Veriteq (DIGA) 10-Q/A 2001 Q2 Quarterly report (amended)

As filed with the Securities and Exchange Commission on August 20, 2001

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q/A

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2001
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____ to ____

Commission File Number: 0-26020

APPLIED DIGITAL SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

MISSOURI	43-1641533
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
(561) 805-8000

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]  No [  ]

     The number of shares outstanding of each of the issuer's classes of common stock as of the close of business on August 15, 2001:

Class
Common Stock; $.001 Par Value Number of Shares
225,632,014

EXPLANATORY NOTE

     This Amendment No. 1 to Quarterly Report on Form 10-Q/A amends and restates Part I, Item 1 of the Registrant's Quarterly Report on Form 10-Q for the fiscal year ended June 30, 2001, filed by the Registrant on August 17, 2001, to correct a typographical error in Note 3, Debt Covenant Compliance, Liquidity and Financing Agreements.

PART I      FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)
Assets

	June 30, 2001	December 31, 2000
Current Assets
Cash and cash equivalents	$     6,403	$     8,039
Accounts receivable and unbilled receivables (net of allowance for doubtful accounts of $1,391 in 2001 and $1,681 in 2000)	38,502	43,890
Inventories	12,454	12,311
Notes receivable	3,765	5,711
Current deferred tax asset	—	10,001
Other current assets	6,879	6,040
Total Current Assets	68,003	85,992
Net Assets Of Discontinued Operations	—	8,076
Property And Equipment, net	31,624	21,368
Notes Receivable	14,646	12,898
Goodwill, net	170,325	166,024
Investment In Affiliate	7,736	—
Other Assets	10,582	25,093
	$ 302,916	$ 319,451
Liabilities and Stockholders’ Equity
Current Liabilities
Notes payable	$       474	$       657
Current maturities of long-term debt	78,066	4,571
Accounts payable	19,388	16,945
Accrued expenses	10,321	16,361
Due to sellers of acquired subsidiary	—	9,465
Earnout and put accruals	943	18,245
Total Current Liabilities	109,192	66,244
Net Liabilities Of Discontinued Operations	11,913	—
Long-Term Debt And Notes Payable	3,540	69,146
Total Liabilities	124,645	135,390
Commitments And Contingencies	—	—
Minority Interest	4,560	4,879
Redeemable Preferred Stock - Series C	3,039	13,440
Redeemable Preferred Stock Options - Series C	5,180	5,180
Preferred Stock, Common Stock and Other Stockholders’ Equity
Preferred shares: Authorized 5,000 shares in 2001 and 2000 of $10 par value; special no shares issued         or outstanding in 2001 and 2000, Class B voting, no shares issued outstanding in 2001 and 2000	—	—
Common shares: Authorized 245,000 shares in 2001 and 2000, of $.001 par value; 192,838 shares issued        and 191,903 shares outstanding in 2001 and 103,063 shares issued and 101,847 shares outstanding in 2000	192	103
Common and preferred additional paid-in capital	338,148	266,573
Accumulated deficit	(152,328)	(99,478)
Common stock warrants	2,521	1,406
Treasury stock (carried at cost, 935 shares in 2001 and 1,216 shares in 2000)	(1,777)	(2,803)
Accumulated other comprehensive loss	(1,754)	(729)
Notes and stock subscriptions received for shares issued	(19,510)	(4,510)
Total Preferred Stock, Common Stock, and Other Stockholders' Equity	165,492	160,562
	$ 302,916	$ 319,451

See the accompanying notes to consolidated financial statements.

2

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2001	2000	2001	2000
Product revenue	$  27,053	$  22,622	$  61,436	$  38,355
Service revenue	12,818	11,148	25,844	18,215
Total revenue	39,871	33,770	87,280	56,570
Cost of products sold	19,314	14,664	43,158	24,132
Cost of services sold	6,246	5,299	12,463	8,831
Gross profit	14,311	13,807	31,659	23,607
Selling, general and administrative expenses	(18,691)	(14,924)	(37,749)	(26,935)
Depreciation and amortization	(7,176)	(1,320)	(13,915)	(2,381)
Interest income	600	369	1,087	566
Interest expense	(1,839)	(1,305)	(3,684)	(2,372)
Loss from continuing operations before taxes, minority interest and equity in net loss of affiliate	(12,795)	(3,373)	(22,602)	(7,515)
Provision (benefit) for income taxes	16,504	(444)	18,052	(1,376)
Loss from continuing operations before minority interest, interest and equity in net loss of affiliate	(29,299)	(2,929)	(40,654)	(6,139)
Minority interest	(353)	125	(446)	95
Equity in net loss of affiliate	400	—	531	—
Loss from continuing operations	(29,346)	(3,054)	(40,739)	(6,234)
(Loss) income from discontinued operations, net of income taxes taxes of $0 in 2001 and $334 in 2000	—	(14,674)	213	(12,666)
Change in estimated loss on disposal and operating losses during the phase out period	(21,789)	—	(21,789)	—
Loss before extraordinary gain	(51,135)	(17,728)	(62,315)	(18,900)
Extraordinary gain	9,465	—	9,465	—
Net loss	(41,670)	(17,728)	(52,850)	(18,900)
Preferred stock dividends and other	(211)	—	(1,061)	—
Accretion of beneficial conversion feature of redeemable preferred stock - series C	(451)	—	(9,392)	—
Net loss available to common stockholders	$  (42,332)	$  (17,728)	$  (63,303)	$  (18,900)
Earnings per common share - basic     Loss from continuing operations	$  (0.22)	$  (0.06)	$  (0.42)	$  (0.13)
Loss from discontinued operations	(0.16)	(0.29)	(0.18)	(0.25)
Extraordinary gain	0.07	—	0.08	—
Net loss per common share - basic	$  (0.31)	$  (0.35)	$  (0.52)	$  (0.38)
Earnings per common share - diluted
Loss from continuing operations	(0.22)	(0.06)	(0.42)	(0.13)
Loss from discontinued operations	(0.16)	(0.29)	(0.18)	(0.25)
Extraordinary gain	0.07	—	0.08	—
Net loss per common share - diluted	$  (0.31)	$  (0.35)	$  (0.52)	$  (0.38)
Weighted average number of common shares outstanding - basic	138,589	50,995	121,236	50,003
Weighted average number of common shares outstanding - diluted	138,589	50,995	121,236	50,003

