Management`s Discussions: 10-Q, APPLIED DIGITAL SOLUTIONS INC - 500 Beiträge pro Seite

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Management`s Discussions: 10-Q, APPLIED DIGITAL SOLUTIONS INC 1 of 4

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Company Name: APPLIED DIGITAL SOLUTIONS INC
(SYMBOL:ADSX)

MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

This discussion should be read in conjunction with the accompanying consolidated
financial statements and related notes in Item 1 of this report as well as our
1999 Annual Report on Form 10-K. Certain statements made in this report may
contain forward-looking statements. For a description of risks and uncertainties
relating to such forward-looking statements, see the Risk Factors sections later
in this Item.

Applied Digital Solutions, Inc. is a leading edge, single-source provider of
e-business solutions. We differentiate ourselves in the marketplace by enabling
e-business through Computer Telephony Internet Integration (CTII(TM)). Beginning
in the fourth quarter of 1998 and continuing into 1999 and 2000, we reorganized
to refocus our strategic direction, organizing into four core business groups:
Telephony, Network, Internet and Applications. With CTII we provide the full
range of services and skills companies need to conduct business online.

Our objective is to continue to grow each of our core operating segments
internally and through acquisitions, both domestically and abroad. Our strategy
has been, and continues to be, to invest in and acquire businesses that
complement and add to our existing business base. We have expanded significantly
through acquisitions in the past and continue to do so. Our financial results
and cash flows are substantially dependent on not only our ability to sustain
and grow existing businesses, but to continue to grow through acquisition. We
expect to continue to pursue our acquisition strategy in 2000 and future years,
but there can be no assurance that management will be able to continue to find,
acquire, finance and integrate high quality companies at attractive prices.

As part of the reorganization of our core business into four reportable business
groups, we implemented a restructuring plan in the first quarter of 1999. The
restructuring plan included the exiting of selected lines of business within our
Telephony and Applications business groups, and the associated write-off of
assets. In the first quarter of 1999, we incurred a restructuring charge of $2.2
million that included asset impairments, primarily software and other intangible
assets, of $1.5 million, lease terminations of $0.5 million, and employee
separations of $0.2 million. In addition, during the first quarter of 1999, as
part of our core business reorganization, we realigned certain operations within
our Telephony division and recognized impairment charges and other related costs
of $0.3 million.

In the second quarter of 2000, IntelleSale recorded a pre-tax charge of $17.0
million. Included in this charge is an inventory reserve of $8.5 million for
products IntelleSale expects to sell below cost, $5.5 million related to
specific accounts and other receivables, and $3.0 million related to fees and
expenses incurred in connection with IntelleSale`s cancelled IPO and certain
other intangible assets. The former Bostek owners filed a lawsuit against the
Company and IntelleSale claiming that their earnout payment was inadequate. The
Company and IntelleSale believe that the claim is without merit and intend to
defend it vigorously, and have filed counterclaims alleging, among other things,
fraud on the part of the former Bostek owners. IntelleSale has also filed a
lawsuit in Massachusetts seeking to recover the damages it has sustained.

RECENT DEVELOPMENTS

SERIES C PREFERRED STOCK TRANSACTION

The Preferred Stock. On October 26, 2000, we issued 26 thousand shares of Series
C convertible preferred stock to a select group of institutional investors in a
private placement. The stated value of the preferred stock is $1,000 per share,
or an aggregate of $26.0 million, and the purchase price of the preferred stock
and the related warrants was an aggregate of $20.0 million. The preferred stock
is convertible into shares of our common stock initially at a rate of $7.56 in
stated value per share, which is reduced to $5.672 in stated value per share 91
days after issuance of the preferred stock. At the earlier of 90 days after the
issuance of the preferred stock or upon the effective date of our registration
statement relating to the common stock issuable on the conversion of the initial
series of preferred stock, the holders also have the option to convert the
stated value of the preferred stock to common stock at an alternative conversion
rate starting at 140% and declining to 110% of the average closing price for the
10 trading days preceding the date of the notice of conversion. The conversion
price and the alternative conversion price are subject to adjustment based on
certain events, including our issuance of shares of common stock, or options or
other rights to acquire common stock, at an issuance price lower than the
conversion price of the preferred stock, or issuance of convertible securities
that have a more favorable price adjustment provision than the preferred stock.
We will be required to accrete the discount on the preferred stock through
equity. However, the accretion will reduce the income available to common
stockholders and earnings per shares. The value assigned to the warrants will
increase the discount on the preferred stock. The holders of the preferred stock
are entitled to receive annual dividends of 4% of the stated value (or 5.2% of
the purchase price) payable in either cash or additional shares of preferred
stock.

If certain triggering events occur in respect of the preferred stock, the
holders may require us to redeem the preferred stock at a price per share equal
to 130% of the stated value (or an aggregate of $33.8 million) plus accrued
dividends, as long as such redemption is not prohibited under our credit
agreement. In addition, under certain circumstances during the occurrence of a
triggering event, the conversion price per share of the preferred stock would be
reduced to 50% of the lowest closing price of our common stock during such
period. The triggering events include (i) failure to have the registration
statement relating to the common stock issuable on the conversion of the
preferred stock declared effective on or prior to 180 days after issuance of the
preferred stock or the suspension of the effectiveness of such registration
statement, (ii) suspensions in trading of or failure to list the common stock
issuable on conversion of the preferred stock, (iii) failure to obtain
shareholder approval at least by June 30, 2001 for the issuance of the common
stock upon the conversion of the preferred stock and upon the exercise of the
warrants, and (iv) certain defaults in payment of or acceleration of our payment
obligations under our credit agreement.

Warrants. The holders of the preferred stock have also received 0.8 million
warrants to purchase up to 0.8 million shares of our common stock over the next
five years. The exercise price is $4.73 per share, subject to adjustment for
various events, including the issuance of shares of common stock, or options or
other rights to acquire common stock, at an issuance price lower than the
exercise price under the warrants. The exercise price may be paid in cash, in
shares of common stock or by surrendering warrants.

Option to Acquire Additional Preferred Stock. The investors may purchase up to
an additional $26.0 million in stated value of Series C convertible preferred
stock and warrants with an initial conversion price of $5.00 per share, for an
aggregate purchase price of $20.0 million, at any time up to ten months
following the effective date of the Company`s registration statement relating to
the common stock issuable

on conversion of the initial series of the preferred stock. The additional
preferred stock will have the same preferences, qualifications and rights as the
initial preferred stock.

ACQUISITIONS AND DISPOSITIONS

In April 1999, we acquired:

(a) 100% of Port Consulting, Inc., an integrator of information technology
application systems and custom application development services based in
Jacksonville, Florida;

(b) 100% of Hornbuckle Engineering, Inc., an integrated voice and data solutions
provider based in Monterey, California;

(c) 100% of Lynch Marks & Associates, Inc., a network integration company
based in Berkley, California; and

(d) 100% of STR, Inc., a software solutions company based in Cleveland, Ohio.

In May 1999, we entered into an agreement to merge our wholly owned Canadian
subsidiary, TigerTel Services Limited, with Contour Telecom Management, Inc., a
Canadian company. We received, in a reverse merger transaction, 19,769 shares of
Contour`s common stock, representing approximately 75% of the total outstanding
shares. In November 1999, TigerTel received an all cash bid for all of its
outstanding common shares from AT&T Canada, Inc. We entered into a lock-up
agreement with AT&T to tender the approximately 65% of the outstanding
shares we owned and, on December 30, 1999, AT&T purchased all of the shares
tendered. We recorded a pre-tax gain in the fourth quarter of 1999 of
approximately $20.1 million, and received gross proceeds of approximately $31.3
million in January 2000, which we applied against the outstanding balance on our
domestic revolving credit line.

In June 1999, IntelleSale purchased all of the shares of Bostek. Bostek is
engaged in the business of acquiring open-box and off-specification computer
equipment and selling such equipment, using the Internet and other selling
channels.

