Equipment Loans/Notes Payable — DSD Holding A/S
|
|
|
1,398
|
|
|
|
1,755
|
|
|
Capital lease obligations
|
|
|
1,526
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,163
|
|
|
|
6,036
|
|
|
Less: Current maturities
|
|
|
(4,127
|
)
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,036
|
|
|
$
|
3,656
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturities of long-term debt, including
capitalized leases, at December 31, 2006 are as follows:
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
|
(In thousands)
|
|
|
|
|
2007
|
|
$
|
4,127
|
|
|
2008
|
|
|
1,038
|
|
|
2009
|
|
|
612
|
|
|
2010
|
|
|
2,303
|
|
|
2011
|
|
|
83
|
|
Interest expense on the above debts amounted to
$0.4 million, $0.3 million, and $0.6 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
Mortgage
Notes
Payable-Animal
Applications and Corporate facilities
Mortgage notes payable is collateralized by land and building.
Principal and interest payments totaling approximately $20,000
are payable monthly through October 2010. The final payment of
$2.0 million is due in November of 2010. The interest rate
on the note is fixed at 8.18%.
Equipment
Loans-DSD Holding A/S
DSD Holding A/S is party to equipment loans which are
collateralized by production equipment. Principal and interest
payments totaling approximately DKK 0.2 million ($35,400
USD at December 31, 2006) are payable monthly.
Payments are due through July 2010. The interest rates on the
loans are variable and range from 6.00% to 8.14% as of
December 31, 2006.
Line
of Credit-DSD Holding A/S
DSD Holding A/S and its wholly-owned subsidiary, Daploma
International A/S, are party to a credit agreement with Danske
Bank A/S. On June 1, 2006, DSD Holding A/S and Daploma
International A/S amended the borrowing availability from DKK
12 million (approximately $2.1 million USD at
December 31, 2006) to DKK 18 million
(approximately $3.2 million USD at December 31, 2006).
In connection with the amendment, the Company executed a Letter
of Support which confirms that it shall maintain its holding of
100% of the share capital of Daploma, and that the Company shall
neither sell, nor pledge, nor in any way
FS-39
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
9.
|
Notes Payable, Line of Credit and Long-Term Debt
(continued)
|
dispose of any part of Daploma or otherwise reduce its influence
on Daploma without the prior consent of Danske Bank. Interest is
determined quarterly and is based on the international rates
Danske Bank can establish on a loan in the same currency on the
international market plus 2.0%. At December 31, 2006, the
annual interest rate on the facility was 5.85%. Borrowing
availability under the credit facility considers guarantees
outstanding. At December 31, 2006, the borrowing
availability on the credit agreement was DKK 0.9 million
(approximately $0.2 million USD at December 31, 2006).
The credit agreement shall remain effective until further
notice. DSD Holding A/S can terminate the credit agreement and
pay the outstanding balance, or Danske Bank may demand the
credit line be settled immediately at any given time, without
prior notice.
Note
Payable-DSD
Holding A/S
As of December 31, 2006, DSD Holding A/S is party to a note
payable with Danske Bank. Principal and interest payments of DKK
0.3 million (approximately $53,100 USD at December 31,
2006) plus interest are payable quarterly through
December 15, 2008. The interest rate on the note is
calculated based on the international rates Danske Bank can
establish on a loan in DKK in the international market plus
2.0%. The interest rate on the note payable was 5.47% at
December 31, 2006.
Invoice
Discounting Agreement
On April 9, 2003, Signature Industries Limited entered into
a two-year Invoice Discounting Agreement with The Royal Bank of
Scotland Commercial Services Limited (“RBS”). The
Invoice Discounting Agreement, as amended October 28, 2003,
June 21, 2005, and July 27, 2006 provides for
Signature to sell with full title guarantee most of its
receivables, as defined in the Invoice Discounting Agreement, as
amended. Under the agreement, RBS prepays 80% of the receivables
sold in the United Kingdom and 80% of the receivables sold in
the rest of the world, not to exceed an outstanding balance of
£1,000,000 (approximately $1.9 million USD at
December 31, 2006) at any given time. RBS pays
Signature the remainder of the receivable upon collection of the
receivable. Receivables which remain outstanding 90 days
from the end of the invoice month become ineligible and RBS may
require Signature to repurchase the receivable. The discounting
charge accrues at an annual rate of 1.5% above the base rate as
defined in the amended Invoice Discounting Agreement (6.50% at
December 31, 2006). Signature pays a commission charge to
RBS of 0.16% of each receivable balance sold. The Invoice
Discounting Agreement, as amended, requires a minimum commission
charge of £833 per month. Discounting charges of $54,000
are included in interest expense in the 2006 statement of
operations. As of December 31, 2006, $0.9 million of
receivables were financed under the Invoice Discounting
Agreement.
|
|
|
|
10.
|
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 Accounts Receivable
The carrying amount approximates fair value because of the short
maturity of those instruments.
FS-40
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
10.
|
Fair Value of Financial Instruments (continued)
|
Long-Term
Debt (mortgages)
The carrying amount approximates fair value because the interest
rate approximates the current rate at which the Company could
borrow funds on similar debt.
|
|
|
|
11.
|
Stock
Exchanges with Applied Digital Solutions, Inc.
|
On February 25, 2005, the Company entered into a Stock
Purchase Agreement with Applied Digital. The purpose of the
stock exchange was to use the shares as partial consideration
for the acquisition of DSD Holding A/S and its wholly-owned
subsidiaries, Daploma International A/S and Digitag A/S, as
described more fully in note 2. The Company and Applied
Digital entered into the share exchange because of the selling
shareholders’ desire, at the time the transaction was
negotiated, to receive their consideration in Applied Digital
common stock as opposed to the Company’s common stock. In
addition, the stock purchase represented a strategic investment
by Applied Digital whereby Applied Digital could increase its
ownership interest in the Company. Pursuant to the agreement,
the Company issued 644,140 shares of its common stock to
Applied Digital in exchange for 684,543 shares of Applied
Digital common stock as consideration. The exchange ratio of
shares was based upon the average of the volume-weighted-average
price of the Company’s common stock and Applied
Digital’s common stock for the ten trading days immediately
preceding, and not including, the transaction closing date which
was $5.434 for the Company’s common stock and $5.113 for
Applied Digital’s common stock. The value of the stock
exchanged was $3.5 million.
The provision for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States at statutory rates
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
International
|
|
|
104
|
|
|
|
114
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision (credit)
|
|
|
104
|
|
|
|
114
|
|
|
|
—
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
International
|
|
|
(176
|
)
|
|
|
(155
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes provision (credit)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(72
|
)
|
|
$
|
(41
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers earnings from its foreign operations to be
indefinitely reinvested and, accordingly, no provision for
United States federal and state income taxes has been made for
these earnings. Upon distribution of foreign subsidiary
earnings, the Company may be subject to United States income
taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the foreign jurisdiction.
FS-41
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
12.
|
Income Taxes (continued)
|
The tax effects of temporary differences and carry forwards that
give rise to significant portions of deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Liabilities and reserves
|
|
$
|
540
|
|
|
$
|
722
|
|
|
Compensation not currently deductible
|
|
|
1,232
|
|
|
|
1,278
|
|
|
Tangible and Intangible property basis difference
|
|
|
416
|
|
|
|
45
|
|
|
Net operating loss carry forwards
|
|
|
21,004
|
|
|
|
18,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
23,192
|
|
|
|
20,808
|
|
|
Valuation allowance
|
|
|
(22,761
|
)
|
|
|
(20,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible property basis difference
|
|
|
641
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
210
|
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
|
The deferred tax assets and liabilities are included in the
following balance sheet captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Other current assets
|
|
$
|
176
|
|
|
$
|
155
|
|
|
Long term liabilities
|
|
|
386
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
210
|
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
|
Domestic and foreign loss from continuing operations before
provision for income taxes and minority interest consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Domestic
|
|
$
|
(3,322
|
)
|
|
$
|
(765
|
)
|
|
Foreign
|
|
|
(1,955
|
)
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,277
|
)
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company had aggregate United
States federal net operating loss carry forwards of
approximately $48.1 million for income tax purposes, which
expire in various amounts through 2026. Approximately
$10.5 million of the net operating loss carry forwards were
acquired in connection with various domestic acquisitions and
are limited as to use in any particular year based on Internal
Revenue Code sections related to change of ownership
restrictions. Further, past and future stock issuances may
subject the Company to additional limitations on the use of the
remaining net operating loss carry forwards under the same
Internal Revenue Code provision.
Additionally, net operating loss carry forwards of approximately
$5.3 million relate to foreign losses. Of this,
$1.6 million was acquired in connection with the
acquisition of DSD Holding A/S during 2005. During
FS-42
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
12.
|
Income Taxes (continued)
|
2005, the Company determined that a portion of Signature
Industries Limited’s United Kingdom net operating loss
carryforwards will more likely than not be utilized and
accordingly released $155,000 of the valuation allowance. A full
valuation allowance against all other net deferred tax assets at
December 31, 2006 has been recorded. The remaining net
deferred tax liability relates primarily to deferred tax
liabilities for purchased intangibles for which no tax basis
exists.
The valuation allowance increased by $2.1 million during
the year ended December 31, 2006. The valuation allowance
increased by $2.8 million during the year ended
December 31, 2005.
The reconciliation of the effective tax rate with the statutory
federal income tax from continuing operations rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Statutory rate
|
|
|
(35
|
)%
|
|
|
35
|
%
|
|
|
(35
|
)%
|
|
State income taxes, net of federal benefits
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(5
|
)
|
|
Goodwill impairment and other permanent differences
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Benefit from nonqualified stock options
|
|
|
—
|
|
|
|
5
|
|
|
|
(289
|
)
|
|
Tax gain on sales of Applied Digital stock
|
|
|
—
|
|
|
|
—
|
|
|
|
186
|
|
|
Change in deferred tax asset valuation allowance(a)
|
|
|
34
|
|
|
|
(87
|
)
|
|
|
141
|
|
|
Foreign tax rate differences
|
|
|
2
|
|
|
|
4
|
|
|
|
—
|
|
|
Expenses not deductible for tax purposes
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)%
|
|
|
(38
|
)%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
net of deferred tax assets acquired in the DSD acquisition.
|
|
|
|
|
13.
|
Commitments
and Contingencies
|
Rental expense for space, vehicles, and office equipment under
operating leases amounted to approximately $0.7 million for
the years ended December 31, 2006, 2005, and 2004.
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, 2006 are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimal
|
|
|
|
|
|
|
|
Rental
|
|
|
Employment
|
|
|
Year
|
|
Payments
|
|
|
Contracts
|
|
|
|
|
2007
|
|
$
|
726
|
|
|
$
|
1,183
|
|
|
2008
|
|
|
638
|
|
|
|
34
|
|
|
2009
|
|
|
560
|
|
|
|
—
|
|
|
2010
|
|
|
539
|
|
|
|
—
|
|
|
2011
|
|
|
526
|
|
|
|
—
|
|
|
Thereafter
|
|
|
16,099
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,088
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
FS-43
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
Applied Digital has a retirement savings plan under
section 401(k) of the Internal Revenue Code for the benefit
of eligible United States employees. Applied Digital has made no
matching contributions to the 401(k) Plan. The Company’s
employees are eligible to participate in this plan and may elect
to contribute a percentage of their salaries. The Company
provides an employer match on the first 4% of the employee
contributions. The Company’s expense related to the plan
was approximately $227,000, $198,000, and $0 for the years ended
December 31, 2006, 2005, and 2004 respectively.
Signature Industries Limited has a defined contribution pension
plan. The Company’s expense relating to the plans
approximated $147,000, $107,000, and $136,000 for the years
ended December 31, 2006, 2005, and 2004, respectively.
|
|
|
|
15.
|
Stock
Options, Restricted Stock, and Warrants
|
Stock
Option Plans
As of December 31, 2006, the Company maintains the Amended
and Restated Digital Angel Corporation Transition Stock Option
Plan (“DAC Stock Option Plan”), which is described
below, and has outstanding stock options which were issued
pursuant to another plan that was terminated on
February 23, 2006. On January 1, 2006 the Company
adopted SFAS 123R, using the modified prospective
transition method. Accordingly, during the year ended
December 31, 2006 the Company recorded stock-based
compensation expense for awards granted in 2006 and awards
granted prior to, but not yet vested as of January 1, 2006,
as if the fair value method required for pro forma disclosure
under SFAS 123 were in effect for expense recognition
purposes. Upon adoption of SFAS 123R, the Company elected
to continue using the Black-Scholes option pricing and have
recognized compensation expense using a straight-line
amortization method. During the years ended December 31,
2006, 2005, and 2004, the Company recorded $868,000, $355,000,
and $31,000 respectively, (this amount includes compensation for
options granted to non-employees and for restricted stock
grants) in stock-based employee compensation expense.
As of December 31, 2006, the DAC Stock Option Plan, which
is stockholder-approved, has 18,195,312 shares of common
stock reserved for issuance, of which 17,726,516 shares
have been issued and 468,796 remain available for issuance. As
of December 31, 2006, awards consisting of options to
purchase 9,728,186 shares were outstanding under the DAC
Stock Option Plan and awards consisting of options to purchase
476,820 shares were outstanding under the Company’s
terminated stock option plan. Additionally, restricted stock
awards for 154,230 shares of common stock have been granted
under the DAC Stock Option Plan. Option awards are generally
granted with exercise prices between market price and 110% of
the market price of the Company’s stock at the date of
grant; option awards generally vest over 3 to 9 years and
have
10-year
contractual terms. Certain option and share awards provide for
accelerated vesting if there is a change in control (as defined
in the DAC Stock Option Plan).
Stock
Option Activity
The fair value of each option award is estimated on the date of
grant using a Black-Scholes valuation model. The following
assumptions were used for options granted in the years ended
December 31, 2006, 2005, and 2004.
FS-44
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
15.
|
Stock Options, Restricted Stock, and Warrants (continued)
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Risk-free interest rate
|
|
4.64% - 4.94%
|
|
3.83%
|
|
3.81%
|
|
Expected life (in years)
|
|
4 - 10
|
|
5
|
|
5
|
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
Expected volatility
|
|
85.74% - 87.19%
|
|
91.04% - 113.34%
|
|
165.00%
|
|
Weighted-average volatility
|
|
87.05%
|
|
105.00%
|
|
165.00%
|
The Company’s computation of expected volatility is
determined based on historical volatility. The computation of
expected life is determined based on historical experience of
similar awards, giving consideration to the contractual terms of
the stock-based awards, vesting schedules and expectations of
future employee behavior. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of
grant.
A summary of the Company’s stock option activity as of
December 31, 2006, and changes during the year then ended
is presented below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
Stock
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Outstanding at January 1, 2006
|
|
|
9,955
|
|
|
$
|
3.94
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,325
|
|
|
|
3.21
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(320
|
)
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(255
|
)
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
11,705
|
|
|
$
|
3.84
|
|
|
|
7.60
|
|
|
$
|
1,402
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or Expected to Vest at December 31, 2006
|
|
|
11,375
|
|
|
$
|
3.85
|
|
|
|
7.50
|
|
|
$
|
1,397
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
|
9,247
|
|
|
$
|
4.00
|
|
|
|
7.36
|
|
|
$
|
1,400
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The intrinsic value of a stock option is the amount by which the
market value of the underlying stock exceeds the exercise price
of the option. The market value of the Company’s stock was
$2.55 at December 31, 2006.
|
The weighted-average grant-date fair value of options granted
during the years ended December 31, 2006 and 2005, and 2004
were $2.65, $4.97, and $3.57 respectively. The total intrinsic
value of options exercised during the years ended
December 31, 2006, 2005, and 2004 was $644,000, $72,000,
and $13,581,000, respectively.
FS-45
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
15.
|
Stock Options, Restricted Stock, and Warrants (continued)
|
A summary of the status of the Company’s non-vested stock
options as of December 31, 2006, and changes during the
year ended December 31, 2006, is presented below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
Stock Options
|
|
|
Fair Value
|
|
|
|
|
Nonvested at January 1, 2006
|
|
|
217
|
|
|
$
|
2.42
|
|
|
Granted
|
|
|
2,325
|
|
|
|
2.65
|
|
|
Vested
|
|
|
(83
|
)
|
|
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
2,458
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $4,639,000 of total
unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the DAC Stock Option
Plan. That cost is expected to be recognized over a
weighted-average period of 5.96 years. The total fair value
of shares vested during the years ended December 31, 2006,
2005, and 2004 was $181,000, $22,495,000, and $5,215,000,
respectively.
Cash received from option exercise under all share-based payment
arrangements for the years ended December 31, 2006, 2005,
and 2004, was $561,000, $55,000, and $12,687,000, respectively.
On January 13, 2004, the Company granted its Chief
Executive Officer (CEO) a ten-year option to purchase
1,000,000 shares of the Company’s common stock at
$3.92 per share. This option was granted outside of the
Company’s stock plans and approved by its stockholders on
May 6, 2004. The option became exercisable on
December 30, 2005. As of December 31, 2006, the option
remains outstanding.
On February 18, 2004, the Company granted its Chairman of
the Board of Directors a ten-year option to purchase
500,000 shares of the Company’s common stock at $3.43
per share. This option was granted outside of the Company’s
stock plans and approved by its stockholders on May 6,
2004. The option became exercisable on February 18, 2005.
As of December 31, 2006, the option remains outstanding.
Restricted
Stock
In March 2005, the Company granted its Chairman of the Board
100,000 shares of the Company’s restricted stock. The
restricted stock vested 50% on March 7, 2006 and will vest
50% on March 7, 2007. The Company determined the value of
the stock to be $506,000 based on the closing price of its stock
on the date of grant. The value of the restricted stock has been
recorded as deferred compensation and is being amortized to
compensation expense over the two year vesting period. In the
years ended December 31, 2006 and 2005, $253,000 and
$211,000, respectively was recognized as compensation expense in
the Company’s consolidated results of operations.
In February 2005, the Company granted an employee,
54,230 shares of the Company’s restricted stock. The
restricted stock vested 30% on February 25, 2006, will vest
30% on February 25, 2007 and 40% on February 25, 2008.
The Company determined the value of the stock to be $250,000
based on the closing price of its stock on the date of grant.
The value of the restricted stock has been recorded as deferred
compensation and is being amortized to compensation expense over
the vesting period. In the years ended December 31, 2006
and 2005, $75,000 and $64,000, respectively was recognized as
compensation expense in the Company’s consolidated results
of operations.
FS-46
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
15.
|
Stock Options, Restricted Stock, and Warrants (continued)
|
Pro
Forma Information for Periods Prior to the Adoption of
SFAS 123R
Prior to the adoption of SFAS 123R, the Company provided
the disclosures required under SFAS 123 as amended by
SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosures.” Employee
stock-based compensation expenses recognized under SFAS 123
were not reflected in the consolidated results of operations for
the twelve month period ended December 31, 2005 for
employee stock option awards as all stock options were granted
with an exercise price greater than or equal to the market value
of the underlying common stock on the date of grant.
The pro forma information for the years ended December 31,
2005 and 2004 was as follows (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(9,476
|
)
|
|
$
|
(4,957
|
)
|
|
|
|
|
|
Stock-based compensation expense in reported net loss
|
|
|
355
|
|
|
|
31
|
|
|
|
|
|
|
Stock-based compensation expense determined under the fair value
based method
|
|
|
(13,152
|
)
|
|
|
(7,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(22,273
|
)
|
|
$
|
(12,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.22
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
Pro forma
|
|
|
(0.51
|
)
|
|
|
(0.37
|
)
|
|
|
|
|
Applied Digital has four non-qualified option plans. On
April 5, 2004, Applied Digital effected a one for ten
reverse split of its common stock. All share prices and share
amounts for Applied Digital common stock reflect the reverse
stock split. Under the Applied Digital plans, options for
4.8 million common shares were authorized for issuance to
certain officers and employees of Applied Digital, which include
certain officers and employees of the Company. There were no
options granted under the plans to the Company’s officers
and employees for services related to Digital Angel Corporation
in 2006, 2005 or 2004. The options may not be exercised until
one to three years after the grant date and are exercisable for
periods ranging from five to ten years. As of December 31,
2006, as it relates to certain of the Company’s officers
and employees, there were 67,000 options outstanding and
exercisable at a weighted average price of $12.94. During 2006,
options to purchase 42,000 shares were forfeited at a
weighted average price of $26.80.
Warrants
On July 31, 2003, in connection with the $2,000,000 secured
convertible note payable to Laurus Master Fund, the Company
issued a warrant to purchase 125,000 shares of its common
stock. The warrant issued to Laurus is exercisable through
July 31, 2008 and permits Laurus Master Fund to purchase
75,000 shares of the Company’s common stock at $2.68
per share, 35,000 shares at $2.91 per share and
15,000 shares at $3.38 per share. The Company determined
the estimated aggregate fair value of these warrants on the date
of grant to be $143,000 based on the Black-Scholes valuation
model using the following assumptions: expected volatility of
107.2%, dividend yield of 0%, risk free interest of 3.3% and an
expected life of 5 years. The value of the warrant was
accounted for as debt discount and amortized to interest expense
over the term of the secured convertible note. As of
December 31, 2006, Laurus has not exercised their warrant.
FS-47
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
15.
|
Stock Options, Restricted Stock, and Warrants (continued)
|
On August 14, 2003, the Company issued warrants to purchase
500,001 shares of its common stock to certain holders of
Applied Digital Solutions Convertible Exchangeable Debentures.
These warrants were issued to procure the consent of the holders
of Convertible Exchangeable Debentures to the issuance of the
Applied Digital common stock to Digital Angel Corporation
pursuant to the Stock Purchase Agreement. At the time the Stock
Purchase Agreement was executed, the terms of the Convertible
Exchangeable Debentures prohibited Applied Digital from, among
other things, issuing or selling shares of its common stock.
Therefore, to avoid breaching the terms of its Convertible
Exchangeable Debentures, Applied Digital was required to obtain
the consent of the holders of Convertible Exchangeable
Debentures to the issuance of Applied Digital common stock to
Digital Angel Corporation pursuant to the Stock Purchase
Agreement. The warrants issued to the holders of Convertible
Exchangeable Debentures are exercisable for five years beginning
February 1, 2004 and entitle the holder to purchase that
number of shares of common stock of Digital Angel Corporation
designated in the warrant at a price of $2.64 per share. The
warrant was valued at $0.8 million using the Black-Scholes
option pricing model and recorded as a charge to interest
expense in Applied Digital’s results of operations. Through
December 31, 2006, 95,238 of the 500,001 warrants were
exercised.
On August 28, 2003, in connection with the
$3.5 million secured revolving convertible note and the
$1.5 million secured minimum borrowing convertible note,
the Company issued a warrant to purchase 115,000 shares of
its common stock. The warrant is exercisable for five years and
entitles Laurus to purchase 70,000 shares of the
Company’s common stock at $2.55, 35,000 shares at
$2.75 per share and 10,000 shares at $2.95 per share. The
Company determined the estimated aggregate fair value of these
warrants on the date of grant to be $133,000 based on the
Black-Scholes valuation model using the following assumptions:
expected volatility of 107.2%, dividend yield of 0%, risk free
interest of 3.3% and an expected life of 5 years. The value
of the warrant was accounted for as debt discount and was
amortized to interest expense over the life of the secured
convertible note. In March 2005, Laurus exercised their warrant
for 115,000 shares, and the Company received proceeds of
$304,000.
|
|
|
|
16.
|
Non-Cash
Compensation Expense
|
Non-cash compensation expense of $0.9 million
($0.7 million in selling, general, and administrative
expense and $0.2 million in research and development
expense) is included for the year ended December 31, 2006.
Non-cash compensation expense of $0.4 million and
$0.2 million has been included, all in selling, general,
and administrative expense, for the years ended
December 31, 2005 and 2004 respectively. The 2006 expense
relates primarily to SFAS 123R expense associated with a
grant of 2,325,000 stock options to employees and directors. The
2005 expense primarily relates to 100,000 stock options issued
to Applied Digital employees, 100,000 shares of restricted
stock issued the Company’s Chairman of the Board in March
2005 and 54,230 shares of restricted stock issued to an
employee in February 2005. The 2004 expense resulted from
10,000 shares of common stock provided to an individual as
compensation for recruiting services.
Digital
Angel Corporation vs. Allflex USA, Inc and Pet Health Services
(USA), Inc.
On October 20, 2004, the Company commenced an action in the
United Stated District Court for the District of Minnesota
against AllFlex USA, Inc. and Pet Health Services (USA), Inc.
The suit alleged that Allflex and PetHealth marketed and sold a
syringe implantable identification transponder that violated our
patent. Allflex moved for a judgment on the pleadings, asserting
that a license agreement between Allflex and us should act as a
bar to a case for infringement, which motion the Company
contested. The Court issued a
FS-48
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
17.
|
Legal Proceedings (continued)
|
ruling granting the Defendant’s motion for judgment on the
pleadings and denying our motion for leave to amend, and final
judgment in the action was entered on February 21, 2006.
Upon our appeal to the Federal Circuit Court of Appeals in
Washington, D.C., the Court found in favor of the
Defendants.
Digital
Angel Corporation vs. Datamars, Inc., Datamars, S.A., The
Crystal Import Corporation and Medical Management International,
Inc.
On October 20, 2004, the Company commenced an action in the
United States District Court for the District of Minnesota
against Datamars, Inc., Datamars, S.A., The Crystal Import
Corporation, and Medical Management International, Inc.
(“Banfield”). This suit claims that the defendants are
marketing and selling syringe implantable identification
transponders manufactured by Datamars that infringe our 1993
patent for syringe implantable identification transponders
previously found by the United States District Court for the
District of Colorado to be enforceable. The suit seeks, among
other things, an adjudication of infringement, injunctive
relief, and actual and punitive damages. The Company believes
that the suit is well-grounded in law and fact. On
February 28, 2006, the Court conducted a hearing (the
“Markman Hearing”) in which each of the parties
presented the Court with their views regarding the scope of the
claims set forth in the subject patent. On May 22, 2006,
the Court issued its order on the Markman Hearing, in which, in
management’s assessment, the court largely adopted our
analysis on the scope of the claims in the subject patent. The
parties are continuing discovery in light of that order. Trial
is anticipated in mid to late 2007.
Crystal
Import Corporation v. Digital Angel, et al.
On or about December 29, 2004, The Crystal Import
Corporation filed an action against AVID Identification Systems,
Inc. and us in the United States District Court for the Northern
District of Alabama. Crystal’s complaint primarily asserted
federal and state antitrust and related claims against AVID,
though it also asserted similar claims against us. On
October 12, 2005, the Alabama Court transferred the action
to Minnesota. Following the docketing of the action in
Minnesota, the Company and AVID filed a motion seeking to stay
the case until the corresponding patent infringement actions
have been resolved. The Court recently lifted a stay of the
matter and discovery is expected to commence in the near future.
Given the uncertainties associated with all litigation and given
the early stage of this proceeding, the Company are unable to
offer any assessment on the potential liability exposure, if
any, to us from this lawsuit.
Digital
Angel Corporation v. Corporativo SCM, S.A. de
C.V.
On or about June 2, 2005, the Company filed a declaratory
judgment action in the U.S. District Court for the District
of Minnesota seeking to have the Court determine our rights and
liabilities under a 2002 distribution agreement with Corporativo
SCM, S.A. de C.V., a Mexican company that entered into a
distribution agreement for a product that was then under
development by us but the development of which was subsequently
abandoned. The case is in the initial discovery stages. Given
the uncertainties associated with all litigation and given the
early stage of this proceeding, the Company is unable to offer
any assessment on the potential liability exposure, if any, from
this lawsuit.
FS-49
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
18.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Income taxes paid
|
|
$
|
100
|
|
|
$
|
121
|
|
|
$
|
71
|
|
|
Interest paid
|
|
|
465
|
|
|
|
380
|
|
|
|
578
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for Applied Digital common stock
|
|
|
—
|
|
|
|
3,500
|
|
|
|
7,920
|
|
|
Issuance of Applied Digital common stock for DSD acquisition
|
|
|
—
|
|
|
|
3,500
|
|
|
|
—
|
|
|
Issuance of common stock to former shareholders of DSD Holding
A/S
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Conversion of debt into common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
2,930
|
|
|
Assets acquired for long-term debt and capital leases
|
|
|
606
|
|
|
|
586
|
|
|
|
—
|
|
The Company is an advanced technology company in the field of
rapid and accurate identification, location tracking, and
condition monitoring of high-value assets. The Company operates
in two segments: (1) Animal Applications and (2) GPS
and Radio Communications.
It is on this basis that the Company’s management utilizes
the financial information to assist in making internal operating
decisions. The Company evaluates performance based on
stand-alone segment operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
|
|
|
|
|
Animal
|
|
|
GPS and Radio
|
|
|
|
|
|
Continuing
|
|
|
For the Year Ended December 31, 2006
|
|
Applications
|
|
|
Communications
|
|
|
Corporate
|
|
|
Operations
|
|
|
|
|
(In thousands)
|
|
|
|
|
Total net revenue
|
|
$
|
38,058
|
|
|
$
|
16,352
|
|
|
$
|
—
|
|
|
$
|
54,410
|
|
|
Operating (loss) income
|
|
|
(4,007
|
)
|
|
|
(1,172
|
)
|
|
|
—
|
|
|
|
(5,179
|
)
|
|
Operating loss from continuing operations before income taxes
and minority interest
|
|
|
(4,048
|
)
|
|
|
(1,229
|
)
|
|
|
—
|
|
|
|
(5,277
|
)
|
|
Depreciation and amortization
|
|
|
1,404
|
|
|
|
479
|
|
|
|
—
|
|
|
|
1,883
|
|
|
Interest income
|
|
|
(267
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(270
|
)
|
|
Interest expense
|
|
|
405
|
|
|
|
60
|
|
|
|
—
|
|
|
|
465
|
|
|
Goodwill, net
|
|
|
50,078
|
|
|
|
1,166
|
|
|
|
—
|
|
|
|
51,244
|
|
|
Segment assets
|
|
|
77,746
|
|
|
|
9,284
|
|
|
|
—
|
|
|
|
87,030
|
|
|
Cash expenditures for property and equipment
|
|
|
1,789
|
|
|
|
1,091
|
|
|
|
—
|
|
|
|
2,880
|
|
FS-50
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
19.
|
Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
|
|
|
|
|
Animal
|
|
|
GPS and Radio
|
|
|
|
|
|
Continuing
|
|
|
For the Year Ended December 31, 2005
|
|
Applications
|
|
|
Communications
|
|
|
Corporate
|
|
|
Operations
|
|
|
|
|
(In thousands)
|
|
|
|
|
Total net revenue
|
|
$
|
35,972
|
|
|
$
|
18,578
|
|
|
$
|
—
|
|
|
$
|
54,550
|
|
|
Operating (loss) income
|
|
|
(1,409
|
)
|
|
|
1,469
|
|
|
|
—
|
|
|
|
60
|
|
|
Operating (loss) income from continuing operations before income
taxes and minority interest
|
|
|
(1,347
|
)
|
|
|
1,453
|
|
|
|
—
|
|
|
|
106
|
|
|
Depreciation and amortization
|
|
|
1,226
|
|
|
|
403
|
|
|
|
—
|
|
|
|
1,629
|
|
|
Interest income
|
|
|
(336
|
)
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
(347
|
)
|
|
Interest expense
|
|
|
337
|
|
|
|
27
|
|
|
|
—
|
|
|
|
364
|
|
|
Goodwill, net
|
|
|
47,343
|
|
|
|
1,148
|
|
|
|
—
|
|
|
|
48,491
|
|
|
Segment assets
|
|
|
81,105
|
|
|
|
7,820
|
|
|
|
—
|
|
|
|
88,925
|
|
|
Cash expenditures for property and equipment
|
|
|
820
|
|
|
|
402
|
|
|
|
——
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
|
|
|
|
|
Animal
|
|
|
GPS and Radio
|
|
|
|
|
|
Continuing
|
|
|
For the Year Ended December 31, 2004
|
|
Applications
|
|
|
Communications
|
|
|
Corporate
|
|
|
Operations
|
|
|
|
|
(In thousands)
|
|
|
|
|
Total net revenue
|
|
$
|
25,871
|
|
|
$
|
18,678
|
|
|
$
|
—
|
|
|
$
|
44,549
|
|
|
Operating (loss) income
|
|
|
(1,314
|
)
|
|
|
2,246
|
|
|
|
—
|
|
|
|
932
|
|
|
Operating (loss) income from continuing operations before income
taxes and minority interest
|
|
|
(3,603
|
)
|
|
|
2,111
|
|
|
|
—
|
|
|
|
(1,492
|
)
|
|
Depreciation and amortization
|
|
|
875
|
|
|
|
371
|
|
|
|
—
|
|
|
|
1,246
|
|
|
Interest income
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
(32
|
)
|
|
Interest expense
|
|
|
1,168
|
|
|
|
168
|
|
|
|
—
|
|
|
|
1,336
|
|
|
Goodwill, net
|
|
|
43,971
|
|
|
|
1,173
|
|
|
|
—
|
|
|
|
45,144
|
|
|
Segment assets
|
|
|
84,313
|
|
|
|
7,787
|
|
|
|
6
|
|
|
|
92,106
|
|
|
Cash expenditures for property and equipment
|
|
|
264
|
|
|
|
285
|
|
|
|
—
|
|
|
|
549
|
|
FS-51
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
19.
|
Segment Information (continued)
|
Information from continuing operations, concerning principal
geographic areas as of and for the years ended December 31,
2006, 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
United
|
|
|
United Kingdom
|
|
|
Foreign
|
|
|
|
|
|
|
|
States
|
|
|
Denmark
|
|
|
Countries
|
|
|
Consolidated
|
|
|
|
|
(In thousands)
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
26,735
|
|
|
$
|
14,970
|
|
|
$
|
12,705
|
|
|
$
|
54,410
|
|
|
Long-lived assets excluding goodwill and other intangible
assets, net
|
|
|
5,523
|
|
|
|
4,242
|
|
|
|
220
|
|
|
|
9,986
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
23,889
|
|
|
$
|
16,830
|
|
|
$
|
13,758
|
|
|
$
|
54,550
|
|
|
Long-lived assets excluding goodwill and other intangible
assets, net
|
|
|
4,350
|
|
|
|
3,824
|
|
|
|
270
|
|
|
|
8,444
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
28,054
|
|
|
$
|
4,369
|
|
|
$
|
12,126
|
|
|
$
|
44,549
|
|
|
Long-lived assets excluding goodwill and other intangible
assets, net
|
|
|
4,514
|
|
|
|
1,101
|
|
|
|
277
|
|
|
|
5,892
|
|
Sales to one customer accounted for approximately 15% of net
revenues in 2006. Sales to one customer accounted for
approximately 10% of net revenues in 2005. Sales to two
customers accounted for approximately 12% and 10% of net
revenues in 2004. Accounts receivable from one customer
accounted for approximately 13% of net accounts receivable in
2006. Accounts receivable from one customer accounted for
approximately 12% of net accounts receivable in 2005 as well.
|
|
|
|
20.
|
Related
Party Activity
|
The Company has an eleven-year Distribution and Licensing
Agreement dated March 4, 2002, amended December 28,
2005, with VeriChip Corporation (“VeriChip”), a
majority-owned subsidiary of Applied Digital at
December 31, 2006, covering the manufacturing, purchasing
and distribution of the Company’s implantable microchip and
the maintenance of the VeriChip Registry by the Company. The
amended agreement contains, among other things, minimum purchase
requirements in order to maintain exclusivity, whereby VeriChip
is required to purchase $875,000, $1,750,000 and $2,500,000 for
each of 2007, 2008 and 2009, respectively, and $3,750,000 for
2010 and each year thereafter. The agreement continues until
March 2013 and, as long as VeriChip continues to meet the
minimum purchase requirements, will automatically renew annually
under its terms. The Distribution and Licensing agreement
includes a license for the use of the Company’s technology
in VeriChip’s identified markets. Under the Distribution
and Licensing Agreement, the Company is the sole manufacturer
and supplier to VeriChip. The existing terms with the
Company’s sole supplier of implantable microchips, Raytheon
Microelectronics España, SA, expire on June 30, 2010.
Revenue recognized under the Distribution and Licensing
Agreement was $0.4 million, $0.7 million, and
$0.1 million for 2006, 2005, and 2004 respectively.
Amounts due from VeriChip as of December 31, 2006 and
December 31, 2005 were $425,000 and $232,000, respectively.