See the accompanying notes to consolidated financial statements.

3

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF PREFERRED STOCK,
COMMON STOCK AND OTHER STOCKHOLDERS’ EQUITY
For The Six Months Ended June 30, 2001

(In thousands)

(Unaudited)

	Preferred Stock		Common Stock		Additional Paid-In Capital	Accumulated Deficit	Common Stock Warrants	Treasury Stock	Accumulated Other Comprehensive Loss	Notes Received and Stock Subscriptions For Shares Issued	Total Stockholders' Equity
	Number	Amount	Number	Amount
Balance - December 31, 2000	—	$ —	103,063	$103	$266,573	$  (99,478)	$1,406	$(2,803)	$    (729)	$  (4,510)	$160,562
Net loss	—	—	—	—	—	(52,850)	—	—	—	—	(52,850)
Comprehensive loss -
Foreign currency translation	—	—	—	—	—	—	—	—	(1,025)	—	(1,025)
Total comprehensive loss	—	—				(52,850)	—	—	(1,025)	—	(53,875)
Conversion of redeemable preferred           shares of common stock	—	—	10,313	10	11,418	—	—	—	—	—	11,428
Accretion of beneficial conversion feature           of redeemable preferred shares	—	—	—	—	(9,392)	—	—	—	—	—	(9,392)
Dividends accrued on redeemable           preferred stock	—	—	—	—	(449)	—	—	—	—	—	(449)
Beneficial conversion feature of           redeemable preferred stock	—	—	—	—	9,392	—	—	—	—	—	9,392
Penalty paid by issuance of           redeemable preferred stock	—	—	—	—	(612)	—	—	—	—	—	(612)
Issuance of warrants			—	—	115	—	1,115	—	—	—	1,230
Issuance of common shares	—	—	23,908	24	1,035	—	—	—	—	—	1,059
Issuance of common shares for           software license purchase	—	—	6,278	6	10,195	—	—	—	—	—	10,201
Issuance of common shares for investment	—	—	3,322	3	8,070	—	—	—	—	—	8,073
Issuance of common shares for           settlement of put agreements	—	—	40,416	40	32,435	—	—	—	—	—	32,475
Common shares repurchased	—	—	—	—	—	—	—	(4,600)	—	—	(4,600)
Notes and stock subscriptions received for     shares issued	—	—	5,538	6	9,368	—	—	5,626	—	(15,000)	—
Balance - June 30, 2001	—	$ —	192,838	$192	$338,148	$(152,328)	$2,521	$(1,777)	$(1,754)	$(19,510)	$165,492

See the accompanying notes to consolidated financial statements.

4

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For The Six Months Ended June 30,
	2001	2000
Cash Flows From Operating Activities
Net loss	$  (52,850)	$  (18,900)
Adjustments to reconcile net loss to net cash       used in operating activities:
Loss from discontinued operations	21,576	12,666
Extraordinary gain	(9,465)	—
Depreciation and amortization	13,915	2,381
Deferred income taxes	19,650	—
Minority interest	(446)	95
Equity in net loss of affiliate	531	—
Non cash unusual and restructuring charges	—	383
Loss on sale of equipment	85	3
Change in assets and liabilities:
Decrease (increase) in accounts receivable	5,389	(2,752)
Increase in inventories	(142)	(9,140)
Decrease (increase) in other current assets	837	(3,069)
Decrease in accounts payable and              accrued expenses	(2,483)	(18,173)
Net cash (used in) provided by discontinued operations	(827)	7,868
Net Cash Used In Operating Activities	(4,230)	(28,638)
Cash Flows From Investing Activities
Decrease in notes receivable	199	30,123
Increase in other assets	(1,982)	(166)
Proceeds from sale of property and equipment	—	31
Payments for property and equipment	(2,578)	(3,429)
Payments for costs of asset and business              acquisitions (net of cash balances acquired)	—	(1,869)
Net cash used in discontinued operations	(539)	(264)
Net Cash (Used In) Provided By Investing Activities	(4,900)	24,426
Cash Flows From Financing Activities
Net amounts (paid) borrowed on notes payable	(54)	5,400
Proceeds from long term debt	7,800	4,866
Payments on long-term debt	(40)	(4,378)
Other financing costs	(34)	—
Issuance of common shares	5	5,359
Proceeds from subsidiary issuance of common stock	126	—
Net cash (used in) provided by discontinued operations	(309)	515
Net Cash Provided By Financing Activities	7,494	11,762
Net (Decrease) Increase In Cash And Cash Equivalents	(1,636)	7,550
Cash And Cash Equivalents - Beginning Of Period	8,039	5,138
Cash And Cash Equivalents - End Of Period	$    6,403	$    12,688

See the accompanying notes to consolidated financial statements.

