Impact of Recently Issued Accounting Standards
In December 2003, the FASB issued revised Interpretation No. 46R, “Consolidation of Variable Interest Entities.” Interpretation No. 46R requires companies with a variable interest in a variable interest entity to apply this guidance as of the first reporting period ending after December 15, 2003. The application of the guidance could result in the consolidation of a variable interest entity. The adoption of the provision of FIN 46R did not have any impact on the Company’s consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (R), “Accounting for Stock-Based Compensation.” SFAS 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123 (R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS 123 (R), only certain pro forma disclosures of fair value were required. SFAS 123 (R) shall be effective for the Company as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The adoption of this new accoun
ting pronouncement is expected to have a material impact on the financial statements of the Company commencing with the quarter ending September 30, 2005.
In December 2002, the Financial Accounting Standards Board (the “FASB”) issued SFAS 148 which amends SFAS 123. SFAS 148 provides alternate methods of transition for a voluntary change from the intrinsic value method to the fair value method of accounting for stock-based employee compensation. However, we do not expect to make such a change. In addition, SFAS 148 amends SFAS 123 to require more prominent annual and quarterly disclosures in the financial statements about the effects of using the intrinsic value method rather than the fair value method for stock-based compensation. We have included the additional disclosures required by SFAS 148 in Note 11 to the financial statements below.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” We do not hold any material derivative instruments and do not conduct any significant hedging activities.
In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS 150 was effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of the provisions of SFAS 150 did not have any impact on our consolidated financial statements.
In November 2002, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” related to the separation and allocation of consideration for arrangements that include multiple deliverables. The EITF requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately as separate units of accounting. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenues recognized in a bundled sales arrangement. The allocation of revenues to the separate deliverables is based on the relative fair value of each item. If the fair value is not available for the d
elivered items then the residual method must be used. This method requires that the amount allocated to the undelivered items in the arrangement is their full fair value. This would result in the discount, if any, being allocated to the delivered items. This consensus was effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the provisions of EITF 00-21 did not have a material impact on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements Nos. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” This Interpretation, among other things, clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The adoption of the initial recognition and measurement provisions of the Interpretation was required for guarantees iss
ued or modified after December 31, 2002. Such adoption did not have a material impact on our consolidated financial statements.
Inflation
In the opinion of management, inflation has not had a material effect on our operations.
Critical Accounting Policies
The Securities and Exchange Commission has previously issued disclosure guidance for “critical accounting policies.” The Commission defines “critical accounting policies” as those that require the application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 1 to our consolidated financial statements, contained elsewhere in this report. We believe that the following accounting policies or estimates require the application of management’s most difficult, subjective or complex judgments:
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood that we will generate sufficient taxable income in future years in which temporary differences reverse. Presently we believe it is not likely that we will be able to realize a substantial portion of the benefit of our deferred tax assets. This is primarily based on the combination of our historical losses, our loss incurred in fiscal year ended September 30, 2004, and the general outlook for the IT industry, resulting in an expectation of marginal profitability in the future. As a result we recorded a valuation allowance of $1,550 at September 30, 2004.
Valuation of Long-Lived Assets
We assess the recoverability of long-lived assets and intangible assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. Our assessment is primarily based upon our estimate of future cash flows associated with these assets. Due to our historical losses, the loss incurred in fiscal year ended September 30, 2004, and the general outlook for the IT industry, we project marginal profitability in the future. Accordingly, we have determined that as of September 30, 2004, there has been an impairment of $701 of our long-lived assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks, nor do we invest in speculative financial instruments. For InfoTech USA, borrowings under the financing agreement with Wells Fargo are at Wells Fargo’s prime rate plus 3%. We do not have any investments in any instruments that are sensitive to changes in the general level of U.S. interest rates.
Due to the nature of our borrowings, we have concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required.
Our consolidated financial statements and supplementary data included in this Annual Report are listed in Item 15 and begin immediately after Item 15.
None.
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in our reporting system. Based upon, and as of the date of that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms.
There was no change in our internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
It should be noted that our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Amendment and Waiver to Credit Agreement
(in $’000s)
On December 2, 2004, we notified Wells Fargo that as of and for the fiscal year ended September 30, 2004, we were not in compliance with the covenants for book net worth and cumulative net income contained in our credit agreement. Under the terms of our credit agreement with Wells Fargo, we were required to have book net worth, as defined in the credit agreement, at September 30, 2004 of at least $7,300 and cumulative net loss, as defined in the credit agreement, for the fiscal year ended September 30, 2004, not to exceed $246. Wells Fargo agreed to waive such non-compliance and, on December 24, 2004, we, and our subsidiaries entered into an amendment and waiver with Wells Fargo. In connection therewith, we agreed to pay Wells Fargo a $40 waiver fee in four equal installments of $10 on each of January 3, 2005, Feb
ruary 7, 2005, March 7, 2005 and April 4, 2005.
Under the terms of the amendment and waiver, we are required to maintain (i) a debt to book net worth ratio, as defined in the credit agreement, of not more than 1.5 to 1.0 for each fiscal quarter, (ii) a minimum book net worth, as defined in the credit agreement, of at least $3,100 for each fiscal quarter and (iii) a net loss, as defined in the credit agreement, not to exceed $121 for the fiscal quarter ended December 31, 2004 and $28 for the two fiscal quarters ended March 31, 2005, a minimum net income, as defined in the credit agreement, of at least $2 for the three fiscal quarters ended June 30, 2005 and a net loss not to exceed $60 for the year ended September 30, 2005.
A copy of the amendment and waiver is filed as an exhibit to this annual report. The foregoing description of the amendment and waiver is only a summary and is qualified in its entirety by the full text of the amendment and waiver, which is incorporated by reference herein.