See Note 11 for a description of the stock exchange
transactions with Applied Digital.
FS-52
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
20.
|
Related Party Activity (continued)
|
Prior to January 1, 2005 and pursuant to a mutual agreement
between the Company, Applied Digital, and Verichip Corporation,
amounts due from Verichip Corporation were offset against
amounts the Company owed to Applied Digital for certain general
and administrative services, research and development services,
directors and officers insurance and expense reimbursement.
Effective January 1, 2005, all amounts due from Verichip
Corporation are to be paid to the Company.
|
|
|
|
21.
|
Summarized
Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
15,319
|
|
|
$
|
12,428
|
|
|
$
|
12,400
|
|
|
$
|
14,263
|
|
|
$
|
54,410
|
|
|
Gross profit
|
|
|
6,606
|
|
|
|
4,866
|
|
|
|
5,249
|
|
|
|
5,770
|
|
|
|
22,491
|
|
|
Net loss before discontinued operations
|
|
|
(75
|
)
|
|
|
(1,579
|
)
|
|
|
(1,181
|
)
|
|
|
(2,375
|
)
|
|
|
(5,210
|
)
|
|
Loss from discontinued operations
|
|
|
(511
|
)
|
|
|
(545
|
)
|
|
|
(254
|
)
|
|
|
(283
|
)
|
|
|
(1,593
|
)
|
|
Net loss
|
|
|
(586
|
)
|
|
|
(2,124
|
)
|
|
|
(1,435
|
)
|
|
|
(2,658
|
)
|
|
|
(6,803
|
)
|
|
Loss per share-basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.12
|
)
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
Net loss
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
12,861
|
|
|
$
|
14,295
|
|
|
$
|
13,206
|
|
|
$
|
14,188
|
|
|
$
|
54,550
|
|
|
Gross profit
|
|
|
5,819
|
|
|
|
6,427
|
|
|
|
5,739
|
|
|
|
6,635
|
|
|
|
24,620
|
|
|
Net income (loss) before discontinued operations
|
|
|
158
|
|
|
|
(285
|
)
|
|
|
(452
|
)
|
|
|
375
|
|
|
|
(204
|
)
|
|
Loss from discontinued operations
|
|
|
(651
|
)
|
|
|
(605
|
)
|
|
|
(532
|
)
|
|
|
(7,484
|
)
|
|
|
(9,272
|
)
|
|
Net loss
|
|
|
(493
|
)
|
|
|
(891
|
)
|
|
|
(984
|
)
|
|
|
(7,108
|
)
|
|
|
(9,476
|
)
|
|
Loss per share-basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.18
|
)
|
|
|
(0.21
|
)
|
|
Net loss
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
22.
|
Proposed
acquisition of the assets of McMurdo Ltd.
|
On December 14, 2006, Signature Industries Limited, or
Signature, the Company’s London-based subsidiary operating
in the GPS and Radio Communications segment, entered into an
agreement to acquire certain assets and customer contracts of
McMurdo Ltd., or McMurdo, a U.K. manufacturer of emergency
location beacons, from Chemring Group PLC. Pursuant to the
agreement, Signature will acquire certain assets of
McMurdo’s marine electronics business, including fixed
assets, inventory, customer lists, customer and supplier
contracts and relations, trade and business names, and
associated assets. The assets exclude certain accrued
liabilities and obligations and real property, including the
plant facility which Signature will have a license to occupy for
a period of nine months after completion of the sale. Under the
terms of the agreement, Signature will retain McMurdo’s
employees related to the marine electronics business after
closing the sale.
The purchase price for the assets is approximately
£3,117,000 (approximately $6,106,000 USD at
December 31, 2006), subject to certain adjustments, plus up
to an additional deferred payment of £1,500,000
FS-53
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
22.
|
Proposed acquisition of the assets of McMurdo Ltd.
(continued)
|
(approximately $2,938,000 USD at December 31,
2006) based on sales of certain products between
November 1, 2006 and October 31, 2007. The deferred
payment is determined on a threshold basis with a minimum
threshold, based on the invoiced value of sales during such
period and payable when the parties finalize a statement of the
sales. Upon signing the agreement, the Company paid
£250,000 (approximately $490,000 USD at December 31,
2006) of the purchase price to McMurdo. The balance is to
be paid upon closing. If the agreement is terminated or the sale
is not completed, under certain circumstances McMurdo will be
entitled to retain the £250,000 deposit. Under the terms of
the agreement, the Company will guarantee Signature’s
obligations for the deferred payment and Chemring Group Plc will
guarantee McMurdo’s obligations for retained liabilities
and obligations.
10.25% Senior Secured Debenture Financing:
On February 6, 2007, the Company entered into a securities
purchase agreement pursuant to which the Company sold a
10.25% senior secured debenture in the original principal
amount of $6,000,000 and a five-year warrant to purchase
699,600 shares of its common stock.
The debenture matures on February 6, 2010, but the Company
may, at its option, prepay the debenture in cash at any time by
paying a premium of 2% of the outstanding principal amount of
the debenture. The Company is obligated to make monthly payments
of principal plus accrued but unpaid interest (including default
interest, if any) beginning on September 4, 2007.
The debenture is not convertible by the holder. However, the
Company may, at its option but not obligation, decide to make
one or more monthly payments of principal and interest with
shares of the Company’s common stock instead of with cash.
The Company’s decision to make a monthly payment with cash
or with its shares, or a combination of both will be determined
on a monthly basis. Currently, the Company anticipates making
monthly payments with cash. If the Company chooses to make a
monthly payment with its shares, the shares will be issued at an
8% discount to the then current market price of the shares. If
an event of default or a change of control occurs, the holder
has the right to require the Company to redeem the debenture for
a cash amount equal to 110% of the outstanding principal plus
interest.
|
|
|
|
24.
|
Discontinued
Operations
|
In May 2007, the Company entered into a Stock Purchase Agreement
with Newcomb Communications, Inc. (“Newcomb”) to sell
100% of the issued and outstanding shares of stock of OuterLink
Corporation (“Outerlink”). OuterLink, which operated
in the Company’s GPS and Radio Communications business
segment, provides satellite-based mobile asset tracking and data
messaging systems used to manage the deployment of aircraft and
land vehicles. On July 2, 2007, the Company completed the
sale of OuterLink Consideration, which is subject to certain
adjustments based on OuterLink’s closing balance sheet,
initially consisted of a cash payment of $800,000 and a
promissory note of $200,000 which matures on December 31,
2007. In connection with the closing, the Company also executed
a one-year non-competition agreement with OuterLink.
Mr. Paul F. Newcomb, President of Newcomb Communications,
Inc. (“Newcomb”), was the founder and President of the
predecessor company to OuterLink, which the Company acquired in
January 2004.
In June 2007, in connection with the Company’s planned sale
of OuterLink, the Company entered into an amendment of the
Securities Purchase Agreement and the Registration Rights
Agreement between the Company and Imperium Master Fund, Ltd.
(“Imperium”) and Gemini Master Fund, Ltd.
(“Gemini,” and
FS-54
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
24.
|
Discontinued Operations (continued)
|
together with Imperium, the “Investors”) and received
a waiver letter from the Investors waiving certain of their
rights under the Subsidiary Guaranty executed by OuterLink in
favor of the Investors and the Security Agreement executed by
the Company and OuterLink in favor of the Investors
(collectively, the amendments and the waiver letter, the
“OuterLink Amendments”). Pursuant to the terms of the
OuterLink Amendments, the Investors consented to the sale of
OuterLink, waived all existing defaults, if any, under
Section 4.10(b) of the Securities Purchase Agreement,
released the outstanding shares of OuterLink owned by the
Company from the pledge and security interest granted to the
Investors, and released OuterLink from its obligations arising
under the Subsidiary Guaranty. As consideration, the Company
exchanged the 699,600 existing warrants for 841,000 newly issued
seven-year warrants with an exercise price of $1.701.
On April 19, 2004, the Company sold certain assets of its
Medical Systems segment’s medical services business
pursuant to an Asset Purchase Agreement dated April 8, 2004
by and between the Company and MedAire, Inc. Assets sold include
all of the tangible and intangible intellectual property
developed for the operation of the Medical Systems
segment’s medical services business, pharmaceutical
supplies and other inventory items, customer and supplier
contracts, computer software licenses, internet website and
domain name and mailing lists. The purchase price was
approximately $0.4 million.
As a result of the sale of OuterLink and the medical services
business, operations are included as part of the Company’s
discontinued operations for all periods presented. The following
discloses the operating losses from discontinued operations for
the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In thousands)
|
|
|
|
|
Revenue
|
|
$
|
2,570
|
|
|
$
|
2,276
|
|
|
$
|
2,180
|
|
|
Cost of sales
|
|
|
1,608
|
|
|
|
1,402
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
962
|
|
|
|
874
|
|
|
|
420
|
|
|
Selling, general and administrative expenses
|
|
|
1,181
|
|
|
|
1,850
|
|
|
|
3,097
|
|
|
Research and development expenses
|
|
|
1,375
|
|
|
|
1,331
|
|
|
|
727
|
|
|
Asset impairment
|
|
|
—
|
|
|
|
7,141
|
|
|
|
—
|
|
|
Other (income) expense
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,593
|
)
|
|
$
|
(9,272
|
)
|
|
$
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.10
|
)
|
The results above do not include any allocated or common
overhead expenses and do not reflect the gain on the sale of
OuterLink, which is expected to be approximately
$1.7 million, after taking into account potential future
purchase price adjustments. Given the Company’s current tax
status, the gain is not expected to result in a provision from
income taxes due to federal and state net operating losses and
carryforwards. This gain is expected to be recorded in the
Company’s actual results of operations in the three months
ended September 30, 2007.
FS-55
DIGITAL
ANGEL CORPORATION
Notes to
Consolidated Financial
Statements — (Continued)
(As
revised, See Notes 1 and 24)
|
|
|
|
24.
|
Discontinued Operations (continued)
|
The net assets of discontinued operations as of
December 31, 2006 and 2005 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2
|
|
|
$
|
100
|
|
|
Accounts receivable
|
|
|
956
|
|
|
|
296
|
|
|
Inventory
|
|
|
503
|
|
|
|
188
|
|
|
Other current assets
|
|
|
874
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,335
|
|
|
|
989
|
|
|
Property and equipment, net
|
|
|
274
|
|
|
|
158
|
|
|
Other assets, net
|
|
|
257
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
531
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,866
|
|
|
$
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
408
|
|
|
|
251
|
|
|
Accrued expenses and other current liabilities
|
|
|
270
|
|
|
|
436
|
|
|
Deferred revenue
|
|
|
1,770
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,448
|
|
|
|
1,989
|
|
|
Other long-term liabilities
|
|
|
1,060
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
3,508
|
|
|
$
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities from discontinued operations
|
|
$
|
642
|
|
|
$
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
FS-56
Schedule II-Valuation
and Qualifying Accounts
Allowance
for Doubtful Accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Balance, at beginning of year
|
|
$
|
194
|
|
|
$
|
212
|
|
|
$
|
205
|
|
|
Amount acquired through acquisition
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
Additions charged to income
|
|
|
18
|
|
|
|
25
|
|
|
|
16
|
|
|
Write-offs
|
|
|
(9
|
)
|
|
|
(53
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of year
|
|
$
|
203
|
|
|
$
|
194
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Excess and Obsolete Inventory (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Balance, at beginning of year
|
|
$
|
1,669
|
|
|
$
|
1,915
|
|
|
$
|
1,821
|
|
|
Additions charged to income
|
|
|
215
|
|
|
|
419
|
|
|
|
150
|
|
|
Write-offs
|
|
|
(873
|
)
|
|
|
(665
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of year
|
|
$
|
1,011
|
|
|
$
|
1,669
|
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance on Deferred Tax Assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Balance, at beginning of year
|
|
$
|
20,653
|
|
|
$
|
17,889
|
|
|
$
|
22,197
|
|
|
Amount acquired through acquisition
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
Additions charged to income
|
|
|
2,108
|
|
|
|
2,904
|
|
|
|
—
|
|
|
Other adjustments
|
|
|
—
|
|
|
|
(155
|
)
|
|
|
(4,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of year
|
|
$
|
22,761
|
|
|
$
|
20,653
|
|
|
$
|
17,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FS-57
EXECUTION
VERSION
AGREEMENT
AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of
August 8, 2007 (the “
Agreement
”), by and
among Digital Angel Corporation, a Delaware corporation (the
“
Company
”), Applied Digital Solutions, Inc., a
Delaware corporation (“
Acquiror
”) and Digital
Angel Acquisition Corp., a Delaware corporation
(“
MergerCo
”).
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of
the State of Delaware (the “
DGCL
”), Acquiror
and the Company will enter into a business combination
transaction pursuant to which MergerCo will merge with and into
the Company (the “
Merger
”) and whereby each
share of common stock, par value $.005 per share, of the Company
(the “
Company Common Stock
”) issued and
outstanding immediately prior to the Effective Time (other than
those shares owned directly or indirectly by Acquiror) will be
converted into the right to receive 1.4 shares of common
stock, par value $.01 per share of Acquiror, subject to
adjustment as hereafter provided (the “
Acquiror Common
Stock
”);
WHEREAS, Acquiror currently owns approximately 55.2% of the
issued and outstanding Company Common Stock;
WHEREAS, the Board of Directors of the Company (the
“
Company Board
”) has established a special
committee composed of disinterested members of the Company Board
(the “
Company Special Committee
”) to review and
evaluate the terms and conditions, and determine the
advisability, of a possible business combination with Acquiror;
WHEREAS, the Company Special Committee has negotiated the terms
and conditions of this Agreement on behalf of the Company and
has (i) determined that the Merger is advisable, fair to,
and in the best interests of, the Company and its stockholders
(other than Acquiror and Acquiror’s Affiliates) and
(ii) recommended the approval of this Agreement by the
Company Board;
WHEREAS, the Company Board has, based upon the recommendation of
the Company Special Committee, (i) determined that the
Merger is advisable, fair to, and in the best interests of, the
Company and its stockholders (other than Acquiror and
Acquiror’s Affiliates), (ii) approved and adopted this
Agreement and declared its advisability and approved the Merger
and the other transactions contemplated by this Agreement and
(iii) recommended the approval of this Agreement by the
stockholders of the Company;
WHEREAS, the Board of Directors of Acquiror (the
“
Acquiror Board
”) has established a special
committee composed of disinterested members of the Acquiror
Board (the “
Acquiror Special Committee
”) to
review and evaluate the terms and conditions, and determine the
advisability, of a possible business combination with the
Company;
WHEREAS, the Acquiror Special Committee has negotiated the terms
and conditions of this Agreement on behalf of Acquiror and has
(i) determined that the Merger is advisable, fair to, and
in the best interests of, Acquiror and its public stockholders
and (ii) recommended the approval of this Agreement by the
Acquiror Board;
WHEREAS, the Acquiror Board has, based upon the recommendation
of the Acquiror Special Committee, (i) determined that the
Merger is advisable, fair to, and in the best interests of,
Acquiror and its public stockholders, (ii) approved and
adopted this Agreement, the Merger and the other transactions
contemplated by this Agreement, (iii) approved the making
of an amendment to the Acquiror Certificate in order to increase
the number of authorized shares of Acquiror Common Stock and
(iv) recommended that the stockholders approve the issuance
of Acquiror Common Stock in connection with the Merger and the
amendment of the Acquiror Certificate;
A-1
WHEREAS, for federal income tax purposes, the Merger is intended
to qualify as a reorganization under the provisions of
Section 368(a) of the United States Internal Revenue Code
of 1986, as amended (the “
Code
”); and
WHEREAS, Acquiror, MergerCo and the Company desire to make
certain representations, warranties, covenants and agreements in
connection with the Merger and also to prescribe various
conditions to the Merger.
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained in this
Agreement, the parties agree as follows:
ARTICLE 1.
CERTAIN
DEFINITIONS; INTERPRETATION
SECTION 1.1.
Certain
Definitions.
The following terms are used in this
Agreement with the meanings set forth below:
“Acquiror” has the meaning assigned in the preamble to
this Agreement.
“Acquiror Acquisition Proposal” means an offer or
proposal regarding any of the following (other than the
transactions contemplated by this Agreement): (i) any
merger, reorganization, consolidation, share exchange,
recapitalization, business combination, liquidation,
dissolution, or other similar transaction involving, or, an
acquisition in any manner of, all or any significant portion of
the assets or any significant equity interest of, the Acquiror
or any of its material subsidiaries, in a single transaction or
series of related transactions which would reasonably be
expected to interfere with the completion of the Merger; or
(ii) any tender offer or exchange offer for any outstanding
shares of capital stock of the Acquiror or any of its material
subsidiaries or the filing of a registration statement under the
Securities Act in connection therewith.
“Acquiror Benefit Plans” has the meaning assigned in
Section 4.3(n).
“Acquiror Board” has the meaning assigned in the
preamble to this Agreement.
“Acquiror Certificate” means the Certificate of
Incorporation of the Acquiror, as amended.
“Acquiror Common Stock” has the meaning assigned in
the first recital of this Agreement.
“Acquiror Disclosure Schedule” has the meaning
assigned in Section 4.1.
“Acquiror ERISA Affiliate” has the meaning assigned in
Section 4.3(n).
“Acquiror Financial Statements” has the meaning
assigned in Section 4.3(g).
“Acquiror Insurance Policies” has the meaning assigned
in Section 4.3(q).
“Acquiror Preferred Stock” has the meaning assigned in
Section 4.3(e).
“Acquiror SEC Documents” has the meaning assigned in
Section 4.3(g).
“Acquiror Special Committee” has the meaning assigned
in the preamble to this Agreement.
“Acquiror Stock” has the meaning assigned in
Section 4.3(e).
“Acquiror Stockholders Meeting” has the meaning
assigned in Section 5.5(a).
“Acquiror Stock Options” has the meaning assigned in
Section 4.3(e).
“Acquiror Warrants” has the meaning assigned in
Section 4.3(e).
“Acquisition Proposal” has the meaning assigned in
Section 5.3(b).
“Affiliate,” means, with respect to any specified
person, any other person, directly or indirectly controlling,
controlled by or under common control with such specified
person. For purposes of this definition, “control”
when used in connection with any specified person means the
power to direct the management or
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policies of such person, directly or indirectly, whether through
the ownership of voting securities, by Contract or otherwise;
and the terms “controlling” and “controlled”
have correlative meanings to the foregoing.
“Agreement” means this Agreement, as amended or
modified from time to time in accordance with Section 8.2.
“Business Day” means any day on which the principal
offices of the SEC in Washington, D.C. are open to accept
filings or, in the case of determining a date when any payment
is due, any day on which banks are not required or authorized by
law to close in New York, New York.
“Certificate of Merger” has the meaning assigned in
Section 2.2.
“Closing” has the meaning assigned in Section 2.2.
“Closing Date” has the meaning assigned in
Section 2.2.
“Code” has the meaning assigned in the preamble to
this Agreement.
“Common Stock Exchange Ratio” has the meaning assigned
in Section 3.1(c).
“Company” has the meaning assigned in the preamble to
this Agreement.
“Company Affiliate” has the meaning assigned in
Section 5.14(a).
“Company Benefit Plans” has the meaning assigned in
Section 4.2(o).
“Company Board” has the meaning assigned in the
preamble to this Agreement.
“Company Bylaws” means the Bylaws of the Company, as
amended.
“Company Certificate” means the Certificate of
Incorporation of the Company, as amended.
“Company Common Stock” has the meaning assigned in the
first recital of this Agreement.
“Company Disclosure Schedule” has the meaning assigned
in Section 4.1.
“Company ERISA Affiliate” has the meaning assigned in
Section 4.2(o).
“Company Financial Statements” has the meaning
assigned in Section 4.2(g).
“Company Insurance Policies” has the meaning assigned
in Section 4.2(r).
“Company License Agreements” has the meaning assigned
in Section 4.2(q).
“Company Preferred Stock” has the meaning assigned in
Section 4.2(e).
“Company Reports” has the meaning assigned in
Section 4.2(j).
“Company Restricted Share Right” has the meaning
assigned in Section 3.3(c).
“Company SEC Documents” has the meaning assigned in
Section 4.2(g).
“Company Special Committee” has the meaning assigned
in the preamble to this Agreement.
“Company Stock” means, collectively, the Company
Common Stock and the Company Preferred Stock.
“Company Stockholders Meeting” has the meaning
assigned in Section 5.4.
“Company Stock Option” has the meaning assigned in
Section 3.3(a).
“Company Stock Plan” means the Medical Advisory
Systems, Inc. Amended and Restated Employee and Director Stock
Option Plan and the Amended and Restated Digital Angel
Corporation Transition Stock Option Plan.
“Company Warrant” has the meaning assigned in
Section 3.3(b).
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“Continuing Employees” means employees of the Company
or any Subsidiary immediately before the Effective Time who
continue as employees of Acquiror, the Surviving Corporation or
any other Affiliate of Acquiror.
“Contract” means, with respect to any person, any
agreement, indenture, undertaking, debt instrument, contract,
contractual obligation, lease or other commitment to which such
person or any of its Subsidiaries is a party or by which any of
them is bound or to which any of their properties is subject.
“Converted Company Restricted Share Right” has the
meaning assigned in Section 3.3(c).
“Converted Company Stock Option” has the meaning
assigned in Section 3.3(a).
“Converted Company Warrant” has the meaning assigned
in Section 3.3(b).
“Current Policy” has the meaning assigned in
Section 5.12(e).
“DGCL” has the meaning assigned in the first recital
of this Agreement.
“Effective Date” means the date on which the Effective
Time occurs.
“Effective Time” has the meaning assigned in
Section 2.2.
“Environmental Laws” means any federal, state or local
law, regulation, permit, or authorization relating to:
(1) the protection or restoration of the environment,
health or safety (in each case as relating to the environment)
or natural resources, or (2) the handling, use, presence,
disposal, release or threatened release of any Hazardous
Substance.
“ERISA” means the Employee Retirement Income Security
Act of 1974, as amended.
“Exchange Act” means the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
“Exchange Agent” has the meaning assigned in
Section 3.4(a).
“Exchange Fund” has the meaning assigned in
Section 3.4(a).
“GAAP” means United States generally accepted
accounting principles.
“Governmental Authority” means any court,
administrative agency or commission, self- regulatory
organization or other foreign, federal, state or local
governmental authority or instrumentality.
“Hazardous Substances” means any hazardous or toxic
substance or waste defined and regulated as such under
Environmental Laws, including the federal Comprehensive
Environmental Response, Compensation and Liability Act or the
federal Resource Conservation and Recovery Act, as well as
petroleum.
“HSR Act” means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
“Indemnified Parties” has the meaning assigned in
Section 5.12(a).
“IRS” means the Internal Revenue Service.
“Joint Proxy Statement/Prospectus” has the meaning
assigned in Section 5.6(a).
“Knowledge” means, (i) with respect to the
Company, the actual knowledge after reasonable inquiry of the
Company’s chief executive officer, general counsel or, as
of the date hereof only, the immediately preceding chief
executive officer, and, (ii) with respect to Acquiror, the
actual knowledge after reasonable inquiry of the Acquiror’s
chief executive officer or chief financial officer.
“Liens” means any charge, mortgage, pledge, security
interest, restriction, claim, lien, or encumbrance.
“Litigation” means all material litigation,
proceedings, investigations or controversies before any court,
arbitrator, mediator or Governmental Authority.
“Material Adverse Effect” means with respect to
Acquiror, the Company, or the Surviving Corporation,
respectively, any change, effect, event or occurrence that,
individually or in the aggregate, has a material
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adverse effect on the financial position, results of operations,
assets, properties, or business of Acquiror and its
subsidiaries, taken as a whole, the Company and its
subsidiaries, taken as a whole, or the Surviving Corporation and
its subsidiaries, taken as a whole, as the case may be; provided
that “Material Adverse Effect” shall not be deemed to
include the effects of (i) any change in the trading prices
of Company Common Stock or Acquiror Common Stock between the
date hereof and the Effective Time, (ii) any changes in
GAAP that affect generally entities such as the Company or the
Acquiror, (iii) general business or economic conditions or
from general changes or developments affecting the industries in
which the Company or the Acquiror operate in areas where the
Company or the Acquiror does business directly or through its
Subsidiaries, except to the extent that any such change has a
disproportionate impact on the Company or its Subsidiaries or
Acquiror or its Subsidiaries or (iv) the announcement of
this Agreement or the consummation of the transactions
contemplated hereby, including compliance with the covenants set
forth herein, or any action taken or omitted to be taken by
(x) the Company at the written request or with the prior
written consent of Acquiror or MergerCo or (y) Acquiror or
MergerCo at the written request or with the prior written
consent of the Company.
“Merger” has the meaning assigned in the first recital
of this Agreement.
“MergerCo” has the meaning assigned in the preamble to
this Agreement.
“Merger Consideration” has the meaning assigned in
Section 3.1(c).
“NASDAQ” means the NASDAQ Stock Market, LLC.
“Permitted Liens” means (a) statutory Liens for
current Taxes or other governmental charges not yet due and
payable or the amount or validity of which is being contested in
good faith by appropriate Proceedings, (b) Liens arising
under workers’ compensation, unemployment insurance, social
security, retirement and similar legislation, (c) other
statutory liens securing payments not yet due including builder,
mechanic, warehousemen, materialmen, contractor, landlord,
workmen, repairmen, and carrier Liens, (d) purchase money
Liens and Liens securing rental payments under capital lease
arrangements entered into in the ordinary course of business or
necessary to meet production or other requirements for the
fulfillment of customer contracts or orders, and
(e) mortgages, or deeds of trust, security interests or
other encumbrances on title related to indebtedness reflected on
the consolidated financial statements of the Company.
“Person” means and includes an individual, bank,
partnership, joint venture, limited liability company,
corporation, trust, unincorporated organization and government
or any department or agency thereof.
“Proceeding” means any claim, action, arbitration,
audit, contest, hearing, investigation, litigation or suit
(whether civil, criminal, administrative, investigative or
informal) commenced, brought, conducted, or heard by or before
or otherwise involving, any court, administrative agency, other
Governmental Authority or arbitrator.
“Recommendation” has the meaning assigned in
Section 5.4(b).
“Registration Statement” has the meaning assigned in
Section 5.6(a).
“Representatives” has the meaning assigned in
Section 5.3(a).
“Requisite Certificate Vote” means the affirmative
vote of holders of shares of the Acquiror Common Stock necessary
to effectuate the amendment of the Acquiror Certificate pursuant
to the laws of Delaware and the Acquiror Certificate.
“Requisite Stockholder Vote” means in the case of the
Company, the affirmative vote of holders of shares of the
Company Common Stock necessary to effectuate the Merger pursuant
to the laws of Delaware and the Company’s certificate of
incorporation, as well as the affirmative vote of the holders of
a majority of the shares of Company Common Stock not held by
Acquiror or Acquiror’s Affiliates, and in the case of
Acquiror, the affirmative vote of the holders of a majority of
the total shares of Acquiror Common Stock cast at the Acquiror
Stockholders Meeting.
“Rights” means, with respect to any person, securities
or obligations convertible into or exercisable or exchangeable
for, or giving any person any right to subscribe for, redeem or
acquire, or any options, calls or
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commitments relating to, or any stock appreciation right or
other instrument the value of which is determined in whole or in
part by reference to the market price or value of, shares of
capital stock of such person.
“SEC” means the Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
“Securities Laws” means, collectively, the Securities
Act, the Exchange Act, the Investment Advisors Act, the
Investment Company Act and any state securities and “blue
sky” laws.
“Series A Preferred Stock” has the meaning
assigned Section 4.2(e).
“Share” has the meaning assigned in
Section 3.1(c).
“Software” has the meaning assigned in
Section 4.2(q).
“Subsidiary” means (1) when referring to
subsidiaries of Acquiror: Computer Equity Corporation,
Government Telecommunications, Inc., Pacific Decision Sciences
Corporation, Perimeter Acquisition Corp., and Thermo Life Energy
Corp.; and (2) when referring to subsidiaries of the
Company: Digital Angel Holdings, LLC, Digital Angel Technology
Corporation, Digital Angel International, Inc., Signature
Industries Limited, DSD Holding A/S, Fearing Manufacturing Co.,
Inc. and Timely Technology Corporation. Notwithstanding the
foregoing, Acquiror’s Subsidiaries shall include VeriChip
Corporation and InfoTech USA, Inc. for purposes of
Sections 4.3(b), 4.3(f), 4.3(g), 4.3(h), 4.3(i), 4.3(j),
4.3(k), 5.2(a), 5.2(b), 5.9 and 5.10 hereof.
“Subsidiary SEC Documents” means, since
December 31, 2004, the reports, registrations, and
statements filed by VeriChip Corporation and InfoTech USA, Inc.
with the SEC under the Securities Act, or under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
including, but not limited to Annual Reports on
Form 10-K,
Form 10-Q,
Form 8-K,
registration statements, definitive proxy statements, and
information statements.
“Superior Proposal” has the meaning assigned in
Section 5.3(c).
“Surviving Corporation” has the meaning assigned in
Section 2.1.
“Tax Opinion” has the meaning assigned in
Section 6.1(f).
“Taxes” means all federal, state, local and foreign
taxes, levies or other assessments imposed by any taxing
authority, however denominated, including, without limitation,
all net income, gross income, gross receipts, sales, use, ad
valorem, goods and services, capital, transfer, franchise,
profits, license, withholding, payroll, employment, employer
health, excise, estimated, severance, stamp, occupation,
property or other taxes, and custom duties, together with any
interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority.
“Tax Returns” means, collectively, all returns,
declarations, reports, estimates, information returns and
statements required to be filed under federal, state, local or
any foreign tax laws.
“Trademarks” has the meaning assigned in
Section 4.2(q).
“Trade Secrets” has the meaning assigned in
Section 4.2(q).
“WARN” has the meaning assigned in Section 4.2(n).
SECTION 1.2.
Interpretation.
When
a reference is made in this Agreement to Recitals, Sections,
Annexes or Schedules, such reference shall be to a Recital or
Section of, or Annex or Schedule to, this Agreement unless
otherwise indicated. The headings contained in this Agreement
are for reference purposes only and are not part of this
Agreement. Whenever the words “include,”
“includes” or “including” are used in this
Agreement, they shall be deemed followed by the words
“without limitation.” No rule against the draftsperson
shall be applied in connection with the interpretation or
enforcement of this Agreement. Whenever this Agreement shall
require a party to take an action, such requirement shall be
deemed to constitute an undertaking by such party to cause its
Subsidiaries also to take such action.
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ARTICLE 2.
THE MERGER
SECTION 2.1.
The Merger.
Upon
the terms and subject to the conditions hereof, at the Effective
Time and in accordance with the provisions of the DGCL, MergerCo
shall be merged with and into the Company, whereupon the
separate corporate existence of MergerCo shall cease, and the
Company shall continue as the surviving corporation (the
“
Surviving Corporation
”). From and after the
Effective Time, the Surviving Corporation shall possess all the
rights, privileges, immunities, powers and franchises, of a
public as well as a private nature, of the Company and MergerCo
and be subject to all the liabilities, obligations and duties of
the Company and MergerCo, all as more fully described in the
DGCL.
SECTION 2.2.
Closing; Effective
Time.
Unless this Agreement has been terminated
pursuant to Article 7 and subject to the satisfaction or,
when permissible, waiver of the conditions set forth in
Article 6, the closing of the Merger (the
“
Closing
”) shall take place at the offices of
Holland & Knight LLP in Fort Lauderdale, Florida,
as soon as practicable but in no event later than
3:00 p.m. EST time on the fourth Business Day after
the date on which each of the conditions set forth in
Article 6 has been satisfied or waived or at such other
place, at such other time or on such other date as MergerCo and
the Company may mutually agree. The date on which the Closing
actually occurs is hereinafter referred to as the
“
Closing Date.
” At the Closing, MergerCo and
the Company shall cause a certificate of merger for the Merger
(the “
Certificate of Merger
”) to be executed
and filed with the Secretary of State of the State of Delaware
in the form required by and executed in accordance with the
applicable provisions of the DGCL. The Merger shall become
effective as of the date and time of such filing or such other
time after such filings as the parties hereto shall agree to in
the Certificate of Merger (the “
Effective
Time
”).
SECTION 2.3.
Certificate of
Incorporation.
At the Effective Time, the Company
Certificate shall continue as in effect immediately prior to the
Effective Time until thereafter amended in accordance with the
terms thereof and the DGCL.
SECTION 2.4.
Bylaws.
At the
Effective Time, the Company Bylaws shall be amended and restated
to be identical to the bylaws of MergerCo, as in effect
immediately prior to the Effective Time until thereafter amended
in accordance with the terms thereof, the certificate of
incorporation of the Surviving Corporation and the DGCL.
SECTION 2.5.
Directors and
Officers.
The directors and officers of the
Company immediately prior to the Effective Time shall become,
from and after the Effective Time, the directors and officers of
the Surviving Corporation, until their respective successors are
duly elected or appointed in accordance with the certificate of
incorporation and bylaws of the Surviving Corporation and the
DGCL, or until such person’s earlier death, resignation or
removal.
SECTION 2.6.
Further
Assurances.
At and after the Effective Time, the
officers and directors of the Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of
the Company or MergerCo, any deeds, bills of sale, assignments
or assurances and to take and do, in the name and on behalf of
the Company or MergerCo, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and
under any of the rights, properties or assets acquired or to be
acquired by the Surviving Corporation as a result of, or in
connection with, the Merger.
SECTION 2.7.
Effect of the
Merger.
From and after the Effective Time, the
effect of the Merger shall be as provided in the applicable
provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the
Company and MergerCo shall vest in the Surviving Corporation,
and all debts, liabilities, obligations, restrictions and duties
of each of the Company and MergerCo shall, by operation of law,
become the debts, liabilities, obligations, restrictions and
duties of the Surviving Corporation.
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ARTICLE 3.
CONVERSION
OF SHARES; STOCKHOLDER APPROVAL
SECTION 3.1.
Effect on Capital
Stock.
At the Effective Time, by virtue of the
Merger and without any action on the part of the Company,
Acquiror, MergerCo or the holders of any of the following
securities:
(a)
Capital Stock of MergerCo.
Each share
of common stock, par value $0.01 per share, of MergerCo issued
and outstanding immediately prior to the Effective Time shall be
canceled and shall be converted automatically into one share of
common stock of the Surviving Corporation. Such shares will
constitute the only outstanding shares of capital stock of the
Surviving Corporation.
(b)
Treasury Stock and Acquiror-Owned
Stock.
Each share of Company Common Stock or
right to acquire Company Common Stock that is owned or
controlled by the Company, Acquiror or any subsidiary of
Acquiror shall automatically be canceled, retired and shall
cease to exist without payment of any consideration thereof and
without any conversion thereof.
(c)
Conversion of Company Common
Stock.
Except as otherwise provided in
Section 3.1(b), each issued and outstanding share of
Company Common Stock (each, a “
Share
”) shall be
converted into and represent the right to receive, and will be
exchangeable for, 1.4 shares (the “
Common Stock
Exchange Ratio
”) of validly issued, fully paid and
nonassessable shares of Acquiror Common Stock, subject to
adjustment pursuant to Section 3.2 (the “
Merger
Consideration
”).
(d)
Appraisal Rights.
The parties hereto
agree that, in accordance with Section 262 of the DGCL, in
connection with the Merger no appraisal rights will be available
to holders of shares of the Company Common Stock.
SECTION 3.2.
Adjustment of Merger
Consideration.
If, after the date of this
Agreement, but prior to the Effective Time, the shares of
Acquiror Common Stock issued and outstanding shall, through a
reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar
change in the capitalization of Acquiror (regardless of the
method of effectuation of any of the foregoing, including by way
of a merger or otherwise), increase or decrease in number or be
changed into or exchanged for a different kind or number of
securities, then the applicable Merger Consideration shall be
appropriately adjusted to provide the holders of Company Stock
the same economic effect as contemplated by this Agreement prior
to such event.
SECTION 3.3.
Treatment of Options, Warrants
and Restricted Stock.
(a)
Options.