5

APPLIED DIGITAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)
(Unaudited)

     1.     Basis of Presentation and Accounting Policy

     The accompanying unaudited consolidated financial statements of Applied Digital Solutions, Inc. (the "Company") as of June 30, 2001 and December 31, 2000 (the December 31, 2000 financial information included herein has been extracted from the Company's audited financial statements included in the Company's 2000 Annual Report on Form 10-K/A) and for the three and six months ended June 30, 2001 and 2000 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company's management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the consolidated financial statements have been made.

     The consolidated statements of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2000.

     In March 2001, the Company's board of directors approved the sale of the Company's Intellesale business segment and all of the Company's other non-core businesses. Results of operations, financial condition and cash flows now reflect these operations as "Discontinued Operations" and prior periods have been restated. See Note 9.

     Certain items in the consolidated financial statements for the 2000 period have been reclassified for comparative purposes.

     2.     Principles of Consolidation

     The financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Interest in less than majority owned entities are accounted for using the equity method of accounting.

     3.     Debt Covenant Compliance, Liquidity and Financing Agreements

     On May 25, 1999, the Company entered into a Term and Revolving Credit Agreement with IBM Credit Corporation ("IBM Agreement"). The IBM Agreement was amended and restated on October 17, 2000, and further amended on March 30, 2001 and July 1, 2001, and currently provides for the following:

(a)	a revolving credit line of up to $53.4 million, subject to availability under a borrowing base formula, designated as follows: (i) a USA revolving credit line of up $49.5 million, and (ii) a Canadian revolving credit line of up to $3.9 million,
(b)	a term loan A of up to $21.8 million, and
(c)	a term loan C of up to $1.8 million.

     The revolving credit line may be used for general working capital requirements, capital expenditures and certain other permitted purposes and is repayable in full on May 25, 2002. The USA revolving credit line bears interest at the 30-day LIBOR rate plus 3.25%; the Canadian revolving credit line bears interest at the base rate as announced by the Toronto-Dominion Bank of Canada each month plus 1.67%. As of June 30, 2001, the LIBOR rate was approximately 4.16% and approximately $55.9 million outstanding on the U.S. revolving credit line, which is included in short-term debt. Approximately $3.5 million was outstanding on the Canadian revolving credit line at June 30, 2001, which is included in the net assets of discontinued operations. As of June 30, 2001, IBM has temporarily advanced the Company $6.4 million in excess funding under the U.S. revolving credit line. The temporary advances are under the terms and conditions of the Company's revolving credit agreement and are provided at the discretion of IBM.

6

     Term loan A bears interest at the 30-day LIBOR rate plus 4.00%, is amortized in quarterly installments over six years and is repayable in full on May 25, 2002. As of June 30, 2001, approximately $21.8 million was outstanding on this loan, which is included in short-term debt.

     Term loan C, which was used by our discontinued Canadian subsidiary to pay off their bank debt, bears interest at the base rate as announced by the Toronto-Dominion Bank of Canada each month plus 1.67%, is amortized in quarterly installments over six years and is repayable in full on May 25, 2002. As of June 30, 2001, the Toronto-Dominion's rate was approximately 6.25% and approximately $1.8 million was outstanding on this loan, which is included in the net assets of discontinued operations.

     The IBM Agreement is secured by a security interest in substantially all of our assets, including shares of our subsidiaries.

     The IBM Agreement, as amended on March 30, 2001 and July 1, 2001, contains debt covenants relating to our financial position and performance, as well as restrictions on the declarations and payments of dividends and redemption of preferred stock. Those covenants and the covenant requirements are as follows:

	Covenant	Covenant Requirement As of the following dates not less than:
(i)	Tangible Net Worth	06/30/01 09/30/01 12/31/01 03/31/02	(47,000,000) (35,000,000) (34,500,000) (20,000,000)
(ii)	Current Assets to Current Liabilities	06/30/01 09/30/01 12/31/01 03/31/02	0.6:1.0   0.8:1.0   0.8:1.0   1.0:1.0
(iii)	Minimum Cumulative EBITDA	06/30/01 09/30/01 12/31/01 03/31/02	5,000,000   7,500,000   11,000,000   10,000,000

     On March 8, 2001, the Company notified IBM Credit that as of and for the quarter ended December 31, 2000 it was not in compliance with the covenants for Tangible Net Worth and Minimum EBITDA and that it had a collateral shortfall. IBM Credit agreed to waive such non-compliance and, on March 30, 2001, the Company, IBM Credit and others entered into a waiver and amendment to the credit agreement. In connection therewith the Company agreed to pay IBM Credit a $375,000 waiver fee, and granted IBM Credit warrants to acquire 2.9 million shares of its common stock valued at $1.2 million and 1.2 million shares of Digital Angel Corporation's common stock valued at $0.1 million.