PART III
Information regarding our directors and executive officers is set forth under the captions “Election of Director and Ratification of Appointment of Director – Board of Directors,” “ – Legal Proceedings and Indemnification,” “ – Directorships,” “ – Board Committees and Meetings,” “ – Code of Ethics,” “ – Section 16(a) Beneficial Ownership Reporting Compliance” and “ – Executive Officers and Significant Employees” in the Proxy Statement for our 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Information regarding executive compensation is set forth under the captions “Election of Director and Ratification of Appointment of Director – Executive Compensation,” “ – Option Grants in Last Fiscal Year,” “ – Aggregate Option Exercises in Last Fiscal Year and Year-End Values,” “ – Compensation of Directors” and “ – Compensation Committee Interlocks and Insider Participation in Compensation Decisions” in the Proxy Statement for our 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Information regarding security ownership of certain beneficial owners and management is set forth under the captions “Election of Director and Ratification of Appointment of Director – Ownership of Equity Securities,” and “ – Principal Stockholders” in the Proxy Statement for our 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth information regarding our compensation plans (including individual compensation arrangements) under which shares of our common stock are authorized for issuance as of September 30, 2004:
|
Plan Category |
|
Number of Securities to be Issued upon Exercise of Outstanding Options,
Warrants and Rights (a) |
|
Weighted Average Exercise
Price of Outstanding
Options, Warrants and
Rights (b) |
|
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a)) |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by security holders |
|
|
3,205,000 |
(1) |
|
|
$0.312 |
|
|
3,967,000 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by securities holders |
|
|
950,000 |
(2) |
|
|
0.699 |
|
|
– |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Represents 3,075,000 options which have previously been granted and which remain outstanding under our 2001 Flexible Stock Plan and 130,000 options which have previously been granted and which remain outstanding under our 1998 Stock Option Plan. Our 2001 Flexible Stock Plan initially had 2,500,000 shares of common stock reserved for issuance. This number is subject to an annual increase of 25% of the number of outstanding shares of common stock as of January 1 of each year but may not exceed 10,000,000 in the aggregate. |
| (2) |
Represents (i) 350,000 options issued to consultants in connection with the provision of certain investment advisory services for us; (ii) 300,000 options issued in December 2000 to David A. Loppert, our former Chief Executive Officer, in connection with his employment with us and (iii) 300,000 warrants issued in December 2000 to John H. Spielberger, a former stockholder, in connection with the sale of his shares to Applied Digital Solutions. |
Information regarding certain relationships and related transactions is set forth under the caption “Election of Director and Ratification of Appointment of Director – Certain Relationships and Related Transactions” in the Proxy Statement for our 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Information regarding our principal accountant fees and services is set forth under the caption “Ratification of Selection of Independent Registered Public Accounting Firm – Principal Accountant Fees and Services” in the Proxy Statement for our 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)(1) |
The financial statements and financial statement schedules listed below are included in this report |
| |
Report of Independent Registered Public Accounting Firm |
| |
Financial Statements |
| |
Consolidated Balance Sheets |
| |
Consolidated Statements of Operations |
| |
Consolidated Statements of Stockholders’ Equity |
| |
Consolidated Statements of Cash Flows |
| |
Notes to Consolidated Financial Statements |
| |
Financial Statement Schedule |
| |
Schedule of Valuation and Qualifying Accounts |
|
(a)(2) |
Financial statement schedules have been included in Item 15(a)(1) above. |
|
(a)(3) |
Exhibits |
| |
See Index to Exhibits filed as part of this annual report on Form 10-K. |
|
(c) |
Exhibits – Included in Item 15(a)(3) above. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
InfoTech USA, Inc.
By: /s/ J. ROBERT PATTERSON
J. Robert Patterson
Vice President, Treasurer, Chief Financial Officer
and Director
Date: December 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date |
| |
|
|
|
/S/ KEVIN MCLAUGHLIN
(Kevin McLaughlin) |
Chairman of the Board of
Directors and Secretary |
December 29, 2004 |
| |
|
|
|
/S/ SEBASTIAN F. PEREZ
(Sebastian F. Perez) |
Chief Operating Officer, Acting
President and Chief Executive Officer
(Principal Executive Officer) |
December 29, 2004 |
| |
|
|
|
/S/ J. ROBERT PATTERSON
(J. Robert Patterson) |
Vice President, Treasurer, Chief
Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer) |
December 29, 2004 |
| |
|
|
|
/S/ CHARLES L. DOHERTY
(Charles L. Doherty) |
Director |
December 29, 2004 |
| |
|
|
|
/S/ JEFFREY S. COBB
(Jeffrey S. Cobb) |
Director |
December 29, 2004 |
(Item 14 (c))
|
Exhibit
Number |
Description |
| |
|
|
3.1 |
Amended and Restated Certificate of Incorporation dated April 21, 1997 (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 14, 2004) |
| |
|
|
3.2 |
Certificate of Amendment of Certificate of Incorporation dated March 22, 2002 (incorporated by reference to Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 14, 2004) |
| |
|
|
3.3 |
Certificate of Amendment of Certificate of Incorporation dated April 9, 2004 (incorporated by reference to Exhibit 3.3 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 14, 2004) |
| |
|
|
3.4 |
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 14, 2004) |
| |
|
|
4.1 |
Non-Qualified Stock Option Award Granted to David A. Loppert dated January 1, 2001 (incorporated by reference to Exhibit 4.1 to the registrant’s Annual Report on Form 10-K filed with the Commission on December 23, 2003) |
| |
|
|
10.1 |
Credit and Security Agreement, dated June 29, 2004, by and among InfoTech USA, Inc., InfoTech USA, Inc., Information Technology Services, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on July 8, 2004) |
| |
|
|
10.2 |
Guaranty by Corporations, dated June 29, 2004, by and among InfoTech USA, Inc., Information Technology Services, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on July 8, 2004) |
| |
|
|
10.3 |
Stock Pledge Agreement, dated June 29, 2004, by and between InfoTech USA, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on July 8, 2004) |
| |
|
|
10.4 |
Collateral Assignment of Note, dated June 29, 2004, by and between InfoTech USA, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the Commission on July 8, 2004) |
| |
|
|
10.5 |
First Amendment and Waiver, dated as of December 24, 2004, among InfoTech USA, Inc., the registrant, Information Technology Services, Inc. and Wells Fargo Business Credit, Inc. |
| |
|
|
10.6 |
Agreement for Wholesale Financing, dated June 30, 2004, by and between IBM Credit, LLC and InfoTech USA, Inc. (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed with the Commission on July 8, 2004) |
| |
|
| |
|
|
10.7 |
Commercial Loan Agreement, dated June 27, 2004, between InfoTech USA, Inc. and Applied Digital Solutions, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K, dated June 27, 2004, filed with the Commission on July 11, 2004) |
| |
|
|
10.8 |
Term Note, dated June 27, 2004, issued by Applied Digital Solutions, Inc. in favor of InfoTech USA, Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K, dated June 27, 2004, filed with the Commission on July 11, 2004) |
| |
|
|
10.9 |
Stock Pledge Agreement, dated June 27, 2004, between Applied Digital Solutions, Inc. and InfoTech USA, Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K, dated June 27, 2004, filed with the Commission on July 11, 2004) |
| |
|
|
10.10 |
First Amendment to Loan Documents, dated June 28, 2004, by and between Applied Digital Solutions, Inc. and InfoTech USA, Inc. (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed with the Commission on July 8, 2004) |
| |
|
|
10.11* |
1998 Incentive Stock Option Plan, as Amended (incorporated herein by reference to Exhibit 99 to the registrant’s definitive Proxy Statement filed with the Commission on December 27, 1999) |
| |
|
|
10.12* |
1999 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit A to the registrant’s definitive Proxy Statement filed with the Commission on December 28, 1998) |
| |
|
|
10.13* |
2001 Flexible Stock Plan (incorporated herein by reference (incorporated herein by reference to Exhibit A to the Company’s definitive Proxy Statement filed with the Commission on February 28, 2001) |
| |
|
|
10.14 |
Sublease Agreement dated as of May 25, 2000 by and between Sungard Portfolio Solutions and Information Products Center, Inc. (incorporated by reference to Exhibit 10.13 to the registrant’s Annual Report on Form 10-K filed with the Commission on December 23, 2003) |
| |
|
|
21.1 |
List of Subsidiaries |
| |
|
|
31.1 |
Certification by Chief Executive Officer of the registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
31.2 |
Certification by Chief Financial Officer of the registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
32.1 |
Certification by Chief Executive Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
32.2 |
Certification by Chief Financial Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| _______________ |
| |
|
|
* |
Management contract or compensatory plan. |
|
|
|
| |
Page |
| |
|
|
|
F-2 |
| |
|
|
Financial Statements |
|
| |
|
|
|
F-3 |
| |
|
|
|
F-4 |
| |
|
|
|
F-5 |
| |
|
|
|
F-6 |
| |
|
|
|
F-7/22 |
| |
|
|
|
S-1 |
Board of Directors and Stockholders
InfoTech USA, Inc.