Each of the then outstanding
stock options, if any, to purchase shares of Company Common
Stock (each, a “
Company Stock Option
”) issued
by the Company pursuant to any Company Stock Plan, and any
non-plan options to acquire shares of Company Common Stock
issued by the Company pursuant to an option agreement or
otherwise issued by the Company, will, by virtue of the Merger,
and without any further action on the part of any holder
thereof, be converted into an option (a “
Converted
Company Stock Option
”) to purchase that number of
shares of Acquiror Common Stock determined by multiplying the
number of shares of Company Common Stock subject to such Company
Stock Option at the Effective Time by the Common Stock Exchange
Ratio, at an exercise price per share of Acquiror Common Stock
equal to the exercise price per share of such Company Stock
Option immediately prior to the Effective Time divided by the
Common Stock Exchange Ratio, rounded up to the nearest whole
cent. If the foregoing calculation results in a Converted
Company Stock Option being exercisable for a fraction of a share
of Acquiror Common Stock, then the number of shares of Acquiror
Common Stock subject to such option will be rounded up to the
nearest whole number of shares. The terms and conditions of each
Converted Company Stock Option will otherwise remain as set
forth in the Company Stock Option converted into such Converted
Company Stock Option. Notwithstanding anything herein to the
contrary, the adjustment provided for in this
Section 3.3(a) with respect to all options will be and is
intended to be effected in a manner that is consistent with
Section 424(a) of the Code and, to the extent applicable,
Q&A-18(d) of Notice
2005-1.
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(b)
Warrants.
Each of the then
outstanding warrants, if any, to purchase shares of Company
Common Stock (each, a “
Company Warrant
”) will,
by virtue of the Merger, and without any further action on the
part of any holder thereof, be converted into a warrant (a
“
Converted Company Warrant
”) to purchase that
number of shares of Acquiror Common Stock determined by
multiplying the number of shares of Company Common Stock subject
to such Company Warrant at the Effective Time by the Common
Stock Exchange Ratio, at an exercise price per share of Acquiror
Common Stock equal to the exercise price per share of such
Company Warrant immediately prior to the Effective Time divided
by the Common Stock Exchange Ratio, rounded up to the nearest
whole cent. If the foregoing calculation results in a Converted
Company Warrant being exercisable for a fraction of a share of
Acquiror Common Stock, then the number of shares of Acquiror
Common Stock subject to such warrant will be rounded up to the
nearest whole number of shares. The terms and conditions of each
Converted Company Warrant will otherwise remain as set forth in
the Company Warrant converted into such Converted Company
Warrant. Notwithstanding anything herein to the contrary, the
adjustment provided for in this Section 3.3(b) with respect
to all warrants will be and is intended to be effected in a
manner that is consistent with Section 424(a) of the Code
and, to the extent applicable, Q&A-18(d) of Notice
2005-1.
(c)
Restricted Stock.
Each right to
receive a share of restricted stock of the Company (each, a
“
Company Restricted Share Right
”), if any,
will, by virtue of the Merger, and without any further action on
the part of any holder thereof, be converted into a right to
receive that number of restricted shares of the Acquiror (the
“
Converted Company Restricted Share Right
”)
determined by multiplying the number of such Company Restricted
Share Rights by the Common Stock Exchange Ratio. Except as set
forth on Section 3.3(c) of the Company Disclosure Schedule,
the terms and restrictions applicable to each Converted Company
Restricted Share Right will otherwise remain as set forth in the
applicable restricted share agreement.
SECTION 3.4.
Payment for Company Stock.
(a)
Exchange Agent.
Not less than three
Business Days prior to the Closing Date, Acquiror shall
designate a bank or trust company reasonably acceptable to the
Company to act as exchange agent in connection with the Merger
(the “
Exchange Agent
”) for the purpose of
exchanging certificates that immediately prior to the Effective
Time represented shares of Company Stock and shares of Company
Common Stock represented by book-entry for the applicable Merger
Consideration. At or prior to the Effective Time, Acquiror shall
deposit with the Exchange Agent, for the benefit of the holders
of Company Stock, certificates or, at Acquiror’s option,
evidence of shares in book-entry form, representing shares of
Acquiror Common Stock in such denominations as the Exchange
Agent may reasonably specify. Such certificates (or evidence of
book-entry form, as the case may be) for shares of Acquiror
Common Stock so deposited, together with any dividends or
distributions with respect thereto, are hereinafter referred to
as the “
Exchange Fund.
”
(b)
Exchange.
(1) As soon as reasonably practicable after the Effective
Time, the Surviving Corporation shall cause to be mailed to each
record holder, as of the Effective Time, of shares of Company
Stock, (i) a letter of transmittal (which shall be in
customary form and shall specify that delivery shall be
effected, and risk of loss and title to the certificates shall
pass, only upon proper delivery of the certificates to the
Exchange Agent or, in the case of book-entry shares, upon
adherence to the procedures set forth in the letter of
transmittal) and (ii) instructions for use of the letter of
transmittal in effecting the surrender of the certificates or,
in the case of book-entry shares, the surrender of such shares,
for payment of the applicable Merger Consideration therefor.
(2) In effecting the payment and delivery of the applicable
Merger Consideration in respect of Shares entitled to the
applicable Merger Consideration pursuant to Section 3.1,
upon the surrender of such Shares (whether in certificate or
book-entry form), the Exchange Agent shall deliver the number of
whole shares of Acquiror Common Stock represented by such
holder’s properly surrendered certificates or book-entry
shares, as applicable, that such Shares are entitled to receive
as Merger
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Consideration in accordance with this Article 3. Upon such
delivery, such Shares so surrendered shall forthwith be canceled.
(3) If Acquiror Common Stock is to be remitted to a Person
other than that in which the certificate for Shares surrendered
for exchange is registered, it shall be a condition of such
delivery: (a) that the certificate so surrendered shall be
properly endorsed, with signature guaranteed or otherwise in
proper form for transfer, and (b) the Person requesting
such delivery shall pay to the Exchange Agent any transfer or
other taxes required by reason of the delivery to a Person,
other than that of the registered holder of the certificate
surrendered, or shall establish to the satisfaction of the
Exchange Agent that such Tax has been paid or is not applicable.
(4) Until surrendered in accordance with the provisions of
this Section 3.4, each certificate or book-entry share,
shall, after the Effective Time, represent for all purposes only
the right to receive upon such surrender, the applicable Merger
Consideration applicable thereto, without any interest thereon,
subject to any required withholding Taxes, the delivery of which
shall be deemed to be the satisfaction in full of all rights
pertaining to the shares of Company Stock exchanged in the
Merger.
(5) The stock transfer books of the Company shall be closed
immediately upon the Effective Time and there shall be no
further registration of transfers of shares of Company Stock
thereafter on the records of the Company. On or after the
Effective Time, any certificates or book-entry shares presented
to the Exchange Agent or the Surviving Corporation for any
reason shall be cancelled and exchanged into the applicable
Merger Consideration with respect to the shares of Company Stock
formerly represented thereby.
(c)
No Issuance of Fractional Shares.
No
certificate or scrip representing fractional Acquiror Common
Stock shall be issued upon the surrender of certificates or
book-entry shares formerly representing Company Stock or
otherwise in the Merger, and in lieu thereof, any fractional
Acquiror Common Stock shall be rounded up to the nearest whole
share of Acquiror Common Stock; provided that, prior to applying
the preceding sentence with respect to any holder of Company
Stock, all Company Stock held by such holder shall be
aggregated, taking into account all certificates and book- entry
shares formerly representing Company Stock delivered by such
holder and the aggregate number of Company Stock represented
thereby, and after giving effect to the exercise of any Company
Stock Options or Company Warrants to be exercised by such holder
in connection with the Closing.
(d)
Lost Certificates.
If any certificate
shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such certificate
to be lost, stolen or destroyed and, if required by Acquiror,
the posting by such Person of a bond in such reasonable amount
as Acquiror may direct as indemnity against any claim that may
be made against it with respect to such certificate, the
Exchange Agent will deliver in exchange for such lost, stolen or
destroyed certificate the applicable Merger Consideration with
respect to the Shares formerly represented thereby, pursuant to
this Agreement.
(e)
Distributions With Respect to Unexchanged
Shares.
No dividends or other distributions with
respect to shares of Acquiror Common Stock issuable with respect
to the shares of Company Stock shall be paid to the holder of
any unsurrendered certificates or book-entry shares until those
certificates or book-entry shares are surrendered as provided in
this Article 3. Upon surrender, there shall be issued
and/or
paid
to the holder of the shares of Acquiror Common Stock issued in
exchange therefor, without interest, (i) at the time of
surrender, the dividends or other distributions payable with
respect to those shares of Acquiror Common Stock with a record
date on or after the date of the Effective Time and a payment
date on or prior to the date of this surrender and not
previously paid and (ii) at the appropriate payment date,
the dividends or other distributions payable with respect to
those shares of Acquiror Common Stock with a record date on or
after the date of the Effective Time but with a payment date
subsequent to surrender.
(f)
Termination of Exchange Fund.
Any
portion of the Exchange Fund which remains undistributed to the
stockholders of the Company for eighteen months after the
Effective Time shall be delivered to
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Acquiror, upon demand, and any holders of Shares prior to the
Merger who have not theretofore complied with Article 3
shall thereafter look only to Acquiror for payment and delivery
of the Merger Consideration, for unexchanged Shares to which
such holders may be entitled.
(g)
No Liability.
None of Acquiror,
MergerCo, the Surviving Corporation or the Exchange Agent shall
be liable to any Person in respect of any portion of the
Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(h)
Withholding.
Acquiror and the
Exchange Agent shall be entitled to deduct and withhold from the
Merger Consideration otherwise payable pursuant to this
Agreement to any holder of Shares such amounts as it is required
to deduct and withhold with respect to the making of such
payment under the Code and the rules and regulations promulgated
thereunder, or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by Acquiror or the
Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of
the shares of Company Stock in respect of which such deduction
and withholding was made by Acquiror or the Exchange Agent.
ARTICLE 4.
REPRESENTATIONS
AND WARRANTIES OF
THE COMPANY,
ACQUIROR AND MERGERCO
SECTION 4.1.
Disclosure
Schedules.
On or prior to the date hereof, the
Company has delivered to Acquiror a schedule setting forth,
among other things, items the disclosure of which is necessary
or appropriate either: (i) in response to an express
informational requirement contained in or requested by a
provision hereof, or (ii) as an exception to one or more
representations or warranties contained in Section 4.2 or
to one or more of its covenants contained in Article 5 (the
“
Company Disclosure Schedule
”). On or prior to
the date hereof, Acquiror has delivered to the Company, a
schedule setting forth, among other things, items the disclosure
of which is necessary or appropriate either: (i) in
response to an express informational requirement contained in or
requested by a provision hereof, or (ii) as an exception to
one or more representations or warranties contained in
Section 4.3 or to one or more of its covenants contained in
Article 5 (the “
Acquiror Disclosure
Schedule
”). The mere inclusion of an item in either the
Company Disclosure Schedule or the Acquiror Disclosure Schedule
as an exception to a representation or warranty or covenant
shall not be deemed an admission by a party that such item (or
any undisclosed item or information of comparable or greater
significance) represents a material exception or fact, event or
circumstance with respect to the Company, Acquiror or MergerCo,
respectively.
SECTION 4.2.
Representations and Warranties
of the Company.
Except as set forth in the
Company Disclosure Schedule or as set forth in the Company SEC
Documents, the Company hereby represents and warrants to
Acquiror and MergerCo as follows:
(a)
Organization, Standing and
Authority.
The Company is a corporation, duly
organized, validly existing and in good standing under the laws
of the State of Delaware, and is duly qualified or licensed to
do business and is in good standing in all jurisdictions where
its ownership or leasing of property or assets or the conduct of
its business requires it to be so qualified or licensed, except
for those jurisdictions in which failure to do so has not, or
could not reasonably be expected to have a Material Adverse
Effect.
(b)
Corporate Power.
The Company and each
of its Subsidiaries has the corporate, partnership or other
business association power and authority to carry on its
business as it is now being conducted and to own or lease all
its properties and assets.
(c)
Corporate Authority and Action.
(1) The Company has the requisite corporate power and
authority necessary to authorize the execution and delivery of,
and performance of its obligations under, this Agreement and,
subject to receipt of the Requisite Stockholder Vote to approve
and adopt this Agreement and the Merger, to consummate the
transactions contemplated by this Agreement. The execution,
delivery and
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performance by the Company of this Agreement and the
consummation of the transactions contemplated hereby have been
duly authorized by the Company Board (with the approval of the
Company Special Committee). This Agreement has been duly
executed and delivered by the Company and is a valid and legally
binding obligation of the Company, enforceable in accordance
with its terms, subject only to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability related to or affecting creditors’
rights and to general principles of equity.
(2) The Company Special Committee has (i) determined
that the Merger is advisable, fair to and in the best interests
of Company’s stockholders (other than Acquiror and
Acquiror’s Affiliates) and (ii) recommended that the
Company Board approve this Agreement.
(3) The Company Board, based on the recommendation of the
Company Special Committee, has (i) determined that the
Merger is advisable, fair to and in the best interests of
Company’s stockholders, (ii) approved this Agreement
and (iii) recommended that the stockholders of the Company
adopt this Agreement and approve the Merger.
(d)
Regulatory Filings; Consents; No Defaults.
(1) No consents, approvals, orders or authorizations of, or
filings, registrations, declarations or qualifications with, any
Governmental Authority are required to be made or obtained by
the Company in connection with the execution, delivery or
performance by the Company of this Agreement, or to consummate
the Merger, except for: (A) those required under the HSR
Act, if any; (B) the filing and declaration of
effectiveness of the Registration Statement and the Joint Proxy
Statement/Prospectus and compliance with the Exchange or
Securities Act; and (C) the filing of Certificate of Merger
with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business. As of
the date hereof, the Company has no Knowledge of any reason why
the approvals of all Governmental Authorities necessary to
permit consummation of the transactions contemplated by this
Agreement will not be received.
(2) Subject to the Requisite Stockholder Vote of the
Company, no consent by or approval or authorization of or notice
to any other Person (other than a Governmental Authority) is
required, whether under any material license or other material
Contract or otherwise.
(3) Subject to the Requisite Stockholder Vote of the
Company, the receipt of the approvals and consents referred to
in Sections 4.2(d)(1) and 4.2(d)(2), the expiration of
applicable waiting periods and the making of required filings
under Securities Laws, the execution, delivery and performance
of this Agreement and the consummation of the transactions
contemplated hereby do not and will not: (A) constitute a
breach or violation of, or a default under, or give rise to any
Lien, any acceleration of remedies, any right of termination
(with or without the giving of notice, passage of time or both)
or any put or call right under, any law, rule or regulation or
any judgment, decree, order, governmental or nongovernmental
permit or license, or Contract of the Company or of any of its
Subsidiaries or to which the Company or any of its Subsidiaries
or its or their properties is subject or bound,
(B) constitute a breach or violation of, or a default
under, the Company Certificate or the Company Bylaws or similar
governing documents of any of its Subsidiaries, or
(C) require any consent or approval under any such law,
rule, regulation, judgment, decree, order, governmental or
nongovernmental permit or license or Contract, except, in the
case of clauses (A), (B) and (C), for any such conflict,
violation, breach, default, loss, right, consent or approval or
other occurrence which would not, or would not reasonably be
expected to, individually or in the aggregate, have a Material
Adverse Effect.
(e)
Company Stock.
The authorized capital
stock of the Company consists of:
(i) 95,000,000 shares of Company Common Stock,
(ii) 900,000 shares of undesignated preferred stock,
par value $1.75 per share, and (iii) 100,000 shares of
Series A Preferred Stock, par value $1.75 per share (the
“
Series A Preferred Stock
”) (the
undesignated and Series A Preferred Stock are collectively
referred to herein as the
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“
Company Preferred Stock
”). As of
August 7, 2007, (a) 44,641,388 shares of Company
Common Stock were issued and outstanding, (b) no shares of
Company Preferred Stock were issued and outstanding,
(c) 18,195,312 shares of Company Common Stock were
reserved for issuance under the Company Stock Plans,
(d) 1,500,000 shares of Company Common Stock were
reserved for issuance under stock options granted outside of the
Company Stock Plans, (e) 1,370,763 shares of Company
Common Stock were reserved for issuance under Company Warrants,
and (f) 378,100 shares of Company Common Stock were
held in treasury. The outstanding shares of Company Common Stock
have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and subject to no
preemptive rights (and were not issued in violation of any
subscriptive or preemptive rights). As of the date hereof, other
than the Company Stock Options and the Company Warrants, there
are no shares of Company Common Stock authorized and reserved
for issuance, the Company does not have any Rights issued or
outstanding with respect to Company Stock, and the Company does
not have any commitment to authorize, issue or sell any Company
Stock or Rights, except pursuant to this Agreement.
Section 4.2(e) of the Company Disclosure Schedule sets
forth a list of the holders of outstanding Company Stock Options
and Company Warrants, the date that each such Company Stock
Option or Company Warrant was granted, the number of shares of
Company Common Stock subject to each such Company Stock Option
or Company Warrant, the vesting schedule and expiration date of
each such Company Stock Option or Company Warrant and the price
at which each such Company Stock Option or Company Warrant may
be exercised.
(f)
Subsidiaries.
Set forth in
Section 4.2(f) of the Company Disclosure Schedule is a list
of all of the Company’s direct and indirect subsidiaries,
including the states or countries in which such subsidiaries are
organized, a brief description of such subsidiaries’
principal activities, and if any of such subsidiaries is not
wholly-owned by the Company or one of its subsidiaries, the
percentage owned by the Company or any such subsidiary and the
names and percentage ownership by any other Person. No equity
securities of any of the Company’s subsidiaries are or may
become required to be issued, transferred or otherwise disposed
of (other than to the Company or a wholly- owned subsidiary of
the Company) by reason of any Rights with respect thereto. There
are no Contracts by which any of the Company’s Subsidiaries
is or may be bound to sell or otherwise issue any shares of its
capital stock, and there are no Contracts relating to the rights
or obligations of the Company to vote or to dispose of such
shares. All of the shares of capital stock of each of the
Company’s Subsidiaries are fully paid and nonassessable and
subject to no subscriptive or preemptive rights or Rights and
are owned by the Company or a Company subsidiary free and clear
of any Liens. Each of the Company’s Subsidiaries has been
duly organized, is validly existing and in good standing under
the laws of the jurisdiction in which it is organized and is
duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified except
where the failure to do so has not, or could not reasonably be
expected to have a Material Adverse Effect. The Company and its
Subsidiaries have respected all corporate formalities of, and
the Company is not liable for the debts and obligations of its
Subsidiaries.
(g)
SEC Documents, Financial Statements.
(1) Since December 31, 2004, the Company has filed all
reports, registrations, and statements it was required to file
with the SEC under the Securities Act, or under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
including, but not limited to the Company’s Annual Reports
on
Form 10-K,
Forms 10-Q,
Form 8-K,
registration statements, definitive proxy statements, and
information statements (collectively, the “
Company SEC
Documents
”). The Company has provided or made available
via EDGAR to Acquiror copies of the Company SEC Documents, each
in the form (including exhibits and any amendments thereto)
filed with the SEC (or, if not so filed, in the form used or
circulated). As of their respective dates (and without giving
effect to any amendments or modifications filed after the date
of this Agreement) each of the Company SEC Documents, including
the financial statements, exhibits and schedules thereto, filed
or circulated prior to the date hereof complied (and each of the
Company SEC Documents filed prior to the Merger will comply) as
to form with applicable Securities Laws and did not (or in the
case of reports, statements, or circulars filed after the date
of this Agreement, will not) contain any untrue statement of a
material
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fact or omit to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make
the statements made therein, in light of the circumstances under
which they were made, not misleading.
(2) Each of the Company’s consolidated statements of
financial condition or balance sheets included in or
incorporated by reference into the Company SEC Documents,
including the related notes and schedules, fairly presented (or,
in the case of Company SEC Documents filed after the date of
this Agreement, will fairly present) the consolidated financial
condition of the Company and its Subsidiaries as of the date of
such statement of financial condition or balance sheet and each
of the consolidated statements of income, cash flows and changes
in stockholders’ equity included in or incorporated by
reference into Company SEC Documents, including any related
notes and schedules (collectively, the foregoing financial
statements and related notes and schedules are referred to as
the “
Company Financial Statements
”), fairly
presented (or, in the case of Company SEC Documents filed prior
to the Merger, will fairly present) the consolidated results of
operations, cash flows and stockholders’ equity, as the
case may be, of the Company and its Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements,
to normal year-end audit adjustments), in each case in
accordance with GAAP consistently applied during the periods
involved (except as may be noted therein and except that such
unaudited statements include no notes).
(3) Except as disclosed in the Company Financial
Statements, none of the Company or any of its Subsidiaries has
any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise) required by GAAP to be set
forth on a consolidated balance sheet of the Company and its
consolidated subsidiaries or in the notes thereto, other than
liabilities or obligations incurred in the ordinary course of
business consistent with past practice since the date of the
most recent financial statements included in the Company SEC
Documents.
(h)
Absence of Certain Changes.
Since
December 31, 2006, the business of the Company and its
Subsidiaries has been conducted in the ordinary and usual
course, consistent with past practice, and there has not been:
(1) any event, occurrence, development or state of
circumstances or facts which has had or is reasonably likely to
have a Material Adverse Effect on the Company and any of its
Subsidiaries;
(2) any amendment of any term of any outstanding security
of the Company or any of its Subsidiaries or to the Company or
any of its Subsidiaries’ certificate of incorporation or
bylaws (or similar governing documents);
(3) any (A) incurrence, assumption or guarantee by the
Company or any of its Subsidiaries of any indebtedness for
borrowed money, or (B) assumption, guarantee, endorsement
or otherwise by the Company of any obligations of any other
Person, in each case, other than in the ordinary and usual
course of business consistent with past practices;
(4) any creation or assumption by the Company or any of its
Subsidiaries of any Lien on any material asset other than in the
ordinary and usual course of business consistent with past
practices, other than a Permitted Lien;
(5) prior to or on the date hereof, any making of any loan
by the Company and any of its Subsidiaries in excess of
$100,000, or aggregate loans in excess of $250,000, advance or
capital contributions to or investment in any Person, in each
case, other than in the ordinary and usual course of business
consistent with past practices;
(6) any material change in any accounting policies or
practices by the Company or any of its Subsidiaries except as
required by GAAP; or
(7) any (A) employment, deferred compensation,
severance, retirement or other similar agreement entered into
with any director, officer, consultant, partner or employee of
the Company or any of its Subsidiaries (or any amendment to any
such existing agreement), (B) grant or agree to grant any
severance or termination pay to any director, officer,
consultant, partner or employee of the
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Company or any of its Subsidiaries, or (C) change in
compensation or other benefits payable to any director, officer,
consultant, partner or employee of the Company or any of its
Subsidiaries, except, in each case, in the ordinary course of
business, or as required by Contract or applicable law with
respect to employees of the Company or any of its Subsidiaries.
(i)
Contracts.
(1) Set forth on Section 4.2(i) of the Company
Disclosure Schedule is a listing of each of the following
material executory Contracts to which either the Company or any
of its Subsidiaries is a party, or by which any of them is bound
or to which any of their properties is subject:
(A) any lease of real property;
(B) any partnership, joint venture or other similar
agreement or arrangement, or any options or rights to acquire
from any Person any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or
voting securities of such Person, in each case, entered into
other than in the ordinary course of business;
(C) any agreement relating to the acquisition or
disposition of any business (whether by merger, sale of stock,
sale of assets or otherwise);
(D) any indenture, mortgage, promissory note, loan
agreement, guarantee or other agreement or commitment,
outstanding as of the date hereof, for the borrowing of money by
the Company or one of its Subsidiaries (other than inter-company
obligations) or the deferred purchase price of property in
excess of $100,000 (in either case, whether incurred, assumed,
guaranteed or secured by any asset);
(E) any agreement in force as of the date hereof that
creates future payment obligations in excess of $100,000 in the
aggregate and which by its terms does not terminate or is not
terminable without penalty upon notice of 90 days or less;
(F) any license, franchise or similar agreement material to
the Company or any of its Subsidiaries or any agreement relating
to any trade name or intellectual property right that is
material to the Company or any of its Subsidiaries on a
consolidated basis;
(G) any exclusive dealing agreement or any agreement that
limits the freedom of the Company or any of its Subsidiaries to
compete in any line of business or with any Person or in any
area or that would so limit their freedom after the Effective
Date;
(H) any compensation, employment, severance, supplemental
retirement or other similar agreement or arrangement with any
employee or former employee of, or independent contractor with
respect to, the Company or any of its Subsidiaries in excess of
$50,000;
(I) any severance, separation, change of control or other
payments or any other “change of control” provision
under any and all severance, separation, change of control,
retention, and salary continuation plans, programs, agreements
or arrangements of the Company, in connection with the
consummation of the Merger (other than the acceleration of any
vesting of Company Stock Options); and
(J) any other Contract that is a “material
contract” as defined in Item 601(b)(10) of SEC
Regulation S-K
and that has not been filed prior to the date hereof as an
exhibit to the Company’s SEC Documents.
(2) Each Contract that has been, or is required to be, set
forth in Section 4.2(i) of the Company Disclosure Schedule
is a valid and binding agreement of the Company or one or more
of its Subsidiaries, as the case may be, and is in full force
and effect, and the Company or its Subsidiaries that are parties
thereto are not in default or breach in any material respect
under the terms of any such Contract.
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(3) Neither the Company nor any of its Subsidiaries is a
party to or is bound by any Contract that would prevent,
materially delay or materially impede the Company’s ability
to consummate the Merger or the other transactions contemplated
by this Agreement.
(j)
Compliance with Laws.
Each of the
Company and its Subsidiaries:
(1) is in compliance in all material respects with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable to the conduct of its businesses or to the employees
conducting such businesses;
(2) has all material permits, licenses, authorizations,
orders and approvals of, and has made all filings, applications
and registrations with, all Governmental Authorities that are
required in order to permit them to own or lease their
properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and
are current and, to the Company’s Knowledge, no suspension
or cancellation of any of them is threatened or is reasonably
likely and all such filings, applications and registrations are
current;
(3) has received, since January 1, 2005, no written
notification or communication (or, to the Knowledge of the
Company, any other communication) from any Governmental
Authority (A) asserting non-compliance with any of the
statutes, regulations, rules or ordinances of such Governmental
Authority, (B) threatening any material penalty or to
revoke any license, franchise, permit, or governmental
authorization, (C) requiring any of them (including any of
the Company’s or its Subsidiaries’ directors or
controlling persons) to enter into a cease and desist order,
agreement, or memorandum of understanding (or requiring the
board of directors thereof to adopt any resolution or policy),
or (D) restricting or disqualifying their activities;
(4) is not aware of any pending or threatened
investigation, review or disciplinary Proceedings by any
Governmental Authority against the Company, any of its
Subsidiaries or any officer, director or employee thereof;
(5) in the conduct of its business with respect to employee
benefit plans subject to Title I of ERISA, has not
(A) breached any applicable fiduciary duty under
Part 4 of Title I of ERISA which would subject it to
material liability under Sections 405 or 409 of ERISA or
(B) engaged in a “prohibited transaction” within
the meaning of Section 406 of ERISA or Section 4975(c)
of the Code which would subject it to material liability or
Taxes under Sections 409 or 502(i) of ERISA or
Section 4975(a) of the Code;
(6) since January 1, 2005, has timely filed all
material reports, registrations and statements, together with
any amendments required to be made with respect thereto, that
were required to be filed under any applicable law, regulation
or rule, with any applicable Governmental Authority (the
“
Company Reports
”). As of their respective
dates, the Company Reports complied with the applicable
statutes, rules, regulations and orders enforced or promulgated
by the regulatory authority with which they were filed.
(k)
Properties.
Except as may be
reflected in the Company’s Financial Statements dated
before the date hereof, the Company and its Subsidiaries have
good and marketable title, free and clear of all Liens (other
than Permitted Liens) to all of the material properties and
assets, tangible or intangible, reflected in such financial
statements as being owned by the Company and its Subsidiaries as
of the dates thereof. To the Company’s Knowledge, all
buildings and all the material fixtures, equipment, and other
property and assets held under leases or subleases by any of the
Company and its Subsidiaries are held under valid leases or
subleases, enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors’ rights generally and to general
principles of equity). Set forth in Section 4.2(k) of the
Company Disclosure Schedule is a list of any and all real estate
owned or leased by it or a Company Subsidiary as of the date
hereof. Except to the extent such securities are pledged in the
ordinary course of business consistent with prudent business
practices to secure obligations of each of the Company or any of
its Subsidiaries, each of the Company and its Subsidiaries has
good and marketable title to all securities held
A-16
by it, free and clear of any Lien. Such securities are valued on
the books of the Company or its Subsidiaries in accordance with
GAAP.
(l)
Taxes.
(1) The Company and each of its Subsidiaries have timely
filed in a complete and correct manner all Tax Returns that they
were required to file, other than any Tax Returns the failure to
complete correctly or to file would not, individually or in the
aggregate, have a Material Adverse Effect. The Company and each
of its Subsidiaries have paid all Taxes due, other than Taxes
adequate reserves for which have been made in the Company’s
financial statements and Taxes the failure to pay would not,
individually or in the aggregate, have a Material Adverse Effect.
(2) There are no claims or assessments pending against the
Company or any of its Subsidiaries for any alleged deficiency in
any Tax, and neither the Company nor any of its Subsidiaries has
been notified in writing of any proposed Tax claims or
assessments against the Company or any of its Subsidiaries
(other than, in each case, claims or assessments for which
adequate reserves in the Company financial statements have been
established and claims or assessments which would not,
individually or in the aggregate, have a Material Adverse
Effect).
(3) There are no Liens on any of the assets or properties
of the Company or any of its Subsidiaries that arose in
connection with any failure (or alleged failure) to pay any Tax,
except for statutory liens for current Taxes not yet due and
payable (and except for Liens which would not, individually or
in the aggregate, have a Material Adverse Effect).
(4) Neither the Company nor any of its Subsidiaries
(x) is bound by any Tax allocation or Tax sharing agreement
with a Person other than Acquiror which applies to
U.S. federal or state income Taxes, or (y) has any
liabilities under any Tax allocation or Tax sharing agreement
(except for any liabilities which would not, individually or in
the aggregate, have a Material Adverse Effect).
(5) Neither the Company nor any of its Subsidiaries has
participated in a listed transaction within the meaning of
Treasury Regulations
Section 1.6011-4(b)(2).
(6) No currently effective waivers of statutes of
limitations (excluding such statutes that relate to any years
currently under examination by the IRS) have been given by or
requested with respect to any Taxes of the Company or any of its
Subsidiaries.
(7) Each of the Company and its Subsidiaries has paid or
made provision for the payment of all Taxes that have been
incurred or are due or claimed to be due from it by federal,
state, foreign or local taxing authorities other than Taxes that
are not yet delinquent or are being contested in good faith and
have not been finally determined.
(8) The federal and state income Tax Returns of the Company
and its Subsidiaries have been examined by the IRS or the
relevant state taxing authorities, as the case may be, through
December 31, 2002. The federal income Tax Returns of the
Company and its Subsidiaries for the fiscal year ended
December 31, 2001 and for all fiscal years prior thereto
are, for purposes of routine audit by the IRS, closed because of
the statute of limitations, and no claims for additional Taxes
for such fiscal years are pending. There are no audits by, or
disputes pending between the Company or any of its Subsidiaries
and, any taxing authority of which the Company or any of its
Subsidiaries has received written notice, or claims asserted in
writing by any taxing authority for, Taxes or assessments upon
the Company or any of its Subsidiaries. In addition, other than
either (i) amounts the failure to withhold or pay, or
(ii) Tax Returns the failure to complete correctly or to
file, would not individually or in the aggregate have a Material
Adverse Effect, (A) proper and accurate amounts have been
withheld by the Company and its Subsidiaries from their
employees for all prior periods in compliance with the Tax
withholding provisions of applicable federal, state and local
laws and (B) federal, state and local Tax Returns that are
complete and accurate have been filed by the Company and its
Subsidiaries for all periods for which Tax Returns were due with
respect to income
A-17
Tax withholding, Social Security and unemployment Taxes. The
amounts shown on such federal, state or local Tax Returns to be
due and payable have been paid in full.
(9) Neither the Company nor any of its Subsidiaries has
been required to include in income any adjustment pursuant to
Section 481 of the Code or otherwise by reason of a
voluntary change in accounting method initiated by the Company
or any of its Subsidiaries, and the IRS has not initiated or
proposed any such adjustment or change in accounting method.
(m)
Litigation.
There is no Litigation
before any court, arbitrator, mediator or Governmental Authority
that has been or would reasonably be expected to be material to
the Company and its Subsidiaries taken as a whole pending
against the Company or any of its Subsidiaries, and, to the
Company’s Knowledge, no such Litigation has been threatened.
(n)
Employees; Labor Matters.
(1) Each of the Company and its Subsidiaries is in
compliance in all material respects with all currently
applicable laws respecting employment and employment practices,
terms and conditions of employment and wages and hours,
including any such laws respecting employment discrimination,
harassment, disability rights or benefits, equal opportunity,
plant closure issues, affirmative action, workers’
compensation, employee benefits, severance payments, labor
relations, employee leave issues, wage and hour standards,
occupational safety and health requirements and unemployment
insurance and related matters. None of the Company or any of its
Subsidiaries is engaged in any unfair labor practice and there
is no unfair labor practice complaint pending or threatened
against the Company or any of its Subsidiaries before the
National Labor Relations Board. There are no charges or
complaints against the Company or any of its Subsidiaries
pending or threatened in writing alleging sexual or other
harassment, or other discrimination or improper employment
practices, by the Company, any of its Subsidiaries or by any of
their employees, agents or representatives.
(2) Neither the Company nor any of its Subsidiaries is a
party to, or is bound by, any collective bargaining agreement,
Contract or other agreement or understanding with any labor
union or organization, nor has it agreed to recognize any union
or other collective bargaining unit, nor has any union or other
collective bargaining unit been certified, or is seeking
certification, as representing any of the employees of the
Company or any of its Subsidiaries.
(3) The Company and its Subsidiaries are and have been in
substantial compliance with all notice and other requirements
under the Worker Adjustment and Retaining Notification
(“
WARN
”) or similar state statute. None of the
employees of the Company or its Subsidiaries have suffered an
“employment loss” (as defined in WARN) during the 90-
day period prior to the execution of this Agreement.
(o)
Employee Benefit Plans.
(1) Set forth in Section 4.2(o) of the Company
Disclosure Schedule is a complete list of each employee or
director benefit plan, arrangement or agreement, whether or not
written, including without limitation any employee welfare
benefit plan within the meaning of Section 3(1) of ERISA,
any employee pension benefit plan within the meaning of
Section 3(2) of ERISA (whether or not such plan is subject
to ERISA) and any bonus, incentive, deferred compensation,
vacation, stock purchase, stock option, severance, employment,
change of control or material fringe benefit plan, program or
agreement that is sponsored, maintained or contributed to by the
Company or any of its Subsidiaries, or with respect to which the
Company has or reasonably could incur any liability, for the
benefit of current or former employees or directors or their
beneficiaries (the “
Company Benefit Plans
”).
(2) The Company has heretofore made available to Acquiror
(A) true and complete copies of each of the Company Benefit
Plans (or written explanations of any unwritten Company Benefit
Plans) as in effect on the date hereof and amendments thereto,
including summary plan descriptions; (B) the three most
recent Annual Reports (Form 5500 Series) and accompanying
schedules, if any;
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and (C) the most recent determination or opinion letter
from the IRS (if applicable) for such Company Benefit Plan.
(3) With respect to each Company Benefit Plan, the Company
and its Subsidiaries have complied, and are now in compliance,
in all material respects with all provisions of ERISA, the Code
and all laws and regulations applicable to such Company Benefit
Plans and each Company Benefit Plan has been administered in all
material respects in accordance with its terms. The IRS has
issued a favorable determination or opinion letter with respect
to each Company Benefit Plan that is intended to be a
“qualified plan” within the meaning of
Section 401(a) of the Code that has not been revoked, and,
to the Knowledge of the Company, no circumstances exist and no
events have occurred that could reasonably be expected to
adversely affect the qualified status of any such plan or the
related trust (except for changes in applicable law for which
the remedial amendment period has not yet expired). No Company
Benefit Plan is intended to meet the requirements of Code
Section 501(c)(9).
(4) All contributions required to be made by the Company to
any Company Benefit Plan by applicable law or regulation or by
any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies
funding any Plan, for any period through the date hereof have
been timely made or paid in full or, to the extent not required
to be made or paid on or before the date hereof, have been
reflected on the Company Financial Statements. Each Company
Benefit Plan, if any, that is an employee welfare benefit plan
under Section 3(1) of ERISA is either (A) funded
through an insurance company Contract and is not a “welfare
benefit fund” within the meaning of Section 419 of the
Code or (B) unfunded.