     As of June 30, 2001, the Company's actual EBITDA was $3.4 million, or $1.6 million less than the Minimum EBITDA covenant, and the Company had a collateral shortfall of $22.0 million, or $15.5 million more than the allowable shortfall of $6.5 million. The Company has not received, and does not anticipate receiving, waivers concerning its non-compliance at June 30, 2001. The Tangible Net Worth and Minimum EBITDA covenants are based on cumulative financial results. As a result, if the Company is not successful in obtaining waivers or amending the IBM Agreement, it may not be able to maintain compliance with certain covenants in the future. The Company is currently seeking to restructure its credit agreement with IBM Credit. Although it is not obligated under the credit agreement to do so, IBM Credit has continued to provide funding to the Company in excess of the availability under the revolving credit facility. The IBM Agreement matures on May 25, 2002 and, accordingly, it is classified in the Company's financial statements as short-term debt.

7

     The Company believes that it will be successful in its efforts to restructure the IBM Agreement. There can be no assurance, however, that it will be successful in negotiating such amendments. In addition, there can be no assurance that IBM Credit will continue to provide funding in excess of the Company’s borrowing base necessary to fund ongoing operations or that its ongoing discussions with IBM Credit concerning the restructuring of the credit arrangements will be successful. In the absence of a waiver or amendment to the financial covenants, the Company’s non-compliance constitutes an event of default under the IBM Agreement, and IBM Credit is entitled to accelerate the maturity of all amounts owed them. The Company does not currently have available funds to repay the amounts owed to IBM Credit if the maturity of the obligation is accelerated. If IBM Credit were to accelerate these obligations and enforce its rights against the collateral securing these obligations, without additional financing resources, there would be substantial doubt the Company would be able to continue its operations in the normal course of business.

     4.     Inventory

	June 30, 2001		December 31, 2000
Raw materials		$    1,996		$    1,807
Work in process		347		499
Finished goods		11,366		11,505
		13,709		13,811
Allowance for excess and obsolescence		(1,255)		(1,500)
Net inventory for continuing operations		$  12,454		$  12,311

     5.     Earnings (Loss) Per Share

     The following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share:

	Three Months Ended June 30,		Six Months Ended June 30,
	2001	2000	2001	2000
Loss from continuing operations	$(29,346)	$(3,054)	$(40,739)	$(6,234)
Preferred stock dividends and other	(211)	—	(1,061)	—
Accretion of beneficial conversion feature of redeemable preferred stock	(451)	—	(9,392)	—
Numerator for basic earnings (loss) per share -      Net loss from continuing operations available to common stockholders	(30,008)	(3,054)	(51,192)	(6,234)
Net loss from discontinued operations available to common stockholders	(21,789)	(14,674)	(21,576)	(12,666)
Extraordinary gain	9,465	—	9,465	—
Net loss available to common stockholders	$(42,332)	$(17,728)	$(63,303)	$(18,900)
Denominator for basic earnings (loss) per share - Weighted-average shares	138,589	50,995	121,236	50,003
Denominator for diluted earnings (loss) per share(1)	138,589	50,995	121,236	50,003
Basic earnings (loss) per share:
Continuing operations	$(0.22)	$(0.06)	$(0.42)	$(0.13)
Discontinued operations	(0.16)	(0.29)	(0.18)	(0.25)
Extraordinary gain	0.07	—	0.08	—
Total - Basic	$(0.31)	$(0.35)	$(0.52)	$(0.38)
Diluted earnings (loss) per share:
Continuing operations	$(0.22)	$(0.06)	$(0.42)	$(0.13)
Discontinued operations	(0.16)	(0.29)	(0.18)	(0.25)
Extraordinary gain	0.07	—	0.08	—
Total - Diluted	$(0.31)	$(0.35)	$(0.52)	$(0.38)

8

⁽¹⁾The weighted average shares listed below that would be derived from potentially dilutive securities were not included in the computation of diluted (earnings) loss per share because to do so would have been anti-dilutive for the periods presented:

	Three Months Ended June 30,		Six Months Ended June 30,
	2001	2000	2001	2000
Redeemable preferred stock	39,989	—	46,868	—
Employee stock options	1,233	2,993	2,628	3,999
Warrants	—	245	102	389
	41,222	3,238	49,598	4,388

     6.     Segment Information

     The Company's business is currently organized into three business segments: Applications, Services and Advanced Wireless. These three segments form the nucleus of the Company's newly implemented I³ Services Platform. Prior to January 2, 2001, the Company's business was organized into four technology groups or industry segments: Networking, Internet, Applications, and Telephony. Combined, these groups formed the basis of the CTII strategy that was the predecessor to the current I³ Services Platform. With the arrival of the Company's new President and Chief Operating Officer, Mercedes Walton, on January 2, 2001, the Company's strategy has evolved to more adequately promote its product services offerings in the marketplace and to more fully integrate its business units. The Company's "I³ Services Platform," with the I³ standing for "intelligent, integrated information," delivers its solutions through three core business segments, Applications, Services and Advanced Wireless, which work together to achieve heightened efficiencies for the Company and better offerings for its customers.