In October 1999, we disposed of the main business units comprising our
Communications Infrastructure division and dissolved this group. As
consideration for the sale, we received approximately 2.8 million shares of our
common stock and a note for $2.5 million. The treasury shares were recorded at
the book value of the divested assets ($2.54 per share), which resulted in no
gain being recognized. The transaction was reflected at book value because the
shareholders of the purchaser of the divested assets were collectively deemed to
be significant shareholders of the Company.

Since April 1, 2000, we acquired, in transactions accounted for under the
purchase method of accounting:

* 100% of the capital stock of Independent Business Consultants, a network
integration company based in Valley Village, California, effective as of April
1, 2000;

* 100% of the capital stock of Timely Technology Corp., a software developer and
application service provider based in Riverside, California, effective as of
April 1, 2000;

* 100% of the capital stock of P-Tech, Inc., a software development company
based in Manchester, New Hampshire, effective as of April 1, 2000;

* 100% of the capital stock of Computer Equity Corporation, a communications
integration company based in Chantilly, Virginia, effective as of June 1, 2000;

* 100% of the capital stock of WebNet Services, Inc., an internet service
provider, network integrator and website developer, effective July 1, 2000; and

On September 8, 2000, we completed our acquisition of Destron Fearing
Corporation, through a merger of our wholly-owned subsidiary, Digital Angel.net
Inc., into Destron Fearing. As a result of the merger, Destron Fearing is now
our wholly-owned subsidiary and has been renamed "Digital Angel.net Inc." The
transaction was accounted for under the purchase method of accounting.

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 an warrants
prior to September 8, 2000 and participated in the merger. The Company issued
20.5 million shares if 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.

Destron Fearing has been in the animal identification business since 1945. For
over 50 years, Destron Fearing has developed, manufactured and marketed a broad
range of individual animal identification products. Destron Fearing owns patents
worldwide in microchip technology and is a leader in the world evolution of
radio frequency animal identification.

Effective as of October 19, 2000, we entered into transactions with MCY.com,
Inc. (OTC-BB:MCYC) ("MCY") under which we sold to MCY a non-exclusive worldwide
license to use our recently-acquired Net-Vu product, an Internet-based Automatic
Contact Distributor, for $9.0 million in cash plus $1.0 million in shares of
MCY. In addition, MCY granted to us an exclusive license to MCY`s digital
encryption and distribution systems, including its NETrax(TM) software for use
in various non-entertainment business-to-business applications, in consideration
for 11.8 million shares of our common stock valued of $40.0 million. These
transactions with MCY are subject to governmental clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

On October 25, 2000, we acquired Pacific Decision Sciences Corporation, a
California corporation ("PDSC"). In the merger transaction, we issued
approximately 8.6 million shares of our common stock. In addition, for each of
the twelve-month periods ending September 30, 2001 and September 30, 2002, the
former stockholders of PDSC will be entitled to receive earnout payments,
payable in cash or in shares of our common stock, of $9.7 million plus 4.0 times
EBITDA (as defined in the merger agreement) in excess of $3.7 million, subject
to reduction by 4.0 times the shortfall from the Projected EBITDA Amount (as
defined in the merger agreement). Goodwill associated with the acquisition
amounted to approximately $23.5 million and will be amortized over 20 years at
the rate of approximately $1.2 million per year. PDSC, based in Santa Ana,
California, is a provider of proprietary web-based customer relationship
management software. It develops, sells and implements software systems that
enable automated, single point of contact delivery of customer service.

On October 27, 2000, we acquired 16% of the capital stock of ATEC Group, Inc.
(AMEX:TEC), in consideration for shares of our common stock valued at
approximately $9.1 million. Goodwill associated with the acquisition amounted to
approximately $7.8 million and will be amortized over 20 years at the rate of
approximately $0.4 million per year. Based in Commack, New York, ATEC is a
leading system integrator and provider of a full line of information technology
products and services.

On October 31, 2000, under an agreement dated November 3, 2000, we sold our
wholly-owned subsidiary STC Netcom, Inc.

On November 2, 2000 we acquired 80% of the capital stock of Connect Intelligence
Limited, in consideration for shares of our common stock valued at approximately
$10.0 million. Goodwill associated with the acquisition amounted to
approximately $7.1 million and will be amortized over 20 years at the rate of
approximately $0.4 million per year. Based in Ireland, Connect Intelligence has
successfully completed a vetting procedure and has now been formally offered up
to 70 high-speed fiber optic circuits from the Irish government`s Department of
Enterprise and Employment. The offering, part of the Irish government`s
e-commerce infrastructure initiative, grants Connect Intelligence and its
partners exclusive rights to nearly one half of all circuits to and from the
Republic of Ireland.

On November 13, 2000 we entered into an agreement to acquire approximately 54%
of the outstanding capital stock of SysComm International Corporation
(NASDAQ:SYCM) in consideration for a combination of cash and shares of our
common stock valued at $4.5 million. No goodwill was associated with the
acquisition. Concurrently, we agreed to sell our interest in Information
Products Corporation to SysComm. Based in Shirley, New York, SysComm is a
network and systems integrator and reseller of computer hardware.

OUR BUSINESS

Beginning in the fourth quarter of 1998 and continuing into 1999 and 2000, we
reorganized into six operating segments to more effectively and efficiently
provide integrated communications products and services to a broad base of
customers. During the second quarter of 1999, several adjustments were made to
the composition of the Telephony, Internet and Non-core divisions to better
align the strengths of the respective divisions with the objectives of those
divisions. In October 1999, we disposed of the main business units comprising
our Communication Infrastructure division and dissolved this group. Prior period
information has been restated to present our reportable segments.

CORE BUSINESS

Our primary businesses, other than IntelleSale, the Non-Core Business Group, and
Digital Angel, are now organized into four business divisions:

* TELEPHONY implements telecommunications and Computer Technology Integration
(CTI) solutions for e-business. We integrate a wide range of voice and data
solutions from communications systems to voice over Internet Protocol and
Virtual Private Networking (VPN). We provide complete design, project
management, cable/fiber infrastructure, installation and ongoing support for the
customers we support. On December 30, 1999, as discussed above, we sold our
interest in our Canadian subsidiary, TigerTel, Inc. to concentrate our efforts
on our domestic CTI solutions.

* NETWORK is a professional services organization dedicated to delivering
quality e-business services and support to our client partners, providing
e-business infrastructure design and deployment, personal computer network
infrastructure for the development of local and wide area networks as well as
site analysis, configuration proposals, training and customer support services.

* INTERNET equips our customers with the necessary tools and support services to
enable them to make a successful transition to implementing e-business
practices, Enterprise Resource Planning (ERP) and Customer Relationship
Management (CRM) solutions, website design, and application and internet access
services to customers of our other divisions.

* APPLICATIONS provides software applications for large retail application
environments, including point of sale, data acquisition, asset management and
decision support systems and develops programs for portable data collection
equipment, including wireless hand-held devices. It is also involved in the
design, manufacture and support of satellite communication technology including
satellite modems, data broadcast receivers and wireless global positioning
systems for commercial and military applications.

INTELLESALE

IntelleSale sells refurbished and new computer equipment and related components
online, through its website at www.IntelleSale.com, and through other Internet
companies, as well as through traditional channels, which includes sales made by
IntelleSale`s sales force.

THE NON-CORE BUSINESS GROUP

This group is comprised of six individually managed companies whose businesses
are as follows:

* Gavin-Graham Electronic Products is a custom manufacturer of electrical
products, specializing in digital and analog panelboards, switchboards, motor
controls and general control panels. The company also provides custom
manufacturing processes such as shearing, punching, forming, welding, grinding,
painting and assembly of various component structures.

* Ground Effects, Ltd., based in Windsor, Canada, is a certified manufacturer
and tier one supplier of standard and specialized vehicle accessory products to
the automotive industry. The company exports over 80% of the products it
produces to the United States, Mexico, South America, the Far East and the
Middle East.