(5) There is no pending or, to the Knowledge of the
Company, threatened Litigation relating to the Company Benefit
Plans. Neither the Company nor any of its Subsidiaries has
engaged in a transaction with respect to any Company Benefit
Plan that would subject the Company or any of its Subsidiaries
to a material tax or penalty imposed by either Section 4975
of the Code or Section 502(i) of ERISA.
(6) No Company Benefit Plan is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the
Code, and neither the Company nor any of its Subsidiaries has
contributed or been obligated to contribute to a
“multiemployer plan” (as defined in Section 3(37)
of ERISA) or a plan that has two or more contributing, but
unrelated, sponsors and that is subject to Title IV of
ERISA at any time on or after December 31, 1994. No
liability under Subtitle C or D of Title IV of ERISA has
been or is reasonably expected to be incurred by the Company or
any of its Subsidiaries with respect to any ongoing, frozen or
terminated “single-employer plan,” within the meaning
of Section 4001 of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which
is considered one employer with the Company under
Section 4001 of ERISA or Section 414 of the Code (a
“
Company ERISA Affiliate
”). No notice of a
“reportable event,” within the meaning of
Section 4043 of ERISA, for which the
30-day
reporting requirement has not been waived has been required to
be filed for any Company Benefit Plan or, to the Knowledge of
the Company, by any Company ERISA Affiliate. Neither the Company
nor any of its Subsidiaries or Company ERISA Affiliates has
provided, or is required to provide, security to any Company
Benefit Plan or any single-employer plan of a Company ERISA
Affiliate.
(7) Neither the Company nor any of its Subsidiaries has any
obligation for retiree health, life or other welfare benefits,
except for benefits and coverage required by applicable law,
including, without limitation, Section 4980B of the Code
and Part 6 of Title I of ERISA. There are no
restrictions on the rights of the Company or any of its
Subsidiaries to amend or terminate any such plan (other than
reasonable and customary advance notice and consent requirements
and administrative expenses) without incurring any material
liability thereunder.
(8) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby
(either standing alone or in conjunction with any other event)
will (A) except as to the Persons listed in the Company
Disclosure Schedule, result in any payment
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(including severance, unemployment compensation, “excess
parachute” (within the meaning of Section 4999 of the
Code), forgiveness of indebtedness or otherwise) becoming due to
any director or any employee of the Company or any of its
Subsidiaries under any Company Benefit Plan, (B) increase
any benefits otherwise payable under any Company Benefit Plan,
(C) result in any acceleration of the time of payment or
vesting of any such benefit, or (D) affect in any way the
ability to amend, terminate, merge or administer any Company
Benefit Plan.
(9) The Company does not maintain a Company Benefit Plan or
other arrangement that is subject to Section 409A of the
Code, and each Company Benefit Plan that is a nonqualified
deferred compensation plan subject to Section 409A of the
Code has been operated and administered in good faith compliance
with Section 409A of the Code since January 1, 2005.
(10) The Company has not granted any awards intended to
constitute performance-based compensation not subject to the
deduction limit under Section 162(m) of the Code.
(p)
Environmental Matters.
The Company
and its Subsidiaries have complied in all material respects with
applicable Environmental Laws; no property (including buildings
and any other structures) currently owned or operated by the
Company or any of its Subsidiaries or in which the Company or
any of its Subsidiaries (whether as fiduciary or otherwise) has
a Lien, is being or, to the Company’s Knowledge, has been
contaminated with, or has had any release of, any Hazardous
Substance in such form or substance so as to create any material
liability for the Company or any of its Subsidiaries; the
Company and any of its Subsidiaries are not subject to material
liability for any Hazardous Substance disposal or contamination
on any other third-party property; within the last six years,
the Company and any of its Subsidiaries have not received any
written notice, demand letter, claim or request for information
alleging any violation of, or liability of the Company or any of
its Subsidiaries under, any Environmental Law; the Company and
any of its Subsidiaries are not subject to any written order,
decree, injunction or other agreement with any Governmental
Authority or any third party relating to any Environmental Law;
the Company and any of its Subsidiaries are not aware of or do
not have any Knowledge of any facts that could lead to liability
for handling or disposal of Hazardous Substances involving the
Company or any of its Subsidiaries, any currently owned or
operated property (whether as fiduciary or otherwise), or any
reasonably likely liability related to any Lien held by the
Company or any of its Subsidiaries; and the Company and any of
its Subsidiaries have made available to Acquiror copies of all
environmental reports, studies, sampling data, correspondence,
filings and other environmental information in its possession or
reasonably available to it relating to the Company or any of its
Subsidiaries or any currently or formerly owned or operated
property or any property in which the Company or any of its
Subsidiaries (whether as fiduciary or otherwise) has held a Lien.
(q)
Intellectual Property.
(1) The Company and its Subsidiaries have a valid right to
use all trademarks, service marks, trade names, Internet domain
names, designs, slogans, trade dress and general intangibles of
like nature (collectively, “
Trademarks
”);
Software (as defined below); technology; trade secrets and other
confidential information, know-how, proprietary processes,
formulae, algorithms, models, and methodologies (collectively,
“
Trade Secrets
”) used in the Company’s and
each Subsidiary’s business as currently conducted, except
where failure to do so would not constitute a Material Adverse
Effect. The Company or its Subsidiaries either (i) own or
have the right to use all patents, Trademarks, and copyrights
necessary for the conduct of the Company’s and each of its
Subsidiaries’ businesses as currently conducted, except
where the failure to do so would not constitute a Material
Adverse Effect,
and/or
(ii) are validly licensed under third-party patents,
Trademarks and copyrights necessary for the same. As used in
this Agreement, the term “
Intellectual
Property
” means patents, copyrights, Trademarks,
applications for any of the foregoing, and Trade Secrets; the
term “
Company License Agreements
” means any
license agreements granting any right to use or practice any
rights under any Intellectual Property (except for such
agreements for software already installed by the manufacturer
before purchase on computers purchased by the Company,
shrink-wrap or click-wrap software or other off-the- shelf
products that are generally available for less than $10,000),
and any written
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settlements relating to any Intellectual Property, to which the
Company or any of its Subsidiaries is a party or otherwise
bound; and the term “
Software
” means any and
all computer programs, including any and all software
implementations of algorithms, models and methodologies, whether
in source code or object code.
(2) Schedule 4.2(q)(2) sets forth, for the
Intellectual Property owned and maintained by the Company and
its Subsidiaries, a complete and accurate list of all
U.S. and foreign (1) patents and patent applications;
(2) issued and pending Trademark registrations (including
Internet domain name registrations) and applications and
material unregistered Trademarks; and (3) copyright
registrations and applications, indicating for each, the
applicable jurisdiction, registration number (or application
number), date issued (or date filed) and current status.
Schedule 4.2(q)(2) sets forth a complete and accurate list
of all third party Software that is incorporated in any Software
sold, licensed, leased or otherwise distributed by or used in
the course of rendering services offered by the Company or any
of its Subsidiaries, indicating for each the title and
owner/licensor of the Software.
(3) The Intellectual Property owned by the Company and its
Subsidiaries is free and clear of all Liens.
(4) The patents, Trademarks and Trade Secrets listed on
Schedule 4.2(q)(2) are owned by the Company or a Subsidiary and
are valid and enforceable, in full force and effect, and have
not been canceled, expired, or abandoned. The Intellectual
Property (other than patents) owned by the Company or any of its
Subsidiaries is valid and enforceable, in full force and effect,
and to the extent such Intellectual Property is the subject of a
registration or application (as described in
Section 4.2(q)(2)), such Intellectual Property is
subsisting and has not been canceled, expired, or abandoned.
There is no pending or, to the Knowledge of the Company,
threatened opposition, interference or cancellation Proceeding
before any court or registration authority in any jurisdiction
against any of the items listed in Schedule 4.2(q)(2), or,
to the Knowledge of the Company, against any Intellectual
Property licensed to the Company or its Subsidiaries.
(5) The conduct of the Company’s and its
Subsidiaries’ business as currently conducted, to the
Company’s Knowledge, does not infringe upon any
Intellectual Property rights owned or controlled by any third
party (either directly or indirectly such as through
contributory infringement or inducement to infringe).
Schedule 4.2(q)(5) lists all U.S. and foreign patents
concerning which: (i) the Company has obtained or requested
written opinion of counsel; or (ii) the Company has
received written allegation or notice of infringement or license
offer outside the ordinary course of business. There are no
claims or suits pending or, to the Knowledge of the Company,
threatened against the Company or any of its Subsidiaries, and
neither the Company nor any of its Subsidiaries has received any
notice of a third party claim or suit against the Company or any
of its Subsidiaries (1) alleging that its past or present
activities, products, services or the conduct of its businesses
infringes or has infringed upon, violates, or constitutes the
unauthorized use of the Intellectual Property rights of any
third party or (2) challenging the ownership, use, validity
or enforceability of any Intellectual Property.
(6) There are no settlements, forbearances to sue,
consents, judgments, or orders or similar obligations to which
the Company or any of its Subsidiaries is bound which
(1) restrict the Company’s or its Subsidiaries’
rights to use any Intellectual Property, (2) restrict the
Company’s or its Subsidiaries’ business in order to
accommodate a third party’s Intellectual Property, or
(3) permit third parties to use any Intellectual Property
owned by the Company or any of its Subsidiaries. The Company and
its Subsidiaries have not licensed or sublicensed their rights
in any material Intellectual Property other than pursuant to the
Company License Agreements, and no royalties, honoraria or other
fees are payable by the Company or its Subsidiaries for the use
of or right to use any Intellectual Property licensed to the
Company or its Subsidiaries, except pursuant to the Company
License Agreements. The Company License Agreements are valid and
binding obligations of all parties thereto, enforceable in
accordance with their terms subject only to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability
A-21
relating to or affecting creditors’ rights and to general
principles of equity. There exists no event or condition which
will result in a material violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default
by the Company or any other party under any such Company License
Agreement.
(7) To the Company’s Knowledge, no Trade Secret of the
Company or its Subsidiaries has been disclosed or authorized to
be disclosed to any third party other than pursuant to a
non-disclosure agreement that protects the Company and the
applicable Subsidiary’s proprietary interests in and to
such Trade Secrets. Neither the Company nor, to the Knowledge of
the Company, any other party to any non-disclosure agreement
relating to the Company’s Trade Secrets is in breach or
default thereof.
(8) To the Knowledge of the Company, no third party is
misappropriating, infringing, diluting, or violating any
Intellectual Property owned by the Company or any of its
Subsidiaries and no such claims have been brought or threatened
against any third party by the Company or any of its
Subsidiaries.
(9) The consummation of the transactions contemplated
hereby will not result in the loss or impairment of the
Company’s or any of its Subsidiaries’ right to own or
use any of the Intellectual Property, nor will require the
consent of any Governmental Authority or third party in respect
of any such Intellectual Property.
(10) Schedule 4.2(q)(10) lists all Software sold,
licensed, leased or otherwise distributed by or used in the
services offered by the Company or any of its Subsidiaries to
any third party, and identifies which Software is sold,
licensed, leased, or otherwise distributed, or used, as the case
may be. With respect to the Software set forth in
Schedule 4.2(q)(10) which the Company or any of its
Subsidiaries purports to own, such Software was either developed
(1) by employees of the Company or any of its Subsidiaries
within the scope of their employment; or (2) by independent
contractors who have unconditionally assigned all of their
rights in such Software and all copyrights in such Software to
the Company or any of its Subsidiaries pursuant to written
agreements.
(11) The Company and each of its Subsidiaries have all
requisite licenses to use any shrink-wrap or click-wrap
software, other off-the- shelf products, or any other Software
used by any of them in connection with their business, and
neither the Company nor any Subsidiary is using any such
products or Software where all requisite consideration has not
been paid for the use thereof. To the Company’s Knowledge,
neither the Company nor any of its Subsidiaries is in violation
of any applicable law or any Contract or other agreement,
arrangement or understanding regarding or in connection with
such products or Software, and neither the Company nor any of
its Subsidiaries has any payment obligations or other actual or
potential liabilities related to or in connection with such
products or Software.
(r)
Insurance.
The Company has provided
to Acquiror a list of all of the material insurance policies,
binders, or bonds maintained by the Company or its Subsidiaries
(“
Company Insurance Policies
”). The Company and
its Subsidiaries are insured with reputable insurers against
such risks and in such amounts as the management of the Company
or its Subsidiaries reasonably determined to be prudent in
accordance with industry practices. All of the Company Insurance
Policies are in full force and effect; the Company and its
Subsidiaries are not in material default thereunder; and all
material claims thereunder have been filed in due and timely
fashion.
(s)
Brokers.
No action has been taken by
the Company or any Subsidiary that would give rise to any valid
claim against any party hereto for a brokerage commission,
finder’s fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding the fees
to be paid by the Company to Seven Hills Partners LLC in amounts
and on terms set forth in Section 4.2(s) of the Company
Disclosure Schedule.
(t)
Tax Treatment.
As of the date hereof,
the Company has no reason to believe that the Merger will not
qualify as a “reorganization” within the meaning of
Section 368(a) of the Code.
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(u)
No Illegal Payments, Etc.
None of the
Company or any of its Subsidiaries, nor any of their directors,
officers, employees or agents, has (a) directly or
indirectly given or agreed to give any illegal gift,
contribution, payment or similar benefit to any supplier,
customer, governmental official or employee or other Person who
was, is or may be in a position to help or hinder the Company or
any of its Subsidiaries (or assist in connection with any actual
or proposed transaction) or made or agreed to make any illegal
contribution, or reimbursed any illegal political gift or
contribution made by any other Person, to any candidate for
federal, state, local or foreign public office (i) which
might subject any of the Company and its Subsidiaries to any
damage or penalty in any civil, criminal or governmental
Litigation or Proceeding or (ii) the non-continuation of
which, in the case of (i) and (ii), has had or might have,
individually or in the aggregate, a Material Adverse Effect or
(b) established or maintained any unrecorded fund or asset
or made any false entries on any books or records for any
purpose.
(v)
Joint Proxy Statement/Prospectus and Registration
Statement.
None of the information supplied or to
be supplied by the Company in writing specifically for inclusion
in or incorporation by reference into, and which is included in
or incorporated by reference into, (i) the Registration
Statement or any amendment or supplement thereto will, at the
respective times such documents are filed, and, in the case of
the Registration Statement or any amendment or supplement
thereto, when the same becomes effective, at the time of the
Company Stockholders Meeting, the Acquiror Stockholders Meeting
or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (ii) the Joint Proxy Statement/Prospectus or
any other documents filed or to be filed with the SEC or any
other Governmental Authority in connection with the transactions
contemplated hereby, will, at the respective times such
documents are filed and, in the case of the Joint Proxy
Statement/Prospectus or any amendment or supplement thereto, at
the time of mailing to stockholders of the Company and Acquiror
and at the times of the Company Stockholders Meeting and
Acquiror Stockholders Meeting, be false or misleading with
respect to any material fact, or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or
necessary to correct any statement made in any earlier
communication. For this purpose, any such information included
in or incorporated by reference into any such document relating
to the Company will be deemed to have been so supplied in
writing specifically for inclusion or incorporation therein if
such document was available for review by the Company or its
counsel a reasonable time before such document was filed (but
the foregoing will not be the exclusive manner in which it may
be established that such information was so supplied). The
Registration Statement and the Joint Proxy Statement/Prospectus
will comply as to form in all material respects with the
applicable requirements of the Securities Act, the Exchange Act
and the rules and regulations promulgated thereunder.
SECTION 4.3.
Representations and Warranties
of Acquiror and MergerCo.
Except as set forth in
the Acquiror Disclosure Schedule, Acquiror SEC Documents or
Subsidiary SEC Documents, each of Acquiror and MergerCo, as the
case may be, hereby represents and warrants to the Company as
follows:
(a)
Organization, Standing and
Authority.
Each of Acquiror and MergerCo is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is duly
qualified or licensed to do business and is in good standing in
all jurisdictions where ownership or leasing of property or
assets or the conduct of business requires either to be so
qualified or licensed, except for those jurisdictions in which
failure to do so has not, or could not reasonably be expected to
have a Material Adverse Effect.
(b)
Corporate Power.
Acquiror and each of
its Subsidiaries has the corporate, partnership or other
business association power and authority to carry on its
business as it is now being conducted and to own or lease all
its properties and assets.
(c)
Corporate Authority.
(1) Each of Acquiror and MergerCo has the requisite
corporate power and authority necessary to authorize the
execution and delivery of, and performance of its obligations
under, this Agreement and, subject to receipt of the Requisite
Stockholder Vote, to consummate the transactions
A-23
contemplated by this Agreement. The execution, delivery and
performance by Acquiror of this Agreement and the consummation
of the transactions contemplated hereby have been duly
authorized by the Acquiror Board (with the approval of the
Acquiror Special Committee). This Agreement has been duly
executed and delivered by Acquiror and MergerCo and is a valid
and legally binding obligation of each of Acquiror and MergerCo,
enforceable in accordance with its terms, subject only to
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability related to
or affecting creditors’ rights and to general principles of
equity.
(2) The Acquiror Special Committee has (i) determined
that the Merger is advisable, fair to and in the best interests
of Acquiror and Acquiror’s public stockholders and
(ii) recommended that the Acquiror Board approve
(x) this Agreement and (y) an amendment to the
Acquiror Certificate to increase the number of authorized shares
of Acquiror Common Stock.
(3) The Acquiror Board, based on the recommendation of the
Acquiror Special Committee, has (i) determined that the
Merger is advisable, fair to and in the best interests of
Acquiror and Acquiror’s public stockholders,
(ii) approved (x) this Agreement and (y) an
amendment to the Acquiror Certificate to increase the number of
authorized shares of Acquiror Common Stock, and
(iii) recommended that the stockholders of Acquiror approve
the issuance of Acquiror Common Stock in connection with the
Merger and the amendment to the Acquiror Certificate.
(d)
Regulatory Filings; Consents; No Defaults.
(1) No consents, approvals, orders or authorizations of, or
filings, registrations, declarations or qualifications with, any
Governmental Authority are required to be made or obtained by
Acquiror in connection with the execution, delivery or
performance by Acquiror and MergerCo of this Agreement, or to
consummate the Merger, except for: (A) those required under
the HSR Act, if any; (B) the filing and declaration of
effectiveness of the Registration Statement and the Joint Proxy
Statement/Prospectus and compliance with the Exchange or
Securities Act; (C) approval of the listing on the NASDAQ
of the shares of Acquiror Common Stock to be issued as Merger
Consideration; (D) the filing of an amendment to
Acquiror’s certificate of incorporation with the Secretary
of State of the State of Delaware to increase the number of
authorized shares of Acquiror Common Stock; and (E) the
filing of a Certificate of Merger with the Secretary of State of
the State of Delaware and appropriate documents with the
relevant authorities of other states in which the Company is
qualified to do business. As of the date hereof, Acquiror has no
Knowledge of any reason why the approvals of all Governmental
Authorities necessary to permit consummation of the transactions
contemplated by this Agreement will not be received.
(2) Subject to the Requisite Stockholder Vote of Acquiror,
no consent by or approval or authorization of or notice to any
other Person (other than a Governmental Authority) is required,
whether under any material license or other material Contract or
otherwise.
(3) Subject to the Requisite Stockholder Vote of Acquiror,
the receipt of the approvals and consents referred to in
Section 4.3(d)(1) and 4.3(d)(2), the expiration of
applicable waiting periods and the making of all required
filings under Securities Laws, the execution, delivery and
performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not:
(A) constitute a breach or violation of, or a default
under, or give rise to any Lien, any acceleration of remedies,
any right of termination (with or without the giving of notice,
passage of time or both) or any put or call right under, any
law, rule or regulation or any judgment, decree, order,
governmental or nongovernmental permit or license, or Contract
of Acquiror or of any of its Subsidiaries or to which Acquiror
or any of its Subsidiaries or its or their properties is subject
or bound, (B) constitute a breach or violation of, or a
default under, the certificate of incorporation or bylaws (or
similar governing documents) of Acquiror or of any of its
Subsidiaries, or (C) require any consent or approval under
any such law, rule, regulation, judgment, decree, order,
governmental or nongovernmental permit or license or Contract,
except, in the case of clauses (A), (B) and (C), for any
such conflict, violation, breach, default, loss, right, consent
or approval or other occurrence
A-24
which would not, or would not reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect.
(e)
Acquiror Stock.
As of the date of
this Agreement, the authorized capital stock of Acquiror
consists of 130,000,000 shares of capital stock, of which
125,000,000 shares are designated as Acquiror Common Stock,
and 5,000,000 shares of preferred stock (the
“
Acquiror Preferred Stock
” and together with
the Acquiror Common Stock, the “
Acquiror
Stock
”). As of the Effective Date, the authorized
capital stock of Acquiror will consist of
165,000,000 shares of capital stock, of which
160,000,000 shares are designated as Acquiror Common Stock,
and 5,000,000 shares of Acquiror Preferred Stock. As of
August 7, 2007, (a) 70,444,085 shares of Acquiror
Common Stock were issued and outstanding, (b) no shares of
Acquiror Preferred Stock were issued and outstanding,
(c) 6,631,702 shares of Acquiror Common Stock were
reserved for issuance upon the exercise of options issued or
issuable under Acquiror’s 2003 Flexible Stock Plan, 1999
Flexible Stock Plan, 1996 Non-Qualified Stock Option Plan and
1999 Employee Stock Purchase Plan, eXI Wireless, Inc.
2000 Share Option Plan, as amended, Digital Angel.net Inc.
Stock Option Plan and 225,000 shares of Acquiror Common
Stock reserved for issuance of stock options granted outside of
the Acquiror Stock Plans (the “
Acquiror Stock
Options
”), (d) 4,229,154 shares of Acquiror
Common Stock were reserved for issuance under outstanding
warrants to purchase Acquiror Common Stock, excluding shares
that may be issued due to anti-dilution provisions (the
“
Acquiror Warrants
”), and
(e) 100,296 shares of Acquiror Common Stock were held
in treasury. The outstanding shares of Acquiror Common Stock
have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and subject to no
preemptive or anti-dilution rights (and were not issued in
violation of any subscriptive or preemptive rights). As of the
date hereof, other than the Acquiror Stock Options, the Acquiror
Warrants and 426,781 shares to be issued pursuant to the
terms of certain settlement and employment agreements, there are
no shares of Acquiror Common Stock authorized and reserved for
issuance, Acquiror does not have any Rights issued or
outstanding with respect to Acquiror Stock, and Acquiror does
not have any commitment to authorize, issue or sell any Acquiror
Stock or Rights as a result of this Agreement or otherwise,
except pursuant to this Agreement. Section 4.3(e) of the
Acquiror Disclosure Schedule sets forth a list of the holders of
outstanding Acquiror Stock Options, Acquiror restricted stock
grants and Acquiror Warrants, the date that each such Acquiror
Stock Option, Acquiror restricted stock grant or Acquiror
Warrant was granted, the number of shares of Acquiror Common
Stock subject to each such Acquiror Stock Option, Acquiror
restricted stock grant or Acquiror Warrant, the vesting schedule
of each such Acquiror Stock Option, Acquiror restricted stock
grant or Acquiror Warrant and the price at which each such
Acquiror Stock Option or Acquiror Warrant may be exercised.
(f)
Subsidiaries.
Set forth in
Section 4.3(f) of the Acquiror Disclosure Schedule is a
list of all its direct and indirect subsidiaries, including the
states in which such subsidiaries are organized, a brief
description of such subsidiaries’ principal activities, and
with respect to Acquiror’s subsidiaries that are not
publicly traded, if any of such subsidiaries is not wholly-owned
by Acquiror or one of its subsidiaries, the percentage owned by
Acquiror or any such subsidiary and the names and percentage
ownership by any other Person and with respect to VeriChip
Corporation, the percentage owned by Acquiror as of the date of
this Agreement. No equity securities of any of Acquiror’s
subsidiaries are or may become required to be issued,
transferred or otherwise disposed of (other than to Acquiror or
a wholly-owned subsidiary of Acquiror) by reason of any Rights
with respect thereto. There are no Contracts by which any of
Acquiror’s Subsidiaries is or may be bound to sell or
otherwise issue any shares of its capital stock, and there are
no Contracts relating to the rights or obligations of Acquiror
to vote or to dispose of such shares. All of the shares of
capital stock of each of Acquiror’s subsidiaries are fully
paid and nonassessable and subject to no subscriptive or
preemptive rights or Rights and are owned by Acquiror or an
Acquiror Subsidiary free and clear of any Liens. Each of
Acquiror’s Subsidiaries has been duly organized, is validly
existing and in good standing under the laws of the jurisdiction
in which it is organized, and is duly qualified to do business
and in good standing in the jurisdictions where its ownership or
leasing of property or the conduct of its business requires it
to be so qualified except where failure to do so has not, or
could not reasonably be expected to have a Material Adverse
Effect. Acquiror and its Subsidiaries have respected all
corporate formalities of, and Acquiror is not liable for the
debts
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and obligations of its Subsidiaries. Acquiror has continuously
owned all of the outstanding capital stock of MergerCo since the
initial issuance by MergerCo of its capital stock.
(g)
SEC Documents; Financial Statements.
(1) Since December 31, 2004, Acquiror and its
Subsidiaries have filed all reports, registrations, and
statements they were required to file with the SEC under the
Securities Act, or under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act, including, but not limited to
Acquiror’s Annual Reports on
Form 10-K,
Forms 10-Q,
Form 8-K,
registration statements, definitive proxy statements, and
information statements (collectively, the “
Acquiror SEC
Documents
” which for purposes of clarity includes
Subsidiary SEC Documents). Acquiror has provided or made
available via EDGAR to the Company copies of the Acquiror SEC
Documents, each in the form (including exhibits and any
amendments thereto) filed with the SEC (or, if not so filed, in
the form used or circulated). As of their respective dates (and
without giving effect to any amendments or modifications filed
after the date of this Agreement) each of the Acquiror SEC
Documents, including the financial statements, exhibits, and
schedules thereto, filed or circulated prior to the date hereof
complied (and each of the Acquiror SEC Documents filed prior to
the Merger will comply) as to form with applicable Securities
Laws and did not (or, in the case of reports, statements, or
circulars filed after the date of this Agreement, will not)
contain any untrue statement of a material fact or omit to state
a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements
made therein, in light of the circumstances under which they
were made, not misleading.
(2) Each of Acquiror’s and Acquiror’s
Subsidiaries’ consolidated and separate financial
statements or balance sheets included in or incorporated by
reference into the Acquiror SEC Documents, including the related
notes and schedules, fairly presented (or, in the case of
Acquiror SEC Documents filed after the date of this Agreement,
will fairly present) the consolidated and separate financial
condition of Acquiror and its Subsidiaries as of the date of
such statement of financial condition or balance sheet and each
of the consolidated and separate statements of income, cash
flows and changes in stockholders’ equity included in or
incorporated by reference into the Acquiror SEC Documents,
including any related notes and schedules (collectively, the
foregoing financial statements and related notes and schedules
are referred to as the “
Acquiror Financial
Statements
”), fairly presented (or, in the case of
Acquiror SEC Documents filed prior to the Merger, will fairly
present) the separate and consolidated results of operations,
cash flows and stockholders’ equity, as the case may be, of
Acquiror and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal
year-end audit adjustments), in each case in accordance with
GAAP consistently applied during the periods involved (except as
may be noted therein and except that such unaudited statements
include no notes).
(3) Except as disclosed in the Acquiror Financial
Statements, none of Acquiror or any of its Subsidiaries has any
liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise) required by GAAP to be set
forth on a consolidated balance sheet of Acquiror and its
consolidated subsidiaries or in the notes thereto, other than
liabilities or obligations incurred in the ordinary course of
business consistent with past practice since the date of the
most recent financial statements included in the Acquiror SEC
Documents.
(h)
Absence of Certain Changes.
Since
December 31, 2006, the business of Acquiror and its
Subsidiaries has been conducted in the ordinary and usual
course, consistent with past practice, and there has not been:
(1) any event, occurrence, development or state of
circumstances or facts which has had or is reasonably likely to
have a Material Adverse Effect on Acquiror and any of its
Subsidiaries;
(2) any amendment of any term of any outstanding security
of Acquiror or any of its Subsidiaries or to Acquiror’s or
any of its Subsidiaries’ certificate of incorporation or
bylaws (or similar governing documents);
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(3) any (A) incurrence, assumption or guarantee by
Acquiror or any of its Subsidiaries of any indebtedness for
borrowed money, or (B) assumption, guarantee, endorsement
or otherwise by Acquiror of any obligations of any other Person,
in each case, other than in the ordinary and usual course of
business consistent with past practices;
(4) any creation or assumption by Acquiror or any of its
Subsidiaries of any Lien on any material asset other than in the
ordinary and usual course of business consistent with past
practices, other than a Permitted Lien;
(5) prior to or on the date hereof, any making of any loan
by Acquiror and any of its Subsidiaries in excess of $100,000,
or aggregate loans in excess of $250,000, advance or capital
contributions to or investment in any Person, in each case,
other than in the ordinary and usual course of business
consistent with past practices;
(6) any material change in any accounting policies or
practices by Acquiror or any of its Subsidiaries except as
required by GAAP; or
(7) any (A) employment, deferred compensation,
severance, retirement or other similar agreement entered into
with any director, officer, consultant, partner or employee of
Acquiror or any of its Subsidiaries (or any amendment to any
such existing agreement), (B) grant or agree to grant any
severance or termination pay to any director, officer,
consultant, partner or employee of Acquiror or any of its
Subsidiaries, or (C) change in compensation or other
benefits payable to any director, officer, consultant, partner
or employee of Acquiror or any of its Subsidiaries, except, in
each case, in the ordinary course of business, or as required by
Contract or applicable law with respect to employees of Acquiror
or any of its Subsidiaries.
(i)
Contracts.
(1) Set forth on Section 4.3(i) of the Acquiror
Disclosure Schedule is a listing of each of the following
material executory Contracts to which either Acquiror or any of
its Subsidiaries is a party, or by which any of them is bound or
to which any of their properties is subject:
(A) any lease of real property;
(B) any partnership, joint venture or other similar
agreement or arrangement, or any options or rights to acquire
from any Person any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or
voting securities of such Person, in each case, entered into
other than in the ordinary course of business;
(C) any agreement relating to the acquisition or
disposition of any business (whether by merger, sale of stock,
sale of assets or otherwise);
(D) any indenture, mortgage, promissory note, loan
agreement, guarantee or other agreement or commitment,
outstanding as of the date hereof, for the borrowing of money by
Acquiror or one of its Subsidiaries or the deferred purchase
price of property in excess of $100,000 (in either case, whether
incurred, assumed, guaranteed or secured by any asset);
(E) any agreement in force as of the date hereof that
creates future payment obligations in excess of $100,000 in the
aggregate and which by its terms does not terminate or is not
terminable without penalty upon notice of 90 days or less;
(F) any license, franchise or similar agreement material to
Acquiror or any of its Subsidiaries or any agreement relating to
any trade name or intellectual property right that is material
to Acquiror or any of its Subsidiaries on a consolidated basis;
(G) any exclusive dealing agreement or any agreement that
limits the freedom of Acquiror or any of its Subsidiaries to
compete in any line of business or with any Person or in any
area or that would so limit their freedom after the Effective
Date;
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(H) any compensation, employment, severance, supplemental
retirement or other similar agreement or arrangement with any
employee or former employee of, or independent contractor with
respect to, Acquiror or any of its Subsidiaries in excess of
$50,000;
(I) any severance, separation, change of control or other
payments or any other “change of control” provision
under any and all severance, separation, change of control,
retention, and salary continuation plans, programs, agreements
or arrangements of Acquiror, in connection with the consummation
of the Merger (other than the acceleration of any vesting of
Acquiror Stock Options); and
(J) any other Contract that is a “material
contract” as defined in Item 601(b)(10) of SEC
Regulation S-K
and that has not been filed prior to the date hereof as an
exhibit to Acquiror’s SEC Documents.
(2) Each Contract that has been, or is required to be, set
forth in Section 4.3(i) of the Acquiror Disclosure Schedule
is a valid and binding agreement of Acquiror or one or more of
its Subsidiaries, as the case may be, and is in full force and
effect, and Acquiror or its Subsidiaries that are parties
thereto are not in default or breach in any material respect
under the terms of any such Contract.
(3) Neither Acquiror nor any of its Subsidiaries is a party
to or is bound by any Contract that would prevent, materially
delay or materially impede Acquiror’s ability to consummate
the Merger or the other transactions contemplated by this
Agreement.
(j)
Litigation.
There is no Litigation
before any court, arbitrator, mediator or Governmental Authority
that has been or would reasonably be expected to be material to
Acquiror and its Subsidiaries taken as a whole pending against
Acquiror or any of its Subsidiaries, and, to Acquiror’s
Knowledge, no such Litigation has been threatened.
(k)
Compliance with Laws.
Each of
Acquiror and its Subsidiaries:
(1) is in compliance in all material respects with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable to the conduct of its businesses or to the employees
conducting such businesses;
(2) has all material permits, licenses, authorizations,
orders and approvals of, and has made all filings, applications
and registrations with, all Governmental Authorities that are
required in order to permit them to own or lease their
properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and
are current and, to Acquiror’s Knowledge, no suspension or
cancellation of any of them is threatened or is reasonably
likely and all such filings, applications and registrations are
current;
(3) has received, since January 1, 2005, no written
notification or communication (or, to the Knowledge of Acquiror,
any other communication) from any Governmental Authority
(A) asserting non- compliance with any of the statutes,
regulations, rules or ordinances of such Governmental Authority,
(B) threatening any material penalty or to revoke any
license, franchise, permit, or governmental authorization,
(C) requiring any of them (including any of Acquiror’s
or its Subsidiaries’ directors or controlling persons) to
enter into a cease and desist order, agreement, or memorandum of
understanding (or requiring the board of directors thereof to
adopt any resolution or policy), or (D) restricting or
disqualifying their activities;
(4) is not aware of any pending or threatened
investigation, review or disciplinary Proceedings by any
Governmental Authority against Acquiror, any of its Subsidiaries
or any officer, director or employee thereof;
(5) in the conduct of its business with respect to employee
benefit plans subject to Title I of ERISA, has not
(A) breached any applicable fiduciary duty under
Part 4 of Title I of ERISA which would subject it to
material liability under Sections 405 or 409 of ERISA or
(B) engaged in a “prohibited transaction” within
the meaning of Section 406 of ERISA or Section 4975(c)
of the
A-28
Code which would subject it to material liability or Taxes under
Sections 409 or 502(i) of ERISA or Section 4975(a) of
the Code;
(6) since January 1, 2005, has timely filed all
material reports, registrations and statements, together with
any amendments required to be made with respect thereto, that
were required to be filed under any applicable law, regulation
or rule, with any applicable Governmental Authority (the
“
Acquiror Reports
”). As of their respective
dates, the Acquiror Reports complied with the applicable
statutes, rules, regulations and orders enforced or promulgated
by the regulatory authority with which they were filed.
(l)
Properties.
Except as may be
reflected in Acquiror’s Financial Statements dated before
the date hereof, Acquiror and its Subsidiaries have good and
marketable title, free and clear of all Liens (other than
Permitted Liens) to all of the material properties and assets,
tangible or intangible, reflected in such financial statements
as being owned by Acquiror and its Subsidiaries as of the dates
thereof. To Acquiror’s Knowledge, all buildings and all the
material fixtures, equipment, and other property and assets held
under leases or subleases by any of Acquiror and its
Subsidiaries are held under valid leases or subleases,
enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors’ rights generally and to general principles of
equity). Set forth in Section 4.3(l) of the Acquiror
Disclosure Schedule is a list of any and all real estate owned
or leased by it or an Acquiror Subsidiary as of the date hereof.
Except to the extent such securities are pledged in the ordinary
course of business consistent with prudent business practices to
secure obligations of each of Acquiror or any of its
Subsidiaries, each of Acquiror and its Subsidiaries has good and
marketable title to all securities held by it, free and clear of
any Lien. Such securities are valued on the books of Acquiror or
its Subsidiaries in accordance with GAAP.
(m)
Employees; Labor Matters.