     Additionally, the Company's previously reported Intellesale and "all other" non-core business segments are now reported as discontinued operations. Prior period information has been restated to present the Company's reportable segments into its three operating segments. See Note 9 for further information regarding Discontinued Operations.

     The "eliminations" category includes all amounts recognized upon consolidation of the Company's subsidiaries such as the elimination of intersegment revenues, expenses, assets and liabilities and goodwill amortization expense. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K/A filed for the year ended December 31, 2000. It is on this basis that management utilizes the financial information to assist in making internal operating decisions. The Company evaluates performance based on stand-alone segment operating income.

      Following is the selected segment data as of and for the three months ended June 30, 2001:

	Applications	Services		Advanced Wireless	Corporate	Eliminations	Consolidated
		Telephony	Networks
Net revenue from external customers:
Product	$   2,908	$   8,825	$    7,098	$    8,306	$            5	$          (89)	$    27,053
Service	6,135	3,308	2,674	1,289	27	(615)	12,818
Intersegment revenue - Product	(89)	—	—	—	—	89	—
Intersegment revenue - Service	(615)	—	—	—	—	615	—
Total revenue	$   8,339	$ 12,133	$   9,772	$   9,595	$          32	$           —	$    39,871
Income (loss) from continuing operations before provision for income taxes and minority interest	$   1,880	$      843	$    (620)	$    (472)	$   (4,161)	$    (6,505)	$  (12,795)
Total assets, exclusive of net assets of discontinued operations	$ 31,958	$ 30,955	$ 18,340	$ 29,857	$ 348,819	$ (157,013)	$ 302,916

9

      Following is the selected segment data as of and for the six months ended June 30, 2001:

	Applications	Services		Advanced Wireless	Corporate	Eliminations	Consolidated
		Telephony	Networks
Net revenue from external customers:
Product	$   7,513	$ 17,772	$ 18,206	$ 18,029	$             5	$         (89)	$   61,436
Service	12,766	6,746	4,250	2,779	85	(782)	25,844
Intersegment revenue - Product	(89)	—	—	—	—	89	—
Intersegment revenue - Service	(782)	—	—	—	—	782	—
Total revenue	$ 19,408	$ 24,518	$ 22,456	$ 20,808	$          90	$          —	$   87,280
Income (loss) from continuing operations before provision for income taxes and minority interest	$ (1,513)	$   1,121	$ (1,021)	$        68	$    (8,085)	$   (13,172)	$  (22,602)
Total assets, exclusive of net assets of discontinued operations	$ 31,958	$ 30,955	$ 18,340	$ 29,857	$ 348,819	$ (157,013)	$ 302,916

      Following is the selected segment data as of and for the three months ended June 30, 2000:

	Applications	Services		Advanced Wireless	Corporate	Eliminations	Consolidated
		Telephony	Networks
Net revenue from external customers:
Product	$   3,627	$   7,135	$   8,466	$ 3,394	$          —	$          —	$   22,622
Service	4,605	3,300	2,556	671	16	—	11,148
Total revenue	$   8,232	$ 10,435	$ 11,022	$ 4,065	$          16	$          —	$   33,770
Income (loss) from continuing operations before provision for income taxes and minority interest	$    (439)	$   1,613	$      591	$   (238)	$   (3,107)	$    (1,793)	$    (3,373)
Total assets, exclusive of net assets of discontinued operations	$ 20,958	$ 29,449	$ 10,333	$ 7,684	$ 247,689	$ (168,151)	$ 147,962

      Following is the selected segment data as of and for the six months ended June 30, 2000:

	Applications	Services		Advanced Wireless	Corporate	Eliminations	Consolidated
		Telephony	Networks
Net revenue from external customers:
Product	$   6,970	$ 10,478	$ 13,590	$ 7,317	$          —	$          —	$   38,355
Service	8,296	4,455	4,678	671	115	—	18,215
Total revenue	$ 15,266	$ 14,933	$ 18,268	$ 7,988	$        115	$          —	$   56,570
Income (loss) from continuing operations before provision for income taxes and minority interest	$    (370)	$   1,151	$      843	$  (330)	$   (5,710)	$    (3,099)	$   (7,515)
Total assets, exclusive of net assets of discontinued operations	$ 20,958	$ 29,449	$ 10,333	$ 7,684	$ 247,689	$ (168,151)	$ 147,962

10

     7.     Acquisitions

     The Company did not make any acquisitions in the first six months of 2001. The following represents acquisitions which occurred during 2000:

Company Acquired	Date Acquired	Percent Acquired	Acquisition Price	Cash Consideration	Value of Shares, Warrants & Options Issued or Issuable	Common/ Preferred Shares Issued	Goodwill Acquired	Business Description
Independent Business Consultants	04/01/00	100%	$  5,547	$   747	$  4,800	958	$  5,109	Network integration company
P-Tech, Inc.	04/01/00	100%	9,099	95	9,004	9,912	8,912	Software development company
Timely Technology Corp.	04/01/00	100%	4,794	375	4,419	7,324	4,467	Software developer and application service provider
Computer Equity Corporation	06/01/00	100%	32,097	8,987	23,110	19,561	22,698	Communications integration company
WebNet Services, Inc.	07/01/00	100%	958	58	900	268	828	Network integrator and website developer
Destron Fearing Corporation	09/08/00	100%	84,721	1,451	83,270	20,821	74,916	Animal identification and microchip technology company
Pacific Decision Sciences Corporation	10/01/00	100%	28,139	120	28,019	8,569	25,220	Developer and implementer of customer relationship management software
SysComm International Corporation	12/01/00	55%	4,976	2,222	2,754	3,239	—	Network and systems integrator and reseller of computer hardware
Transatlantic Software Corporation	12/18/00	100%	8,931	266	8,665	5,430	6,624	Retail software developer