* Hopper Manufacturing Co., Inc. remanufactures and distributes automotive
parts. This primarily includes alternators, starters, water pumps, distributors
and smog pumps.

* Innovative Vacuum Solutions, Inc. designs, installs and re-manufactures vacuum
systems used in industry.

* Americom and STC Netcom are each involved in the fabrication, installation and
maintenance of microwave, cellular and digital personal communication services
towers.

We previously announced our intention to divest, in the ordinary course of
business, our non-core businesses at such time and on such terms as our Board of
Directors determines advisable. During the third quarter of 2000, we sold ACT
Leasing for no gain or loss, and effective October 31, 2000, we sold

STC Netcom, Inc. There can be no assurance that we will divest of any or all of
these remaining businesses or as to the terms of any divestiture transaction.

RESULTS OF OPERATIONS

The following table summarizes the Company`s results of operations as a
percentage of net operating revenue for the three and nine month periods ended
September 30, 2000 and 1999 and is derived from the unaudited consolidated
statements of operations in Part I, Item 1 of this report.




RELATIONSHIP TO REVENUE




-------------------------------------




THREE MONTHS NINE MONTHS




ENDED ENDED




SEPTEMBER 30, SEPTEMBER 30,




-------------------------------------




2000 1999 2000 1999




---- ---- ---- ----




% % % %




- - - -


Net operating revenue

100.0 100.0 100.00 100.0


Cost of goods sold

68.8 73.3 71.5 68.3


Unusual inventory charge

0.0 0.0 3.8 0.0




-------------------------------------


Gross profit

31.2 26.7 24.7 31.7


Selling, general and administrative expenses

28.8 22.4 29.5 26.7


Depreciation and amortization

4.2 2.4 3.4 2.8


Unusual and restructuring charges

0.0 0.0 3.8 1.1


Interest income

(0.1) (0.2) (0.3) (0.2)


Interest expense

2.2 1.1 1.9 1.0




-------------------------------------


Income (loss) before provision (benefit) for income taxes, minority
interest and extraordinary loss

(3.9) 1.0 (13.6) 0.3


Provision (benefit) for income taxes

(1.7) 0.6 (4.5) 0.4




-------------------------------------


Income (loss) before minority interest and extraordinary loss

(2.2) 0.4 (9.1) (0.1)


Minority interest

0.2 0.0 0.2 0.2




-------------------------------------


Income (loss) before extraordinary loss

(2.4) 0.4 (9.3) (0.3)


Extraordinary loss

0.0 0.0 0.0 0.1




-------------------------------------


Net income (loss) available to common stockholders

(2.4) 0.4 (9.3) (0.4)




===================================== COMPANY OVERVIEW

Revenue -

Revenue for the three months ended September 30, 2000 was $73.8 million, a
decrease of $33.5 million, or 31.2%, from $107.3 million for the three months
ended September 30, 1999. Revenue for the nine months ended September 30, 2000
was $222.9 million, a decrease of $8.9 million, or 3.8%, from $231.8 million for
the nine months ended September 30, 1999. The decrease for the three and nine
month periods is due primarily to the dispositions during 1999. Also, revenue
for the third quarter has decreased because we ceased selling certain low-margin
Bostek products during the second quarter of 2000, as more fully discussed
below. Partially offsetting these decreases were revenues from acquisition
during the nine months ended September 30, 2000.

Revenue for each of the operating segments was: (In thousands)


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Part 2:

Management`s Discussions: 10-Q, APPLIED DIGITAL SOLUTIONS INC 2 of 4

----------------------------------------------------


THREE

MONTHS NINE MONTHS


ENDED

SEPTEMBER 30, ENDED SEPTEMBER 30,




----------------------------------------------------


2000

1999 2000 1999


----

---- ---- ----


Telephony(1) $12,276 $

17,265 $ 27,210 $ 40,797


Network 12,758

7,399 31,026 19,905


Internet 4,248

2,285 9,071 4,405


Applications 11,638

11,800 30,069 26,498


IntelleSale 21,447

51,481 94,865 92,742


Non-Core(2) 12,532

19,820 35,566 52,379


Corporate Consolidating Eliminations (1,053)

(2,788) (4,945) (4,936)




----------------------------------------------------


Consolidated $73,846

$107,262 $222,862 $231,790




====================================================---------

(1) Includes TigerTel`s revenue of $12.4 million and $25.8 million for the three
and nine months ending September 30, 1999.

(2) Includes revenue from the Communications Infrastructure group of companies,
the majority of which were disposed of in 1999. Revenue for these disposed
entities included above amounted to $10.5 million and $26.4 million during the
three and nine months ended September 30, 1999.

Changes during the quarter were:

* Telephony revenue decreased 28.9% for the quarter and 33.3% for the nine
months primarily as a result of the sale of TigerTel in December 1999. Revenue
from the remaining entities increased by $7.4 million in the quarter and $12.2
million for the nine months primarily as a result of the acquisition, in the
second quarter of 2000, of Computer Equity Corporation.

* Network revenue increased 72.4% for the quarter and 55.9% for the nine months.
The acquisition of Independent Business Consultants in the second quarter of
2000 contributed $2.9 million and $5.3 million, representing 54.1% and 47.6% of
the increase for the quarter and nine months, respectively. Growth of existing
business contributed the additional increase in the three and nine month
periods.

* Internet revenue increased by 85.9% in the quarter and 105.9% for the nine
months. The increases were due to the result of the growth of Port Consulting,
Inc., which was acquired on April 1, 1999 and to the acquisitions of Timely
Technology Corp. on April 1, 2000 and WebNet Services, Inc. on July 1, 2000.

* Applications revenue decreased by 1.4% in the quarter and increased by 13.5%
for the nine months. The decline in the quarter is due to a delay in
implementations of retail application software and a shift into new geographic
markets for existing businesses. Partially offsetting the decrease in revenue
for the quarter and the primary contributors to the increase in revenue for the
nine months are the acquisitions of Destron Fearing Corporation, which was
acquired on September 8, 2000, and P-Tech, Inc., which was acquired during the
second quarter of 2000. During the nine months of 2000, Destron Fearing
Corporation and P-Tech, Inc. contributed revenue of $2.7 million and $2.4
million, respectively.

* IntelleSale`s revenue decreased 58.3% in the quarter, while revenue for the
nine months increased 2.3%. As previously discussed, the Company and IntelleSale
are in a dispute with the former owners of Bostek and have ceased selling
certain high-volume, low-margin Bostek products in the second quarter of 2000.
Revenue remained relatively stable for the nine months periods despite the loss
of revenue from Bostek products due to increased business in several of
IntelleSale`s subsidiaries.

* Non-core revenue, which includes revenue from the former Communications
Infrastructure group, decreased $7.3 million, or 36.8%, in the third quarter and
$16.8 million, or 32.1%, for the nine months. Four entities in this segment were
sold during 1999 and their revenue is no longer included, and certain lines of
business within this segment continue to suffer from competition and lost market
share. Partially offsetting the decrease was an increase in Ground Effect`s
revenue due to increased business.

Gross Profit and Gross Margin Percentage

Gross profit for the three months ended September 30, 2000 was $23.0 million, a
decrease of $5.7 million, or 19.9%, from $28.7 million for the three months
ended September 30, 1999. Gross profit for the nine months ended September 30,
2000 was $55.0 million, a decrease of $18.4 million, or 25.1% from $73.4 million
for the nine months ended September 30, 1999. As a percentage of revenue, the
gross margin was 31.2% and 26.7% for the three months ended September 30, 2000
and 1999, and was 24.7% and 31.7% for the nine months ended September 30, 2000
and 1999 respectively.