(1) Each of Acquiror and its Subsidiaries is in compliance
in all material respects with all currently applicable laws
respecting employment and employment practices, terms and
conditions of employment and wages and hours, including any such
laws respecting employment discrimination, harassment,
disability rights or benefits, equal opportunity, plant closure
issues, affirmative action, workers’ compensation, employee
benefits, severance payments, labor relations, employee leave
issues, wage and hour standards, occupational safety and health
requirements and unemployment insurance and related matters.
None of Acquiror or any of its Subsidiaries is engaged in any
unfair labor practice and there is no unfair labor practice
complaint pending or threatened against Acquiror or any of its
Subsidiaries before the National Labor Relations Board. There
are no charges or complaints against Acquiror or any of its
Subsidiaries pending or threatened in writing alleging sexual or
other harassment, or other discrimination or improper employment
practices, by Acquiror, any of its Subsidiaries or by any of
their employees, agents or representatives.
(2) Neither Acquiror nor any of its Subsidiaries is a party
to, or is bound by, any collective bargaining agreement,
Contract or other agreement or understanding with any labor
union or organization, nor has it agreed to recognize any union
or other collective bargaining unit, nor has any union or other
collective bargaining unit been certified, or is seeking
certification, as representing any of the employees of Acquiror
or any of its Subsidiaries.
(3) Acquiror and its Subsidiaries are and have been in
substantial compliance with all notice and other requirements
under the Worker Adjustment and Retaining Notification
(“
WARN
”) or similar state statute. None of the
employees of Acquiror or its Subsidiaries has suffered an
“employment loss” (as defined in WARN) during the 90-
day period prior to the execution of this Agreement.
(n)
Employee Benefit Plans.
(1) Set forth in Section 4.3(n) of the Acquiror
Disclosure Schedule is a complete list of each employee or
director benefit plan, arrangement or agreement, whether or not
written, including
A-29
without limitation any employee welfare benefit plan within the
meaning of Section 3(1) of ERISA, any employee pension
benefit plan within the meaning of Section 3(2) of ERISA
(whether or not such plan is subject to ERISA) and any bonus,
incentive, deferred compensation, vacation, stock purchase,
stock option, severance, employment, change of control or
material fringe benefit plan, program or agreement that is
sponsored, maintained or contributed to by Acquiror or any of
its Subsidiaries, or with respect to which Acquiror has or
reasonably could incur any liability, for the benefit of current
or former employees or directors or their beneficiaries (the
“
Acquiror Benefit Plans
”).
(2) Acquiror has heretofore made available to the Company
(A) true and complete copies of each of the Acquiror
Benefit Plans (or written explanations of any unwritten Acquiror
Benefit Plans) as in effect on the date hereof and amendments
thereto, including summary plan descriptions; (B) the three
most recent Annual Reports (Form 5500 Series) and
accompanying schedules, if any; and (C) the most recent
determination or opinion letter from the IRS (if applicable) for
such Acquiror Benefit Plan.
(3) With respect to each Acquiror Benefit Plan, Acquiror
and its Subsidiaries have complied, and are now in compliance,
in all material respects with all provisions of ERISA, the Code
and all laws and regulations applicable to such Acquiror Benefit
Plans and each Acquiror Benefit Plan has been administered in
all material respects in accordance with its terms. The IRS has
issued a favorable determination or opinion letter with respect
to each Acquiror Benefit Plan that is intended to be a
“qualified plan” within the meaning of
Section 401(a) of the Code that has not been revoked, and,
to the Knowledge of Acquiror, no circumstances exist and no
events have occurred that could reasonably be expected to
adversely affect the qualified status of any such plan or the
related trust (except for changes in applicable law for which
the remedial amendment period has not yet expired). No Acquiror
Benefit Plan is intended to meet the requirements of Code
Section 501(c)(9).
(4) All contributions required to be made by Acquiror to
any Acquiror Benefit Plan by applicable law or regulation or by
any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies
funding any Plan, for any period through the date hereof have
been timely made or paid in full or, to the extent not required
to be made or paid on or before the date hereof, have been
reflected on the Acquiror Financial Statements. Each Acquiror
Benefit Plan, if any, that is an employee welfare benefit plan
under Section 3(1) of ERISA is either (A) funded
through an insurance company Contract and is not a “welfare
benefit fund” within the meaning of Section 419 of the
Code or (B) unfunded.
(5) There is no pending or, to the Knowledge of Acquiror,
threatened Litigation relating to the Acquiror Benefit Plans.
Neither Acquiror nor any of its Subsidiaries has engaged in a
transaction with respect to any Acquiror Benefit Plan that would
subject Acquiror or any of its Subsidiaries to a material Tax or
penalty imposed by either Section 4975 of the Code or
Section 502(i) of ERISA.
(6) No Acquiror Benefit Plan is subject to Title IV or
Section 302 of ERISA or Section 412 or 4971 of the Code,
and neither Acquiror nor any of its Subsidiaries has contributed
or been obligated to contribute to a “multiemployer
plan” (as defined in Section 3(37) of ERISA) or a plan
that has two or more contributing, but unrelated, sponsors and
that is subject to Title IV of ERISA at any time on or
after December 31, 1994. No liability under Subtitle C or D
of Title IV of ERISA has been or is reasonably expected to
be incurred by Acquiror or any of its Subsidiaries with respect
to any ongoing, frozen or terminated “single- employer
plan,” within the meaning of Section 4001 of ERISA,
currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered one
employer with Acquiror under Section 4001 of ERISA or
Section 414 of the Code (an “
Acquiror ERISA
Affiliate
”). No notice of a “reportable
event,” within the meaning of Section 4043 of ERISA,
for which the
30-day
reporting requirement has not been waived has been required to
be filed for any Acquiror Benefit Plan or, to the Knowledge of
Acquiror, by any Acquiror ERISA Affiliate. Neither Acquiror nor
any of its Subsidiaries or Acquiror ERISA Affiliates has
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provided, or is required to provide, security to any Benefit
Plan or any single-employer plan of an Acquiror ERISA Affiliate.
(7) Neither Acquiror nor any of its Subsidiaries has any
obligation for retiree health, life or other welfare benefits,
except for benefits and coverage required by applicable law,
including, without limitation, Section 4980B of the Code
and Part 6 of Title I of ERISA. There are no
restrictions on the rights of Acquiror or any of its
Subsidiaries to amend or terminate any such plan (other than
reasonable and customary advance notice and consent requirements
and administrative expenses) without incurring any material
liability thereunder.
(8) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby
(either standing alone or in conjunction with any other event)
will (A) except as to the Persons listed in the Acquiror
Disclosure Schedule, result in any payment (including severance,
unemployment compensation, “excess parachute” (within
the meaning of Section 4999 of the Code), forgiveness of
indebtedness or otherwise) becoming due to any director or any
employee of Acquiror or any of its Subsidiaries under any
Acquiror Benefit Plan, (B) increase any benefits otherwise
payable under any Acquiror Benefit Plan, (C) result in any
acceleration of the time of payment or vesting of any such
benefit, or (D) affect in any way the ability to amend,
terminate, merge or administer any Acquiror Benefit Plan.
(9) Acquiror does not maintain an Acquiror Benefit Plan or
other arrangement that is subject to Section 409A of the
Code, and each Acquiror Benefit Plan that is a nonqualified
deferred compensation plan subject to Section 409A of the
Code has been operated and administered in good faith compliance
with Section 409A of the Code since January 1, 2005.
(10) Acquiror has not granted any awards intended to
constitute performance-based compensation not subject to the
deduction limit under Section 162(m) of the Code.
(o)
Environmental Matters.
Acquiror and
its Subsidiaries have complied in all material respects with
applicable Environmental Laws; no property (including buildings
and any other structures) currently owned or operated by
Acquiror or any of its Subsidiaries or in which Acquiror or any
of its Subsidiaries (whether as fiduciary or otherwise) has a
Lien, is being or, to Acquiror’s Knowledge, has been
contaminated with, or has had any release of, any Hazardous
Substance in such form or substance so as to create any material
liability for Acquiror or any of its Subsidiaries; Acquiror and
its Subsidiaries are not subject to material liability for any
Hazardous Substance disposal or contamination on any other
third-party property; within the last six years Acquiror and its
Subsidiaries have not received any written notice, demand
letter, claim or request for information alleging any violation
of, or liability of Acquiror or any of its Subsidiaries under,
any Environmental Law; Acquiror and its Subsidiaries are not
subject to any written order, decree, injunction or other
agreement with any Governmental Authority or any third party
relating to any Environmental Law; Acquiror and its Subsidiaries
are not aware of or do not have any Knowledge of any facts that
could lead to liability for handling or disposal of Hazardous
Substances involving Acquiror or any of its Subsidiaries, any
currently owned or operated property (whether as fiduciary or
otherwise), or any reasonably likely liability related to any
Lien held by Acquiror or any of its Subsidiaries; and Acquiror
and its Subsidiaries have made available to the Company copies
of all environmental reports, studies, sampling data,
correspondence, filings and other environmental information in
its possession or reasonably available to it relating to
Acquiror or any currently or formerly owned or operated property
or any property in which Acquiror or any of its Subsidiaries
(whether as fiduciary or otherwise) has held a Lien.
(p)
Intellectual Property.
(1) Acquiror and its Subsidiaries have a valid right to use
all trademarks, service marks, trade names, Internet domain
names, designs, slogans, trade dress and general intangibles of
like nature (collectively, “
Trademarks
”);
Software (as defined below); technology; trade secrets and other
confidential information, know-how, proprietary processes,
formulae, algorithms, models, and methodologies (collectively,
“
Trade Secrets
”) used in Acquiror’s and
each Subsidiary’s business as
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currently conducted, except where the failure to do so would not
constitute a Material Adverse Effect. Acquiror or its
Subsidiaries either (i) own or have the right to use all
patents, Trademarks, and copyrights necessary for the conduct of
Acquiror’s and each of its Subsidiaries’ businesses as
currently conducted, except where the failure to do so would not
constitute a Material Adverse Effect,
and/or
(ii) are validly licensed under third-party patents,
Trademarks and copyrights necessary for the same. As used in
this Agreement, the term “Intellectual Property” means
patents, copyrights, Trademarks, applications for any of the
foregoing, and Trade Secrets; the term “
Acquiror License
Agreements
” means any license agreements granting any
right to use or practice any rights under any Intellectual
Property (except for such agreements for software already
installed by the manufacturer before purchase on computers
purchased by Acquiror, shrink-wrap or click-wrap software or
other off-the-shelf products that are generally available for
less than $10,000), and any written settlements relating to any
Intellectual Property, to which Acquiror or any of its
Subsidiaries is a party or otherwise bound; and the term
“
Software
” means any and all computer programs,
including any and all software implementations of algorithms,
models and methodologies, whether in source code or object code.
(2) Schedule 4.3(p)(2) sets forth, for the
Intellectual Property owned and maintained by Acquiror and its
Subsidiaries, a complete and accurate list of all U.S. and
foreign (1) patents and patent applications;
(2) issued and pending Trademark registrations (including
Internet domain name registrations) and applications and
material unregistered Trademarks; and (3) copyright
registrations and applications, indicating for each, the
applicable jurisdiction, registration number (or application
number), date issued (or date filed) and current status.
Schedule 4.3(p)(2) sets forth a complete and accurate list
of all third party Software that is incorporated in any Software
sold, licensed, leased or otherwise distributed by or used in
the course of rendering services offered by Acquiror or any of
its Subsidiaries, indicating for each the title and
owner/licensor of the Software.
(3) The Intellectual Property owned by Acquiror and its
Subsidiaries is free and clear of all Liens.
(4) The patents, Trademarks and Trade Secrets owned by
Acquiror or any of its Subsidiaries set forth on
Schedule 4.3(p)(2) are valid and enforceable, in full force
and effect, and have not been canceled, expired, or abandoned.
The Intellectual Property (other than patents) owned by Acquiror
or any of its Subsidiaries is valid and enforceable, in full
force and effect, and to the extent such Intellectual Property
is the subject of a registration or application (as described in
Section 4.3(p)(2)), such Intellectual Property is
subsisting and has not been canceled, expired, or abandoned.
There is no pending or, to the Knowledge of Acquiror, threatened
opposition, interference or cancellation Proceeding before any
court or registration authority in any jurisdiction against any
of the items listed in Schedule 4.3(p)(2), or, to the Knowledge
of Acquiror, against any Intellectual Property licensed to
Acquiror or its Subsidiaries.
(5) To Acquiror’s Knowledge, the conduct of
Acquiror’s and its Subsidiaries’ business as currently
conducted does not infringe upon any Intellectual Property
rights owned or controlled by any third party (either directly
or indirectly such as through contributory infringement or
inducement to infringe). Schedule 4.3(p)(5) lists all
U.S. and foreign patents concerning which:
(i) Acquiror has obtained or requested written opinion of
counsel; or (ii) Acquiror has received written allegation
or notice of infringement or license offer outside the ordinary
course of business. There are no claims or suits pending or, to
the Knowledge of Acquiror, threatened against Acquiror or any of
its Subsidiaries, and neither Acquiror nor any of its
Subsidiaries has received any notice of a third party claim or
suit against Acquiror or any of its Subsidiaries
(1) alleging that its past or present activities, products,
services or the conduct of its businesses infringes or has
infringed upon, violates, or constitutes the unauthorized use of
the Intellectual Property rights of any third party or
(2) challenging the ownership, use, validity or
enforceability of any Intellectual Property.
(6) There are no settlements, forbearances to sue,
consents, judgments, or orders or similar obligations to which
Acquiror or any of its Subsidiaries are bound which
(1) restrict Acquiror’s or its
A-32
Subsidiaries’ rights to use any Intellectual Property,
(2) restrict Acquiror’s or its Subsidiaries’
business in order to accommodate a third party’s
Intellectual Property or (3) permit third parties to use
any Intellectual Property owned by Acquiror or any of its
Subsidiaries. Acquiror and its Subsidiaries have not licensed or
sublicensed their rights in any material Intellectual Property
other than pursuant to the Acquiror License Agreements, and no
royalties, honoraria or other fees are payable by Acquiror or
its Subsidiaries for the use of or right to use any Intellectual
Property licensed to Acquiror or its Subsidiaries, except
pursuant to the Acquiror License Agreements. The Acquiror
License Agreements are valid and binding obligations of all
parties thereto, enforceable in accordance with their terms
subject only to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors’ rights
and to general principles of equity. There exists no event or
condition which will result in a material violation or breach
of, or constitute (with or without due notice or lapse of time
or both) a default by Acquiror or any other party under any such
Acquiror License Agreement.
(7) To Acquiror’s Knowledge, no Trade Secret of
Acquiror or its Subsidiaries has been disclosed or authorized to
be disclosed to any third party other than pursuant to a
non-disclosure agreement that protects Acquiror and the
applicable Subsidiary’s proprietary interests in and to
such Trade Secrets. Neither Acquiror nor, to the Knowledge of
Acquiror, any other party to any non-disclosure agreement
relating to Acquiror’s Trade Secrets is in breach or
default thereof.
(8) To the Knowledge of Acquiror, no third party is
misappropriating, infringing, diluting, or violating any
Intellectual Property owned by Acquiror or any of its
Subsidiaries and no such claims have been brought or threatened
against any third party by Acquiror or any of its Subsidiaries.
(9) The consummation of the transactions contemplated
hereby will not result in the loss or impairment of
Acquiror’s or any of its Subsidiaries’ right to own or
use any of the Intellectual Property, nor will require the
consent of any Governmental Authority or third party in respect
of any such Intellectual Property.
(10) Schedule 4.3(p)(10) lists all Software sold,
licensed, leased or otherwise distributed by or used in the
services offered by Acquiror or any of its Subsidiaries to any
third party, and identifies which Software is sold, licensed,
leased, or otherwise distributed, or used, as the case may be.
With respect to the Software set forth in
Schedule 4.3(p)(10) which Acquiror or any of its
Subsidiaries purports to own, such Software was either developed
(1) by employees of Acquiror or any of its Subsidiaries
within the scope of their employment; or (2) by independent
contractors who have unconditionally assigned all of their
rights in such Software and all copyrights in the Software to
Acquiror or any of its Subsidiaries pursuant to written
agreements.
(11) Acquiror and each of its Subsidiaries has all
requisite licenses to use any shrink-wrap or click-wrap
software, other off-the- shelf products, or any other Software
used by any of them in connection with their business, and
neither Acquiror nor any Subsidiary is using any such products
or Software where all requisite consideration has not been paid
for the use thereof. To Acquiror’s Knowledge, neither
Acquiror nor any of its Subsidiaries is in violation of any
applicable law or any Contract or other agreement, arrangement
or understanding regarding or in connection with such products
or Software, and neither Acquiror nor any of its Subsidiaries
has any payment obligations or other actual or potential
liabilities related to or in connection with such products or
Software.
(q)
Insurance.
Acquiror has provided the
Company with a list of all of the material insurance policies,
binders, or bonds maintained by Acquiror or its Subsidiaries
(“
Acquiror Insurance Policies
”). Acquiror and
its Subsidiaries are insured with reputable insurers against
such risks and in such amounts as the management of Acquiror or
its Subsidiaries reasonably determined to be prudent in
accordance with industry practices. All of the Acquiror
Insurance Policies are in full force and effect; Acquiror and
its Subsidiaries are not in material default thereunder; and all
material claims thereunder have been filed in due and timely
fashion.
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(r)
Brokers.
No action has been taken by
Acquiror or any Subsidiary that would give rise to any valid
claim against any party hereto for a brokerage commission,
finder’s fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding the fees
to be paid by Acquiror to Duff & Phelps, LLC in
amounts and on terms set forth in Section 4.3(r) of the
Acquiror Disclosure Schedule.
(s)
Activities of MergerCo.
MergerCo is a
direct, wholly- owned subsidiary of Acquiror, and MergerCo does
not have any subsidiaries or material investments of any kind in
any entity. MergerCo was recently incorporated on behalf of
Acquiror solely for purposes of accomplishing the Merger, has
not engaged in any other business activity, has no material
liabilities and has conducted its operations only as
contemplated hereby.
(t)
Validity of Acquiror Common
Stock.
The shares of Acquiror Common Stock to be
issued to the holders of Company Stock as part of the Merger
Consideration will be, when issued, duly authorized, validly
issued, fully paid and nonassessable and not in violation of any
preemptive rights.
(u)
No Illegal Payments, Etc.
None of
Acquiror or any of its Subsidiaries, nor any of their directors,
officers, employees or agents, has (a) directly or
indirectly given or agreed to give any illegal gift,
contribution, payment or similar benefit to any supplier,
customer, governmental official or employee or other Person who
was, is or may be in a position to help or hinder Acquiror or
any of its Subsidiaries (or assist in connection with any actual
or proposed transaction) or made or agreed to make any illegal
contribution, or reimbursed any illegal political gift or
contribution made by any other Person, to any candidate for
federal, state, local or foreign public office (i) which
might subject any of Acquiror and its Subsidiaries to any damage
or penalty in any civil, criminal or governmental Litigation or
Proceeding or (ii) the non-continuation of which, in the
case of (i) and (ii), has had or might have, individually
or in the aggregate, a Material Adverse Effect on Acquiror or
(b) established or maintained any unrecorded fund or asset
or made any false entries on any books or records for any
purpose.
(v)
Taxes.
(1) Acquiror and each of its Subsidiaries have timely filed
in a complete and correct manner all Tax Returns that they were
required to file, other than any Tax Returns the failure to
complete correctly or file would not, individually or in the
aggregate, have a Material Adverse Effect. Acquiror and each of
its Subsidiaries have paid all Taxes due, other than Taxes
adequate reserves for which have been made in the Acquiror
Financial Statements and Taxes the failure to pay would not,
individually or in the aggregate, have a Material Adverse Effect.
(2) There are no claims or assessments pending against
Acquiror or any of its Subsidiaries for any alleged deficiency
in any Tax, and neither Acquiror nor any of its Subsidiaries has
been notified in writing of any proposed Tax claims or
assessments against Acquiror or any of its Subsidiaries (other
than, in each case, claims or assessments for which adequate
reserves in the Acquiror Financial Statements have been
established and claims or assessments which would not,
individually or in the aggregate, have a Material Adverse
Effect).
(3) There are no Liens on any of the assets or properties
of Acquiror or any of its Subsidiaries that arose in connection
with any failure (or alleged failure) to pay any Tax, except for
statutory liens for current Taxes not yet due and payable (and
except for Liens which would not, individually or in the
aggregate, have a Material Adverse Effect).
(4) Neither Acquiror nor any of its Subsidiaries
(x) is bound by any Tax allocation or Tax sharing agreement
with a Person other than the Company which applies to
U.S. federal or state income Taxes, or (y) has any
liabilities under any Tax allocation or Tax sharing agreement
(except for any liabilities which would not, individually or in
the aggregate, have a Material Adverse Effect).
(5) Neither Acquiror nor any of its Subsidiaries has
participated in a listed transaction within the meaning of
Treasury Regulations
Section 1.6011-4(b)(2).
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(6) No currently effective waivers of statutes of
limitations (excluding such statutes that relate to any years
currently under examination by the IRS) have been given by or
requested with respect to any Taxes of Acquiror or any of its
Subsidiaries.
(7) Each of Acquiror and its Subsidiaries has paid or made
provision for the payment of all Taxes that have been incurred
or are due or claimed to be due from it by federal, state,
foreign or local taxing authorities other than Taxes that are
not yet delinquent or are being contested in good faith and have
not been finally determined.
(8) The federal and state income Tax Returns of Acquiror
and its Subsidiaries have been examined by the IRS or the
relevant state taxing authorities, as the case may be, through
December 31, 2002. The federal income Tax Returns of
Acquiror and its Subsidiaries for the fiscal year ended
December 31, 2001 and for all fiscal years prior thereto
are, for purposes of routine audit by the IRS, closed because of
the statute of limitations, and no claims for additional Taxes
for such fiscal years are pending. There are no audits by, or
disputes pending between Acquiror or any of its Subsidiaries
and, any taxing authority of which Acquiror or any of its
Subsidiaries has received written notice, or claims asserted in
writing by any taxing authority for, Taxes or assessments upon
Acquiror or any of its Subsidiaries. In addition, other than
either (i) amounts the failure to withhold or to pay, or
(ii) Tax Returns the failure to complete correctly or to
file, would not, individually or in the aggregate have a
Material Adverse Effect, (A) proper and accurate amounts
have been withheld by Acquiror and its Subsidiaries from their
employees for all prior periods in compliance with the Tax
withholding provisions of applicable federal, state and local
laws and (B) federal, state and local Tax Returns that are
complete and accurate have been filed by Acquiror and its
Subsidiaries for all periods for which Tax Returns were due with
respect to income Tax withholding, Social Security and
unemployment Taxes. The amounts shown on such federal, state or
local Tax Returns to be due and payable have been paid in full.
(9) Neither Acquiror nor any of its Subsidiaries has been
required to include in income any adjustment pursuant to
Section 481 of the Code or otherwise by reason of a
voluntary change in accounting method initiated by Acquiror or
any of its Subsidiaries, and the IRS has not initiated or
proposed any such adjustment or change in accounting method.
(w)
Tax Treatment.
As of the date hereof,
Acquiror has no reason to believe that the Merger will not
qualify as a “reorganization” within the meaning of
Section 368(a) of the Code.
(x)
Joint Proxy Statement/Prospectus and Registration
Statement.
None of the information supplied or to
be supplied by Acquiror in writing specifically for inclusion in
or incorporation by reference into, and which is included in or
incorporated by reference into, (i) the Registration
Statement or any amendment or supplement thereto will, at the
respective times such documents are filed, and, in the case of
the Registration Statement or any amendment or supplement
thereto, when the same becomes effective, at the time of the
Company Stockholders Meeting, the Acquiror Stockholders Meeting
or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (ii) the Joint Proxy Statement/Prospectus or
any other documents filed or to be filed with the SEC or any
other Governmental Authority in connection with the transactions
contemplated hereby, will, at the respective times such
documents are filed and, in the case of the Joint Proxy
Statement/Prospectus or any amendment or supplement thereto, at
the time of mailing to stockholders of the Company and Acquiror
and at the times of the Company Stockholders Meeting and
Acquiror Stockholders Meeting, be false or misleading with
respect to any material fact, or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or
necessary to correct any statement made in any earlier
communication. For this purpose, any such information included
in or incorporated by reference into any such document relating
to Acquiror will be deemed to have been so supplied in writing
specifically for inclusion or incorporation therein if such
document was available for review by Acquiror or its counsel a
reasonable time before such document was filed (but the
foregoing will not be the exclusive manner in which it may be
established that such information was so supplied).
A-35
The Registration Statement and the Joint Proxy
Statement/Prospectus will comply as to form in all material
respects with the applicable requirements of the Securities Act,
the Exchange Act and the rules and regulations promulgated
thereunder.
ARTICLE 5.
COVENANTS
SECTION 5.1.
Forbearances of the
Company.
From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement or the
Company’s Disclosure Schedule, without the prior written
consent of Acquiror, the Company will not, and will cause each
of its Subsidiaries not to:
(a)
Ordinary Course.
Conduct the business
of the Company or any of its Subsidiaries other than in the
ordinary and usual course and consistent with past practices.
(b)
Status Quo.
Except in connection with
actions and expenses necessary to fulfill the conditions set
forth in Article 6, or, to the extent consistent therewith,
fail to use reasonable best efforts to preserve intact any of
their business organizations and assets and maintain their
rights, franchises and existing relations with clients,
customers, distributors, representatives, independent
contractors, suppliers, employees and business associates; or
engage in any new lines of business.
(c)
Capital Stock.
Other than pursuant to
the exercise of Rights set forth in the Company Disclosure
Schedule and outstanding on the date hereof, (1) authorize
for issuance, issue, grant, sell, deliver, dispose, pledge or
otherwise encumber any additional shares of Company Stock or any
Rights, (2) enter into any Contract with respect to the
foregoing, or (3) permit any additional shares of Company
Stock to become subject to new grants of employee or director
stock options, other Rights or similar stock- based employee
rights; provided; however, that the Company shall have the right
to issue up to an additional 100,000 shares of its common
stock upon the prior written consent of Acquiror, which consent
will not be unreasonably withheld.
(d)
Dividends, Etc.
(1) Make,
declare, pay or set aside for payment any dividend on or in
respect of, or declare or make any distribution on, any shares
of its capital stock, other than dividends from wholly-owned
Subsidiaries to the Company (in each case having record and
payment dates consistent with past practice) or
(2) directly or indirectly adjust, split, combine, redeem,
reclassify, purchase or otherwise acquire, any shares of its
capital stock, other than as required by the Company Stock Plans
upon exercise of Rights set forth in the Company Disclosure
Schedule and outstanding on the date hereof.
(e)
Compensation; Employment Agreements;
Etc.
Enter into, amend, modify or renew any
Contract regarding employment, consulting, severance or similar
arrangements with any directors, officers of, or independent
contractors with respect to, the Company or its Subsidiaries, or
grant any salary, wage or other increase in compensation or
increase in any employee benefit (including incentive or bonus
payments), except (1) for changes that are required by
applicable law, (2) to satisfy Contracts set forth in the
Company Disclosure Schedule and existing on the date hereof or
(3) for salary, wage or other compensation changes in the
ordinary course consistent with past practice.
(f)
Benefit Plans.
Enter into, establish,
adopt, amend or modify any pension, retirement, stock option,
stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit,
incentive or welfare Contract, plan, program or arrangement, or
any trust agreement (or similar arrangement) related thereto, in
respect of any directors, officers, employees of, or independent
contractors with respect to, the Company or its Subsidiaries,
including taking any action that accelerates the vesting or
exercisability of stock options, restricted stock or other
compensation or benefits payable thereunder, except, in each
such case, as may be required by applicable law or expressly
required by the terms of Contracts set forth in the Company
Disclosure Schedule or Company SEC Documents and as such
Contracts are in effect as of the date hereof.
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(g)
Dispositions.
Except for sales of
securities or other investments or assets in the ordinary course
of business consistent with past practice or previously
disclosed in the Company SEC Documents, and the Company’s
entering into any and all agreements related thereto, sell,
transfer, mortgage, lease, encumber or otherwise dispose of or
discontinue any material portion of its assets, business or
properties.
(h)
Acquisitions.
Except for the purchase
of securities or other investments or assets in the ordinary
course of business consistent with past practice, acquire a
substantial equity interest in or material portion of the assets
of any other Person.
(i)
Governing Documents.
Amend or make
any change to the Company Certificate or the Company Bylaws or
the governing instrument or document (as the case may be) of any
Subsidiary.
(j)
Accounting Methods.
Implement or
adopt any change in accounting principles, practices or methods,
other than as may be required by GAAP.
(k)
Contracts.
Except in the ordinary
course of business consistent with past practice, enter into,
renew or terminate any material Contract or amend or modify in
any material respect, or waive any material right under, any of
its existing material Contracts.
(l)
Claims.
Settle any Proceeding, except
for any Proceeding involving solely money damages in an amount,
individually and in the aggregate for all such settlements, not
more than $100,000 and which could not reasonably be expected to
establish an adverse precedent or basis for subsequent
settlements.
(m)
Capital Expenditures.
Authorize or
make any capital expenditures, other than (1) annual
budgeted amounts previously disclosed to Acquiror, (2) in
the ordinary and usual course of business consistent with past
practice in amounts not exceeding $100,000 in the aggregate, or
(3) expenditures made through the entering into capital
leases.
(n)
Tax Matters.
Make or change any Tax
election, change any annual tax accounting period, adopt or
change any method of Tax accounting, file any amended Tax
Return, enter into any closing agreement, settle any Tax claim
or assessment, surrender or compromise any right to claim a Tax
refund or consent to any extension or waiver of the limitations
period applicable to any Tax claim or assessment, other than any
of the foregoing actions that are required by law or are
(i) not, alone or in the aggregate, material and
(ii) taken in the ordinary and usual course of business,
consistent with past practice.
(o)
Indebtedness.
(A) Incur any
indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance existing short-term
indebtedness, and indebtedness of the Company or any of its
Subsidiaries to the Company or any of its Subsidiaries),
(B) assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any
other Person, or (C) forgive or extinguish any indebtedness
to the Company or any of its Subsidiaries for borrowed money or
otherwise waive any rights under any instrument or arrangement
pursuant to which such indebtedness was incurred.
(p)
Commitments.
Agree or commit to do,
or adopt any resolutions of its board of directors in support
of, anything that would be precluded by clauses (a) through
(o).
SECTION 5.2.
Forbearances of
Acquiror.
From the date hereof until the
Effective Time, except as expressly contemplated by this
Agreement or Acquiror’s Disclosure Schedule, without the
prior written consent of the Company, Acquiror will not, and
will cause each of its Subsidiaries not to:
(a)
Ordinary Course.
Conduct the business
of Acquiror or any of its Subsidiaries other than in the
ordinary and usual course and consistent with past practices.
(b)
Status Quo.
Except in connection with
actions and expenses necessary to fulfill the conditions set
forth in Article 6, or, to the extent consistent therewith,
fail to use reasonable best efforts to preserve intact any of
their business organizations and assets and maintain their
rights, franchises and existing relations with clients,
customers, distributors, representatives, independent
contractors, suppliers, employees and business associates; or
engage in any new lines of business.
A-37
(c)
Capital Stock.
Other than pursuant to
the exercise of Rights set forth in the Acquiror Disclosure
Schedule and outstanding on the date hereof, (1) authorize
for issuance, issue, grant, sell, deliver, dispose, pledge or
otherwise encumber any additional shares of Acquiror Stock or
any Rights, (2) enter into any Contract with respect to the
foregoing, or (3) permit any additional shares of Acquiror
Stock to become subject to new grants of employee or director
stock options, other Rights or similar stock- based employee
rights; provided; however, that Acquiror shall have the right to
issue up to an additional 100,000 shares of its common
stock upon the prior written consent of the Company, which
consent will not be unreasonably withheld.
(d)
Dividends, Etc.
(1) Make,
declare, pay or set aside for payment any dividend on or in
respect of, or declare or make any distribution on, any shares
of its capital stock, other than dividends from wholly-owned
Subsidiaries to Acquiror (in each case having record and payment
dates consistent with past practice) or (2) directly or
indirectly adjust, split, combine, redeem, reclassify, purchase
or otherwise acquire, any shares of its capital stock, other
than as required by the Acquiror Stock Plans upon exercise of
Rights set forth in the Acquiror Disclosure Schedule and
outstanding on the date hereof.
(e)
Compensation; Employment Agreements;
Etc.
Enter into, amend, modify or renew any
Contract regarding employment, consulting, severance or similar
arrangements with any director, officer, or independent
contractor of Acquiror or its Subsidiaries, or grant any salary,
wage or other increase in compensation or increase in any
employee benefit (including incentive or bonus payments), except
(1) for changes that are required by applicable law,
(2) to satisfy Contracts set forth in the Acquiror
Disclosure Schedule and existing on the date hereof or
(3) for salary, wage or other compensation changes in the
ordinary course consistent with past practice.
(f)
Benefit Plans.
Enter into, establish,
adopt, amend or modify any pension, retirement, stock option,
stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit,
incentive or welfare Contract, plan, program or arrangement, or
any trust agreement (or similar arrangement) related thereto, in
respect of any directors, officers, employees of, or independent
contractors with respect to, Acquiror or its Subsidiaries,
including taking any action that accelerates the vesting or
exercisability of stock options, restricted stock or other
compensation or benefits payable thereunder, except, in each
such case, (1) as may be required by applicable law or
(2) expressly required by the terms of Contracts set forth
in the Acquiror Disclosure Schedule or Acquiror SEC Documents
and as such Contracts are in effect as of the date hereof.
(g)
Dispositions.
Except for sales of
securities or other investments or assets in the ordinary course
of business consistent with past practice or previously
disclosed in the Acquiror SEC Documents, and Acquiror’s
entering into any and all agreements related thereto, sell,
transfer, mortgage, lease, encumber or otherwise dispose of or
discontinue any material portion of its assets, business or
properties.
(h)
Acquisitions.
Except for the purchase
of securities or other investments or assets in the ordinary
course of business consistent with past practice, acquire a
substantial equity interest in or material portion of the assets
of any other Person.
(i)
Governing Documents.
Amend or make
any change to Acquiror’s certificate of incorporation or
bylaws or the governing instrument or document (as the case may
be) of any Subsidiary.
(j)
Accounting Methods.
Implement or
adopt any change in accounting principles, practices or methods,
other than as may be required by GAAP.
(k)
Contracts.
Except in the ordinary
course of business consistent with past practice, enter into,
renew or terminate any material Contract or amend or modify in
any material respect, or waive any material right under, any of
its existing material Contracts.
(l)
Claims.
Settle any Proceeding, except
for any Proceeding involving solely money damages in an amount,
individually and in the aggregate for all such settlements, not
more than $100,000 and which could not reasonably be expected to
establish an adverse precedent or basis for subsequent
settlements.
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(m)
Capital Expenditures.
Authorize or
make any capital expenditures, other than (1) annual
budgeted amounts previously disclosed to the Company (2) in
the ordinary and usual course of business consistent with past
practice in amounts not exceeding $100,000 in the aggregate or
(3) expenditures made through the entering into capital
leases.
(n)
Tax Matters.
Make or change any Tax
election, change any annual Tax accounting period, adopt or
change any method of Tax accounting, file any amended Tax
Return, enter into any closing agreement, settle any Tax claim
or assessment, surrender or compromise any right to claim a Tax
refund or consent to any extension or waiver of the limitations
period applicable to any Tax claim or assessment, other than any
of the foregoing actions that are required by law or are
(i) not, alone or in the aggregate, material and
(ii) taken in the ordinary and usual course of business,
consistent with past practice.
(o)
Indebtedness.
(A) Incur any
indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance existing short-term
indebtedness, and indebtedness of Acquiror or any of its
Subsidiaries to Acquiror or any of its Subsidiaries),
(B) assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any
other Person, or (C) forgive or extinguish any indebtedness
to Acquiror or any of its Subsidiaries for borrowed money or
otherwise waive any rights under any instrument or arrangement
pursuant to which such indebtedness was incurred.
(p)
Commitments.
Agree or commit to do,
or adopt any resolutions of its board of directors in support
of, anything that would be precluded by clauses (a) through
(o).
SECTION 5.3.
No Solicitation.