     In each of the above transactions, the value of the consideration paid by the Company was in accordance with the acquisition agreement. Based on the contractually agreed-to amounts, the Company calculated the number of shares issued to the sellers as of the closing date. The price of the Company's common stock used to determine the number of shares issued was based on either the closing price set on a fixed date or on a formula as specified in the agreements.

     All acquisitions have been accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements reflect the results of operations of each company from the date of acquisition. The costs of acquisitions include all payments according to the acquisition agreements plus costs for investment banking services, legal and accounting services that were direct costs of acquiring these assets. Goodwill resulting from these acquisitions is being amortized on a straight-line basis over periods ranging from five to ten years. In conjunction with the Company's review for impairment of goodwill and other intangible assets in the fourth quarter of 2000, the Company reviewed the useful lives assigned to acquisitions and effective October 1, 2000, changed the lives to periods ranging from 5 to 10 years, down from periods ranging from 10 to 20 years.

      Earnout and Put Agreements

     Certain acquisition agreements include additional consideration, generally payable in shares of the Company's common stock, contingent on profits of the acquired subsidiary. Upon earning this additional consideration, the value will be recorded as additional goodwill. The acquisitions above include shares earned upon attainment of certain profits by subsidiaries through June 30, 2001. At June 30, 2001, under these agreements, assuming all earnout profits are achieved, the Company is contingently liable for additional consideration of approximately $11.7 million in 2001, $24.0 million in 2002 and $2.0 million in 2004, all of which would be payable in shares of the Company's common stock.

11

     The Company has entered into a put option with the selling shareholders of a company in which the Company acquired less than a 100% interest. The option requires the Company to purchase the remaining portion it does not own sometime after four years from the date of acquisition at an amount per share equal to 20% of the average annual earnings per share of the acquired company before income taxes for a two-year period ending on the effective date of the put multiplied by a multiple of four. Based upon the provisions of the put agreement, at June 30, 2001, the Company is contingently liable for additional consideration of approximately $0.9 million payable in shares of the Company's common stock. The contingent amount for the put option has not been recorded as a liability in the financial statements as the put has not yet been exercised.

     In January 2001, the Company entered into an agreement with the minority shareholders of Intellesale to terminate all put rights and employment agreements that each shareholder had with or in respect of Intellesale. In exchange, the Company issued an aggregate of 6.6 million shares of the Company's common stock. In addition, during the six months ended June 30, 2001 and 2000, 33.8 million and 1.9 million shares of common stock, respectively, were issued to satisfy earnouts and to purchase minority interests.

     Major Acquisitions

     Effective June 1, 2000, the Company acquired all of the outstanding common stock of Computer Equity Corporation (Compec). The aggregate purchase price was approximately $32.1 million, $15.8 million of which was paid in shares of the Company's common stock at closing, $8.9 million of which was paid in cash in August, 2000 and $7.3 of which was paid in common stock as a result of the achievement of earnings targets for the twelve months ended June 30, 2001. An additional earnout payment, payable in cash or in shares of the Company's common stock, of $5.1 million, plus 3.5 times EBITDA in excess of a specified amount, (as defined in the merger agreement), is contingent upon achievement of certain earnings targets during the twelve months ending June 30, 2002. The total purchase price of Computer Equity Corporation, including the liabilities, was allocated to the identifiable assets with the remainder of $22.7 million recorded as goodwill, which is being amortized over ten years.

     On September 8, 2000, the Company completed the acquisition of Destron Fearing Corporation through a merger of its wholly-owned subsidiary, Digital Angel Corporation (formerly known as Digital Angel.net Inc.), into Destron Fearing Corporation. As a result of the merger, Destron Fearing is now a wholly-owned subsidiary of the Company and has been renamed "Digital Angel Corporation." In connection with the merger, each outstanding share of Destron Fearing common stock was exchanged for 1.5 shares of the Company's common stock, with fractional shares settled in cash. In addition, outstanding options and warrants to purchase shares of Destron Fearing common stock were converted into a right to purchase that number of shares of the Company's common stock as the holders would have been entitled to receive had they exercised such options and warrants prior to September 8, 2000 and participated in the merger. The Company issued 20.5 million shares of its common stock in exchange for all the outstanding common stock of Destron Fearing and 0.3 million shares of its common stock as a transaction fee. The Company will issue up to 2.7 million shares of its common stock upon the exercise of the Destron Fearing options and warrants. The aggregate purchase price of approximately $84.7 million, including the liabilities, was allocated to the identifiable assets with the remainder of $74.9 million recorded as goodwill, which is being amortized over ten years.