Fairfield, New Jersey
We have audited the accompanying consolidated balance sheets of InfoTech USA, Inc. and Subsidiaries as of September 30, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended September 30, 2004, 2003 and 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of InfoTech USA, Inc. and Subsidiaries as of September 30, 2004 and 2003, and their results of operations and cash flows for the years ended September 30, 2004, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.
Our audits referred to above included the information in Schedule II, which presents fairly, in all material respects, when read in conjunction with the consolidated financial statements, the information required to be set forth therein.
/s/ J. H. Cohn LLP
Roseland, New Jersey
December 24, 2004
| INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|
Assets |
|
|
|
September 30, |
| |
|
|
2004 |
|
|
2003 |
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
291 |
|
$ |
855 |
|
|
Accounts receivable (net of allowance for doubtful accounts |
|
|
|
|
|
|
|
|
of $97 and $113) |
|
|
3,377 |
|
|
2,955 |
|
|
Inventories |
|
|
113 |
|
|
120 |
|
|
Deferred tax assets |
|
|
— |
|
|
44 |
|
|
Note receivable - Parent Company |
|
|
1,000 |
|
|
1,013 |
|
|
Other current assets |
|
|
414 |
|
|
283 |
|
|
Total Current Assets |
|
|
5,195 |
|
|
5,270 |
|
| |
|
|
|
|
|
|
|
|
Property, equipment and improvements, net |
|
|
183 |
|
|
325 |
|
| |
|
|
|
|
|
|
|
|
Goodwill, net |
|
|
1,453 |
|
|
2,154 |
|
| |
|
|
|
|
|
|
|
|
Other assets |
|
|
174 |
|
|
1,619 |
|
| |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
7,005 |
|
$ |
9,368 |
|
|
Liabilities And Stockholders’ Equity |
| |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Current maturities of capital lease obligations |
|
$ |
— |
|
$ |
21 |
|
|
Line of credit - Wells Fargo |
|
|
812 |
|
|
— |
|
|
Amounts due to Parent Company |
|
|
95 |
|
|
105 |
|
|
Accounts payable |
|
|
264 |
|
|
146 |
|
|
Accrued expenses and other liabilities |
|
|
921 |
|
|
1,502 |
|
| |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
2,092 |
|
|
1,774 |
|
| |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Preferred shares: |
|
|
|
|
|
|
|
|
Authorized 5,000 shares, no par value: none issued |
|
|
— |
|
|
— |
|
|
Common shares: |
|
|
|
|
|
|
|
|
Authorized 80,000 shares of $.01 par value; 5,757 shares |
|
|
|
|
|
|
|
|
issued; 4,896 shares outstanding |
|
|
58 |
|
|
58 |
|
|
Additional paid-in capital |
|
|
6,653 |
|
|
6,653 |
|
|
(Accumulated deficit) retained earnings |
|
|
(880 |
) |
|
1,801 |
|
|
Treasury stock (861 shares, carried at cost) |
|
|
(918 |
) |
|
(918 |
) |
| |
|
|
|
|
|
|
|
|
Total Stockholders’ Equity |
|
|
4,913 |
|
|
7,594 |
|
| |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity |
|
$ |
7,005 |
|
$ |
9,368 |
|
See the accompanying notes to consolidated financial statements.
| INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
|
For The Years Ended September 30, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
13,431 |
|
$ |
11,071 |
|
$ |
22,266 |
|
|
Service revenue |
|
3,253 |
|
|
2,537 |
|
|
2,916 |
|
|
Total revenue |
|
16,684 |
|
|
13,608 |
|
|
25,182 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
11,642 |
|
|
9,533 |
|
|
19,203 |
|
|
Cost of services sold |
|
2,203 |
|
|
1,621 |
|
|
1,562 |
|
|
Total cost of products and services sold |
|
13,845 |
|
|
11,154 |
|
|
20,765 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,839 |
|
|
2,454 |
|
|
4,417 |
|
|
Selling, general and administrative expenses |
|
|
3,139 |
|
|
3,332 |
|
|
4,179 |
|
|
Depreciation and amortization |
|
|
184 |
|
|
223 |
|
|
268 |
|
|
Asset impairment |
|
701 |
|
|
— |
|
|
— |
|
|
Loss from operations |
|
|
(1,185 |
) |
|
(1,101 |
) |
|
(30 |
) |
|
Other expense, net |
|
|
46 |
|
|
26 |
|
|
223 |
|
|
Interest (income) expense |
|
(95 |
) |
|
(36 |
) |
|
274 |
|
|
Loss before income tax expense (benefit) |
|
|
(1,136 |
) |
|
(1,091 |
) |
|
(527 |
) |
|
Income tax expense (benefit) |
|
|
1,545 |
|
|
(447 |
) |
|
(115 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
$ |
(2,681 |
) |
$ |
(644 |
) |
$ |
(412 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share - Basic |
$ |
(0.55 |
) |
$ |
(0.13 |
) |
$ |
(0.08 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number Of Common Shares |
|
|
|
|
|
|
|
|
|
|
|
Outstanding - Basic |
|
4,896 |
|
|
4,896 |
|
|
4,896 |
|
| |
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
| INFOTECH USA, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| INFOTECH USA, INC. AND SUBSIDIARIES |
(In Thousands Except Per Share Amounts)
Note 1 – Summary Of Significant Accounting Policies
Business Organization And Basis Of Presentation
InfoTech USA, Inc. (the “Company”) was incorporated on September 30, 1987 as a Delaware corporation. The Company has two subsidiaries: Information Technology Services, Inc. (doing business as InfoTech), a New York Corporation since 1980, and InfoTech USA, Inc., a New Jersey corporation since 1983. The Company is controlled by its 53% majority stockholder, Applied Digital Solutions, Inc. (“ADS”, “Applied Digital” or the “Parent Company”).