Gross profit for the three and nine months ended September 30, 2000 and 1999 by
each of the operating segments was: (In thousands)




------------------------------------------------------




THREE MONTHS NINE MONTHS




ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,




------------------------------------------------------




2000 1999 2000 1999




---- ---- ---- ----


Telephony(1) $ 4,

214 $ 5,837 $10,853 $16,853


Network 2,

899 2,574 8,048 6,226


Internet 2,

845 1,696 6,824 3,314


Applications 5,

747 5,367 15,350 14,537


IntelleSale 4,

253 7,943 5,623 19,588


Non-Core(2) 3,

015 5,219 8,113 12,825


Corporate

59 30 167 69




------------------------------------------------------


Consolidated $23,

032 $28,666 $54,978 $73,412




======================================================---------

(1) Includes TigerTel`s gross profit of $3.8 million and $11.1 million for the
three and nine months ended September 30, 1999.

(2) Includes gross profit from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Gross profit for
these disposed entities included above amounted to $2.4 million and $5.7 million
during the three and nine months ended September 30, 1999.

Gross margin percentage for the three and nine months ended September 30, 2000
and 1999 by operating segments was:




-----------------------------------------------------




THREE MONTHS NINE MONTHS




ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,




-----------------------------------------------------




2000 1999 2000 1999




---- ---- ---- ----




% % % %




- - - -


Telephony(1)

34.3 33.8 39.9 41.3


Network

22.7 34.8 25.9 31.3


Internet

67.0 74.2 75.2 75.2


Applications

49.4 45.5 51.0 54.9


IntelleSale

19.8 15.4 5.9 21.1


Non-Core(2)

24.1 26.3 22.8 24.5




-----------------------------------------------------


Consolidated

31.2 26.7 24.7 31.7




===================================================== -

(1) Includes TigerTel`s gross profit margin of 30.6% and 43.0% and for the three
and nine months ended September 30, 1999.

(2) Includes gross profit margin from the Communications Infrastructure group of
companies, the majority of which were disposed of in 1999. Gross profit margin
for these disposed entities included above amounted to 22.9% and 21.6% during
the three and nine months ended September 30, 1999.

Changes during the quarters were:

* Telephony gross profit decreased by 27.8% for the quarter and 35.6% for the
nine months primarily as a result of the sale of TigerTel in December 1999. This
was partially offset by the acquisition, in the second quarter of 2000, of
Computer Equity Corporation, which contributed $1.7 million and $3.0 million in
gross profit for the three and nine months periods, respectively. Margins
increased to 34.3% from 33.8% for the quarter primarily due to higher margins
from existing businesses and decreased to 39.9% from 41.3% for the nine months
primarily as a result of the sale of TigerTel.

* Network gross profit increased in the quarter and nine months due to the
acquisition of Independent Business Consultants during the second quarter of
2000 and increased profits from our existing businesses. Gross margins decreased
for the quarter and nine months primarily because Independent Business
Consultants earns lower margins than our existing businesses.

* Internet gross profit increased for the three and nine month periods as a
result of increased business from Port Consulting, Inc., acquired in the second
quarter of 1999 and the inclusion of Timely Technology Corp., acquired in the
second quarter of 2000 and WebNet Services, Inc., acquired July 1, 2000. Timely
Technology and WebNet Services, Inc. earn lower margins than Port Consulting,
which resulted in the slight decrease in the quarter. Margins remained stable
for the nine months. Generally, gross profit and margins are higher in this
division as it is service oriented and most of its operating costs are recorded
in selling, general and administrative expense.

* Applications gross profit increased $0.4 million or 7.1% in the quarter and
increased $0.8 million or 5.6% for the nine months. Margins increased 3.9% and
decreased 3.9% for the three and nine month periods, respectively. The increase
in margins for the quarter is due primarily to the acquisitions of Destron
Fearing Corporation and P-Tech, Inc. The decrease in margins for the nine months
is due primarily to a delay in implementations of applications for one our
existing

businesses. Also, we are continuing to implement our planned exit from a once
highly profitable but declining modem and communications market in the United
Kingdom.

* IntelleSale`s gross profit decreased in the quarter and nine months. As
previously discussed, the Company and IntelleSale are in a dispute with the
former owners of Bostek and have ceased selling certain high-volume, low-margin
Bostek products. During the second quarter of 2000, the Company set up an
inventory reserve of $8.5 million and, in addition, inventory was liquidated at
below cost resulting in a loss of approximately $3.4 million, both of which
affected IntelleSale`s gross profit and margins in the nine months. Gross margin
increased in the quarter primarily as a result of ceasing the sales of the low
margin products discussed above.

* Non-core gross profit and margins decreased primarily as a result of the sale
of four businesses during 1999. Improved business conditions at Ground Effects
partially offset the decrease in gross profit for the nine months.

Selling, General and Administrative Expense -

Selling, general and administrative expense for the three months ended September
30, 2000 was $21.2 million, a decrease of $2.8 million, or 11.7%, from $24.0
million for the three months ended September 30, 1999. Selling, general and
administrative expense for the nine months ended September 30, 2000 was $65.8
million, an increase of $4.0 million, or 6.5% from $61.8 million for the nine
months ended September 30, 1999. As a percentage of revenue, selling, general
and administrative expense was 28.8% and 22.4% for the three months ended
September 30, 2000 and 1999, and was 29.5% and 26.7% for the nine months ended
September 30, 2000 and 1999, respectively.

Selling, general and administrative expense for the three and nine months ended
September 30, 2000 and 1999 by each of the operating segments was: (In
thousands)




------------------------------------------




THREE MONTHS NINE MONTHS




ENDED ENDED




SEPTEMBER 30, SEPTEMBER 30,




------------------------------------------




2000 1999 2000 1999




---- ---- ---- ----


Telephony(1)

$ 3,400 $ 4,829 $ 8,424 $14,459


Network

1,616 1,913 5,808 4,566


Internet

2,505 1,397 6,386 2,716


Applications

4,697 4,616 14,111 12,617


IntelleSale

3,850 5,737 15,560 13,259


Non-Core(2)

1,932 4,196 5,934 10,083


Corporate

3,227 1,334 9,528 4,138




------------------------------------------


Consolidated

$21,227 $24,022 $65,751 $61,838




==========================================---------

(1) Includes TigerTel`s SG&A of $2.8 million and $8.2 million for the three
and nine months ended September 30, 1999.

(2) Includes SG&A from the Communications Infrastructure group of companies,
the majority of which were disposed of in 1999. SG&A for these disposed
entities included above amounted to $1.8 million and $4.6 million in the three
and nine months ended September 30, 1999.

Selling, general and administrative expense as a percentage of revenue for the
three and nine months ended September 30, 2000 and 1999 by each of the operating
segments was:




--------------------------------------------




THREE MONTHS ENDED NINE MONTHS ENDED




SEPTEMBER 30, SEPTEMBER 30,




--------------------------------------------




2000 1999 2000 1999




---- ---- ---- ----




% % % %




- - - -


Telephony(1)

27.7 28.0 31.0 35.4


Network

12.7 25.9 18.7 22.9


Internet

59.0 61.1 70.4 61.7


Applications

40.4 39.1 46.9 47.6


IntelleSale

18.0 11.1 16.4 14.3


Non-Core(2)

15.4 21.2 16.7 19.3




--------------------------------------------


Consolidated

28.8 22.4 29.5 26.7




============================================ -

(1) Includes TigerTel`s SG&A of 22.6% and 31.8% for the three and nine
months ended September 30, 1999.

(2) Includes SG&A from the Communications Infrastructure group of companies,
the majority of which were disposed of in 1999. SG&A for these disposed
entities included above amounted to 17.1% and 17.4% for the three and nine
months ended September 30, 1999.

Changes during the quarter were:

* Telephony decreased $1.4 million or 29.2% in the quarter and $6.0 million or
41.4% in the nine months primarily due to the sale of TigerTel in December 1999.
As a percentage of revenue, SG&A expense in this division decreased for both
periods as a result of lower SG&A costs excluding TigerTel, which had a
historically higher percentage of SG&A to revenue.

