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Form 10-K/A for APPLIED DIGITAL SOLUTIONS INC
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21-May-2004
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with the accompanyingfinancial statements and related notes included in this Annual Report.Certain statements contained herein may contain forward-looking statements -see "Cautionary Statement Regarding Forward-Looking Information and RiskFactors."
OVERVIEW
Our business has evolved during the past few years. We grewsignificantly through acquisitions and since 1996 have completed 51acquisitions. During the last half of 2001 and during 2002, we sold orclosed many of the businesses we had acquired that we believed did notenhance our strategy of becoming an advanced technology development company.These companies were primarily telephone system providers, softwaredevelopers, software consultants, networking integrators, computer hardwaresuppliers or were engaged in other businesses or had customer bases that webelieved did not promote or complement our current business strategy. As ofDecember 31, 2003, our business operations consisted of the operations offive wholly-owned subsidiaries, which we collectively refer to as theAdvanced Technology segment, and two majority-owned subsidiaries, DigitalAngel Corporation (AMEX
OC) and InfoTech USA, Inc. (OTC:IFTH) (formerlySysComm International Corporation).
Excluding the effects of a gain on the extinguishment of debt of$70.1 million, we incurred a consolidated loss from continuing operations of$66.5 million for the year ended December 31, 2003. We incurred consolidatedlosses from continuing operations of $113.9 million and $188.6 million,respectively, for the years ended December 31, 2002 and 2001, and as ofDecember 31, 2003, we had an accumulative deficit of $413.9 million. Ourconsolidated operating activities used cash of $11.4 million, $3.9 millionand $18.0 million during 2003, 2002 and 2001, respectively. Digital AngelCorporation incurred losses during 2003, 2002 and 2001, which are presentedbelow. In addition, its operating activities used cash of $4.7 million, $2.7million and $3.2 million during 2003, 2002 and 2001, respectively.
The reduced settlement payment of our debt obligations to IBMCredit LLC, referred to as IBM Credit, the conversion to equity of ourobligations under our 8.5% Convertible Exchangeable Debentures, and the saleof 3.0 million shares of our common stock under our 3.0 million shareoffering, have been major factors mitigating concerns that existed about ourability to continue as a going concern. Our profitability and liquiditydepend on many factors including the success of our marketing programs, themaintenance and reduction of expenses and our ability to successfullydevelop and bring to market our new products and technologies.
We haveestablished a management plan intending to guide us in achievingprofitability and positive cash flows over the twelve-months ending December31, 2004. The major components of our plan are as follows:
o to attempt to establish a sustainable positive cash flow business model;
o to attempt to produce additional cash flow and revenue from our advanced technology products - Digital Angel(TM), Thermo Life(TM), VeriChip(TM), Bio-Thermo(TM) and PLD;
o to generate additional liquidity through divestiture of business units and assets that are not critical to us;
o to position Digital Angel Corporation for growth under the leadership of it new management team and through strategic acquisitions such as the recent OuterLink acquisition;
o to generate additional liquidity for Digital Angel Corporation through the Share Exchange Agreement between us and Digital Angel Corporation;
o to attempt to pair VeriChip Corporation with a complementary company that will bring experienced management, revenue and a synergistic customer base.
Our management estimates that the above plan can be effectivelyimplemented.