The Company, through its subsidiaries, is a supplier and systems integrator of a broad range of computer services and related products. The Company conducts business in the New York City Metropolitan area and New Jersey. The Company’s customers are generally medium to large size entities.
Change In Control
On December 14, 2000, pursuant to the terms of a Stock Purchase Agreement, as amended, between the selling stockholders described in Note 2 and ADS, a Missouri corporation, ADS acquired approximately 55% of the then issued and outstanding common stock of the Company, resulting in a change in control.
Basis Of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use Of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Revenue Recognition
For product sales, the Company recognizes revenue upon delivery in accordance with the applicable product’s shipping terms. The Company has no obligation for warranties on new hardware sales, because the manufacturer provides the warranties. For consulting and other services, the Company recognizes revenue based on the direct labor hours incurred for services rendered times the standard billing rate, adjusted to realizable value, if necessary. Revenues from sales contracts involving both products and consulting and other services are allocated to each element based on the relative fair value of each element. The Company does not offer a warranty policy for services to customers. Revenues are not recognized unless prices are fixed or determinable and collectibility is reasonably assured.
The Company does not require any collateral in connection with sales of products or services. It provides an allowance for doubtful accounts equal to the estimated collection losses based on historical experience coupled with a review of the current status of existing receivables.
Inventories
Inventories consist principally of computer hardware and software and are valued at the lower of cost (first-in, first-out) or market. Substantially all inventory items are finished goods.
The Company reviews the movement of inventories on an item-by-item basis to determine the value of items which are slow moving. After considering the potential for near term product engineering changes and/or technological obsolescence and current realizability due to changes in returns and price protection policies, the Company determines the need for an inventory valuation allowance. The allowance was $29, $39 and $78 as of September 30, 2004, 2003 and 2002, respectively.
Property, Equipment And Improvements
Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged against operations as incurred. Upon retirement or sale, any assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Capitalized values of property under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less.
Depreciation and amortization are computed using straight-line and accelerated method over the following estimated useful lives:
| |
Estimated |
|
|
| |
Useful Life |
|
|
| |
|
|
|
|
Vehicles |
1-5 years |
|
|
|
Computer equipment |
5 years |
|
|
|
Furniture and fixtures |
7 years |
|
|
|
Leasehold improvements |
5 years |
|
|
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Impairment losses on long-lived assets, such as equipment and improvements, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts.
Goodwill
The cost in excess of fair value of net assets of businesses acquired is recorded as goodwill. Prior to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) in fiscal 2002, goodwill was amortized on a straight-line basis over 10 years. Goodwill is no longer amortized. Instead, it is tested at least annually for impairment. Goodwill is deemed to be impaired only when the carrying amount exceeds the estimated fair value, which is determined based on models that incorporate estimates of future profitability and cash flows. See Note 4 for the impact of the adoption of SFAS 142 on the consolidated financial statements and a charge for impairment in 2004.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS 109”) which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Net Income (Loss) Per Common Share
The Company presents “basic” income (loss) per common share and, if applicable, “diluted” income per common share, pursuant to the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). Basic income (loss) per common share is calculated by dividing net income or loss by the weighted average number of common shares outstanding during each period. The calculation of diluted income per common share is similar to that of basic income per common sh
are, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options, were issued during the period.
Since the Company had net losses in 2004, 2003 and 2002, the assumed effects of the exercise of employee stock options for the purchase of 3,855, 4,070 and 4,970 common shares outstanding at September 30, 2004, 2003 and 2002, respectively, would have been anti-dilutive.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Cash And Cash Equivalents
The Company considers all liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents.
Fair Value Of Financial Instruments
The carrying values of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the relatively short maturity of these instruments. The carrying value of the note receivable from the Parent Company and the line of credit borrowing approximate fair values because they bear interests at market interest rates and have a relatively short maturities. The carrying values of the cash surrender value of life insurance policies approximate fair values because the balance is recorded at the amount realizable if the policies were terminated as of the balance sheet date.
Stock-based compensation
In accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), the Company will recognize compensation costs as a result of the issuance of stock options to employees, including directors, based on the excess, if any, of the fair value of the underlying stock at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employees must pay to acquire the stock (the “intrinsic value method”). However, the Company will not be required to recognize compensation expense as a result of any grants to employees at an exercise price that is equal to or greater than fair value. The Company will
also make pro forma disclosures, as required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures” (“SFAS 148”) of net income or loss as if the Black-Scholes option pricing model, which is a fair value based method of accounting for stock options under SFAS 123, had been applied if such amounts differ materially from the historical amounts.