* Network remained relatively stable in dollar terms for the third quarter of
2000. The increase of $1.2 million or 26.3% for the nine months is due to
increases in salaries and related benefits, rent and additional sales and
marketing expenses, some of which is attributable to the acquisition of Creative
Computers in April 2000. As a percentage of revenue, SG&A expense in this
division decreased 13.2% in the quarter and 4.2% for the nine months primarily
because Creative Computers incurs lower SG&A expense as a percentage of
revenue than our existing businesses.

* Internet increased in dollar terms for the three and nine month periods as a
result of increased business by Port Consulting, acquired in the second quarter
of 1999 and the inclusion of Timely Technology Corp., acquired in the second
quarter of 2000 and the acquisition of WebNet Services, Inc. on July 1, 2000. As
a percentage of revenue, SG&A decreased for the quarter primarily due the
acquisitions of Timely Technology Corp. and WebNet Services, Inc. which have
lower SG&A costs and increased for the nine months due to higher expenses
associated with our expansion of Port Consulting. As a rule, entities comprising
this group are service oriented companies with lower cost of goods sold but
higher SG&A expenses.

* Applications increased $0.1 million or 2.2% for the quarter and $1.5 million
or 11.9% for the nine months due to the acquisition of P-Tech, Inc. in the
second quarter of 2000 and Destron Fearing Corporation on September 8, 2000.
Partially offsetting these increases was a decrease in SG&A

expenses of existing businesses. As a percentage of revenue, SG&A expense in
this division has remained relatively stable over the comparable 1999 periods.

* IntelleSale`s SG&A expenses decreased in dollar terms in the quarter
primarily as a result of a reduction in personnel related costs as we
consolidated the businesses and ceased certain operations related to Bostek.
SG&A expenses increased in the nine months as a result of the acquisition of
Bostek in June 1999 and the expansion of that company`s infrastructure to handle
increases in both its traditional and internet related business and the
consolidation of operations into one facility. As a percentage of revenue,
SG&A expense in this division has increased 6.9% and 2.1% in the quarter and
nine months, respectively, primarily due to lower sales from Bostek.

* Non-core SG&A decreased in dollar terms and as a percentage of revenue
primarily as a result of the sale of four entities during 1999.

* Corporate SG&A increased $1.9 million or 142.4% in the quarter and $5.4
million or 130.5% for the nine months as a result of the establishment of a
corporate office in June of 1999, and the corresponding costs associated
therewith, including increases in personnel and the associated costs therewith,
facilities costs, increases in the remuneration of outside directors, insurance
and legal and other professional fees.

Depreciation and Amortization -

Depreciation and amortization expense for the three months ended September 30,
2000 was $3.1 million, an increase of $0.5 million or 19.2%, from $2.6 million
for the three months ended September 30, 1999. Depreciation from companies
disposed was offset by depreciation from companies acquired and fixed asset
additions. Depreciation and amortization expense for the nine months ended
September 30, 2000 was $7.5 million, an increase of $1.1 million, or 17.2%, from
$6.4 million for the nine months ended September 30, 1999.

Depreciation and amortization expense for the three and nine months ended
September 30, 2000 and 1999 by operating segments was:




---------------------------------------------------


(In thousands)

THREE MONTHS ENDED NINE MONTHS




SEPTEMBER 30, ENDED SEPTEMBER 30,




---------------------------------------------------




2000 1999 2000 1999




---- ---- ---- ----


Telephony(1)

$ 201 $ 465 $ 428 $1,127


Network

32 51 117 86


Internet

72 23 150 46


Applications

332 461 841 1,208


IntelleSale

232 132 575 317


Non-Core(2)

245 364 852 949


Corporate(3)

2,022 1,116 4,572 2,640




---------------------------------------------------


Consolidated

$3,136 $2,612 $7,535 $6,373




===================================================---------

(1) Includes TigerTel`s depreciation and amortization of $0.4 million and $0.9
million in the three and nine months ended September 30, 1999.

(2) Includes depreciation and amortization from the Communications
Infrastructure group of companies, the majority of which were disposed of in
1999. Depreciation and amortization for these disposed entities included above
amounted to $0.1 million and $0.3 million in the three and nine months ended
September 30, of 1999.

(3) Includes consolidation adjustments of $1.6 million and $0.9 million in the
third quarters ended September 30, 2000 and 1999, respectively, and $3.6 million
and $1.9 million in the first nine months ended September 30, 2000 and 1999,
respectively.

Changes during the quarter were

* Telephony decreased primarily as a result of the sale of TigerTel in December
1999.

* Network decrease in the quarter as a result of assets retired in previous
quarters and increased in the nine month period due to an increase in
depreciable assets in this group during 1999 and 2000.


-0-

[OesiStockpicker]

Part 3:

Management`s Discussions: 10-Q, APPLIED DIGITAL SOLUTIONS INC 3 of 4

* Internet increased due to the increase in depreciable assets associated with
the expansion of this division during 1999 and 2000 and the acquisitions of
Timely Technology Corp. in the second quarter of 2000 and WebNet Services, Inc.
on July 1, 2000.

* Applications decreased due primarily to the reduction of depreciable assets in
this division during 2000.

* IntelleSale increased as a result of the increase in depreciable assets during
1999 and the first half of 2000 associated with the consolidation of the
businesses into one facility.

* Non-core decreased in 2000 due primarily to the sale of assets associated with
the Communications Infrastructure group of companies in 1999.

On an annual basis, goodwill amortization will be approximately $8.8 million for
goodwill recorded as of September 30, 2000.

Interest Income and Expense -

Interest income was $0.1 million and $0.2 million for the three months ended
September 30, 2000 and 1999, respectively, and was $0.7 million and $0.4 million
for the nine months ended September 30, 2000 and 1999, respectively. Interest
income is earned primarily from short-term investments and notes receivable.

Interest expense was $1.6 million and $1.2 million for the three months ended
September 30, 2000 and 1999, respectively, and was $4.1 million and $2.3 million
for the nine months ended September 30, 2000 and 1999, respectively. Interest
expense is principally associated with revolving credit lines, notes payable and
term loans.

Income Taxes

The effective tax rates were 42.7% and 62.7% for the three months ended
September 30, 2000 and 1999, respectively and 32.9% and 137.6% for the nine
months ended September 30, 2000 and 1999, respectively. The income tax benefits
are the result of losses arising in the periods. The effective tax rates
differed from the statutory federal income tax rate of 34% primarily as a result
of non-deductible goodwill amortization associated with acquisitions and state
taxes net of federal benefits.

Extraordinary Loss

In connection with the early retirement of the Company`s line of credit with
State Street Bank and Trust Company and its simultaneous refinancing with IBM
Credit Corporation, deferred financing fees associated with the State Street
Bank and Trust agreement were written off during the second quarter of 1999. The
total amount of the write off classified as an extraordinary loss was $0.2
million, net of income taxes.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2000, cash and cash equivalents totaled $9.5 million, an
increase of $4.4 million, or 86.3% from $5.1 million at December 31, 1999. We
utilize a cash management system to apply excess cash on hand against our
revolving credit facility for which we had availability of $0.2 million at
September 30, 2000, down from $11.8 million at December 31, 1999. Working
capital was $65.1 million at both September 30, 2000 and December 31, 1999. Cash
used by operating activities totaled $33.6 million in the first nine months of
2000 as compared to cash used by operating activities of $14.3 million in the
first nine months of 1999. Excluding assets and liabilities acquired or assumed
in connection with acquisitions, cash used in the first nine months of 2000 was
due to the net loss, after adjusting for non-cash expenses, and increases in
inventories, prepaid expenses and other current assets, deferred taxes and
decreases in accounts payable and accrued expenses. Partially offsetting these
uses was cash received on the collection of accounts receivable. Excluding
assets and liabilities acquired or assumed in connection with acquisitions, cash
used in the first nine months of 1999 was due to the net loss, after adjusting
for non-cash expenses, and increases in receivables, inventories and prepaid
expenses and other current assets. An increase in accounts payable and accrued
expenses partially offset these uses.