(a) From the date of this Agreement until the Effective
Time or the termination of this Agreement pursuant to its terms,
the Company agrees that it will not and will not permit any of
its Subsidiaries, or any of its or their officers, directors,
employees, representatives, agents, or Affiliates, including,
without limitation, any investment banker, attorney or
accountant retained by the Company or any of its Subsidiaries
(collectively, “
Representatives
”) to, directly
or indirectly, (i) initiate, solicit, encourage or
otherwise facilitate (including by way of furnishing information
or otherwise), any inquiries or the making of any proposal or
offer that constitutes, or may reasonably be expected to lead to
an Acquisition Proposal (as defined below), or (ii) enter
into or maintain or continue discussions or negotiate with any
Person in furtherance of such inquiries or to obtain an
Acquisition Proposal, or (iii) agree to, approve,
recommend, or endorse any Acquisition Proposal, or resolve,
agree or publicly propose to take any such action and the
Company shall promptly notify Acquiror of any such inquiries and
proposals received by the Company or any of its Subsidiaries or
Representatives, relating to any of such matters,
provided
,
however
, that at any time prior to the
Company Requisite Stockholder Vote, the Company Board (and the
Company Special Committee) may, in response to a written
Acquisition Proposal that the Company Board (upon the
recommendation of the Company Special Committee) determines, in
good faith, after consultation with outside counsel and
financial advisors, constitutes, or could reasonably be expected
to lead to, a Superior Proposal, and which Acquisition Proposal
did not result from a breach of this Section 5.3(a),
(x) provide access or furnish information with respect to
the Company and its Subsidiaries to the Person making such
Acquisition Proposal (and its representatives) pursuant to a
customary confidentiality agreement and (y) engage in
discussions or negotiations with the Person making such
Acquisition Proposal (and its representatives) regarding such
Acquisition Proposal;
provided further
,
however
,
that, subject to the right of the Company to withhold
information where such disclosure would violate or prejudice the
rights of its or its Subsidiaries’ clients, jeopardize the
attorney-client privilege of the Company or its Subsidiaries or
contravene any law or binding agreement entered into prior to
the date of this Agreement, the Company shall promptly provide
to Acquiror any non-public information that is provided to the
Person making such Acquisition Proposal or its representatives
which was not previously provided to Acquiror. The Company shall
also, within one Business Day, notify Acquiror of the receipt of
any Acquisition Proposal and the material terms and conditions
thereof. Further, the Company shall promptly keep Acquiror
advised on a substantially current basis of any developments
relating to any such Acquisition Proposal.
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(b) For purposes of this Agreement, “
Acquisition
Proposal
” means an offer or proposal regarding any of
the following (other than the transactions contemplated by this
Agreement) including the Company or its Subsidiaries:
(i) any merger, reorganization, consolidation, share
exchange, recapitalization, business combination, liquidation,
dissolution, or other similar transaction involving, or, an
acquisition in any manner of, all or any significant portion of
the assets or any significant equity interest of, the Company or
any of its Subsidiaries, in a single transaction or series of
related transactions which would reasonably be expected to
interfere with the completion of the Merger; or (ii) any
tender offer or exchange offer for any outstanding shares of
capital stock of the Company or the filing of a registration
statement under the Securities Act in connection therewith.
(c) For purposes of this Agreement, the term
“
Superior Proposal
” means any written offer
made by a third party that the Company Board (upon the
recommendation of the Company Special Committee, if appropriate)
reasonably determines to be bona fide for a transaction that if
consummated, would result in such third party acquiring,
directly or indirectly, more than 50% of the voting power of the
Company Common Stock (or, in the case of a direct merger, the
common stock of the resulting company) or all or substantially
all the consolidated assets of the Company and its Subsidiaries
for consideration consisting of cash
and/or
securities payable to holders of shares of Company Common Stock
that the Company Board (upon the recommendation of the Company
Special Committee, if appropriate) determines in good faith,
after consultation with its financial advisors and outside
counsel, to be more favorable to holders of Company Common Stock
(other than Acquiror and its Affiliates) than the Merger, taking
into account all financial, regulatory, legal and other aspects
of such offer and transaction and any changes to the terms of
this Agreement proposed by Acquiror in response to such Superior
Proposal or otherwise.
(d) The Company Board shall not (i) withdraw or modify
in a manner adverse to Acquiror or MergerCo, or propose publicly
to withdraw or modify in a manner adverse to Acquiror or
MergerCo, the Recommendation or resolve, agree or propose
publicly to take any such action (any such action or any such
resolution or agreement to take such action being referred to
herein as an “
Adverse Recommendation Change
”),
unless at any time prior to obtaining the Company Requisite
Stockholder Vote, (A) the Company Board receives an
Acquisition Proposal that the Company Board determines, in good
faith and after consultation with its outside counsel and
financial advisors, does constitute, or could reasonably be
expected to lead to, a Superior Proposal or (B) other than
in connection with an Acquisition Proposal, if the Company Board
determines in good faith after consultation with outside counsel
that failure to take such action would result in a breach by the
Company Board of its fiduciary duties to the Company’s
stockholders under applicable law;
provided
, in each
case, that the Company shall provide Acquiror with no less than
two Business Days notice of any expected Adverse Recommendation
Change prior to any such change or (ii) cause or permit the
Company to enter into any letter of intent, memorandum of
understanding, agreement in principle, acquisition agreement,
merger agreement, option agreement, joint venture agreement,
partnership agreement or other agreement constituting or related
to, or which is intended to or is reasonably likely to lead to,
any Acquisition Proposal (other than a confidentiality agreement
entered into in accordance with Section 5.3(a)).
SECTION 5.4.
Company Stockholders
Meeting.
The Company, acting through the Company
Board or the Company Special Committee, will as promptly as
practicable following the date of this Agreement and in
consultation with Acquiror and MergerCo:
(a) duly call, give notice of, convene and hold a meeting
of its stockholders for the purpose of considering and approving
this Agreement and the transactions contemplated hereby (the
“
Company Stockholders Meeting
”), and
(b) (1) include in the Joint Proxy
Statement/Prospectus (as defined in Section 5.6) the
recommendation of the Company Board that the stockholders of the
Company vote in favor of the approval of this Agreement and the
transactions contemplated hereby (the
“
Recommendation
”), as well as the written
opinion of Seven Hills Partners LLC, the Company Special
Committee’s financial advisor, that, as of the date of such
opinion, the consideration to be received by the stockholders of
the Company (excluding Acquiror and its Affiliates) pursuant to
the Merger is fair to such stockholders from a financial point
of
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view and (2) use its commercially reasonable efforts to
obtain the Requisite Stockholder Vote; provided, however, that
the Company Board may fail to make or may withdraw or modify
such recommendation or fail to seek the Requisite Stockholder
Vote if prior to obtaining the Company Requisite Stockholder
Vote, (A) the Company Board receives an Acquisition
Proposal that the Company Board determines, in good faith and
after consultation with its outside counsel and financial
advisors, does constitute, or could reasonably be expected to
lead to, a Superior Proposal or (B) other than in
connection with an Acquisition Proposal, if the Company Board
determines in good faith after consultation with outside counsel
that failure to take such action would result in a breach by the
Company Board of its fiduciary duties to the Company’s
stockholders under applicable law;
provided
, in each
case, that the Company shall have provided Acquiror with no less
than two Business Days notice of such determination.
SECTION 5.5.
Acquiror Stockholders
Meeting.
Acquiror, acting through the Acquiror
Board or the Acquiror Special Committee, will as promptly as
practicable following the date of this Agreement and in
consultation with Company:
(a) duly call, give notice of, convene and hold a meeting
of its stockholders for the purpose of considering and approving
the issuance of Acquiror Common Stock in connection with the
Merger (the “
Acquiror Stockholders
Meeting
”), and
(b) (1) include in the Joint Proxy
Statement/Prospectus the recommendation of the Acquiror Board
that the stockholders of Acquiror vote in favor of the proposals
regarding (x) the issuance of Acquiror Common Stock in
connection with the Merger and (y) the amendment to the
Acquiror Certificate to authorize shares necessary to effectuate
the transactions contemplated hereby, as well as the written
opinion of Duff & Phelps, LLC, that, as of the date of
such opinion, the Common Stock Exchange Ratio is fair to the
public stockholders of Acquiror from a financial point of view
and (2) use its commercially reasonable efforts to obtain
the necessary approval of the issuance of Acquiror Common Stock
in connection with the Merger and of the amendment of the
Acquiror Certificate to increase the number of authorized shares
of Acquiror Common Stock, provided however, that the Acquiror
Board may fail to make or may withdraw or modify such
recommendation (any such action or any such resolution or
agreement to take such action being referred to herein as an
“
Acquiror Adverse Recommendation Change
”), or
fail to seek such approval if the Acquiror Board determines in
good faith after consultation with outside counsel that failure
to so act would result in a breach by the Acquiror Board of its
fiduciary duties to Acquiror’s stockholders under
applicable law;
provided
, in each case, that the Acquiror
shall have provided Company with no less than two Business Days
notice of such determination.
SECTION 5.6.
Registration Statement and Other
SEC Filings.
(a) As soon as reasonably practicable after the execution
of this Agreement, (i) the Company and Acquiror will
prepare and file with the SEC a preliminary joint proxy
statement relating to the Company Stockholders Meeting and the
Acquiror Stockholders Meeting and (ii) Acquiror will
prepare and file with the SEC a Registration Statement on
Form S-4
(the “
Registration Statement
”) in connection
with the registration under the Securities Act of the Acquiror
Common Stock issuable in the Merger (including Acquiror Common
Stock issuable upon exercise of outstanding Company Options and
outstanding Company Warrants). The joint proxy statement
furnished to the Company’s stockholders in connection with
the Company Special Meeting and the joint proxy statement
furnished to Acquiror’s stockholders in connection with the
Acquiror Special Meeting will be included as part of the
prospectus (the “
Joint Proxy
Statement/Prospectus
”) forming a part of the
Registration Statement. Acquiror, MergerCo and the Company will
cooperate and consult with each other, their respective counsel
and accountants, in the preparation of the Joint Proxy
Statement/Prospectus and Registration Statement, and provided
that all parties have cooperated as required above, Acquiror and
the Company agree to file the Joint Proxy Statement/Prospectus
and Registration Statement with the SEC as promptly as
practicable. Without limiting the generality of the foregoing,
the Company will furnish to Acquiror the information relating to
it required by the Exchange Act and the rules and regulations
promulgated thereunder to be set forth in the Joint Proxy
Statement/Prospectus and Registration Statement. Acquiror shall
not file the Joint Proxy
A-41
Statement/Prospectus and Registration Statement, or any
amendment or supplement thereto, without providing the Company a
reasonable opportunity to review and comment thereon.
(b) Each party shall use its commercially reasonable
efforts to resolve, and Acquiror agrees to consult and cooperate
with the Company in resolving, all SEC comments with respect to
the Joint Proxy Statement/Prospectus and Registration Statement
as promptly as practicable after receipt thereof and to cause
the Joint Proxy Statement/Prospectus in definitive form to be
mailed to the Company’s stockholders and Acquiror’s
stockholders as soon as practicable after all SEC staff comments
have been resolved. Acquiror agrees to consult with the Company
prior to responding to SEC comments with respect to the Joint
Proxy Statement/Prospectus and the Registration Statement, and
agrees to cooperate with the Company in formulating such
responses. Each of Acquiror, MergerCo and the Company agrees to
correct any information provided by it for use in the Joint
Proxy Statement/Prospectus and the Registration Statement which
shall have become false or misleading. Each party shall as soon
as reasonably practicable (i) notify the other parties of
the receipt of any comments from the SEC with respect to the
Joint Proxy Statement/Prospectus and the Registration Statement
and any request by the SEC for any amendment to the Joint Proxy
Statement/Prospectus or the Registration Statement or for
additional information and (ii) provide each other party
with copies of all correspondence between a party and its
employees and other authorized representatives, on the one hand,
and the SEC, on the other hand, with respect to the Joint Proxy
Statement/Prospectus or the Registration Statement and
(iii) notify the other parties of any event which occurs
that should be described in an amendment or supplement to the
Joint Proxy Statement/Prospectus or the Registration Statement.
Acquiror will advise the Company, promptly after Acquiror
receives notice thereof, of the time when the Registration
Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the
suspension of the qualification of Acquiror Common Stock for
offering or sale in any jurisdiction, of the initiation or
threat of any Proceeding for any such purpose, or of any request
by the SEC for the amendment or supplement of the Registration
Statement or for additional information.
(c) The Company shall use its commercially reasonable
efforts to cause to be delivered to Acquiror a letter and
consent relating to the financial statements of the Company
included in the Registration Statement from Eisner LLP, the
Company’s independent registered public accounting firm,
dated a date within two Business Days before the date on which
the Registration Statement shall become effective and addressed
to Acquiror, in form and substance reasonably satisfactory to
Acquiror and customary in scope and substance for letters and
consents delivered by independent public accountants in
connection with registration statements similar to the
Registration Statement.
(d) Acquiror shall use its commercially reasonable efforts
to cause to be delivered to the Company a letter and consent
relating to the financial statements of Acquiror included in the
Registration Statement from Eisner LLP, Acquiror’s
independent registered public accounting firm, dated a date
within two Business Days before the date on which the
Registration Statement shall become effective and addressed to
the Company, in form and substance reasonably satisfactory to
the Company and customary in scope and substance for letters and
consents delivered by independent public accountants in
connection with registration statements similar to the
Registration Statement.
(e) Acquiror agrees to use its reasonable best efforts to
obtain all necessary state securities law or “Blue
Sky” permits and approvals required to carry out the
transactions contemplated by this Agreement.
SECTION 5.7.
Stock
Listing.
Acquiror shall use its reasonable best
efforts to cause the shares of Acquiror Common Stock to be
issued in the Merger and shares reserved for issuance to be
approved for listing on the NASDAQ, as promptly as practicable,
and in any event before the Effective Date.
SECTION 5.8.
Access to Information;
Confidentiality.
(a) The Company and its Subsidiaries, on one hand, and
Acquiror and its Subsidiaries on the other, shall upon
reasonable prior notice and subject to applicable laws relating
to the exchange of information, afford the other party and its
officers, employees, counsel, accountants and other authorized
representatives, such access during normal business hours
throughout the period prior to the Effective Time to the
A-42
books, records (including, without limitation, Tax Returns and
work papers of independent auditors), properties, personnel and
to such other information as the other party may reasonably
request and, during such period, it shall furnish promptly to
such other party (1) a copy of each material report,
schedule and other document filed by it pursuant to the
requirements of Securities Laws, and (2) all other
information concerning the business, properties, personnel and
affairs of it as the other may reasonably request. No
investigation pursuant to this Section 5.8 shall affect or
otherwise obviate or diminish any representations or warranties
of any party or conditions to the obligations of any party.
(b) The parties hereto acknowledge that Acquiror and the
Company have previously executed that certain Mutual
Nondisclosure and Confidentiality Agreement, effective
June 5, 2007, which shall continue in full force and effect
in accordance with its terms.
SECTION 5.9.
Commercially Reasonable
Efforts.
(a) Subject to the terms and conditions of this Agreement
and applicable law, each of the Company and Acquiror agrees to
use its commercially reasonable efforts in good faith to take,
or cause to be taken (including causing any of its subsidiaries
to take), all actions, and to do, or cause to be done, all
things necessary, proper or desirable, or advisable under
applicable laws and regulations or otherwise, so as to permit
consummation and make effective the Merger as promptly as
reasonably practicable and otherwise to enable consummation of
the transactions contemplated hereby, including such actions or
things as any other party hereto may reasonably request in order
to cause any of the conditions to such other party’s
obligations to consummate such transactions specified in
Article 6 to be fully satisfied.
(b) Without limiting the generality of Section 5.9(a),
the parties will, and will cause their respective officers and
subsidiaries to, and will use commercially reasonable efforts to
cause their respective Affiliates, directors, employees, agents,
attorneys, accountants and representatives to, consult and fully
cooperate with and provide assistance to each other in
(i) obtaining all necessary consents, approvals, waivers,
licenses, permits, authorizations, registrations,
qualifications, or other permission or action by, and giving all
necessary notices to and making all necessary filings with and
applications and submissions to any Person; (ii) lifting
any permanent or preliminary injunction or restraining order or
other similar order issued or entered by any court or
Governmental Authority; (iii) taking such actions as may
reasonably be required under applicable federal securities laws
in connection with the issuance of the Acquiror Common Stock to
be covered by the Registration Statement; and (iv) in
general, consummating and making effective the transactions
contemplated hereby;
provided
,
however
, that in
order to obtain any consent, approval, waiver, license, permit,
authorization, registration, qualification, or other permission
or action or the lifting of any injunction referred to in
clause (i) or (ii) of this sentence, no party will be
required to pay any consideration (other than filing fees for
any governmental filings or listing fees for any stock
exchange), to divest itself of any of, or otherwise rearrange
the composition of, its assets or to agree to any of the
foregoing or to any conditions or requirements that are
materially adverse to its interests or materially burdensome.
SECTION 5.10.
Regulatory Applications.
(a) Acquiror and the Company and their respective
subsidiaries shall cooperate and use their respective reasonable
best efforts to prepare all documentation, to effect all filings
and to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities
necessary to consummate the transactions contemplated by this
Agreement as promptly as reasonably practicable. Each of
Acquiror and the Company shall have the right to review in
advance, and to the extent practicable each will consult with
the other (subject in each case to applicable laws relating to
the exchange of information) with respect to, all material
written information submitted to any third party or Governmental
Authority in connection with the transactions contemplated by
this Agreement. In exercising the foregoing right, each of
Acquiror and the Company agrees to act reasonably and as
promptly as practicable. Each of Acquiror and the Company agrees
that it will consult with the other party hereto with respect to
the obtaining of all material permits, consents, approvals and
authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions
contemplated
A-43
by this Agreement and each party will keep the other party
apprised of the status of material matters relating to
completion of the transactions contemplated hereby.
(b) Each of Acquiror and the Company agrees, upon request,
to furnish the other party with all information concerning
itself, its Subsidiaries, directors, officers and stockholders
and such other matters as may be reasonably necessary or
advisable in connection with any filing, notice or application
made by or on behalf of such other party or any of its
Subsidiaries to any third party or Governmental Authority.
SECTION 5.11.
Certain Employee
Benefits.
In the event that Acquiror discontinues
any Company Benefit Plans for the benefit of Continuing
Employees and replaces them with new benefit plans, programs or
arrangements or Acquiror Benefit Plans, Acquiror shall, or shall
cause its Subsidiaries to, cause each such plan, program or
arrangement to treat such Continuing Employee in the same manner
as similarly situated employees of Acquiror and treat the prior
service with the Company of each Continuing Employee (to the
same extent such service is recognized under any analogous
plans, programs or arrangements of the Company immediately prior
to the Effective Time to the extent such a plan, program or
arrangement is in effect immediately prior to the Effective
Time) as service rendered to Acquiror or its Subsidiaries, as
the case may be, solely for purposes of eligibility to
participate and for vesting thereunder (but not for purposes of
benefit accruals under a defined benefit plan). To the extent
commercially reasonable, Acquiror and its Subsidiaries will
cause any and all preexisting condition limitations (to the
extent applicable) and eligibility waiting periods, under any
health plans maintained or adopted by Acquiror or its
Subsidiaries in which Covered Employees are eligible to
participate after the Effective Time, to be waived with respect
to (a) Continuing Employees who, immediately prior to the
Effective Time, participated in a Company- sponsored health plan
and (b) their eligible dependents. Acquiror and its
Subsidiaries will make commercially reasonable efforts to
recognize, for purposes of any annual deductible and
out-of-pocket limits under its existing or any new health plans,
deductible and out-of-pocket expenses paid by Continuing
Employees and their dependents during the calendar year in which
the Effective Time occurs under the health plans of the Company
and its Subsidiaries. Nothing in this Section 5.11 shall
prevent Acquiror from amending or terminating any Company
Benefit Plans or Acquiror Benefit Plans (or its Subsidiaries) or
any other contracts, arrangements, commitments or
understandings, in accordance with their terms and applicable
law; providing, however, that the arrangements identified in
Section 5.11 of the Company Disclosure Schedule shall be
administered as described therein. No Continuing Employee who
participates in any Acquiror Benefit Plan as of the date of this
Agreement shall be adversely affected by the provisions of this
section 5.11, other than the preservation of the rights of
Acquiror or its Subsidiaries to amend or terminate any Company
Benefit Plans or Acquiror Benefit Plans or any other contracts,
arrangements, commitments or understandings, as set forth in the
immediately preceding sentence.
SECTION 5.12.
Directors’ and
Officers’ Indemnification.
(a) From and after the Effective Time, Acquiror and the
Surviving Corporation shall indemnify and hold harmless each
current (as of the Effective Time) and former officer and
director of the Company and its subsidiaries (when acting in
such capacity) (the “
Indemnified Parties
”),
against all claims, losses, liabilities, damages, judgments,
inquiries, fines and reasonable fees, costs and expenses,
including attorneys’ fees and disbursements (collectively,
“
Costs
”), incurred in connection with any
Proceeding arising out of or pertaining to the fact that the
Indemnified Party is or was at any time prior to the Effective
Time a director or officer of the Company or its subsidiaries,
pertaining to any matter existing or occurring at or prior to
the Effective Time and whether asserted or claimed prior to, at
or after the Effective Time, to the same extent such Persons are
indemnified or have the right to advancement of expenses as of
the date hereof by the Company pursuant to the Company
Certificate, the Company Bylaws and indemnification agreements,
if any, in existence on the date hereof.
(b) The parties agree that all rights to indemnification,
including provisions relating to advances of expenses, existing
in favor of the Indemnified Parties as provided in
Section 5.12(a), will survive the Merger and will continue
in full force and effect for a period of not less than six years
from the Effective Time; provided, however, that all rights to
indemnification in respect of any claim asserted, made or
commenced within such period will continue until the final
disposition of such claim.
A-44
(c) The provisions of this Section 5.12 are intended
to be for the benefit of, and shall be enforceable by, each of
the Indemnified Parties and their respective heirs and legal
representatives. The indemnification provided for herein shall
not be deemed exclusive of any other rights to which an
Indemnified Party is entitled, whether pursuant to law, contract
or otherwise.
(d) In the event that either Acquiror or the Surviving
Corporation or their respective successors or assigns
(i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers or
conveys all or a majority of its properties and assets to any
Person, then, and in each such case, proper provision shall be
made so that the successors and assigns of Acquiror or the
Surviving Corporation, as the case may be, shall succeed to the
obligations set forth in this Section 5.12.
(e) As of the Effective Time, the Surviving Corporation
shall have purchased, and shall maintain, a tail policy to the
current policy of directors’ and officers’ liability
insurance maintained on the date hereof by the Company (the
“
Current Policy
”) which tail policy shall be
effective for a period from the Effective Time through and
including the date six years after the Effective Time with
respect to claims arising from facts or events that existed or
occurred prior to or at the Effective Time, and which tail
policy shall contain substantially the same coverage and amount
as, and contain terms and conditions no less advantageous, in
the aggregate, than the coverage currently provided by the
Current Policy.
SECTION 5.13.
Notification of Certain
Matters.
Between the date hereof and the
Effective Time, each party will give prompt notice in writing to
the other party of: (i) any information that indicates that
any of its representations or warranties contained herein was
not true and correct in any material respect as of the date
hereof or will be untrue and incorrect in any material respect
at and as of the Effective Time (except for changes permitted or
contemplated by this Agreement), (ii) the occurrence or
non-occurrence of any event which will result, or is reasonably
likely to result, in the failure of any condition set forth in
Article 6, any covenant or agreement contained in this
Agreement to be complied with or satisfied, (iii) any
failure of the Company to satisfy any condition or comply with,
in any material respect, any covenant or agreement to be
satisfied or complied with by it hereunder, (iv) any notice
or other communication from any third party alleging that the
consent of such third party is or may be required in connection
with the transactions contemplated by this Agreement or that
such transactions otherwise may violate the rights of or confer
remedies upon such third party and (v) any notice of, or
other communication relating to, any Litigation referred to in
Section 5.17 or any order or judgment entered or rendered
therein;
provided
,
however
, that the delivery of
any notice pursuant to this Section 5.13 will not limit or
otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION 5.14.
Affiliate Agreements.
(a) Not later than the 15th day prior to the mailing
of the Joint Proxy Statement/Prospectus, the Company shall
deliver to Acquiror a schedule of each Person that, to the
Company’s Knowledge, is or is reasonably likely to be, as
of the date of the Company Stockholders Meeting, deemed to be an
“Affiliate” of the Company (each, a “
Company
Affiliate
”) as that term is used in Rule 145 under
the Securities Act.
(b) The Company shall use its reasonable best efforts to
cause each Person who may be deemed to be a Company Affiliate to
execute and deliver to Acquiror, on or before the date of
mailing of the Joint Proxy Statement/Prospectus, an agreement in
substantially the form attached hereto as
Annex A.
SECTION 5.15.
Section 16
Matters.
Assuming that the Company delivers to
Acquiror the Section 16 Information (as defined below) in a
timely and accurate manner before the Effective Time,
Acquiror’s Board, or a committee of “non-employee
directors” thereof (as such term is defined for purposes of
Rule 16b-3(d)
under the Exchange Act), shall reasonably promptly thereafter
and in any event before the Effective Time adopt a resolution
providing that the receipt by the Company Insiders (as defined
below) of Acquiror Common Stock in exchange for shares of
Company Stock, and of Company Stock Options or Company warrants
to purchase shares of Acquiror Common Stock upon conversion of
Company Stock Options and Company Warrants, in each case
pursuant to the transactions contemplated hereby and to the
extent such securities are listed in the Section 16
Information, are intended to be exempt from liability pursuant
to Section 16(b) under
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the Exchange Act, such that any such receipt shall be so exempt.
For the purpose of this Section 5.15, “
Company
Insiders
” means those officers and directors of the
Company subject to the reporting requirements of
Section 16(a) of the Exchange Act and who are listed in the
Section 16 Information, and “
Section 16
Information
” means information regarding the Company
Insiders, including the number of shares of Company Common Stock
held or to be held by a Company Insider expected to be exchanged
for Acquiror Common Stock in the Merger, and the number and
description of the Company Stock Options and Company Warrants
held by a Company Insider and expected to be converted into
options or warrants to purchase shares of Acquiror Common Stock
in connection with the Merger.
SECTION 5.16.
Plan of Reorganization.
(a) This Agreement is intended to constitute a “plan
of reorganization” within the meaning of
section 1.368-2(g)
of the income tax regulations promulgated under the Code. From
and after the date of this Agreement and until the Effective
Time, each party hereto shall use its commercially reasonable
efforts to cause the Merger to qualify, and will not take any
action, cause any action to be taken, fail to take any action or
cause any action to fail to be taken which action or failure to
act could prevent the Merger from qualifying, as a
“reorganization” within the meaning of
Section 368(a) of the Code. Following the Effective Time,
neither the Surviving Corporation, Acquiror nor any of their
Affiliates shall knowingly take any action, cause any action to
be taken, fail to take any action or cause any action to fail to
be taken, which action or failure to act could cause the Merger
to fail to qualify as a “reorganization” within the
meaning of Section 368(a) of the Code.
(b) As of the date hereof, neither Acquiror nor the Company
knows of any reason (i) why it would not be able to deliver
to counsel to Acquiror, at the date of the legal opinion
required by Section 6.1(f), certificates substantially in
compliance with IRS published advance ruling guidelines, with
customary exceptions and modifications thereto, to enable such
firm to deliver such opinion, and Acquiror and the Company
hereby agree to deliver such certificates effective as of the
date of such opinion or (ii) why counsel to Acquiror would
not be able to deliver the opinion required by
Section 6.1(f). Acquiror and the Company will deliver such
certificates to counsel to the Acquiror and will cooperate with
such counsel in all reasonable respects.
SECTION 5.17.
Stockholder
Litigation.
Each of the parties agrees to give
the other party the opportunity to participate in the defense or
settlement of any stockholder Litigation against Acquiror or the
Company, as the case may be, and their respective officers or
directors relating to any Litigation to which Acquiror or the
Company is a party, and each of the parties shall not settle any
such Litigation without the prior consent of the other party,
which shall not be unreasonably withheld, delayed or
conditioned. Except as expressly stated otherwise in this
Section 5.17, the party named in any stockholder Litigation
shall control and make all decisions related to such stockholder
Litigation.
SECTION 5.18.
Consents of
Accountants.
Acquiror and the Company will each
use reasonable best efforts to cause to be delivered to each
other consents from their respective independent registered
public accounting firm, dated the date on which the Registration
Statement shall become effective, in form reasonably
satisfactory to the recipient and customary in scope and
substance for consents delivered by independent registered
public accounting firms in connection with registration
statements on
Form S-4
under the Securities Act.
SECTION 5.19.
Appointment of Additional
Directors.
Acquiror shall take such action as may
be required so that immediately after the Effective Date
Acquiror Board shall consist of four (4) individuals
designated by Acquiror and three (3) individuals designated
by the Company. No less than three (3) Business Days prior
to the Effective Date, Acquiror and the Company shall inform the
other in writing of the Persons to be so designated.
SECTION 5.20.
State Takeover
Laws.
If any “fair price,”
“business combination” or “control share
acquisition” statute or other similar statute or regulation
is or may become applicable to the Merger, Acquiror or the
Company, as applicable, shall take such actions as are necessary
so that the transactions contemplated
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by this Agreement may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate
or minimize the effects of any such statute or regulation on the
Merger.
SECTION 5.21.
Certificate of
Amendment.
Prior to the Effective Time Acquiror
will file with the Secretary of State of the State of Delaware a
certificate of amendment to the Acquiror Certificate reflecting
the amendment approved by Acquiror’s stockholders at the
Acquiror Stockholders Meeting.
ARTICLE 6.
CONDITIONS
TO CONSUMMATION OF THE MERGER
SECTION 6.1.
Conditions to Obligations of
Each Party.
The respective obligations of each of
the parties hereto to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment or written
waiver by Acquiror and the Company at or prior to the Effective
Time of the following conditions:
(a)
No Restraints.
No temporary
restraining order, preliminary or permanent injunction or other
order preventing the consummation of the transactions
contemplated hereby, or permitting such consummation only
subject to any condition or restriction that has or would have a
Material Adverse Effect shall have been issued since the date of
this Agreement by any U.S. federal or state court of
competent jurisdiction and shall remain in effect; and no
U.S. federal or state law, statute, rule, regulation or
decree that would prohibit or make the consummation of the
Merger illegal shall have been enacted or adopted since the date
of this Agreement and shall remain in effect.
(b)
Registration Statement.
The
Registration Statement (as amended or supplemented) shall have
been declared effective in accordance with the provisions of the
Securities Act; and no stop order suspending the effectiveness
of the Registration Statement shall have been issued by the SEC,
and no Proceeding shall have been initiated or threatened in
writing by the SEC for the purpose of seeking or obtaining such
a stop order.
(c)
Listing.
The Acquiror Common Stock to
be issued pursuant to this Agreement shall have been approved
for listing on the NASDAQ, subject to official notice of
issuance.
(d)
Company Stockholder Approval.
The
Company shall have obtained the Requisite Stockholder Vote at
the Company Stockholders Meeting.
(e)
Acquiror Stockholder
Approval.
Acquiror shall have obtained the
Requisite Stockholder Vote at the Acquiror Stockholders Meeting.
(f)
Tax Opinion.
The Company and Acquiror
shall have received an opinion (the “
Tax
Opinion
”) of Holland & Knight, LLP, counsel
to Acquiror, or another nationally recognized law firm, dated
the Effective Date, substantially to the effect that, based upon
the facts and assumptions stated therein for United States
federal income tax purposes, the transactions contemplated by
this Agreement should qualify as a “reorganization”
within the meaning of Section 368(a) of the Code. In
rendering such opinion, Holland & Knight, LLP or such
other alternate firm may require and rely upon (and may
incorporate by reference) representations and covenants made in
certificates provided by the parties hereto and upon such other
documents and data as Holland & Knight, LLP or such
other alternate firm deems appropriate as a basis for such
opinion.
(g)
Third Party Consents.
All consents
and approvals of all Persons required in connection with the
execution, delivery and performance of this Agreement and
consummation of the Merger shall have been obtained and shall be
in full force and effect, unless the failure to obtain any such
consent or approval is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on
Acquiror or the Company or to materially adversely affect the
consummation of the Merger.
(h)
Amendment of Acquiror
Certificate.
Acquiror shall have obtained the
Requisite Certificate Vote and shall have filed a certificate of
amendment with the Secretary of State of the State of Delaware
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to increase the number of authorized shares of Acquiror Common
Stock in a sufficient number to satisfy Acquiror’s
obligations under this Agreement.
SECTION 6.2.
Conditions to Obligation of the
Company.
The obligation of the Company to
consummate the transactions contemplated by this Agreement is
also subject to the fulfillment or written waiver by the Company
at or prior to the Effective Time of each of the following
conditions:
(a)
Representations and Warranties.
(1) The representations and warranties of Acquiror and
MergerCo contained in this Agreement shall be true and correct
(without giving effect to any limitation on any representation
or warranty indicated by the words “Material Adverse
Effect”, “in all material respects”, “in any
material respect”, “material” or
“materially”) as of the date hereof and as of the
Effective Time, as though made on and as of the Effective Time
(except to the extent expressly made as of an earlier date, in
which case as of such earlier date), in each case except where
the failure of any such representations and warranties to be so
true and correct would not, or would not reasonably be expected
to, individually or in the aggregate, have a Material Adverse
Effect.
(2) Notwithstanding Section 6.2(a)(1), the
representations and warranties set forth in Section 4.3(e)
(subject to de minimis deviations) and Section 4.3(h)(1)
shall be true and correct in all respects as of the date hereof
and as of the Effective Time, as though made on and as of the
Effective Time.
(3) The Company shall have received a certificate, dated
the Effective Date, signed on behalf of Acquiror by a senior
executive officer to such effect.
(b)
Performance of Obligations of Acquiror and
MergerCo.
Acquiror and MergerCo shall have
performed in all material respects all covenants required to be
performed by it under this Agreement at or prior to the
Effective Time, and the Company shall have received
certificates, dated the Effective Date, signed on behalf of
Acquiror and MergerCo, respectively, by a senior executive
officer to such effect.
(c)
Fairness Opinion.
The Company shall
have received a written opinion in a form reasonably acceptable
to the Company from Seven Hills Partners LLC (or another
investment banking firm reasonably acceptable to the Company) to
the effect that the Common Stock Exchange Ratio is fair, from a
financial point of view, to the holders of the Company Common
Stock (other than Acquiror and its Affiliates).
(d)
Board Matters.
Acquiror shall have
taken all requisite action and shall have obtained letters of
registration necessary, effective as of the Effective Time, to
cause the Acquiror Board to be constituted as set forth in
Section 5.19; provided, however, that the Company shall
have timely provided to Acquiror the names of the
Company-designated individuals as provided for in
Section 5.19.
SECTION 6.3.
Conditions to Obligation of
Acquiror and MergerCo.
The obligation of Acquiror
and MergerCo to consummate the Merger is also subject to the
fulfillment or written waiver by Acquiror at or prior to the
Effective Time of each of the following conditions:
(a)
Representations and Warranties.
(1) The representations and warranties of the Company
contained in this Agreement shall be true and correct (without
giving effect to any limitation on any representation or
warranty indicated by the words “Material Adverse
Effect”, “in all material respects”, “in any
material respect”, “material” or
“materially”) as of the date hereof and as of the
Effective Time, as though made on and as of the Effective Time
(except to the extent expressly made as of an earlier date, in
which case as of such earlier date), in each case except where
the failure of any such representations and warranties to be so
true and correct would not, or would not reasonably be expected
to, individually or in the aggregate, have a Material Adverse
Effect.
(2) Notwithstanding Section 6.3(a)(1), the
representations and warranties set forth in Section 4.2(e)
(subject to de minimis deviations) and Section 4.2(h)(1)
shall be true and correct in all
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respects as of the date hereof and as of the Effective Time, as
though made on and as of the Effective Time.
(3) Acquiror shall have received a certificate, dated the
Effective Date, signed on behalf of the Company by a senior
executive officer to such effect.
(b)
Performance of Obligations of the
Company.
The Company shall have performed in all
material respects all covenants required to be performed by it
under this Agreement at or prior to the Effective Time, and
Acquiror shall have received, prior to the Effective Time, a
certificate, dated the Effective Date, signed on behalf of the
Company by a senior executive officer to such effect.
(c)
Fairness Opinion.