No earned or unearned compensation cost was recognized in the accompanying consolidated financial statements for the stock options granted by the Company to its employees since all of those options have been granted at exercise prices that equaled or exceeded the market value at the date of grant. The Company’s historical net loss and net loss per common share and pro forma net loss and net loss per common share assuming compensation cost had been determined in 2004, 2003 and 2002 based on the fair value at the grant date for all awards by the Company and amortized over the vesting period consistent with the provisions of SFAS 123 are set forth below:
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Net loss - as reported |
|
$ |
(2,681 |
) |
$ |
(644 |
) |
$ |
(412 |
) |
|
Deduct total stock-based employee compensation expense determined under a fair value based
method for all awards, net of related tax effects |
|
|
(138 |
) |
|
— |
|
|
(191 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net loss - pro forma |
|
$ |
(2,819 |
) |
$ |
(644 |
) |
$ |
(603 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
Basic - as reported |
|
$ |
(0.55 |
) |
$ |
(0.13 |
) |
$ |
(0.08 |
) |
|
Basic - pro forma |
|
|
(0.58 |
) |
|
(0.13 |
) |
|
(0.12 |
) |
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for determining the fair value of options granted in 2004 and 2002:
| |
2004 |
2002 |
| |
|
|
|
Risk-free interest rates |
4.5% |
3.5% |
|
Expected option lives |
8 years |
4 years |
|
Expected volatilities |
109% |
169% |
|
Expected dividend yields |
0% |
0% |
In accordance with the provisions of SFAS 123, all other issuances of common stock, stock options or other equity instruments to employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options or similar equity instruments issued will be estimated based on the Black-Scholes option-pricing model, and the assumption that all of the options or other equity instruments will ultimately vest. Such fair value is measured as of an appropriate date pursuant to the EITF Issue No. 96-18 (generally, the earlier of the date the other party becomes committed to provide goods or services or th
e date performance by the other party is complete) and capitalized or expensed as if the Company had paid cash for the goods or services.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note 2 – Other Current Assets
| |
|
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
| |
Vendor receivables (rebates and returns) |
|
$ |
74 |
|
$ |
89 |
|
| |
Prepaid expenses |
|
|
219 |
|
|
56 |
|
| |
Miscellaneous receivable |
|
|
116 |
|
|
105 |
|
| |
Other |
|
|
5 |
|
|
33 |
|
| |
|
|
|
|
|
|
|
|
| |
Totals |
|
$ |
414 |
|
$ |
283 |
|
Note 3 – Property, Equipment And Improvements
| |
|
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
| |
Vehicles |
|
$ |
— |
|
$ |
24 |
|
| |
Computer equipment |
|
|
1,462 |
|
|
1,422 |
|
| |
Furniture and fixtures |
|
|
277 |
|
|
321 |
|
| |
Leasehold improvements |
|
|
69 |
|
|
63 |
|
| |
|
|
|
1,808 |
|
|
1,830 |
|
| |
Less accumulated depreciation and amortization |
|
|
(1,625 |
) |
|
(1,505 |
) |
| |
|
|
|
|
|
|
|
|
| |
Totals |
|
$ |
183 |
|
$ |
325 |
|
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Included above are computer equipment and furniture and fixtures acquired under capital lease obligations in the amount of $64 at September 30, 2004 and 2003. Related accumulated depreciation amounted to $64 and $44 at September 30, 2004 and 2003, respectively. Amortization expense of capital lease assets is included in depreciation expense.
Depreciation and amortization charged to operations amounted to $184, $223 and $268 for 2004, 2003 and 2002, respectively.
On January 28, 2002, the Company sold its facilities in Shirley, New York for $2,400. The sale generated cash of approximately $1,300 after repaying the related mortgage and other transaction fees. The Company has centralized all back office and warehousing operations in its Fairfield, New Jersey location, which has become the new corporate headquarters.
Note 4 – Goodwill
Goodwill consists of the unamortized excess of cost over fair value of tangible and identifiable intangible assets of InfoTech USA, Inc. at the date of acquisition. The Company applied APB No. 16, “Business Combinations,” and used the purchase method of accounting for this acquisition in 2001. Goodwill at September 30, 2004 and 2003 consists of:
| |
|
|
|
2004 |
|
|
2003 |
|
| |
Original balance |
|
$ |
2,339 |
|
$ |
2,339 |
|
| |
Less accumulated amortization |
|
|
(185 |
) |
|
(185 |
) |
| |
Less impairment |
|
|
(701 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
| |
Carrying value |
|
$ |
1,453 |
|
$ |
2,154 |
|
Effective October 1, 2001, the Company adopted SFAS 142. Under SFAS 142, goodwill amortization ceased upon the adoption of the new standard. SFAS 142 also require an initial goodwill impairment assessment in the year of adoption and annual impairment tests thereafter. Valuation analysis testing for goodwill impairment as of September 30, 2004 resulted in a charge of $701 for goodwill impairment.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note 5 – Other Assets
| |
|
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
| |
Long-term net deferred tax assets |
|
$ |
— |
|
$ |
1,501 |
|
| |
Cash surrender value of life insurance policies |
|
|
76 |
|
|
76 |
|
| |
Other |
|
|
98 |
|
|
42 |
|
| |
|
|
|
|
|
|
|
|
| |
Totals |
|
$ |
174 |
|
$ |
1,619 |
|
Note 6 – Financing Arrangements
The Company’s financing agreement with Wells Fargo, entered into on June 30, 2004, provides financing up to $4,000. Amounts borrowed under the credit facility bear interest at Wells Fargo’s prime rate plus 3%. Unless earlier terminated, the credit facility matures on June 29, 2007 and automatically renews for successive one-year periods thereafter unless terminated by Wells Fargo or the Company. The financing agreement with IBM Credit in effect as of September 30, 2004, provides for inventory financing up to $600 and is secured by a letter of credit in the amount of $600. The new wholesale financing agreement with IBM Credit was executed in connection with the Wells Fargo credit facility and replaced the IBM Cre
dit Agreement for Wholesale Financing dated as of April 20, 1994.
Under the terms of the credit agreement, Wells Fargo may, at its election, make advances from time to time in the amounts requested by the Company up to an amount equal to the difference between the borrowing base and the sum of (i) the amount outstanding under the credit facility and (ii) the $600 letter of credit outstanding under the credit facility which secures our obligations to IBM Credit under the wholesale financing agreement. The borrowing base is equal to the lesser of (x) $4,000 or (y) the amount equal to (a) 85% of our eligible accounts receivable plus (b) the amount of available funds in our deposit account with Wells Fargo minus (c) certain specified reserves. As of September 30, 2004, the Company had a borrowing base of approximately $1,766 and availability of approximately $354 under the credit
facility.
In connection with the execution of the credit agreement, the Company paid Wells Fargo an origination fee of $40. Each year, the Company must pay Wells Fargo a facility fee of $15 and an unused line fee of 0.5% of the daily, unused amount under the credit facility. Additionally, there is minimum monthly interest based on minimum borrowings of $1,500. The Company will incur additional fees if Wells Fargo terminates the credit facility upon default or if the Company terminates the credit facility prior to its termination date. These fees are $120 during the first year of the credit facility, $60 during the second year of the credit facility and $20 after the second year of the credit facility.
The obligations under the credit agreement have been guaranteed by the Company and by both of the Company’s subsidiaries. In addition, the Company has pledged the stock of its subsidiaries and assigned the rights under the loan agreement to Applied Digital. The credit facility is further secured by a first priority security interest in substantially all assets.