     Effective October 1, 2000, the Company acquired all of the outstanding common stock of Pacific Decisions Sciences Corporation (PDSC). The aggregate purchase price was approximately $28.1 million, which was paid in shares of the Company's common stock. In addition, for each of the twelve month periods ended September 30, 2001 and 2002, the former stockholders of PDSC will be entitled to receive earnout payments, payable in cash or in shares of the Company's common stock, of $9.7 million plus 4.0 times EBITDA in excess of a specified amount (as defined in the merger agreement). The total purchase price of PDSC, including the liabilities assumed, was allocated to the identifiable assets with the remainder of $25.2 million recorded as goodwill, which is being amortized over five years.

     Effective June 1, 1999, the Company acquired all of the outstanding common stock of Bostek, Inc. and an affiliate (Bostek) in a transaction accounted for under the purchase method of accounting. The aggregate purchase price was approximately $27.5 million, of which $10.2 million was paid in cash at closing, $5 million was paid in cash in January 2000 and $1.8 million for the 1999 earnout was paid in cash in February 2000 and $0.5 million of additional acquisition costs were paid in 2000. Upon a successful initial public offering of Intellesale, $9.5 million was to be payable in cash. As the result of settling certain disputes between the Company and the former owners of Bostek, the parties agreed to eliminate the remaining $9.5 million payable provided the Company registered approximately 3.0 million common shares by June 15, 2001. The former Bostek owners agreed to purchase these shares at a price up to $2.03 per share depending on the market price of the common stock on the date payment is due. The Company was successful in meeting this June 15, 2001 deadline and, accordingly, the extinguishment of the $9.5 million payable was recorded in June 2001 as an extraordinary gain. The operating results of the Company include Bostek from its acquisition date. See Note 9 regarding discontinued operations, which includes the operations of Intellesale and Bostek.

12

     Unaudited pro forma results of operations for the six months ended June 30, 2000 are included below. Such pro forma information assumes that each of the above acquisitions had occurred as of January 1, 2000.

	Six Months Ended June 30,
	2000
Revenue from continuing operations		$110,208
Loss from continuing operations		(8,722)
Loss available to common stockholders from continuing operations		(8,722)
Loss per common share from continuing operations — basic		$     (0.09)
Loss per common share from continuing operations — diluted		$     (0.09)

     Other Investments

     On February 27, 2001, the Company acquired 16.6% of the capital stock of Medical Advisory Systems, Inc. (AMEX: DOC), a provider of medical assistance and technical products and services, in a transaction valued at approximately $8.0 million in consideration for 3.3 million shares of our common stock. The Company is now the single largest shareholder and controls two of the seven board seats. The Company is accounting for this investment under the equity method of accounting. The excess of the purchase price over the estimated fair value of acquired net assets was approximately $6.8 million (goodwill) and is being amortized on a straight-line basis over five years.

     8.     Redeemable Preferred Stock

     The Company has revised its calculation of the beneficial conversion feature (BCF) associatd with its redeemable preferred stock for the three months ended March 31, 201. The effect of change does not impact reported net loss in the period, but it does reduce income available to common stockholders as follows:

	Previously Reported March 31, 2001	Revised March 31, 2001
Net income (loss)	$(11,180)	$(11,180)
Net loss available to common stockholders	$(13,869)	$(20,359)
Total basic earnings per share	$      (.13)	$      (.20)
Total diluted earnings per share	$      (.13)	$      (.20)

     In the quarter ended June 30, 2001, the Company recorded an additional BCF charge to earnings per share of $0.5 million to recognize a deemed divided to the holders of the Series C preferred stock equal to the alternative conversion rate which can be realized by the holders at June 30, 2001. For the six months ended June 30, 2001, the additional BCF charge to earnings per share was $9.4 million. As a result the Company has cumulatively recorded a charge to earnings per share of $13.2 million, since the issuance of the preferred stock. As of June 30, 2001, the BCF is fully accreted and will not impact future earnings per share.

     9.     Discontinued Operations

     On March 1, 2001, the Company's board of directors approved a plan to offer for sale its Intellesale business segment and all of its other "non-core businesses". Accordingly, the operating results of these entities have been reclassified and reported as Discontinued Operations for all periods presented. The Company expects to dispose of these businesses by March 1, 2002. Cash proceeds will be used to reduce outstanding debt.

13

     The following discloses the results of Intellesale and all other non-core businesses comprising Discontinued Operations for the period from January 1, 2001 through March 1, 2001, and the three months and six months ended June 30, 2000:

	January 1, through March 1,		Three Months Ended June 30,		Six Months Ended June 30,
	(In thousands)
		2001		2000		2000
Product revenue		$13,039		$ 27,306		$ 84,834
Service revenue		846		2,787		7,611
Total revenue		13,885		30,093		92,445
Cost of products sold		10,499		32,451		81,210
Cost of services sold		259		1,665		4,774
Total cost of products and services sold		10,758		34,116		85,984
Gross profit		3,127		(4,023)		6,461
Selling, general and administrative expenses		2,534		16,827		24,211
Depreciation and amortization		264		988		2,018
Interest, net		29		43		94
Provision (benefit) for income taxes		34		(7,678)		(7,345)
Minority interest		53		471		147
Income (loss) from discontinued operations		$     213		$(14,674)		$(12,666)

     The above results do not include any allocated or common overhead expenses. Included in Interest, net above are interest charges based on the debt of these businesses that the Company believes will be assumed by a purchaser when the business is sold.