Acquiror shall have
received a written opinion in a form reasonably acceptable to
Acquiror from Duff & Phelps, LLC (or another
investment banking firm reasonably acceptable to Acquiror) to
the effect that the Common Stock Exchange Ratio is fair from a
financial point of view to the public stockholders of Acquiror.
ARTICLE 7.
TERMINATION
SECTION 7.1.
Termination.
This
Agreement may be terminated, and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after
approval thereof by stockholders of the Company or Acquiror:
(a) by the mutual consent of Acquiror and the Company
authorized by their respective Boards of Directors;
(b) by Acquiror or the Company in the event of either:
(1) a breach by the other party of any representation or
warranty contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written
notice to the breaching party of such breach, or (2) a
breach by the other party of any of the covenants or agreements
contained herein, which breach cannot be or has not been cured
within 30 days after the giving of written notice to the
breaching party of such breach and which breach, in each case,
is reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect on the breaching party or the
Surviving Corporation;
(c) At any time prior to the Effective Time, by Acquiror or
the Company in the event that the Merger is not consummated by
March 31, 2008 or such later date as the Company and
Acquiror may mutually agree, except to the extent that the
failure of the Merger then to be consummated arises out of or
results from the knowing action or inaction of the party seeking
to terminate pursuant to this Section 7.1(c);
(d) By the Company or Acquiror in the event (1) the
approval of any Governmental Authority required for consummation
of the Merger and the other transactions contemplated by this
Agreement shall have been denied by final nonappealable action
of such Governmental Authority, or such Governmental Authority
shall have requested the permanent withdrawal of any application
therefor, provided, however, that the party seeking to terminate
this Agreement pursuant to this Section 7.1(d) shall have
used commercially reasonable efforts to prevent the entry of and
to remove such restraint, or (2) the stockholder approval
required by Section 6.1(e) herein is not obtained at the
Company Stockholders Meeting or at any adjournment or
postponement thereof, or (3) the stockholder approval
required by Section 6.1(f) herein is not obtained at the
Acquiror Stockholders Meeting or at any adjournment or
postponement thereof;
(e) By the Company prior to obtaining the Requisite
Stockholder Vote in the event that the Company receives and
accepts a Superior Proposal;
(f) By Acquiror in the event that an Adverse Recommendation
Change has occurred (other than an Adverse Recommendation Change
occurring as a result of an Acquiror Material Adverse Effect);
A-49
(g) By the Company in the event that an Acquiror Adverse
Recommendation Change has occurred (other than an Acquiror
Adverse Recommendation Change occurring as a result of a Company
Material Adverse Effect);
(h) By Acquiror in the event that a willful and material
breach of Section 5.3 has occurred and such breach leads to
the making of a Superior Proposal; and
(i) By the Company in the event that Acquiror receives and
accepts an Acquiror Acquisition Proposal.
Any party desiring to terminate this Agreement shall give
written notice of such termination and the reasons therefor to
the other party.
SECTION 7.2.
Expenses on Termination.
(a) In the event that this Agreement is terminated by
Acquiror pursuant to Section 7.1(b), Section 7.1(f) or
Section 7.1(h) or by the Company pursuant to
Section 7.1(e), then the Company shall reimburse in their
entirety, up to a maximum of $750,000, the fees and expenses of
Acquiror (including attorneys’ fees and expenses) incurred
in connection with this Agreement and the transactions
contemplated herein.
(b) In the event that this Agreement is terminated by the
Company pursuant to Section 7.1(b), Section 7.1(g) or
Section 7.1(i), then Acquiror shall reimburse in their
entirety, up to a maximum of $750,000, the fees and expenses of
the Company (including attorneys’ fees and expenses)
incurred in connection with this Agreement and the transactions
contemplated herein.
(c) The amounts paid pursuant to Section 7.2(a) or
(b) shall constitute for the party receiving the fee such
party’s sole and exclusive remedy for such termination
(other than as provided in Section 7.3 below) and such
amount paid shall constitute liquidated damages in respect of,
the termination of this Agreement regardless of the
circumstances giving rise to such termination.
SECTION 7.3.
Effect of Termination and
Abandonment.
In the event of any termination of
this Agreement pursuant to Section 7.1, this Agreement
(other than as set forth in Section 8.1 below) immediately
will become void and there will be no liability or obligation on
the part of any party or their respective Affiliates,
stockholders, directors, officers, agents or representatives;
provided
, that no such termination will relieve any party
of any liability or damages resulting from any willful or
intentional breach of any of its representations, warranties,
covenants or agreements contained in this Agreement.
ARTICLE 8.
MISCELLANEOUS
SECTION 8.1.
Survival.
No
representations, warranties, agreements and covenants contained
in this Agreement shall survive the Effective Time or
termination of this Agreement if this Agreement is terminated
prior to the Effective Time; provided, however, that (a) to
the extent the agreements of the parties contained herein by
their terms apply after the Effective Time, such agreements
shall survive the Effective Time and (b) if this Agreement
is terminated prior to the Effective Time, the agreements of the
parties contained in Section 5.8(b) and Section 7.2
and Article 8 shall survive such termination.
SECTION 8.2.
Waiver;
Amendment.
Prior to the Effective Time, any
provision of this Agreement may be: (1) waived by the party
benefited by the provision, or (2) amended or modified at
any time, by an agreement in writing between the parties hereto
approved or authorized by their respective Boards of Directors
and executed in the same manner as this Agreement, except that,
after approval of the Merger by the stockholders of the Company
or Acquiror, no amendment may be made which under applicable law
requires further approval of such stockholders without obtaining
such required further approval.
SECTION 8.3.
Counterparts.
This
Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different
parties hereto in separate counterparts, each of
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which when executed shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
SECTION 8.4.
Governing
Law.
This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware,
regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws thereof.
SECTION 8.5.
Expenses.
Each
party hereto will bear all expenses incurred by it in connection
with this Agreement and the transactions contemplated hereby,
whether or not the Merger is consummated, except that Acquiror
shall bear the following: (i) all fees and expenses, other
than attorneys’, accountants’, financial
advisers’ and consultants’ fees and expenses which
shall be paid by the party incurring same, incurred in relation
to the printing and filing with the SEC of the Joint Proxy
Statement/Prospectus, including preliminary materials related
thereto and the Registration Statement, including financial
statements and exhibits, and any amendments and supplements
thereto, and (ii) the filing fees for the Registration
Statement; provided, however, that if this Agreement is
terminated for any reason, the Company will repay to the
Acquiror one-half of all the expenses in clauses (i) and
(ii) actually paid by the Acquiror (other than
attorneys’, accountants’, financial advisers’ and
consultants’ fees and expenses).
SECTION 8.6.
Notices.
All
notices, requests and other communications hereunder to a party
shall be in writing and shall be deemed given: (1) on the
date of delivery, if personally delivered, (2) on the first
Business Day following the date of dispatch, if delivered by a
nationally recognized
next-day
courier service, or (3) on the third Business Day following
the date of mailing, if mailed by registered or certified mail
(return receipt requested), in each case to such party at its
address set forth below or such other address as such party may
specify by notice to the parties hereto.
If to the Company, to:
Digital Angel Corporation
1690 South Congress Avenue
Suite 201
Delray Beach, FL 33445
Attention: Barry M. Edelstein, Chief Executive Officer
With a copy to:
Digital Angel Corporation
1690 South Congress Avenue
Suite 201
Delray Beach, FL 33445
Attention: Michael S. Zarriello, Special Committee Chairman
and a copy to:
Cozen O’Connor
1900 Market Street
Philadelphia, PA 19103
Attention: Sandra A. Bloch
and
Winthrop & Weinstine P.A.
225 South Sixth Street, Suite 3500
Minneapolis, MN 55402
Attention: Phillip T. Colton
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If to Acquiror or MergerCo, to:
Applied Digital Solutions, Inc.
1690 South Congress Avenue
Suite 200
Delray Beach, FL 33445
Attention: Michael E. Krawitz, Chief Executive Officer
With a copy to:
Applied Digital Solutions, Inc.
1690 South Congress Avenue
Suite 200
Delray Beach, FL 33445
Attention: Michael A. Norris, Special Committee Chairman
and a copy to:
Holland & Knight LLP
701 Brickell Avenue, Suite 3000
Miami, FL 33131
Attention: Harvey Goldman
and
Baker Botts LLP
2001 Ross Avenue
Dallas, TX 75201
Attention: John W. Martin
SECTION 8.7.
Entire Understanding, No Third
Party Beneficiaries.
This Agreement (together
with the Disclosure Schedules and the Mutual Nondisclosure and
Confidentiality Agreement dated June 5,
2007) represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby
and thereby supersedes any and all other oral or written
agreements heretofore made. Except for Section 5.12,
insofar as such Section expressly provides certain rights to the
Persons named therein, nothing in this Agreement, expressed or
implied, is intended to confer upon any Person, other than the
parties hereto or their respective successors and permitted
assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
SECTION 8.8.
Assignment.
Neither
this Agreement nor any of the rights or obligations hereunder
may be assigned by any party without the prior written consent
of the other parties hereto. Subject to the foregoing, this
Agreement shall be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
assigns.
SECTION 8.9.
Severability.
If
any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any
party.
SECTION 8.10.
Waiver of Jury
Trial.
EACH OF THE PARTIES TO THIS AGREEMENT
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
SECTION 8.11.
Enforcement.
The
parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and
provisions of this Agreement in
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the Delaware Court of Chancery or any Federal court located in
the State of Delaware, this being in addition to any other
remedy to which they are entitled at law or in equity.
SECTION 8.12.
Jurisdiction.
Each
of the parties hereto (a) consents to submit itself to the
personal jurisdiction of the Delaware Court of Chancery or any
Federal court located in the State of Delaware in the event any
dispute arises out of this Agreement or the Merger,
(b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from
any such court, and (c) agrees that it will not bring any
action arising out of or relating to this Agreement or the
Merger in any court other than the Delaware Court of Chancery or
any Federal court sitting in the State of Delaware.
SECTION 8.13.
Joint
Participation.
The parties acknowledge and
confirm that each of their respective attorneys have
participated jointly in the drafting, review and revision of
this Agreement and that it has not been written solely by
counsel for one party and that each party has had the benefit of
its independent legal counsel’s advice with respect to the
terms and provisions hereof and its rights and obligations
hereunder. Each party hereto, therefore, stipulates and agrees
that the rule of construction to the effect that any ambiguities
are to be or may be resolved against the drafting party shall
not be employed in the interpretation of this Agreement to favor
any party against another and that no party shall have the
benefit of any legal presumption or the detriment of any burden
of proof by reason of any ambiguity or uncertain meaning
contained in this Agreement.
SECTION 8.14.
Public Announcement.
(a) On the date this Agreement is executed, Acquiror and
the Company shall issue a joint press release with respect to
the execution hereof and the transactions contemplated hereby.
Except as may be required by applicable law or any listing
agreement with or rule of any regulatory body, national
securities exchange or association, Acquiror and the Company
shall consult with each other before issuing any press release,
making any other public statement or scheduling any press
conference or conference call with investors or analysts with
respect to this Agreement or the transactions contemplated by
this Agreement.
(b) Before any Merger Communication of Acquiror, the
Company or any of their respective “participants” (as
defined in Rule 165 of the Securities Act or Item 4 of
Schedule 14A of the Exchange Act) is (i) disseminated
to any investor, analyst, member of the media, employee, client,
customer or other third party or otherwise made accessible on
the website of Acquiror, the Company or any such participant, as
applicable (whether in written, video or oral form via webcast,
hyperlink or otherwise), or (ii) utilized by any executive
officer, key employee or advisor of Acquiror, the Company or any
such participant, as applicable, as a script in discussions or
meetings with any third parties, Acquiror or the Company, as the
case may be, shall (or shall cause any such participant to)
cooperate in good faith with respect to any such Merger
Communication for purposes of, among other things, determining
whether that communication (x) is required to be filed
under Rules 165 and 425 of the Exchange Act or
(y) constitutes “soliciting material” that is
required to be filed by
Rule 14a-6(b)
or
Rule 14a-12(b)
of the Exchange Act, as applicable. Acquiror, MergerCo or the
Company, as applicable, shall (or shall cause any such
participant to) give reasonable and good faith consideration to
any comments made by the other such party or parties and their
counsel on any such Merger Communication. For purposes of the
foregoing, the term “
Merger Communication
”
shall mean, with respect to any Person, any document or other
written communication prepared by or on behalf of that Person,
or any document or other material or information posted or made
accessible on the website of that Person (whether in written,
video or oral form via webcast, hyperlink or otherwise), that is
related to any of the transactions contemplated by this
Agreement and, if reviewed by a relevant stockholder, could
reasonably be deemed to constitute either (x) an offer to
sell such stock or a solicitation of any offer to buy the
Acquiror Common Stock or (y) a “solicitation” of
“proxies” (in each case, as defined in
Rule 14a-1
of the Exchange Act) in favor of the Merger.
A-53
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed as of the day and year first above
written.
DIGITAL ANGEL CORPORATION
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By:
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/s/ Barry
M. Edelstein
Name: Barry
M. Edelstein
Its: Chief Executive Officer
and President
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APPLIED DIGITAL SOLUTIONS, INC.
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By:
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/s/ Michael
E. Krawitz
Name: Michael
E. Krawitz
Its: Chief Executive Officer
and President
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DIGITAL ANGEL ACQUISITION CORP.
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By:
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/s/ Michael
E. Krawitz
Name: Michael
E. Krawitz
Its: Chief Executive Officer
and President
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(Signature
Page to Agreement and Plan of Reorganization)
A-54
DUFF &
PHELPS. LLC • 311 SOUTH WACKER
DRIVE, SUITE 4200 • CHICAGO, IL
60606 •
Tel
312
697-4600 •
Fax
312-697-0112
Duff
&
Phelps
August 8,
2007
Special
Committee of the Board of Directors
Applied Digital Solutions, Inc.
1690 South Congress Avenue
Delray Beach, FL 33445
Dear Members of the Special Committee:
The Special Committee of the Board of Directors of Applied
Digital Solutions, Inc. (the “Company”) has engaged
Duff & Phelps, LLC (“Duff &
Phelps”) as its independent financial advisor to provide an
opinion (the “Opinion”) as of the date hereof as to
the fairness to the public stockholders of the Company, from a
financial point of view, of the Exchange Ratio (as hereinafter
defined) in the contemplated transaction described below (the
“Proposed Transaction”)(without giving effect to any
impact of the Proposed Transaction on any particular stockholder
other than in its capacity as a stockholder). We have been
advised that the Company already owns approximately 55.2% of
Digital Angel Corporation (“Digital Angel”).
Duff & Phelps will receive a fee for rendering this
Opinion, which is not contingent upon either the conclusion
expressed herein or the successful consummation of the Proposed
Transaction. This Opinion has been approved by the internal
opinion committee of Duff & Phelps. Other than this
engagement, Duff & Phelps has not provided financial
advisory services to the Company or to Digital Angel.
Description
of the Proposed Transaction
The Proposed Transaction involves the acquisition by the Company
of the outstanding stock of Digital Angel not owned directly or
indirectly by the Company pursuant to an agreement and plan of
reorganization by and among Digital Angel, the Company, and
Digital Angel Acquisition Corp., a wholly owned direct
subsidiary of the Company (the “Merger Agreement”).
The Proposed Transaction will be effected by a merger whereby,
except for shares held in treasury or owned directly or
indirectly by the Company, each issued and outstanding share of
Digital Angel common stock (the “Digital Angel Common
Stock”) will be converted into and represent the right to
receive 1.4 shares (the “Exchange Ratio”) of
validly issued, fully paid and nonassessable shares of Company
common stock (the “Company Common Stock”), subject to
adjustment as provided for in the Merger Agreement.
Scope
of Analysis
In connection with this Opinion, we have made such reviews,
analyses and inquiries, as we have deemed necessary and
appropriate under the circumstances. Duff & Phelps
also took into account its assessment of general economic,
market and financial conditions, as well as its experience in
securities and business valuation, in general, and with respect
to similar transactions, in particular. Our due diligence with
regards to the Proposed Transaction included, but was not
limited to, the items summarized below.
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1.
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Conducted meetings with members of the senior management team of
Digital Angel in person and via teleconference, including Kevin
N. McGrath, President & Chief Executive Officer; and
Lorraine Breece, Vice President, Chief Financial
Officer & Treasurer, at which we discussed the
operations, financial condition, future prospects, and projected
operations and performance of Digital Angel;
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B-1
Special Committee of the Board of Directors
Applied Digital Solutions, Inc.
August 8, 2007
Page 3
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2.
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Conducted meetings with members of the senior management team of
the Company in person and via teleconference, including Michael
Krawitz, Chief Executive Officer; and Lorraine Breece, Senior
Vice President & Chief Financial Officer, at which we
discussed the operations, financial condition, future prospects,
and projected operations and performance of the Company and of
Digital Angel;
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3.
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Reviewed the financial statements and filings with the
Securities and Exchange Commission (the “SEC”),
including the annual reports on
Form 10-K
for the fiscal years ended December 31, 2002 through 2006,
and the quarterly reports on Form
10-Q
for the
fiscal quarters ended March 31, 2006 and March 31,
2007 for each of the Company and Digital Angel;
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4.
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Reviewed certain publicly available business and financial
information for each of the Company and Digital Angel, and the
industries in which they operate;
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5.
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Reviewed financial projections for Digital Angel prepared by
Digital Angel management for the fiscal years 2007 through 2011
(the “Digital Angel Forecasts”);
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6.
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Reviewed the Merger Agreement dated August 8, 2007;
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7.
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Reviewed the Confidential Memorandum dated August 2006 prepared
by Raymond James & Associates, Inc.;
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8.
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Reviewed the Digital Angel Management Presentation;
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9.
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Reviewed a schedule of cost savings expected to be realized as a
result of the Proposed Transaction, as prepared by Company
management (the “Cost Savings”);
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10.
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Reviewed the pro forma impact of the Proposed Transaction on the
Company;
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11.
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Reviewed the historical trading price and trading volume of the
Company Common Stock, Digital Angel Common Stock and the
publicly traded securities of certain other companies that we
deemed relevant;
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12.
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Compared the financial performance of the Company and of Digital
Angel and the prices and trading activity of the Company Common
Stock and Digital Angel Common Stock with those of certain other
publicly traded companies that we deemed relevant;
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13.
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Compared certain financial terms of the Proposed Transaction to
financial terms, to the extent publicly available, of certain
other business combination transactions that we deemed
relevant; and
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14.
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Conducted such other analyses and considered such other factors
as we deemed appropriate.
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Assumptions,
Qualifications and Limiting Conditions
In performing its analysis and rendering its Opinion with
respect to the Proposed Transaction, Duff & Phelps,
with your consent:
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1.
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Relied upon the accuracy, completeness, and fair presentation of
all information, data, advice, opinions and representations
obtained from public sources or provided to it from private
sources, including Digital Angel and Company management, and did
not independently verify such information;
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2.
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Assumed that any estimates, evaluations, forecasts and
projections, as well as the Cost Savings, furnished to
Duff & Phelps were reasonably prepared and based upon
the best currently available information and good faith judgment
of the person furnishing the same;
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3.
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Assumed that the final versions of all documents reviewed by us
in draft form conform in all material respects to the drafts
reviewed;
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B-2
Special Committee of the Board of Directors
Applied Digital Solutions, Inc.
August 8, 2007
Page 3
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4.
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Assumed that information supplied and representations and
warranties made in the Merger Agreement are substantially
accurate;
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5.
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Assumed that all of the conditions required to implement the
Proposed Transaction will be satisfied and that the Proposed
Transaction will be completed in accordance with the Merger
Agreement without any amendments thereto or any waivers of any
terms or conditions thereof; and
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6.
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Assumed that all governmental, regulatory or other consents and
approvals necessary for the consummation of the Proposed
Transaction will be obtained without any adverse effect on
Digital Angel, the Company, or the contemplated benefits
expected to be derived in the Proposed Transaction.
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In our analysis and in connection with the preparation of this
Opinion, Duff & Phelps has made numerous assumptions
with respect to industry performance, general business, market
and economic conditions and other matters, many of which are
beyond the control of any party involved in the Proposed
Transaction. To the extent that any of the foregoing assumptions
or any of the facts on which this Opinion is based prove to be
untrue in any material respect, this Opinion cannot and should
not be relied upon.
Duff & Phelps did not make any independent evaluation,
appraisal or physical inspection of Digital Angel’s or the
Company’s solvency or of any specific assets or liabilities
(contingent or otherwise). This Opinion should not be construed
as a valuation opinion, credit rating, solvency opinion, an
analysis of Digital Angel’s or the Company’s credit
worthiness or otherwise as tax advice or as accounting advice.
This Opinion does not express an opinion about any compensation
paid or payable to the officers, directors or employees of
either the Company or Digital Angel relative to the
consideration to be paid to the holders of Company Common Stock
or Digital Angel Common Stock. Duff & Phelps was not
requested to and did not provide advice concerning the
structure, the specific amount or form of the consideration, or
any other aspect of the Proposed Transaction, or to provide
services other than the delivery of this Opinion.
Duff & Phelps was not requested to and did not solicit
any expressions of interest from any other parties with respect
to the sale of all or any part of Digital Angel or the Company
or any other alternative transaction. Duff & Phelps
did not participate in negotiations with respect to the terms of
the Merger Agreement or the Proposed Transaction and therefore,
Duff & Phelps has assumed that such terms are the most
beneficial terms, from the Company’s perspective, that
could, under the circumstances, be negotiated among the parties
to the Merger Agreement and the Proposed Transaction. In
addition, Duff & Phelps is not expressing any opinion
as to the market price or value of the Company Common Stock or
Digital Angel Common Stock after announcement of the Proposed
Transaction. In rendering this Opinion, Duff & Phelps
relied upon the fact that the Special Committee and the Company
have been advised by counsel as to all legal matters with
respect to the Proposed Transaction, including whether all
procedures required by law to be taken in connection with the
Proposed Transaction have been duly, validly and timely taken;
and Duff & Phelps has not made, and assumes no
responsibility to make, any representation, or render any
opinion, as to any legal matter.
Duff & Phelps has prepared this Opinion effective as
of the date hereof. This Opinion is necessarily based upon
market, economic, financial and other conditions as they exist
and can be evaluated as of the date hereof, and Duff &
Phelps disclaims any undertaking or obligation to advise any
person of any change in any fact or matter affecting this
Opinion which may come or be brought to the attention of
Duff & Phelps after the date hereof. Notwithstanding
and without limiting the foregoing, in the event that there is
any change in any fact or matter affecting this Opinion after
the date hereof and prior to the completion of the Proposed
Transaction, Duff & Phelps reserves the right to
change, modify or withdraw this Opinion.
The basis and methodology for this Opinion have been designed
specifically for the express purposes of the Special Committee
and may not translate to any other purposes. This Opinion is not
a recommendation as to how the Special Committee, any
stockholder or any other party to the Proposed Transaction
should vote or act with respect to any matters relating to the
Proposed Transaction, or whether to proceed with the Proposed
B-3
Special Committee of the Board of Directors
Applied Digital Solutions, Inc.
August 8, 2007
Page 4
Transaction or any related transaction, nor does it indicate
that the consideration paid is the best possibly attainable
under any circumstances. Instead, it merely states whether the
Exchange Ratio in the Proposed Transaction is within a range
suggested by certain financial analysis. The decision as to
whether to proceed with the Proposed Transaction or any related
transaction may depend on an assessment of factors unrelated to
the financial analysis on which this Opinion is based. This
letter should not be construed as creating any fiduciary duty on
the part of Duff & Phelps to any party.
This Opinion may be included in its entirety in any proxy
statement distributed to stockholders of the Company in
connection with the Proposed Transaction or other document
required by law or regulation to be filed with the SEC, and you
may summarize or otherwise reference the existence of this
Opinion in such documents, provided that any such summary or
reference language shall be subject to prior approval by
Duff & Phelps. Except as described above, without our
prior consent, this Opinion may not be quoted or referred to, in
whole or in part, in any written document or used for any other
purpose.
Duff & Phelps has not been requested to opine as to,
and this Opinion does not address: (i) the fairness of any
portion or aspect of the Proposed Transaction to the holders of
any class of securities, creditors or other constituencies of
the Company, or Digital Angel, or any other party other than
those set forth in this Opinion; (ii) the relative merits
of the Proposed Transaction as compared to any alternative
business strategies that might exist for the Company, Digital
Angel or any other party or the effect of any other transaction
in which the Company, Digital Angel or any other party might
engage; (iii) the fairness of any portion or aspect of the
Proposed Transaction to any one class or group of the
Company’s or any other party’s security holders
vis-à-vis any other class or group of the Company’s or
such other party’s security holders (including without
limitation the allocation of any consideration amongst or within
such classes or groups of security holders); or
(iv) whether or not the Company, Digital Angel, their
respective security holders or any other party is receiving or
paying reasonably equivalent value in the Proposed Transaction.
Conclusion
Based upon and subject to the foregoing, Duff & Phelps
is of the opinion that the Exchange Ratio is fair to the public
stockholders of the Company, from a financial point of view
(without giving effect to any impacts of the Proposed
Transaction on any particular stockholder other than in its
capacity as a stockholder).
Respectfully submitted,
/s/ Duff & Phelps, LLC
Duff
&
Phelps,
llc
B-4
SEVEN
HILLS
August 8,
2007
PERSONAL &
CONFIDENTIAL
Special Committee of the Board of Directors
Digital Angel Corporation
490 Villaume Avenue
South St. Paul, MN
55075-2443
Members of the Special Committee:
We understand that Digital Angel Corporation (the
“Company”), Digital Angel Acquisition Corp.
(“MergerCo”) and Applied Digital Solutions, Inc. (the
“Acquiror”) propose to enter into an Agreement and
Plan of Reorganization, substantially in the form of the draft
dated August 7, 2007 (the “Agreement”), which
provides, among other things, that (i) MergerCo will merge
with and into the Company (the “Merger”) and
(ii) each share of common stock, par value $0.005 per share
of, of the Company (“Company Common Stock”), other
than shares of Company Common Stock owned directly or indirectly
by the Acquiror, will be converted into a right to receive
1.4 shares of common stock, par value $0.01 per share
(“Acquiror Common Stock”), of the Acquiror (the
“Common Stock Exchange Ratio”).
The Special Committee of the Board of Directors of the Company
(the “Special Committee”) has requested our opinion as
to the fairness of the Common Stock Exchange Ratio, from a
financial point of view, to holders of Company Common Stock
(other than the Acquiror and its affiliates).
Seven Hills Partners LLC provides merger and acquisition
advisory services to public and private companies. In this
capacity, we are continually engaged in performing financial
analyses with respect to businesses and their securities in
connection with mergers and acquisitions as well as for other
transactions and corporate purposes.
In connection with the Merger, we have not been authorized to
solicit, nor have we solicited, third-party indications of
interest for the acquisition of all or any part of the Company
or the Company Common Stock, and did not otherwise participate
in the transaction process. Our opinion does not address the
Company’s underlying business decision to effect the
Merger. We did not evaluate, nor did the Company request us to
evaluate, alternative transaction structures or financial
alternatives other than the Merger.
In connection with our opinion, we have reviewed and considered
such financial and other matters as we have deemed relevant,
including, among other things:
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a.
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a draft of the Agreement dated August 7, 2007 which, for
purposes of this opinion, we have assumed to be in all material
respects identical to the agreement to be executed;
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b.
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certain publicly available financial and other information for
the Company and the Acquiror, including Annual Reports on
Form 10-K
for the fiscal year ended December 31, 2006 and Quarterly
Reports on
Form 10-Q
for the quarter ended March 31, 2007 and certain other
relevant financial and operating data furnished to us by
management of the Company;
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c.
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certain internal financial analyses, financial forecasts,
reports and other information concerning the Company, prepared
and furnished to us by management of the Company;
|
Seven
Hills Partners LLC
275 Battery Street • San Francisco, CA • 94111
Tel: (415) 869-6200 • Fax: (415) 869-6262
Member
of NASD and SIPC
C-1
d. certain internal financial forecasts and other
information concerning the Acquiror, furnished to us by
management of the Company;
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e.
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discussions we have had with certain members of the Company
management concerning the historical and current business
operations and strategy, financial condition and prospects of
the Company and such other matters we deemed relevant;
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f.
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certain operating results, the reported price and trading
histories of the shares of Company Common Stock and Acquiror
Common Stock, and operating results, the reported price and
trading histories of certain publicly traded companies we deemed
relevant;
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g.
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certain financial terms of the Merger as compared to the
financial terms of certain selected business combinations we
deemed relevant; and
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h.
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such other information, financial studies, analyses and
investigations and such other factors that we deemed relevant
for the purposes of this opinion.
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In conducting our review and arriving at our opinion, we have,
with your consent, assumed and relied, without independent
investigation, upon the accuracy and completeness of all
financial and other information provided to us or otherwise made
available by the Company or its advisors (including, without
limitation, the representations and warranties contained in the
Agreement) or that is publicly available. We have not assumed
any responsibility for the accuracy or completeness, or
independently verified, any such information. Our analyses were
based, among other things, on the financial projections of the
Company (the “Company Financial Projections”) prepared
by management of the Company and the financial projections of
the Acquiror (the “Acquiror Financial Projections” and
collectively with the Company Financial Projections, the
“Financial Projections”) prepared by management of the
Acquiror. With respect to the Financial Projections, which were
furnished to us, discussed with us or reviewed for us by
management of the Company, we have assumed that they have been
reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of management of
the Company or the Acquiror, as the case may be, as to the
future competitive, operating and regulatory environments and
related financial performance of the Company or the Acquiror, as
the case may be, and such projections and the assumptions
derived therefrom provide a reasonable basis for our opinion. We
express no view as to such Financial Projections, or the
assumptions on which they are based.
In addition, we have not conducted, nor have we assumed any
obligation to conduct, any physical inspection of the properties
or facilities of the Company or the Acquiror. We have also
assumed that in the course of obtaining the necessary regulatory
and third party approvals, consents and releases for the Merger,
no modification, delay, restriction or condition will be imposed
that will have a material adverse effect on the Merger and that
the Merger will be consummated in accordance with applicable
laws and regulations and the terms of the Agreement, without
delay, waiver, amendment or modification of any material term,
condition or agreement. We have relied without independent
verification upon the views of management of the Company
concerning the business, operational and strategic benefits and
implications of the Merger. Our analyses must be considered as a
whole. Considering any portion of such analyses or the factors
considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying
the conclusions expressed herein.
We have not been asked to pass upon, and express no opinion with
respect to, any matters, including any agreements between the
Company and the Acquiror or any of their respective affiliates,
other than the fairness from a financial point of view of the
Common Stock Exchange Ratio to holders of Company Common Stock
(other than the Acquiror and its affiliates).
We have not made or obtained any independent evaluations,
valuations or appraisals of the assets or liabilities of the
Company nor have we been furnished with such materials. We have
assumed with your consent that there are no legal issues with
regard to the Company or the Acquiror that would affect our
opinion, and we have relied on this assumption without
undertaking any independent investigation or inquiry. Our
opinion is necessarily based upon economic and market conditions
and other circumstances as they exist and can be evaluated by us
on the date hereof. It should be understood that although
subsequent developments may affect our opinion, we do not have
any obligation to update, revise or reaffirm our opinion and we
expressly disclaim
C-2
any responsibility to do so. Our opinion does not address the
relative merits of the Merger as compared to other business
strategies that might be available to the Company, nor does it
address the underlying business decision of the Company to
proceed with the Merger. We express no view as to the federal,
state or local tax consequences of the Merger.
For purposes of rendering our opinion we have assumed in all
respects material to our analysis that the representations and
warranties of each party contained in the Agreement are true and
correct, that each party will perform all of the covenants and
agreements required to be performed by it under the Agreement
and that all conditions to the consummation of the Merger will
be satisfied without waiver thereof.
It is understood that this letter is intended for the benefit
and use of the Special Committee in its consideration of the
Merger and may not be used for any other purpose or reproduced,
disseminated, quoted, communicated (in whole or in part) or
referred to at any time, in any manner or for any purpose
without our prior written consent, except that this opinion may
be provided to the Board of Directors of the Company and may be
included in its entirety, if required, in any filing made by the
Company with respect to the Merger with the Securities and
Exchange Commission, provided that this opinion is reproduced in
such filing in full and any description of or reference to us or
summary of this opinion and the related analyses in such filing
is in a form acceptable to us and our counsel in our sole
discretion. This letter does not constitute a recommendation to
any holder of Company Common Stock, or any other person, as to
how such person should act with respect to the Merger.
Based upon and subject to the foregoing, including the various
assumptions and limitations set forth herein, it is our opinion
that, as of the date hereof, the Common Stock Exchange Ratio is
fair, from a financial point of view, to holders of Company
Common Stock (other than the Acquiror and its affiliates).
Very truly yours,
/s/ Seven Hills Partners LLC
SEVEN HILLS PARTNERS LLC
C-3
CERTIFICATE
OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
APPLIED
DIGITAL SOLUTIONS, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
“Corporation”) is Applied Digital Solutions, Inc.
2. The Certificate of Incorporation of the Corporation is
hereby amended by changing the first paragraph of the Article
numbered “Three” so that, as amended, said paragraph
of said Article shall be and read as follows:
ARTICLE THREE
“The aggregate number of shares of all classes of stock
which the Corporation shall have authority to issue is One
Hundred Seventy Million (170,000,000) shares, of which Five
Million (5,000,000) shares shall be preferred stock
(“Preferred Stock”) having a par value of $10.00 per
share and One Hundred Sixty-Five Million (165,000,000) shares
shall be common stock (“Common Stock”) having a par
value of $.01 per share. A statement of the preferences,
qualifications, limitations, restrictions, and the special or
relative rights, including convertible rights, in respect of the
shares of each class is as follows:”
3. Thereafter, pursuant to a resolution of its Board of
Directors, a meeting of stockholders of the Corporation was duly
called and held, on • upon notice in accordance with
Section 222 of the General Corporation Law of the State of
Delaware, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
4. The foregoing amendment was duly adopted in accordance
with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
NOW, THEREFORE, the Corporation has caused this Certificate to
be signed this • day of •, 2007.
D-1
AMENDMENT
TO THE RESTATED CERTIFICATE OF INCORPORATION
OF
DIGITAL ANGEL CORPORATION
DIGITAL ANGEL CORPORATION, a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as
follows:
1. The Restated Certificate of Incorporation as heretofore
amended and supplemented is further amended to delete former
Article Ninth, section (ii).
2. The Board of Directors of the corporation has duly
adopted this amendment to the Restated Certificate of
Incorporation pursuant to the provisions of Section 245 of
the General Corporation Law of the State of Delaware in the form
set forth as follows:
NINTH:
The Corporation shall not take any of
the following actions without the approval of the holders of
66.6% of the issued and outstanding common stock of the
Corporation: implementing a Bankruptcy Decision with respect to
the Corporation or any of its direct or indirect subsidiaries
if, at the time such Bankruptcy Decision is implemented or is to
be implemented, (A) a Bankruptcy Decision has been made
with respect to Applied Digital Solutions, Inc., a corporation
organized under the laws of Delaware (“ADS”), or any
of its direct or indirect subsidiaries, or (B) ADS is in
default under or with respect to any obligation for borrowed
money, including the Credit Documents, regardless of whether
such default has been declared.
For purposes of article NINTH above, the following defined
terms shall have the following meanings:
“
Bankruptcy Decision
” means, with respect to a
specified entity, any of the following actions: (i) filing
any voluntary petition in bankruptcy on behalf of such entity,
(ii) consenting to the filing of any involuntary petition
in bankruptcy against such entity, (iii) filing any
petition seeking, or consenting to, reorganization or relief
under any applicable federal, state or foreign law relating to
bankruptcy or insolvency, on behalf of such entity,
(iv) consenting to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar
official) of such entity or a substantial part of the property
of such entity, (v) making any assignment for the benefit
of creditors on behalf of such entity, (vi) admitting in
writing the inability of such entity to pay its debts generally
as they become due, or (vii) taking any action by such
entity in furtherance of any of the foregoing actions.