The credit facility requires the Company to maintain certain financial covenants, for fiscal year 2004, including a book net worth (calculated without taking into account any impairment or write-down of goodwill) of at least $7,300, a debt to book net worth ratio of not more than 0.8, and a minimum net income of at
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
least 80% of the projected cumulative net income provided by the Company to Wells Fargo. In addition, the credit facility prohibits incurring or contracting to incur capital expenditures exceeding $50 in the aggregate during any fiscal year or more than $10 in any one transaction. The credit agreement contains other standard covenants related to our operations, including prohibitions on the creation of additional liens, the incurrence of additional debt, the payment of dividends, the sale of certain assets and other corporate transactions by the Company, without Wells Fargo’s consent.
Borrowings under the Wells Fargo line of credit amounted to $812 at September 30, 2004. Borrowings under the IBM Credit financing arrangement amounted to $346 and $469 at September 30, 2004 and 2003, respectively, and are included in either accounts payable or accrued expenses and other liabilities.
Management believes that the present financing arrangements with Wells Fargo and IBM Credit, and current cash position will be sufficient to fund the Company’s operations and capital expenditures through at least September 30, 2005. The Company’s long-term capital needs may require additional sources of credit. There can be no assurances that the Company will be successful in negotiating additional sources of credit for its long-term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs may materially and adversely impact its financial condition, results of operations and cash flows.
On December 2, 2004, the Company notified Wells Fargo that as of and for the fiscal year ended September 30, 2004, the Company was not in compliance with the covenants for book net worth and cumulative net income contained in the Company’s credit agreement. Wells Fargo agreed to waive such non-compliance and, on December 24, 2004, the Company and the Company’s subsidiaries entered into an amendment and waiver with Wells Fargo. Management currently expects to maintain compliance with the amended financial covenants contained in the Company’s credit agreement with Wells Fargo throughout the remainder of fiscal year 2005. However, if business conditions are other than as anticipated or other unforeseen events or circumstances occur, the Company may have difficulty maintaining compliance with these c
ovenants. If it appears likely that such non-compliance may occur, the Company will seek to obtain a waiver or amendment to such financial covenants. There can be no assurance, however, that the Company would be successful in negotiating such waiver or amendment or that such waiver or amendment would be granted on terms that are favorable to the Company. In the absence of a waiver or amendment to the financial covenants, such non-compliance would constitute an event of default under the credit agreement, and Wells Fargo would be entitled to accelerate the maturity of all amounts the Company owes them.
Note 7 – Income Taxes
Income tax expense (benefit) consists of the following:
| |
|
Years Ended September 30, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Current |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Deferred |
|
|
1,545 |
|
|
(447 |
) |
|
(115 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,545 |
|
$ |
(447 |
) |
$ |
(115 |
) |
INFOTECH, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
The reconciliation of the effective tax rate with the statutory Federal income tax rate is as follows:
| |
|
Years Ended September 30, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
|
% |
|
% |
|
% |
|
| |
|
|
|
|
|
|
|
|
Statutory rate |
|
|
(34 |
) |
|
(34 |
) |
|
(34 |
) |
|
Non-deductible permanent difference |
|
|
9 |
|
|
3 |
|
|
6 |
|
|
Non-deductible goodwill write-off |
|
|
(183 |
) |
|
— |
|
|
— |
|
|
State income taxes, net of Federal benefits |
|
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
Non-deductible deferred tax asset write-off |
|
|
354 |
|
|
— |
|
|
— |
|
|
Other |
|
|
(4 |
) |
|
(4 |
) |
|
12 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
136 |
|
|
(41 |
) |
|
(22 |
) |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:
| |
|
|
2004 |
|
2003 |
|
| |
Deferred Tax Assets: |
|
|
|
|
|
| |
Asset reserves |
|
$ |
52 |
|
$ |
63 |
|
| |
Investments |
|
|
— |
|
|
17 |
|
| |
Accruals |
|
|
102 |
|
|
102 |
|
| |
Stock options |
|
|
19 |
|
|
88 |
|
| |
Net operating loss carryforwards |
|
|
1,985 |
|
|
1,856 |
|
| |
Gross deferred tax assets |
|
|
2,158 |
|
|
2,126 |
|
| |
Valuation allowance |
|
|
(2,124 |
) |
|
(574 |
) |
| |
Totals |
|
|
34 |
|
|
1,552 |
|
| |
Deferred Tax Liabilities - property and equipment |
|
|
(34 |
) |
|
(7 |
) |
| |
|
|
|
|
|
|
|
|
| |
Net Deferred Tax Assets |
|
$ |
— |
|
$ |
1,545 |
|
The current and long-term components of the net deferred tax assets are as follows:
| |
|
2003 |
| |
|
|
|
Current net deferred tax assets |
$ |
44 |
| Long-term net deferred tax assets |
|
1,501 |
| |
|
|
|
Total |
$ |
1,545 |
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
At September 30, 2004, the Company has net operating loss carryforwards of approximately $4,800, which will expire in varying amounts between 2022 and 2023. Utilization of the Company’s net operating losses is subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
As of September 30, 2004, management believes the Company is not likely to realize a substantial portion of the tax benefits from its deferred tax assets in subsequent years. This is based primarily on the Company’s history of losses and the Company’s susceptibility to the volatile conditions that exist in the IT market, making the likelihood of InfoTech generating taxable income in future years uncertain. Accordingly, InfoTech’s management has determined that it is appropriate to record an incremental valuation allowance of $1,550, the full amount of its net deferred tax assets as of September 30, 2004. Additionally, a portion of the Company’s net operating loss carryforwards arose prior to the change of control during December 2000. As a result, these ne
t operating loss carryforwards are subject to the annual limitations previously discussed. Therefore, management believes the Company is not likely to realize the tax benefits associated with the net operating loss carryforwards that arose prior to the change of control and, accordingly, the Company recorded a valuation allowance of $574, which did not change in 2003 and 2002.
Note 8 – Stock-Based Compensation
Stock Option Plans
In February 1998, a stock option plan (the “1998 Plan”) was approved by the stockholders. The 1998 Plan was amended in January 2000. Under the revised plan, 1,000 shares of common stock are reserved for issuance upon the exercise of options designated as either incentive stock options or non-qualified stock options. The 1998 Plan will terminate in February 2008. Options granted under the 1998 Plan will expire not more than ten years from the date of grant. At September 30, 2004, no options remain available for issuance under the 1998 Plan.
During 2000 and 1999, options for the purchase of 110 and 115 shares, respectively, were granted to investment bankers, directors and employees of the Company with immediate vesting under the 1998 Plan. All other options granted vest over a four-year period following the date of grant. All options under the 1998 Plan expire five years from the date of grant. The options granted in 1997 under a previous plan expired on September 1, 2001.