      Assets and liabilities of Discontinued Operations are as follows at June 30, 2001 and December 31, 2000:

	June 30, 2001		December 31, 2000
	(In thousands)
Current Assets
Cash and cash equivalents		$       —		$       —
Accounts receivable and unbilled receivables, net		8,798		10,290
Inventories		10,358		17,950
Prepaid expenses and other current assets		243		336
Total Current Assets		19,399		28,576
Property and equipment, net		5,721		6,536
Other assets		1,495		1,212
		$26,615		$36,324
Current Liabilities
Notes payable		$       —		$         4
Current maturities of long-term debt		5,425		519
Accounts payable		10,307		10,691
Accrued expenses		22,069		10,908
Total Current Liabilities		37,801		22,122
Long-term debt		—		5,224
Minority interest		727		902
		38,528		28,248
Net Assets (Liabilities) of Discontinued Operations		$(11,913)		$  8,076

14

     At December 31, 2000, the Company recorded a provision for operating losses and carrying costs during the phase-out period including operating and other disposal costs to be incurred in selling the businesses. Carrying costs primarily include the cancellation of facility leases and employment contract buyouts. The following table sets forth the roll forward of the liabilities for operating losses and carrying costs from March 1, 2001, the measurement date, through June 30, 2001. The additions represent a change in the estimated loss on sale and actual losses in excess of estimated operating losses during the phase out period, based upon a reevaluation performed during the second quarter of 2001. During the second quarter of 2001, the Company incurred actual losses in excess of estimated operating losses accrued on the measurement date due primarily to inventory write-downs of $4.5 million. The majority of the inventory write-downs were associated with a reduction in the net realizable value of Intellesale's computer-related inventory as a result of deteriorating market conditions during the second quarter. In addition, the Company increased its provision for estimated operating losses during the remainder of the phase out period by approximately $3.0 million. The Company also increased its estimated loss on the sale of Intellesale by $13.9 million and on the sale of Innovative Vacuum Solutions, Inc., which was sold effective May 10, 2001, by $0.2 million. The increase in the estimated loss on the sale of Intellesale is the result of a combination of the deteriorating market conditions for the technology sector as well as the Company's strategic decision to reallocate funding to its core businesses. The deductions represent activity from March 1, 2001, the measurement date, to June 30, 2001:

Type of Cost	Balance, March 1, 2001		Additions		Deductions		Balance, June 30, 2001
Operating losses		$  1,619		$  7,681		$  6,300		$  3,000
Estimated loss on sale		—		14,108		210		13,898
Carrying Costs		6,954		—		1,515		5,439
Total		$  8,573		$21,789		$  8,025		$22,337

     10.     Extraordinary Gain

     As a result of settling certain disputes between the Company and the former owners of Bostek, Inc. and an affiliate (Bostek), as more fully discussed in Note 7, the parties agreed to forgive a $9.5 million payable, provided the Company registered approximately 3.0 million common shares by June 15, 2001. The Company was successful in meeting the June 15, 2001 registration deadline and, accordingly, the extinguishment of the $9.5 million payable was recorded in June 2001 as an extraordinary gain.

     11.     Subsequent Events

     On July 12, 2001, the Company received notification from Nasdaq that it had failed to maintain a minimum bid price of $1.00 over the previous 30 consecutive trading days, as required by the Nasdaq National Market. Nasdaq has given the Company until October 10, 2001 to regain compliance with the minimum bid price requirement. If the Company is unable to satisfy this requirement, Nasdaq may begin procedures to remove the Company's common stock from the Nasdaq National Market. Should the Company receive notification from the staff of Nasdaq that its shares of common stock will be delisted, the Company has the right to appeal the staff's decision.

     Effective July 18, 2001, the Company amended its articles of incorporation to increase the number of common shares authorized from 245.0 million to 345.0 million.

     Effective July 20, 2001, the Company entered into an agreement to sell the business assets of its wholly-owned subsidiary ACT Wireless Corp. The total proceeds of $0.2 million in cash resulted in a pre-tax loss of approximately $0.5 million, which will be recorded in the Company's financial statements in the third quarter of 2001.

     Effective August 1, 2001, the Company entered into an agreement to sell the business assets of its wholly-owned subsidiary Signal Processors, Limited. The total proceeds of $0.7 million in cash resulted in a pre-tax loss of approximately $1.4 million, which will be recorded in the Company's financial statements in the third quarter of 2001.

     Effective August 1, 2001, the Company entered into an agreement for the sale of 100% of the stock of its wholly-owned subsidiary, Hopper Manufacturing Co., Inc. (Hopper). Hopper's operations are included in Discontinued Operations and the sale is part of the Company's plan of disposal of its Discontinued Operations. Proceeds on the sale approximated the estimated proceeds at June 30, 2001.

15

SIGNATURE

     Pursuant to the requirements 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.

	APPLIED DIGITAL SOLUTIONS, INC. (Registrant)
Dated: August 20, 2001	By:	/s/ JEROME C. ARTIGLIERE
		Jerome C. Artigliere Senior Vice President, Chief Financial Officer