"Due from buyer of divested subsidiary" at December 31, 1999 represents the net
proceeds due from AT&T Canada, Inc. on the sale of TigerTel, Inc. This
amount was paid in January 2000, and we applied the proceeds against our
domestic line of credit.

Accounts and unbilled receivables, net of allowance for doubtful accounts,
increased by $3.4 million, or 6.5%, to $55.6 million at September 30, 2000 from
$52.2 million at December 31, 1999. This increase was primarily attributable to
the receivables associated with companies acquired during 2000, partially offset
by the unusual charge against receivables in the second quarter of 2000.

Inventories increased by $2.2 million, or 5.4%, to $42.6 million at September
30, 2000 from $40.4 million at December 31, 1999. This increase was primarily
attributable to inventories associated with companies acquired during 2000,
partially offset by write-downs of inventories associated with the second
quarter unusual charges.

Prepaid expenses and other current assets increased by 80.0%, or $4.8 million to
$10.8 million at September 30, 2000 from $6.0 million at December 31, 1999. This
increase was primarily attributable to prepaid expenses and other current assets
associated with companies acquired during 2000 and income tax receivable
associated with the carryback of net operating losses.

Other assets increased by $9.4 million, or 86%, to $20.3 million at September
30, 2000 from $10.9 million at December 31, 1999. The increase was primarily
attributable to other assets associated with the companies acquired during 2000
and deferred income taxes associated with net operating losses.

"Due to shareholders of acquired subsidiary" decreased by $5.0 million, or
33.3%, to $10.0 million at September 30, 2000 from $15.0 million at December 31,
1999. At September 30, 2000, the balance consisted of $10.0 million due to the
former owners of Bostek. As previously discussed, due to the litigation between
the Company, IntelleSale and the former Bostek owners, the $10.0 million payment
due to the former Bostek owners on June 30, 2000 was not paid. The Company and
IntelleSale intend to vigorously assert their position set forth in their
counterclaims and lawsuits that such payments are not owed, but continue to
carry this amount as a liability pending the outcome of the litigation.

Accounts payable decreased by $4.6 million, or 15.6%, to $24.9 million at
September 30, 2000 from $29.5 million at December 31, 1999. This decrease was
primarily attributable to a reduction of higher payables incurred in the fourth
quarter of 1999 to support year end sales, partially offset by accounts payable
associated with companies acquired in 2000.

Accrued expenses decreased by $1.0 million, or 5.6%, to $16.7 million at
September 30, 2000 from $17.7 million at December 31, 1999 due primarily to a
reduction in accrued personnel related costs.

Other current liabilities represent accrued earnout payments of $2.7 million at
December 31, 1999.

Investing activities provided cash of $14.9 million and used cash of $21.4
million in the first nine months of 2000 and 1999, respectively. In the first
nine months of 2000, cash proceeds of $31.3 million was collected on the sale of
TigerTel, while cash of $10.5 million was used in connection with acquired
businesses, $5.5 million was spent to acquire property and equipment, $0.6
million was advanced against notes receivable and $0.7 million was used to
increase other assets. In the first nine months of 1999, cash of $15.8 million
was used to acquire businesses, $3.8 million was used to acquire property and
equipment and $1.3 million was used to increase other assets. Partially
offsetting these uses was $0.8 million and $0.4 million in proceeds from the
sales of property, equipment and other assets in the first nine months of 2000
and 1999, respectively.

Cash of $23.1 million and $40.2 million was provided by financing activities in
the first nine months of 2000 and 1999, respectively. In the nine months of
2000, $8.9 million was borrowed under

notes payable, $7.2 million was repaid and $16.3 million was borrowed on
long-term debt, while $5.5 million was obtained through the issuance of common
shares and $0.4 million was used for other financing costs. In the nine months
of 1999, $51.9 million was borrowed and $8.3 million was repaid on long-term
debt, while $0.1 million was used to repay borrowings under notes payable and
$3.3 million was used for other financing costs.

One of our stated objectives is to maximize cash flow, as management believes
positive cash flow is an indication of financial strength. However, due to our
significant growth rate, our investment needs have increased. Consequently we
will continue, in the future, to use cash from operations and will continue to
finance this use of cash through financing activities such as the sale of common
and preferred stock and/or bank borrowing, if available.

In August 1998, we entered into a $20.0 million line of credit with State Street
Bank and Trust Company secured by all of our domestic assets at the prime
lending rate or at the London Interbank Offered Rate, at our discretion. In
February 1999, the amount of the credit available under the facility was
increased to $23.0 million. On May 25, 1999, we entered into a Term and
Revolving Credit Agreement with IBM Credit Corporation (the "IBM Agreement")
and, on May 26, 1999, we repaid the amount due to State Street Bank and Trust
Company. On July 30, 1999 the IBM Agreement was amended and restated, and it was
again amended on January 27, 2000. On October 17, 2000, we entered into a Second
Amended and Restated Term and Revolving Credit Agreement with IBM Credit
Corporation. The Second IBM Agreement provides for: (a) a revolving credit line
of up to $67.260 million, subject to availability under a borrowing base
formula, designated as follows: (i) a U.S. revolving credit line of up to
$63.405 million, (ii) a Canadian revolving credit line of up to $3.855 million,
and (b) a term loan A of up to $25.0 million, and (c) a Canadian term loan C of
up to $2.740 million.

The revolving credit line may be used for general working capital requirements,
capital expenditures and certain other permitted purposes and is payable in full
on May 25, 2002. The U.S. revolving credit line bears interest at the 30-day
LIBOR rate plus 2.75% and the Canadian revolving credit line bears interest at
the base rate as announced by the Toronto-Dominion Bank of Canada each month
plus 1.17%. As of September 30, 2000, the LIBOR rate was approximately 6.6% and
approximately $33.7 million was outstanding on the revolving credit line, which
is included in long-term debt.

Term loan A, which was used to pay off State Street Bank and Trust Company,
bears interest at the 30-day LIBOR rate plus 3.5%, is amortized in quarterly
installments over six years and is repayable in full on May 25, 2002. As of
September 30, 2000 approximately $17.4 million was outstanding on this loan.

Term loan B bears interest at the 30-day LIBOR rate plus 1.75% to 1.90%. As of
September 30, 2000, approximately $32.6 million was outstanding on this loan. On
October 17, 2000, Term loan B was terminated and the balance was transferred
into the revolving credit line.

Term loan C, which was used by our Canadian subsidiary to pay off its bank debt,
bears interest at the base rate as announced by the Toronto-Dominion Bank of
Canada each month plus 1.17%, is amortized in quarterly installments over six
years and is repayable in full on May 25, 2002. As of September 30, 2000,
Toronto-Dominion`s rate was approximately 7.5% and approximately $2.1 million
was outstanding on this loan.

The agreement contains debt covenants relating to the financial position and
performance as well as restrictions on the declarations and payment of
dividends. As of September 30, 2000, the Company was in compliance with all debt
covenants.

As of September 30, 2000, there were 82.9 million shares of Common Stock
outstanding. In addition, five hundred shares of Common Stock are reserved for
issuance in exchange for certain exchangeable shares issued by our Canadian
subsidiary. Since January 1, 2000, we have issued an aggregate of 34.6 million
shares of Common Stock, of which 2.4 million shares of Common Stock were issued
as earnout payments and puts in acquisitions, 46 thousand shares were issued in
exchange for the exchangeable shares of our Canadian subsidiary and the
exchangeable shares of our former Canadian subsidiary, TigerTel Services
Limited, 28.5 million shares of Common Stock were issued for acquisitions, 3.1
million shares were issued upon the exercise of options, 0.3 million shares were
issued upon the exercise of warrants, and 0.2 million shares were issued under
our Employee Stock Purchase Program.