In March 2001, the stockholders approved the 2001 Flexible Stock Plan (the “2001 Plan”). Under the 2001 Plan, the number of shares which may be issued or sold, or for which options, Stock Appreciation Rights (“SARs”) or Performance Shares may be granted to certain directors, officers and employees of the Company is 2,500 per year, plus an annual increase, effective as of the first day of each calendar year, commencing with 2002, equal to 25% of the number of outstanding shares as of the first day of such calendar year, but in no event more than 10,000 shares in the
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
aggregate. A total of 6,172 and 4,948 shares were issuable under the 2001 Plan at October 1, 2004 and 2003, respectively. The options may not be exercised until one year after the options have been granted, and are exercisable over a period of ten years.
On June 28, 2002, the Board of Directors approved a grant of 2,200 stock options at an exercise price of $.28 to the Officers and Directors of the Company, and to outside parties. The options are exercisable on June 28, 2003 and expire on June 28, 2010. Additionally the Board of Directors approved a grant of 375 stock options under the same terms to be used as employee incentives.
A summary of stock option activity related to the Company’s stock option plans is as follows:
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
|
Weighted- |
|
| |
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
| |
|
|
|
Exercise |
|
|
|
Exercise |
|
|
|
Exercise |
|
| |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on October 1 |
|
|
4,070 |
|
$ |
.45 |
|
|
4,970 |
|
$ |
.46 |
|
|
2,665 |
|
$ |
.64 |
|
|
Granted |
|
|
200 |
|
|
.31 |
|
|
— |
|
|
— |
|
|
2,575 |
|
|
.28 |
|
|
Exercised |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Forfeited |
|
|
(415 |
) |
|
(1.03 |
) |
|
(900 |
) |
|
(.53 |
) |
|
(270 |
) |
|
(.54 |
) |
|
Outstanding on September 30 |
|
|
3,855 |
|
|
.39 |
|
|
4,070 |
|
|
.45 |
|
|
4,970 |
|
|
.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on September 30 |
|
|
3,655 |
|
|
.39 |
|
|
4,070 |
|
|
.45 |
|
|
3,039 |
|
|
.57 |
|
The following table summarizes information about the options outstanding at September 30, 2004:
| |
|
|
|
| |
|
|
Exercisable Stock |
| |
Outstanding Stock Options |
|
Options |
| |
|
Weighted- |
|
|
|
|
| |
|
Average |
Weighted- |
|
|
Weighted- |
| |
|
Remaining |
Average |
|
|
Average |
|
Range Of |
|
Contractual |
Exercise |
|
|
Exercise |
|
Exercise Prices |
Shares |
Life |
Price |
|
Shares |
Price |
| |
|
|
|
|
|
|
|
$0.01 to $1.00 |
3,855 |
6.1 |
$.39 |
|
3,655 |
$.39 |
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
The Company continues to measure compensation cost related to stock options issued to employees using the intrinsic value method of accounting prescribed by APB. 25. The Company has adopted the disclosure-only provisions of SFAS 123.
Employee Stock Purchase Plan
On December 17, 1998, the Company adopted the 1999 Employee Stock Purchase Plan (the “1999 Plan”) whereby 200 shares of common stock were reserved for issuance to eligible employees. A participant may have up to 10% of their earnings withheld during a period of approximately six months commencing on the first trading day on or after April 1 and terminating on the last trading day ending the following September 30, or commencing on the first trading day on or after October 1 and terminating on the last trading day ending the following March 31. The purchase price shall be an amount equal to 85% of the fair market value of a share of common stock on the enrollment date, or on the exercise date, whichever is lower. There were no purchases under the 1999 Plan during 2004, 2003 and 2002.
Note 9 - 401(k) Plan
The Company has a 401(k) Savings Plan (the “Plan”) for the benefit of all eligible employees. An employee would become a participant after the completion of three months of service and the attainment of 20 years of age.
Participants may elect to contribute from their compensation any amount up to the maximum deferral allowed by the Internal Revenue Code. Employer contributions are a discretionary percentage match. The Company may make optional contributions for any Plan year at its discretion.
During 2004, 2003 and 2002, there were no Company contributions to the Plan.
Effective January 1, 2002, the InfoTech USA, Inc. employees ceased contributing to the Parent Company’s 401(k) plan and became participants of the Plan.
Note 10 - Concentration Of Credit Risk
Cash
The Company places most of its temporary cash investments with high quality financial institutions. Balances normally exceed the Federal Deposit Insurance Corporation limit. At September 30, 2004, amounts in excess of the Federally insured limit totaled approximately $195. The Company has not experienced any loss to date as a result of the practice.
Major Customers
Computer sales encompass markets wherein the demands of any one customer may vary greatly due to changes in technology. For 2004, the top three customers comprised 53% of sales. These customers comprised 58% accounts receivable at September 30, 2004. For 2003, the top three customers comprised 51% of sales. These customers comprised 60% of accounts receivable at September 30, 2003. For 2002, the top three customers comprised 39% of sales. These customers comprised 46% of accounts receivable at September 30, 2002. In addition, another customer comprised 11% of accounts receivable at September 30, 2002.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note 11 - Commitments And Contingencies
Operating Leases And Consulting Contract
The Company has operating leases on real property and equipment expiring through the year 2005. In addition to fixed rentals, the real property leases have escalation clauses that require the Company to pay a percentage of common area maintenance, real estate taxes and insurance.
Rent expense and other charges totaled $240, $256 and $311 for 2004, 2003 and 2002, respectively.
The Company has entered into a consulting contract with the former majority stockholder of the Company. The agreement is for a period of five years through December 2005.
The approximate minimum payments required under operating leases, that have initial or remaining terms in excess of one year, and the consulting contract at September 30, 2004 are:
| |
|
Minimum |
|
| |
Year Ending |
Rental |
Consulting |
| |
September 30, |
Payments |
Contract |
| |
|
|
|
| |
2005 |
$ 223 |
$ 120 |
| |
2006 |
47 |
30 |
| |
2007 |
1 |
— |
| |
|
|
|
| |
Totals |
$ 271 |
$ 150 |
Purchases
The Company purchases a majority of its products from a small number of suppliers. Approximately 78%, 73% and 87% of purchases were from the top four vendors for 2004, 2003 and 2002, respectively.
