Here's Lookin' at You

A Delray company implanting people with microchips looks to the bright Orwellian future

Mexican Attorney General Rafael Macedo de la Concha made an announcement in July that thrilled a Delray Beach company while frightening the hell out of privacy advocates. Macedo, the top law enforcement officer south of the border, allowed news photographers to snap his dimpled mug as doctors injected him with a microchip made by Delray-based Applied Digital Solutions Inc.

The chip allows Macedo into his classified offices, while those without implants are barred. An Applied Digital distributor in Mexico announced that Macedo had implanted chips in 160 employees. It was the largest-ever installation yet for the fledgling chip maker. The news of Mexico's leap into the new technology was reported the world over, from the New York Times to the Irish Times. Some saw it as a sign that the chip -- dubbed the VeriChip -- would soon replace driver's licenses and credit cards, and it could some day be a way to track anyone just about anywhere in the world. Critics saw it as a sign of the frightening future, a world in which Big Brother can monitor the movements of every citizen.

If all of this sounds a bit like the plot of a science fiction movie, it may be because part of it is fiction.

It turns out that the Mexican attorney general had only 18 chips installed in his employees, according to Macedo spokeswoman Elizabeth Juarez. Applied Digital employees blamed the gaffe on its Mexican distributor, but company officials, including the CEO, have bragged of the Macedo deal to dozens of media outlets, including the Today Show and several other national news shows, without correcting the error. Applied Digital spokeswoman Angela Fulcher tried last week to dodge the blame, saying, "The specific information on who was chipped was not released to us."

That blurring of the truth is one of several corporate missteps associated with Applied Digital in its tarnished 11-year history. As the company tries to market its microchip for human use, its spotty past appears to become more and more relevant.

The first signs of problems within Applied Digital came in April 2002, when the company admitted in filings to the Securities and Exchange Commission that one of its subsidiaries was claiming revenue that it didn't have. The company also admitted that another subsidiary "lacked monitoring controls" on its books, according to court papers. Just how bad that is isn't clear. Applied Digital's annual report from last year acknowledges that the SEC's Miami office is conducting an inquiry into the company, but an SEC spokesman declined to say where the inquiry stands or what it involves.

Applied Digital's biggest public relations blunder came on May 9, 2002, when, according to court papers, the company announced in a press release that nearly every hospital in West Palm Beach had agreed to install its scanners, the devices needed to detect microchips in people's arms. The stock of Applied Digital and its VeriChip subsidiary soared over the news. One problem: The announcement was untrue. Not one of the nine hospitals in the West Palm area had signed on to use the scanner. When the truth came out, Applied Digital's stock plummeted by 40 percent. Investors filed a class action lawsuit in West Palm Beach federal court, and in March, Applied Digital agreed to reimburse nearly 90,000 misled investors a total of $5.6 million. (The settlement was dictated by the company's insurer, says Applied Digital General Counsel Michael Krawitz.)

Even now, Applied Digital is the subject of several ongoing lawsuits. The accounting firm Bowne of Chicago claims the company has refused to pay a $171,358 bill for SEC filings Bowne produced for Applied Digital. And Innovative Circuits of Arizona claims in one suit that an Applied Digital subsidiary owes it $191,000 for networking parts it purchased. Michael Addison, the Tampa attorney who filed the Innovative Circuits suit, says Applied Digital has made a practice of ignoring its debts. "They've left a lot of people holding the bag," Addison says. "I don 't know if they're just incompetent or something else."

Last week, Applied Digital officials said the company's problems are behind it. CEO Scott Silverman said that since he took control of the company in 2002, he has managed to save it from bankruptcy. Silverman acknowledges that his predecessors had problems, but he claims he eliminated $100 million in debt and streamlined the company by closing several of its unprofitable subsidiaries. Silverman improved the bottom line, at least temporarily. Applied Digital lost $215 million in 2001, $112 million in 2002, and last year just under $50 million.

The company promoted Silverman after he served as head of one of its subsidiaries. He banked much of Applied Digital's future on the success of the $200 microchip and the $650 scanners needed to detect a device that's smaller than a grain of rice and looks like a miniature ballpoint pen. Earlier this month, the company got its best news yet: The FDA approved the chip for use in humans as a way to access medical information. But Applied Digital continued losing money during the first three quarters of 2004, despite the spike in investor interest last month because of the FDA ruling. Some analysts questioned the potential profitability of the VeriChip, compared to other technologies, like iris or fingerprint scans.

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