Certain acquisition agreements include additional consideration contingent on
profits of the acquired subsidiary. Upon earning this additional consideration,
the value will be recorded as additional purchase price. On September 30, 2000,
under these agreements, assuming all earnout profits are achieved, we were
contingently liable for additional consideration of approximately $19.6 million
in 2001, $9.1 million in 2002 and $2.0 million in 2004, of which $1.0 million
would be payable in cash and $29.7 million would be payable in stock.

We have entered into put options with the sellers of those companies in which we
acquired less than a 100% interest. These options require us to purchase the
remaining portion we do not own after periods ranging from four to five years
from the dates of acquisition at amounts per share generally equal to 10% to 20%
of the average annual earnings per share of the acquired company before income
taxes for, generally, a two year period ending on the effective date of the put
multiplied by a multiple ranging from four to five. The purchases under these
put options are recorded as changes in minority interest based upon current
operating results.

In June 2000, we entered into agreements to issue, in the aggregate, 2.3 million
shares of our common stock, 1.6 million of which have been issued through
September 30, 2000, to acquire $10.0 million in put options and to settle
earnout payments in certain companies owned by IntelleSale. These agreements
superseded agreements entered into during the second quarter of 1999.

Our sources of liquidity include, but are not limited to, funds from operations
and funds available under the Second IBM Agreement. We may be able to use
additional bank borrowings, proceeds from the sale of non-core businesses,
proceeds from the sale of common and preferred shares, proceeds from the
exercise of stock options and warrants, and the raising of other forms of debt
or equity through private placement or public offerings. There can be no
assurance however, that these options will be available, or if available, on
favorable terms. Our capital requirements depend on a variety of factors,
including but not limited to, the rate of increase or decrease in our existing
business base; the success, timing, and amounts of investment required to bring
new products on-line; revenue growth or decline; and potential acquisitions. We
believe that we have the financial resources to meet our future business
requirements for at least the next twelve months.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Certain statements in this Form 10-Q, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
We intend that such forward-looking statements be subject to the safe harbors
created thereby.

Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: our continued ability to sustain
our growth through product development and business acquisitions; the successful
completion and integration of future acquisitions; the ability to hire and
retain key personnel; the continued development of technical, manufacturing,
sales, marketing and management capabilities, relationships with and dependence
on third-party suppliers; anticipated competition; uncertainties relating to
economic conditions where we operate; uncertainties relating to government and
regulatory policies; uncertainties relating to customer plans and commitments;
rapid technological developments and obsolescence in the industries in which we
operate and complete; potential performance issues with suppliers and customers;
governmental export and import policies; global trade policies; worldwide
political stability and economic growth; the highly competitive environment in
which we operate; potential entry of new, well-capitalized competitors into our
markets; changes in our capital structure and cost of capital; and uncertainties
inherent in international operations and foreign currency fluctuations. The
words "believe", "expect", "anticipate", "intend" and "plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.

RISK FACTORS

You should carefully consider the risk factors listed below. These risk factors
may cause our future earnings to be less or our financial condition to be less
favorable than we expect. You should read this section together with the other
information contained herein.

Forward Looking Statements and Associated Risk. This Form 10-Q contains
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. All such forward-looking information involves risks and
uncertainties and may be affected by many factors, some of which are beyond our
control. These factors include:

* our growth strategies,

* anticipated trends in our business and demographics,

* our ability to successfully integrate the business operations of recently
acquired companies, and

* regulatory, competitive or other economic influences.

We Cannot Be Certain of Future Financial Results. While we have been profitable
for the last three fiscal years, future financial results are uncertain. During
both the three and nine month periods ended September 30, 2000, we incurred net
losses. There can be no assurance that we will return to profitability which
depends upon many factors, including the success of our various marketing
programs, the maintenance or reduction of expense levels and our ability to
successfully coordinate the efforts of the different segments of our business.

Future Sales of Shares of our Common Stock Could Adversely Affect the Market
Price of Our Common Stock. As of September 30, 2000, there were 82.9 million
shares of our common stock outstanding. In addition, five hundred shares of
Common Stock are reserved for issuance in exchange for certain exchangeable
shares issued by our Canadian subsidiary. Since January 1, 2000, we have issued
an aggregate of 34.6 million shares of common stock, of which 2.4 million shares
of common stock were

issued as earnout payments and puts in acquisitions, 46 thousand shares were
issued in exchange for the exchangeable shares of our Canadian subsidiary and
the exchangeable shares of our former Canadian subsidiary, TigerTel Services
Limited, 28.5 million shares of common stock were issued for acquisitions, 3.1
million shares were issued upon the exercise of options, 0.3 million shares were
issued upon the exercise of warrants, and 0.2 million shares were issued under
our Employee Stock Purchase Program. In addition, we have entered into
additional acquisition agreements which, when completed, will result in the
issuance of approximately 11.8 million additional shares of our common stock.

We have effected, and will continue to effect, acquisitions or contract for
certain services through the issuance of common stock or our other equity
securities, as we have typically done in the past. In addition, we have agreed
to certain "price protection" provisions in prior acquisition agreements which
may result in additional shares of common stock being issued. Such issuances of
additional securities may be dilutive of the value of our common stock in
certain circumstances and may have an adverse impact on the market price of our
common stock.

Our Series C Convertible Preferred Stock. You should be aware of the following
matters relating to our Series C Convertible Preferred Stock which is described
under "Recent Developments":

* The conversion of the Series C Preferred Stock and the exercise of the related
warrants could result in a substantial number of additional shares being issued
if the market price of our common stock declines. At the earlier of 90 days
after the issuance of the Series C Preferred Stock or upon the effective date of
our registration statement relating to the common stock issuable on the
conversion of preferred stock, the holders of the Series C Preferred Stock have
the option to convert the Series C Preferred at a floating rate based on the
market price of our common stock, but the conversion price may not exceed $7.56
per share, subject to adjustment. As a result, the lower the price of our common
stock at the time of conversion, the greater the number of shares the holders of
the Series C Preferred Stock will receive.

* To the extent that shares of the Series C Preferred Stock are converted, a
significant number of shares of common stock may be sold into the market, which
could decrease the price of our common stock. In that case, we could be required
to issue an increasingly greater number of shares of our common stock upon
future conversions of the Series C Preferred Stock, sales of which could further
depress the price of our common stock.

* Upon the occurrence of certain triggering events set forth in the certificate
of designation relating to our Series C Preferred Stock, we may be required to
redeem the preferred stock at a redemption price equal to 130% of the stated
value (or $33.8 million) plus accrued dividends, if such redemption is not
prohibited by our credit agreement. In addition, under certain circumstances
during the occurrence of a triggering event, the conversion price of the
preferred stock may be reduced to 50% of the lowest closing price of our common
stock during such period. We may also be required to redeem the preferred stock
at a redemption price equal to 130% of the stated value upon a change of control
or other major transactions. If we become obligated to effect such redemption,
it could adversely affect our financial condition. If such reduction in the
conversion price occurs, it would double the number of shares of common stock
issuable on conversion.

* We may be required to delist our shares of common stock from the Nasdaq
National Market if specific events occur. In accordance with Nasdaq Rule 4460,
which generally requires shareholder approval for the issuance of securities
representing 20% or more of an issuer`s outstanding listed securities, and under
the terms of the agreement pursuant to which we sold the Series C Preferred

Stock and related warrants, we must solicit shareholder approval of the issuance
of the common stock issuable upon the conversion of the Series C Preferred Stock
and the exercise of the related warrants, at a meeting of our shareholders which
shall occur on or before June 30, 2001. If we obtain shareholder approval, the
number of shares that could be issued upon the conversion of the Series C
Preferred Stock would not be limited by the Nasdaq 20% limitation. If we do not
obtain shareholder approval and are not obligated to issue shares because of
restrictions relating to Nasdaq Rule 4460, we may be required to pay a
substantial penalty and may be required to voluntarily delist our shares of
common stock from the Nasdaq National Market. In that event, trading in our
shares of common stock could decrease substantially, and the price of our shares
of common stock may decline.