Legal Proceedings
On October 22, 2002, Anat Ebenstein, the Company’s former President, Chief Executive Officer and director, filed a complaint against the Company, Applied Digital and certain officers and directors in connection with the termination of her employment. The complaint filed in the Superior Court of New Jersey, Mercer County, seeks compensatory and punitive damages arising from an alleged improper termination. The action is currently in the final stages of a negotiated settlement and is not expected to go to trial. However, the Company cannot provide any assurance that it will be successful in negotiating a favorable settlement, and, if the case proceeds to trial, the Company cannot provide any assurance that it will be successful in defending against these allegations. Management believes that a portion of any
ultimate damages may be covered under the Company’s employment practices liability insurance. As of September 30, 2004, the Company has accrued the full amount of the insurance deductible of $250. An unfavorable outcome in this action, however, may result in a material adverse effect on the Company’s liquidity, financial position or results of operations. The estimate of potential impact of the legal proceedings could change in the future.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note 12 - Related Party Transactions
The Parent Company incurs certain expenses on behalf of the Company. In 2004, 2003 and 2002, these costs included various business insurance coverages and miscellaneous business expenses. Additionally, in 2004 these costs included legal and accounting fees, and in 2003 and 2002, these costs included the salary, payroll taxes and benefits of personnel assigned to the Company. The Company incurred $347, $367 and $166 of these costs for the Parent Company for 2004, 2003 and 2002, respectively.
At September 30, 2004 and 2003, amounts due to the Parent Company were $95 and $105 respectively. These amounts arose out of inter-company expenses.
Prior to 2003, the Company incured certain expenses on behalf of the Parent Company, primarily related to services performed by Company officers related to the management of other companies owned by the Parent Company. The Company received $49 in 2002, in reimbursements from the Parent Company, primarily for salaries of certain officers. There were no reimbursements in 2004 or 2003 due to the restructuring of the Parent Company’s operations.
Interest expense paid or accrued to the Parent Company amounted to $208 in 2002. There were no borrowings from the Parent Company in 2004 or 2003.
On June 27, 2003, the Company loaned $1,000 to the Parent Company. Under the terms of the loan, interest, which accrues at an annual rate of 16%, is due and payable on a monthly basis beginning July 31, 2003. The principal amount of the loan and any unpaid interest is due on or before June 30, 2005. As collateral for the loan, the Parent Company pledged 750,000 shares of the common stock of Digital Angel Corporation (“Digital Angel”), a majority-owned subsidiary of the Parent Company. As of September 30, 2004, the market value of the shares of stock of Digital Angel was approximately $2,228 based on the closing price of Digital Angel’s common stock. Interest income paid or accrued on the loan to the Parent Company amounted to $160 and $40 in 2004 and 2003, respectively. There were no loans to the
Parent in 2002.
During 2002, the Company had entered into a non-binding letter of intent to merge with VeriChip Corporation, a wholly-owned subsidiary of the Parent Company. The Company did not complete the merger. Charges of $274 for related expenses are included in other (income) expense in the accompanying 2002 consolidated statement of operations.
INFOTECH USA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note 13 - Summarized Quarterly Data (Unaudited)
| |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Full |
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
3,727 |
|
$ |
4,520 |
|
$ |
4,877 |
|
$ |
3,560 |
|
$ |
16,684 |
|
|
Gross profit |
|
|
700 |
|
|
779 |
|
|
780 |
|
|
580 |
|
|
2,839 |
|
|
Loss from operations |
|
|
(201 |
) |
|
(15 |
) |
|
(43 |
) |
|
(926 |
|
|
(1,185 |
)(1) |
|
Net income (loss) |
|
|
(111 |
) |
|
5 |
|
|
(31 |
) |
|
(2,544 |
)(1) |
|
(2,681 |
)(1) |
|
Basic net (loss) per common share |
|
|
(0.02 |
) |
|
— |
|
|
(0.01 |
) |
|
(0.52 |
) |
|
(0.55 |
) |
|
Diluted net loss per common share |
|
|
(0.02 |
) |
|
— |
|
|
(0.01 |
) |
|
(0.52 |
) |
|
(0.55 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
2,880 |
|
$ |
2,534 |
|
$ |
3,970 |
|
$ |
4,224 |
|
$ |
13,608 |
|
|
Gross profit |
|
|
644 |
|
|
487 |
|
|
556 |
|
|
767 |
|
|
2,454 |
|
|
Loss from operations |
|
|
(355 |
) |
|
(455 |
) |
|
(157 |
) |
|
(134 |
) |
|
(1,101 |
) |
|
Net loss |
|
|
(219 |
) |
|
(289 |
) |
|
(98 |
) |
|
(38 |
) |
|
(644 |
) |
|
Basic net loss per common share |
|
|
(0.04 |
) |
|
(0.06 |
) |
|
(0.02 |
) |
|
(0.01 |
) |
|
(0.13 |
) |
|
Diluted net loss per common share |
|
|
(0.04 |
) |
|
(0.06 |
) |
|
(0.02 |
) |
|
(0.01 |
) |
|
(0.13 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In the fourth quarter of 2004, the Company recorded impairment charges of $1,550 and $701 related to certain deferred tax assets and goodwill, respectively.
Income (loss) per share is calculated independently for each of the quarters presented. Therefore, the sum of the quarterly amounts of net income (loss) per common share will not necessarily equal the total for the year.
INFOTECH USA, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
|
Deducted from Assets |
|
Balance at Beginning of Period |
|
Additions
Charged to Costs and Expenses |
|
Deductions |
|
|
|
Balance at End of Period |
|
|
Allowance for Doubtful Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2002 |
|
$ |
414 |
|
$ |
(125 |
) |
$ |
81 |
|
|
(a) |
|
$ |
208 |
|
|
Year ended September 30, 2003 |
|
|
208 |
|
|
(66 |
) |
|
29 |
|
|
(a) |
|
|
113 |
|
|
Year ended September 30, 2004 |
|
|
113 |
|
|
— |
|
|
16 |
|
|
(a) |
|
|
97 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Sales Returns: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2002 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
Year ended September 30, 2003 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
Year ended September 30, 2004 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Inventory Obsolescence: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2002 |
|
|
115 |
|
|
62 |
|
|
99 |
|
|
|
|
|
78 |
|
|
Year ended September 30, 2003 |
|
|
78 |
|
|
— |
|
|
39 |
|
|
|
|
|
39 |
|
|
Year ended September 30, 2004 |
|
|
39 |
|
|
— |
|
|
10 |
|
|
|
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Valuation Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2002 |
|
|
574 |
|
|
— |
|
|
— |
|
|
|
|
|
574 |
|
|
Year ended September 30, 2003 |
|
|
574 |
|
|
— |
|
|
— |
|
|
|
|
|
574 |
|
|
Year ended September 30, 2004 |
|
|
574 |
|
|
1,550 |
|
|
— |
|
|
|
|
|
2,124 |
|
| |
(a) |
Amounts written off, net of recoveries. |
See Report of Independent Registered Public Accounting Firm.