“
Corporation Stock
” means the common stock, par
value $.005 per share, of the Corporation, and any stock into
which such common stock shall have been changed, any stock
resulting from any reclassification of such common stock, any
other shares of stock issued or issuable with respect thereto
(whether by way of a stock dividend or stock split or in
exchange for or upon conversion of such shares or otherwise in
connection with a combination of shares, recapitalization,
merger, consolidation or other corporate reorganization), and
all other stock of any class or classes (however designated) of
the Corporation (or its successors) the holders of which have
the right, without limitation as to amount, either to all or to
a share of the balance of current dividends and liquidating
dividends after the payment of dividends and distributions on
any shares entitled to preference.
“
Credit Agreement
” means that certain Third
Amended and Restated Term Credit Agreement, dated as of
March 1, 2002, among IBM Credit Corporation, Digital Angel
Share Trust and ADS.
“
Credit Documents
” means the Credit Agreement,
the Guarantee (as defined in the Credit Agreement), and any
security agreements, leases, instruments, documents, guarantees,
schedules of assignment, contracts and similar agreements,
including schedules, attachments, exhibits and ancillary
documentation or other supporting documents, executed by or on
behalf of each Borrower (as defined in the Credit Agreement), or
any other Loan Party (as defined in the Credit Agreement), and
delivered to Lender (as defined in the Credit Agreement),
pursuant to the Credit Agreement or otherwise, and all
amendments, supplements and other modifications to the foregoing
from time to time.
E-1
“
Fair Market Value
” means, on any date
specified, the average of the daily Market Price of a share of
Corporation Stock during the 10 consecutive trading days before
such date, except that, if on any such date the shares of
Corporation Stock are not listed or admitted for trading on any
national securities exchange or quoted in the over-the-counter
market, Fair Market Value shall be the Market Price on such date.
“
Market Price
” means, on any date specified, an
amount per share of Corporation Stock equal to (i) the last
reported sale price of such common stock, regular way, on such
date or, in case no such sale takes place on such date, the
average of the closing bid and asked prices thereof regular way
on such date, in either case as officially reported on the
principal national securities exchange on which such Corporation
Stock is then listed or admitted for trading, (ii) if such
Corporation Stock is not then listed or admitted for trading on
any national securities exchange but is designated as a national
market system security by the NASD, the last reported trading
price of the Corporation Stock on such date, (iii) if there
shall have been no trading on such date or if the Corporation
Stock is not so designated, the average of the closing bid and
asked prices of the Corporation Stock on such date as shown by
the NASD automated quotation system, or (iv) if such
Corporation Stock is not then listed or admitted for trading on
any national exchange or quoted in the over-the-counter market,
the fair value thereof (as of a date which is within
10 days of the date as of which the determination is to be
made) determined in good faith by the Corporation’s Board
of Directors.”
3. This Amendment to the Certificate of Incorporation was
duly adopted by vote of the stockholders in accordance with
Sections 242 and 245 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, said Digital Angel Corporation, has caused
this Certificate to be signed by
,
and attested by
,
its
,
this
day of August, 2007.
DIGITAL ANGEL CORPORATION
ATTEST:
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APPLIED
DIGITAL SOLUTIONS, INC.
EMPLOYMENT AND NON-COMPETE AGREEMENT
AGREEMENT
made this 6th day of December 2006 (the
“Effective Date”), by and between the parties to this
Agreement (hereinafter individually referred to as
“Party” and collectively referred to as
“Parties”),
APPLIED DIGITAL SOLUTIONS, INC
.
,
a Missouri Business Corporation (hereinafter referred to as
“ADS”), and
MICHAEL KRAWITZ
(hereinafter
referred to as “Executive”).
WHEREAS
, ADS is an advanced digital technology
development company (the “Business”); and
WHEREAS
, Executive has contributed meaningfully in his
capacity as Executive Vice President and General Counsel of
ADS; and
WHEREAS
, ADS finds it is in its best interest to enhance
Executive’s contribution to the Business, to protect its
technologies and business relationships, and to engage
Executive’s services as Chief Executive Officer of
ADS; and
WHEREAS
, Executive is willing to assume the fulltime role
as ADS’s Chief Executive Officer;
NOW THEREFORE
, in consideration of the promises and the
mutual obligations set forth in this Agreement, the Parties
agree as follows:
1.
EMPLOYMENT
. ADS agrees to continue to
employ Executive, and Executive agrees to accept such continued
employment by ADS, pursuant to the terms and conditions set
forth in this Agreement. Executive agrees that the provisions
and benefits under the 2003 Severance Policy, and the 2004
Executive Management Change in Control Plan shall terminate with
respect to Executive and Executive specifically waives any
rights he may have thereunder.
2.
POSITION AND RESPONSIBILITIES
. During the
term of this Agreement, as defined below, Executive shall serve
as Chief Executive Officer of ADS and will perform such duties
and exercise such supervision with regard to the business of ADS
as are associated with such positions, as well as such
additional duties as may be prescribed from time to time by
ADS’s Board of Directors (the “Board”). Executive
agrees to render services to the best of Executive’s
ability for and on behalf of ADS. Executive agrees to devote his
full business time to rendering such services on behalf of ADS,
other than reasonable time for charitable works, managing
personal investments and, with the consent of the Board, service
on boards of other companies.
3.
TERM
. Except as terminated in this
Section 3 or Section 8(c) of this Agreement, the term
of this Agreement (the “Term”) shall commence on the
Effective Date and shall continue in force thereafter.
Notwithstanding the foregoing, upon the happening of any of the
following events, this Agreement shall terminate (unless
otherwise provided herein for a termination after a period of
time) and Executive shall cease to be an employee of ADS:
(a) Executive’s resignation upon sixty (60) days
advance written notice;
(b) Executive’s Total Disability upon ADS’s
election. For purposes of this Agreement, “Total
Disability” shall be defined as Executive’s inability,
due to illness, accident or any other physical or mental
incapacity, to perform Executive’s usual responsibilities
performed by Executive for ADS prior to the onset of such
disability, for one hundred eighty (180) consecutive days
during the Term. ADS may elect, by written notice to Executive,
within thirty (30) days of the end of such period of Total
Disability defined above, to terminate Executive’s
employment herein;
(c) the death of Executive;
(d) Executive’s Constructive Termination. For purposes
of this Agreement, “Constructive Termination” shall be
defined as a material breach by ADS of its obligations under
this Agreement, including but not limited to (i) any
reduction of Executive’s Base Salary or incentive
compensation as provided herein,
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(ii) a diminution in duties or position, (iii) moving
Executive’s workplace away from headquarters or moving
headquarters outside of Palm Beach, Broward or Dade Counties. If
Executive chooses to treat such material breach as a
Constructive Termination, Executive shall provide ADS with
written notice describing the circumstances being relied upon by
Executive for such termination with respect to this Agreement
within thirty (30) days after the event giving rise to the
Constructive Termination. ADS shall have thirty (30) days
after receipt of such notice to remedy the situation prior to
the Constructive Termination being deemed final;
(e) ADS terminates this Agreement without cause upon sixty
(60) days advance written notice; or
(f) ADS terminates this Agreement for cause, with said
cause being defined as a conviction of a felony or
Executive’s being prevented from providing services
hereunder as a result of Executive’s violation of any law,
regulation
and/or
rule.
(g) Executive’s resignation by written notice within
one hundred twenty (120) days following a Change in
Control, such term being defined as a transaction or series of
transactions in which any person or entity (or persons or
entities acting as a group) acquires stock of ADS that, together
with stock then held by such person, entity or group, results in
such person, entity or group holding more than fifty (50%)
percent of the fair market value or total voting power of ADS,
as well as the Board members prior to the transaction no longer
constituting a majority of the Board members following such
transaction.
4.
ANNUAL COMPENSATION
.
(a) During the Term, Executive shall be entitled to
compensation for all services performed by Executive pursuant to
this Agreement (“Compensation”) as follows:
(i) Executive shall, during the Term, be entitled to a base
salary (the “Base Salary”) of THREE HUNDRED FIFTY
THOUSAND ($350,000.00) DOLLARS per annum. The Base Salary may be
increased (but not decreased) in the reasonable discretion of
ADS. The “Base Salary” shall, for all purposes of this
Agreement, mean the Base Salary then being paid by ADS to
Executive.
(ii) During the Term, Executive shall be eligible for
incentive bonus compensation for each calendar year, to be
reasonably determined by the Board, which shall consider bonuses
paid by similarly situated employers to similarly situated
employees.
(b) ADS shall deduct from the Compensation all taxes and
other deductions which are required to be deducted or withheld
under any provision of any federal, state, or local law now in
effect or which may become effective at any time during the term
of this Agreement (collectively, the “Withholdings”).
5.
FRINGE BENEFITS
. During the Term,
Executive shall be entitled to all fringe benefits (the
“Fringe Benefits”) provided to senior executive
employees of ADS, as reasonably determined by the Board. The
Fringe Benefits shall specifically include executive health
benefits which shall entitle Executive to full reimbursement for
all physical examinations and other related services, use of an
automobile leased by ADS for use by Executive, premium payments
of life and disability insurance comparable to that currently
provided, as well as the payment by ADS of all reasonable
expenses relating to a foreign language course in which
Executive may be enrolled.
6.
BUSINESS AND OTHER EXPENSES
. ADS will
reimburse Executive for all reasonable travel, entertainment and
other expenses incurred by Executive in connection with the
performance of his duties and obligations under this Agreement.
Executive will comply with all reasonable reporting requirements
with respect to business expenses as may be established by ADS
from time to time. In addition, ADS shall pay to Executive
TWENTY THOUSAND ($20,000.00) DOLLARS per year during the Term,
payable in ten thousand dollar installments on or before January
15 and July 15, representing non-allocable expenses that
shall be deemed additional compensation to Executive.
7.
ADDITIONAL BENEFITS
.
(a) Executive will be entitled to participate in all other
compensation or employee benefit plans or programs and receive
all benefits for which salaried employees of ADS generally are
eligible under any
F-2
plan or program now or later established by ADS on the same
basis as similarly situated senior executives of ADS. Executive
will participate to the extent permissible under the terms and
provisions of such plans or programs, in accordance with program
provisions.
(b) Upon the execution of this Agreement, ADS shall issue
100,000 shares (the “Shares”) of common stock of
ADS to Executive under an applicable stock incentive plan
previously approved by shareholders. It is agreed that 50,000 of
the Shares will vest immediately, while the remaining
50,000 Shares (the “Unvested Shares”) shall be
restricted and subject to a substantial risk of forfeiture in
the event that this Agreement is terminated on or before
December 31, 2008 pursuant to subparagraphs (a) or
(f) of Section 3 of this Agreement, in which event the
Unvested Shares shall immediately be forfeited.
8.
PAYMENT UPON TERMINATION OF AGREEMENT
.
(a) Upon the termination of this Agreement, ADS will pay to
Executive any and all earned but unpaid Base Salary and earned
but unpaid incentive bonus compensation as of the date of
termination. ADS shall pay such amounts due Executive within
thirty (30) days of Executive’s last day of service.
Any outstanding stock options held by Executive on
Executive’s last day of service shall remain exercisable
for the life of the option. In addition, ADS shall remain
responsible for all rental payments relating to the leased
vehicle then used by Executive until the expiration of the
lease. Further, Executive shall be permitted to maintain
possession of all computer equipment owned by ADS which is then
being used by Executive. Executive shall remain reasonably
available by electronic mail or telephone to assist with any
post-separation transition relating to pre-separation issues.
(b) To the extent that this Agreement is terminated other
than pursuant to subparagraphs (a) or (f) of
Section 3, Executive shall be entitled to receive: ONE
MILLION FOUR HUNDRED EIGHTY THOUSAND ($1,480,000.00) DOLLARS
(the “Severance Amount”) as severance. The Severance
Amount shall be payable in common stock of ADS (“ADS
Stock”), except for the Withholdings, which shall be
payable in cash. In the event that (i) ADS is unable to pay
part of the Severance Amount in the form of common ADS Stock, or
(ii) at the time of issuance or delivery the shares of ADS
Stock are not both traded and expected for the foreseeable to be
traded in the public markets on a national exchange (for
example, without limitation, because a Change in Control results
in ADS being a private company), then and in that event, ADS
shall pay the Severance Amount in cash. Within twenty
(20) business days of the termination of this Agreement,
ADS will contribute to a Rabbi Trust (as defined in
Section 8(c)) the Severance Amount (whether cash or, if
applicable, the number of shares of ADS Stock determined
pursuant to section 8(d)).
(c) Payments pursuant to Section 8(b) and 10(c) shall
be deposited in the Rabbi Trust. As used herein, the “Rabbi
Trust” shall mean a “rabbi trust” to be on terms
reasonably acceptable to the Executive and ADS, but in no event
less favorable to the Executive than the terms of the rabbi
trust set forth in Rev. Proc.
92-64.
The
amount contributed to the rabbi trust will be released from the
trust (together with any earnings thereon) and paid or delivered
to the Executive as follows: (i) as to the Severance
Amount, the cash or the shares of ADS Stock (as applicable)
shall be released from escrow and paid or delivered to Executive
six (6) months and one (1) day following termination
of this Agreement, and (ii) as to the Covenant
Consideration pursuant to Section 10(c), the cash or the
shares of ADS Stock (as applicable) shall be released from
escrow and paid or delivered to Executive one year following
termination of this Agreement, assuming for this
clause (ii) only that Executive does not materially breach
the provisions of Section 10, in which case such cash or
ADS Stock shall be returned to ADS.
(d) To the extent that ADS Stock shall be issued pursuant
to subparagraph (b) or (c) of this Section 8, the
ADS Stock shall be included on an applicable registration
statement filed by ADS as soon as practicable, which is
anticipated to be within six (6) months from the date of
issuance of any such stock. ADS shall utilize good faith efforts
to include ADS Stock in any other registration statement filed
by ADS, but shall not be obligated to file a separate
registration statement for the ADS Stock. In all events, ADS
shall bear all costs of registration of the ADS Stock. In the
event that the ADS Stock is not registered within one
(1) year from the date of issuance, ADS shall fully
cooperate at all times thereafter
F-3
in allowing Executive to benefit from any and all registration
requirement exemptions that shall then exist. In all events, the
number of shares of ADS Stock due will be calculated based upon
the average closing price of one (1) share of common stock
of ADS for the ten (10) trading days preceding the day in
which the ADS Stock is issued. Any ADS Stock issued hereunder
shall be price protected through the later of: (i) the date
on which the applicable registration statement becomes
effective, or the date in which such ADS Stock should otherwise
become eligible for trading without restriction pursuant to an
exemption from registration, or (ii) the date such ADS
Stock is delivered to Executive from the Rabbi Trust (such later
date, the “Price Protection Date”), such that if the
value of the ADS Stock on such Price Protection Date is less
than the intended applicable amount as set forth in
Section 8(b) or Section 10(c), cash or freely tradable
shares of ADS Stock (at ADS’s option) will be issued to
Executive to subsidize any shortfall, which cash or additional
shares shall be due fourteen (14) months following
termination of this Agreement. ADS agrees that it shall not
announce or effect any stock split, reverse split or similar
transaction for a period of three (3) months following any
Price Protection Date. The Parties agree that the various
provisions regarding payment of ADS Stock pursuant to the
Agreement is intended to benefit both ADS and the Executive as a
substitute for cash value, so that notwithstanding any provision
herein, any payment hereunder shall be made in cash and not ADS
Stock if (i) it is reasonably likely that Executive will
not be able, within a reasonable period of time (complying with
applicable securities laws), to sell such ADS Stock for cash for
any reason including, without limitation, if shares of ADS Stock
are not publicly traded following a transaction or (ii) any
such issuance would not be in full compliance with applicable
securities laws and stock exchange or stock market rules.
9.
CONFIDENTIAL INFORMATION
.
(a) Executive recognizes and acknowledges that all
information pertaining to this Agreement or to the affairs;
business; results of operations; accounting methods, practices
and procedures; shareholders; acquisition candidates; financial
condition; clients; customers or other relationships of ADS or
any of its affiliates (“Information”) is confidential
and is a unique and valuable asset of ADS or any of its
affiliates. Access to and knowledge of the Information is
essential to the performance of Executive’s duties under
this Agreement. Executive will not, during the Term or
thereafter, except to the extent reasonably necessary in
performance of his duties under this Agreement, give to any
person, firm, association, corporation, or governmental agency
any Information, except as may be required by law. Executive
will not make use of the Information for his own purposes or for
the benefit of any person or organization other than ADS or any
of its affiliates. Executive will also use his best efforts to
prevent the disclosure of this Information by others. All
records, memoranda, etc. relating to the business of ADS or its
affiliates, whether made by Executive or otherwise coming into
his possession, are confidential and will remain the property of
ADS or its affiliates.
(b) Executive will, with reasonable notice during or after
the Term, furnish information as may be in his possession and
reasonably cooperate (taking into account Executive’s then
current employment situation) with ADS and its affiliates as may
be required in connection with any claims or legal action in
which ADS or any of its affiliates is or may become a party to
the extent that such claim or legal action reasonably relates to
Executive’s pre-termination duties with ADS.
10.
RESTRICTIONS
.
(a) During the Term and thereafter for a one (1) year
period (the “Restriction Period”), Executive agrees
that, without the prior express written approval from the Board,
he shall not compete with ADS and its affiliates by directly or
indirectly engaging in the Business or by engaging in any
business comparable to that of ADS or its affiliates, either
directly or indirectly, as an individual, partner, member,
corporation, limited liability company, limited liability
partnership, officer of a corporation or in
any other
capacity whatsoever
at any location at which ADS or its
affiliates conducts business
and/or
provides
any
services.
(b) Executive acknowledges that the restrictions contained
in this Section 10 of this Agreement, in view of the nature
of the activities in which ADS and its affiliates are engaged,
are reasonable and necessary in order to protect the legitimate
interests of ADS and its affiliates, and that any violation
F-4
thereof would result in irreparable injuries to ADS
and/or
its
affiliate(s), as the case may be. Executive, therefore,
acknowledges that, in the event of the violation of any of these
restrictions, ADS shall be entitled to seek from any Court of
competent jurisdiction preliminary and permanent injunctive
relief, as well as attorneys fees and costs, damages and an
equitable accounting of all earnings, profits and other benefits
arising from such violation, which rights shall be cumulative,
and in addition to any other rights or remedies to which ADS may
be entitled.
(c) In consideration for the restrictions contained in this
Section 10, as well as in consideration for the services to
be provided by Executive pursuant to the terms of
Section 9(a), ADS shall pay to Executive the amount of TWO
HUNDRED FIFTY THOUSAND ($250,000.00) DOLLARS (the “Covenant
Consideration”) payable in ADS Stock, except for the
Withholdings, which shall be payable in cash. In the event that
ADS is unable to pay part of the Covenant Consideration in the
form of ADS Stock, then and in that event, ADS shall pay the
Covenant Consideration in cash. Whether in cash or ADS Stock,
the cash or ADS Stock shall be deposited in the Rabbi Trust
within twenty (20) business days of the termination of this
Agreement, and shall be released as provided in
Section 8(c). To the extent that ADS is able to pay part of
the Covenant Consideration in the form of ADS Stock, then and in
that event, all of the terms and conditions set forth in
Section 8(d) applicable to the ADS Stock shall similarly be
applicable to the common stock issued by ADS incident to the
Covenant Consideration, including the issue of those
circumstances upon which the Covenant Consideration may be paid
in ADS Stock.
(d) If any of the restrictions set forth in this
Section 10 should, for any reason, be adjudged invalid or
unreasonable in any proceeding, then the validity or
enforceability of the remainder of such restrictions or
provisions shall not be adversely affected. If the Restriction
Period or the area specified in this Section 10 of this
Agreement shall be adjudged unreasonable in any proceeding, then
the Restriction Period shall be reduced by such number of
months, or the area shall be reduced by the elimination of such
portion thereof or both, so that such restrictions may be
enforced in such area and for such period of time as is adjudged
to be reasonable. If Executive violates any of the restrictions
contained in this Section 10, the Restriction Period shall
not run in favor of Executive from the time of commencement of
any such violation until such time as such violation shall be
cured by Executive to the satisfaction of ADS.
(e) The terms of this Section 10 shall survive the
termination of this Agreement. Executive acknowledges that he
can be gainfully employed and still comply with the terms of
this Section 10 and that it is not unduly inconvenient to
him.
11.
INDEMNIFICATION; LITIGATION
.
(a) ADS will indemnify Executive to the fullest extent
permitted by the laws of the State of Florida in effect at that
time, or the certificate of incorporation and by-laws of ADS,
whichever affords the greater protection to Executive. Executive
will be entitled to any insurance policies ADS may elect to
maintain generally for the benefit of its officers and directors
against all costs, charges and expenses incurred in connection
with any action, suit or proceeding to which he may be made a
party by reason of being an officer of ADS.
(b) In the event of any litigation or other proceeding
between ADS and Executive with respect to the subject matter of
this Agreement, ADS will reimburse Executive for all costs and
expenses related to the litigation or proceedings, including
attorney’s fees and expenses, providing that the litigation
or proceedings results in either a settlement requiring ADS to
make a payment to Executive or judgment in favor of Executive.
12.
MITIGATION
. Executive will not be
required to mitigate the amount of any payment provided for
hereunder by seeking other employment or otherwise, nor will the
amount of any such payment be reduced by any compensation earned
by Executive as the result of employment by another employer
after the date Executive’s employment hereunder terminates.
F-5
13.
REMEDIES
.
(a) In the event of a breach of this Agreement, the
nonbreaching Party may maintain an action for specific
performance against the Party who is alleged to have breached
any of the terms of this Agreement. This subparagraph
(a) of this Section 13 of this Agreement will not be
construed to limit in any manner any other rights or remedies an
aggrieved Party may have by virtue of any breach of this
Agreement.
(b) Each of the Parties has the right to waive compliance
with any obligation of this Agreement, but a waiver by any Party
of any obligation will not be deemed a waiver of compliance with
any other obligation or of its right to seek redress for any
breach of any obligation on any subsequent occasion, nor will
any waiver be deemed effective unless in writing and signed by
the Party so waiving.
14.
CONSOLIDATION, MERGER OR SALE OF ASSETS
.
Subject to the terms of Section 8, this Agreement shall not
preclude ADS from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another
corporation which, subject to the express written consent of
Executive, which consent may be withheld for any reason or for
no reason, may then assume this Agreement and all obligations
and undertakings of ADS hereunder. In that event,
“ADS” will mean the other corporation and this
Agreement will continue in full force and effect.
15.
ATTORNEY’S REPRESENTATIONS
.
Executive acknowledges that ADS’ counsel, COOPER LEVENSON
APRIL NIEDELMAN & WAGENHEIM, P.A., prepared this
Agreement on behalf of and in the course of its representation
of ADS, and that:
1. Executive has been advised to seek the advice of
independent counsel; and
2. Executive has had the opportunity to seek and has, in fact,
received the advice of independent counsel of his choosing.
16.
NOTICES
. Any notices required or
permitted by this Agreement or by law to be served on, or
delivered to, any Party to this Agreement, shall be in writing
and shall be signed by the Party giving or delivering it and
sent by courier that guarantees overnight delivery, or by
registered or certified mail, return receipt requested,
addressed to the Party to whom any communication under this
Agreement is to be made. Notice given as provided herein shall
be deemed to have been given on the mailing date and, unless
otherwise provided herein, shall be effective from that date.
Notice shall be sent to the respective Party at the address set
forth below. Any Party may change its address for purposes of
receiving notices by furnishing notice of such change in the
manner set forth above.
If to ADS:
APPLIED DIGITAL SOLUTIONS, INC.
1690 South Congress Avenue- Suite 200
Delray Beach, Florida 33445
If to
Executive
Michael Krawitz
400 South Pointe Drive, Apt. 2204
Miami Beach, Florida 33139
17.
INVALID PROVISIONS
. The invalidity or
unenforceability of any particular provision of this Agreement
shall not affect the other provisions hereof, and the Agreement
shall be construed in all respects as though such invalid or
unenforceable provisions were omitted.
18.
ASSIGNMENT
. This Agreement shall inure to
the benefit of and be binding upon ADS, its successors and
assigns, and Executive. This Agreement, being for the personal
services of Executive, shall not be assignable or subject to
anticipation by Executive.
19.
AMENDMENTS
. The terms and provisions of
this Agreement may not be modified except by written instrument
duly executed by the Parties.
F-6
20.
ENTIRE AGREEMENT
. This Agreement
supersedes all other oral and written agreements between the
Parties with respect to the matters contained in this Agreement
and, except as otherwise provided herein, this Agreement
contains all of the covenants and agreements between the Parties
with respect to those matters.
21.
LAW GOVERNING AGREEMENT
. This Agreement
shall be governed by and construed in accordance with the laws
of the State of Florida. Any terms and conditions of this
Agreement which apply to Executive
and/or
govern Executive’s behavior after Executive’s
termination of employment
and/or
after
the termination of this Agreement shall automatically survive
the termination of this Agreement.
22.
CONSENT TO JURISDICTION AND VENUE
.
The
Parties hereby consent and submit to the jurisdiction and venue
of any state or federal court within the State of Florida, Palm
Beach County in any litigation arising out of this Agreement.
23.
CAPTIONS AND GENDER
.
The headings
contained in this Agreement are inserted for convenience and
reference purposes only and are not intended to describe,
interpret, define or limit the scope, extent or intent of this
Agreement or any provisions hereof, and shall not affect in any
way the meaning or interpretation of this Agreement or any
provisions hereof. All personal pronouns used in this Agreement
shall include the other genders whether used in the masculine or
feminine or neuter gender, and the singular shall include the
plural and vice versa, whenever and as often as may be
appropriate.
24.
COUNTERPART EXECUTION
. This Agreement may
be executed in two or more counterparts either by facsimile or
otherwise, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF
, the Parties hereto have set their
hands and seals as of the date set forth on the first page of
this Agreement.
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ATTEST:
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APPLIED DIGITAL SOLUTIONS, INC
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/s/ Kay
E. Langsford
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/s/ Evan
C.
McKeown 12/5/06
By:
Evan C. McKeown CFO and Senior Vice President
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WITNESS:
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EXECUTIVE:
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/s/ Chris
R. Himes
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/s/ Michael
Krawitz
MICHAEL
KRAWITZ
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F-7
Severance
Policy
If the Corporation terminates an employee without Cause, or the
employee resigns with Good Reason, then the employee shall be
paid severance in accordance with the following schedule:
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Position at Applied Digital Solutions, Inc.
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Severance
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Terms and Conditions
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Senior Vice President or Above
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One year of base salary based on salary at time of termination
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At Corporation’s option payable at once or payable ratably
on regular pay days over six months. Severance is reduced by
half if employee has been with the Corporation less than one
year. Payments cease if, in any material respect, employee
engages in a competitive activity with the Corporation or if
employee breaches a duty of confidentiality.
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Vice President
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Six months of salary based on salary at time of termination
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At Corporation’s option payable at once or payable ratably
on regular pay days over three months. Severance is reduced by
half if employee has been with the Corporation less than one
year. Payments cease if, in any material respect, employee
engages in a competitive activity with the Corporation or if
employee breaches a duty of confidentiality.
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All other employees
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Based on Employee handbook
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Note: This applies to Applied Digital Solutions, Inc. only.
Policies at subsidiaries vary.
Defined Terms
“Cause” shall mean: (i) Employee’s willful
and continued failure to perform his or her duties (other than
as a result of total or partial incapacity due to physical or
mental illness) for twenty (20) days after a written demand
is delivered to Employee on behalf of the Corporation, which
specifically identifies the manner in which it is alleged that
Employee has not substantially performed his or her duties,
(ii) Employee’s dishonesty in the performance of his
or her duties, (iii) an act or acts on Employee’s part
constituting a felony under the laws of the United States or any
state thereof applicable to the Corporation or its business
(including securities laws), (iv) any other act or omission
which materially injures the financial condition or business
reputation of the Corporation or any of its subsidiaries or
affiliates or that knowingly breaches corporate financial
controls, or (v) Employee’s material breach of his or
her obligations not to disclose confidential information of the
Corporation or .his or her obligations not to engage in
competitive activities with the Corporation.
“Good Reason” shall mean: (i) assignment of
duties inconsistent with Employee’s position (including
status, title and reporting requirements) or reduction of the
Employee’s position (including status, title and reporting
requirements), authority, duties or responsibilities, or
(ii) relocation of the Corporation’s principle place
of business or relocation of Employee’s primary workplace
outside of Palm Beach or Broward County.
G-1
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
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Item 20.
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Indemnification
of Officers and Directors.
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Under Section 145 of the Delaware General Corporation Law,
or the DGCL, a corporation may indemnify any person who was or
is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason
of the fact that the person is or was a director, officer,
employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person’s
conduct was unlawful.
Section 145 also provides that a corporation has the power
to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that the person is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys’ fees)
actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation. However, no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
Expenses (including attorneys’ fees) incurred by an officer
or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it
shall ultimately be determined that such person is not entitled
to be indemnified by the corporation as authorized in
Section 145 of the DGCL. Such expenses (including
attorneys’ fees) incurred by former directors and officers
or other employees and agents may be so paid upon such terms and
conditions, if any, as the corporation deems appropriate.
Notwithstanding the instances outlined above where a corporation
may indemnify its current and former directors and officers, a
corporation may purchase and maintain insurance on behalf of any
person who is or was a director or officer of the corporation
against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such
person’s status as such. Correspondingly, Applied Digital
has purchased and maintain insurance on behalf of its directors
and officers against any liability asserted against such
directors and officers in their capacities as such.
Applied Digital’s amended and restated bylaws provide that
it shall indemnify, to the full extent permitted by law, any of
its current or former directors or officers and that it may
indemnify, to the full extent permitted by law, any of its
current or former employees or agents against any claim,
liability or expense incurred as a result of such service, or as
a result of any other service on Applied Digital’s behalf,
or service at its request as a director, officer, employee
member of agent of another corporation, partnership, joint
venture, trust or other enterprise.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Applied Digital’s
directors, officers or controlling persons pursuant to such
provisions, Applied Digital has been
II-1
informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable.
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Item 21.
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Exhibits
and Financial Schedules.
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Exhibit
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Number
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Exhibit Description
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2
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.1
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Agreement and Plan of Reorganization by and among Applied
Digital, Digital Angel and Digital Angel Acquisition Corp. dated
August 8, 2007 (included as Annex A to the joint proxy
statement/prospectus forming part of this Registration Statement
and incorporated herein by reference)
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3
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.1
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Certificate of Incorporation of Applied Digital (incorporated by
reference to Exhibit 3.1 to Applied Digital’s
Form 8-K
filed with the SEC on April 25, 2007)
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3
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.2
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Amended and Restated Bylaws of Applied Digital (incorporated by
reference to Exhibit 3.3 to Applied Digital’s
Form 10-Q
filed with the SEC on August 9, 2007)
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3
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.3**
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Form of specimen common stock certificate for Applied Digital
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5
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.1*
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Opinion of Holland & Knight LLP regarding validity of
the shares of Applied Digital common stock registered hereunder
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8
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.1**
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Opinion of Holland & Knight LLP regarding material
federal income tax consequences relating to the merger
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23
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.1*
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Consent of Eisner LLP with respect to Applied Digital
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23
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.2*
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Consent of Eisner LLP with respect to Digital Angel
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23
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.4*
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Consent of Holland & Knight LLP (included as part of
Exhibit 5.1)
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23
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.5**
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Consent of Holland & Knight LLP (included as part of
Exhibit 8.1)
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24
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.1**
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Powers of Attorney of Applied Digital (included on signature
page)
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99
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.1**
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Form of Proxy for Applied Digital
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99
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.2**
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Form of Proxy for Digital Angel
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99
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.3**
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Opinion of Duff & Phelps, LLC (included as
Annex B to the joint proxy statement/prospectus forming
part of this Registration Statement and incorporated herein by
reference)
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99
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.4**
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Opinion of Seven Hills Partners LLC (included as Annex C to
the joint proxy statement/prospectus forming part of this
Registration Statement and incorporated herein by reference)
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99
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.5**
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Consent of Duff & Phelps, LLC
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99
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.6**
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Consent of Seven Hills Partners LLC
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(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration statement
(or the most recent post-effective amendment hereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate
II-2
offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided
,
however
, that Paragraphs (a)(1)(i),
(a)(1)(ii) and (a)(1)(iii) of this section do not apply if the
registration statement is on
Form S-3
or
Form F-3
and the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with
or furnished to the SEC by the registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that
are incorporated by reference in the registration statement, or
is contained in a form of prospectus filed pursuant to
Rule 424(b) that is part of the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under
the Securities Act to any purchaser:
(A) Each prospectus filed by the registrant pursuant to
Rule 424(b)(3) (§ 230.424(b)(3) of this chapter) shall
be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the
registration statement; and
(B) Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5),
or (b)(7) of this chapter) as part of a registration statement
in reliance on Rule 430B relating to an offering made
pursuant to Rule 415(a)(1)(i), (vii), or (x)
(§ 230.415(a)(1)(i), (vii), or (x) of this
chapter) for the purpose of providing the information required
by section 10(a) of the Securities Act shall be deemed to
be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such effective date.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act,
each filing of the registrant’s annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against
II-3
such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13
of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
(e) The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information
concerning a transaction, and Digital Angel being acquired
involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Delray Beach, State of Florida, on
October 4, 2007.
APPLIED DIGITAL SOLUTIONS, INC.
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By:
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/s/
Michael
E. Krawitz
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Michael E. Krawitz
Chief Executive Officer and President
Pursuant to the requirements of Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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*
(Michael
E. Krawitz)
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Chief Executive Officer,
President and Director
(Principal Executive Officer)
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October 4, 2007
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*
(Lorraine
M. Breece)
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Senior Vice President and Acting
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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October 4, 2007
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*
(Daniel
E. Penni)
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Chairman of the Board of Directors
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October 4, 2007
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*
(J.
Michael Norris)
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Director
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October 4, 2007
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*
(Dennis
G. Rawan)
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Director
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October 4, 2007
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*
(Constance
K. Weaver)
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Director
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October 4, 2007
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*
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Michael E. Krawitz hereby signs this registration statement on
behalf of the persons for whom he is attorney-in-fact on
October 4, 2007, pursuant to a power of attorney previously
filed.
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By:
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/s/
Michael
E. Krawitz
Attorney-in-fact
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Dated:
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October 4, 2007
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II-5
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Exhibit
|
|
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|
Number
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Exhibit Description
|
|
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|
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2
|
.1
|
|
Agreement and Plan of Reorganization by and among Applied
Digital, Digital Angel and Digital Angel Acquisition Corp. dated
August 8, 2007 (included as Annex A to the joint proxy
statement/prospectus forming part of this Registration Statement
and incorporated herein by reference)
|
|
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3
|
.1
|
|
Certificate of Incorporation of Applied Digital (incorporated by
reference to Exhibit 3.1 to Applied Digital’s
Form 8-K
filed with the SEC on April 25, 2007)
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Applied Digital (incorporated by
reference to Exhibit 3.3 to Applied Digital’s
Form 10-Q
filed with the SEC on August 9, 2007)
|
|
|
3
|
.3**
|
|
Form of specimen common stock certificate for Applied Digital
|
|
|
5
|
.1*
|
|
Opinion of Holland & Knight LLP regarding validity of
the shares of Applied Digital common stock registered hereunder
|
|
|
8
|
.1**
|
|
Opinion of Holland & Knight LLP regarding material
federal income tax consequences relating to the merger
|
|
|
23
|
.1*
|
|
Consent of Eisner LLP with respect to Applied Digital
|
|
|
23
|
.2*
|
|
Consent of Eisner LLP with respect to Digital Angel
|
|
|
23
|
.4*
|
|
Consent of Holland & Knight LLP (included as part of
Exhibit 5.1)
|
|
|
23
|
.5**
|
|
Consent of Holland & Knight LLP (included as part of
Exhibit 8.1)
|
|
|
24
|
.1**
|
|
Powers of Attorney of Applied Digital (included on signature
page)
|
|
|
99
|
.1**
|
|
Form of Proxy for Applied Digital
|
|
|
99
|
.2**
|
|
Form of Proxy for Digital Angel
|
|
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99
|
.3**
|
|
Opinion of Duff & Phelps, LLC (included as
Annex B to the joint proxy statement/prospectus forming
part of this Registration Statement and incorporated herein by
reference)
|
|
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99
|
.4**
|
|
Opinion of Seven Hills Partners LLC (included as Annex C to
the joint proxy statement/prospectus forming part of this
Registration Statement and incorporated herein by reference)
|
|
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99
|
.5**
|
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Consent of Duff & Phelps, LLC
|
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99
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.6**
|
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Consent of Seven Hills Partners LLC
|
II-6
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