* We will be required to accrete the discount on the preferred stock through
equity. However, the accretion will reduce the income available to common
stockholders and earnings per shares. The value assigned to the warrants will
increase the discount on the preferred stock.

* We may not pay dividends on our common stock without the consent of the
holders of a majority of the shares of preferred stock.

* The holders of the preferred stock have the right to require us to issue up to
an additional $26 million in stated value of the preferred stock for an
aggregate purchase price of $20 million, at any time until ten months from the
effective date of the registration statement relating to the common stock
issuable on conversion of the initial series of the preferred stock. The
additional preferred stock will have the same preferences, qualifications and
rights as the initial preferred stock. The additional preferred stock would be
accompanied by warrants to purchase up to 0.8 million shares of our common
stock.

We Face Significant Competition. Each segment of our business is highly
competitive, and we expect that competitive pressures will continue. Many of our
competitors have far greater financial, technological, marketing, personnel and
other resources than us. The areas which we have identified for continued growth
and expansion are also target market segments for some of the largest and most
strongly capitalized companies in the United States, Canada and Europe. There
can be no assurance that we will have the financial, technical, marketing and
other resources required to compete successfully in this environment in the
future.


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Part 4:

Management`s Discussions: 10-Q, APPLIED DIGITAL SOLUTIONS INC 4 of 4

We Face Risks Associated with Acquisitions and Expansion. We have engaged in a
continuing program of acquisitions of other businesses which are considered to
be complementary to our lines of business, and we anticipate that such
acquisitions will continue to occur. Since January 1, 1995 we have made 49
acquisitions and since January 1, 2000 we have made seven acquisitions. Our
total assets were approximately $341.6 million as of September 30, 2000 and $229
million, $124 million, $61 million, $33 million and $4 million as of December
31, 1999, 1998, 1997, 1996 and 1995, respectively. Net operating revenue was
approximately $73.8 million and $107.3 million for the three months ended
September 30, 2000 and 1999, respectively, $222.9 million and $231.8 million for
the nine months ended September 30, 2000 and 1999, respectively, and $337
million, $207 million, $103 million, $20 million and $2 million for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Managing these
dramatic changes in the scope of our business will present ongoing challenges to
management, and there can be no assurance that our operations as currently
structured, or as affected by future acquisitions, will be successful.

It is our policy to retain existing management of acquired companies, under the
overall supervision of our senior management. The success of the operations of
these subsidiaries will depend, to a great extent, on the continued efforts of
the management of the acquired companies.

We have entered into earnout arrangements with certain sellers under which they
are entitled to additional consideration for their interests in the companies
they sold to us. At September 30, 2000, under these agreements, assuming that
all earnout profits are achieved, we are contingently liable for additional
consideration of approximately $19.6 million in 2001, $9.1 million in 2002 and
$2.0 million in 2004, of which $1.0 million would be payable in cash and $29.7
million would be payable in stock.

We have entered into put options with the sellers of those companies in which we
acquired less than a 100% interest. These options require us to purchase the
remaining portion we do not own after periods ranging from four to five years
from the dates of acquisition at amounts per share generally equal to 10% to 20%
of the average annual earnings per share of the acquired company before income
taxes for, generally, a two year period ending on the effective date of the put
multiplied by a multiple ranging from four to five. The purchases under these
put options are recorded as changes in minority interest based upon current
operating results.

In June 2000, we entered into agreements to issue, in the aggregate, 2.3 million
shares of our common stock, 1.6 million of which have been issued, to acquire
$10.0 million in put options and to settle earnout payments in certain companies
owned by our subsidiary, IntelleSale. These agreements superseded agreements
entered into during the second quarter of 1999.

Goodwill Amortization will Reduce Our Earnings. As a result of the acquisitions
we have completed through September 30, 2000, we have approximately $175.6
million of goodwill, approximately $23.3 million of which is deductible for tax
purposes, which is currently being amortized over 20 years at the rate of
approximately $8.8 million per year, which reduces our net income and earnings
per share. In addition, future acquisitions may also increase the existing
goodwill and the amount of annual amortization, further reducing net income and
earnings per share. Goodwill associated with the Pacific Decision Sciences
Corporation, ATEC and Connect Intelligence acquisitions recently completed
amounted to approximately $38.4 million and will be amortized over 20 years at
the rate of approximately $2.0 million per year. As required by Statement of
Financial Accounting Standards No. 121, we will periodically review our goodwill
for impairment, based on expected discounted cash flows. If we determine that
there is such impairment, we would be required to write down the amount of
goodwill accordingly, which would also reduce our earnings.

Our Need for Additional Capital Could Adversely Affect Earnings and Shareholder
Rights. We may require additional capital to fund growth of our current business
as well as to make future acquisitions. However, we may not be able to obtain
capital from outside sources. Even if we do obtain capital from outside sources,
it may not be on terms favorable to us. Our current credit agreement with IBM
Credit Corporation may hinder our ability to raise additional debt capital. In
addition, the terms of the Series C Preferred Stock and the sale of substantial
amounts of our common stock upon the conversion of the Series C Preferred may
make it more difficult for us to raise capital through the sale of equity or
equity-related securities. If we raise additional capital by issuing equity
securities, these securities may have rights, preferences or privileges senior
to those of our common shareholders.

Covenants Under Credit Agreement. We entered into an amended and restated credit
agreement with IBM Credit Corporation on October 17, 2000, which contains
various covenants relating to our financial position and performance as well as
restrictions on declaration and payment of dividends. As of June 30, 2000, we
were out of compliance with three of four financial debt covenants in our prior
agreement with IBM Credit, and we received waivers of compliance from IBM. As of
September 30, 2000 we were in compliance with the terms of the new agreement,
but we cannot assure you that we will be

able to maintain compliance with our covenants in the future. If we fail to
comply with such covenants, IBM Credit would have the right to accelerate the
maturity of our loans.

We Depend on Key Individuals. Our future success is highly dependent upon our
ability to attract and retain qualified key employees. We are organized with a
small senior management team, with each of our separate operations under the
day-to-day control of local managers. If we were to lose the services of any
members of our central management team, our overall operations could be
adversely affected, and the operations of any of our individual facilities could
be adversely affected if the services of the local managers should be
unavailable. We have entered into employment contracts with our key officers and
employees and certain subsidiaries. The agreements are for periods of one to ten
years through June 2009. Some of the employment contracts also call for bonus
arrangements based on earnings.

We Face Risks that the Value of our Inventory May Decline. We purchase and
warehouse inventory, much of which is refurbished or excess inventory of
personal computer equipment. As a result, we assume inventory risks and price
erosion risks for these products. These risks are especially significant because
personal computer equipment generally is characterized by rapid technological
change and obsolescence. These changes affect the market for refurbished or
excess inventory equipment. Our success will depend on our ability to purchase
inventory at attractive prices relative to its resale value and our ability to
turn our inventory rapidly through sales. If we pay too much or hold inventory
too long, we may be forced to sell our inventory at a discount or at a loss or
write down its value, and our business could be materially adversely affected.

We Do Not Pay Dividends on Our Common Stock. We do not have a history of paying
dividends on our common stock, and we cannot assure you that any dividends will
be paid in the foreseeable future. The Second IBM Agreement places restrictions
on the declaration and payment of dividends. In addition, we may not pay
dividends on our common stock without the consent of the holders of a majority
of the shares of the preferred stock. We intend to use any earnings which may be
generated to finance the growth of our businesses.

We May Issue Preferred Stock. Our Board of Directors has the right to authorize
the issuance of preferred stock, without further shareholder approval, the
holders of which may have preferences over the holders of our common stock as to
payments of dividends, liquidation and other matters. As described under "Recent
Developments," we issued a series of convertible preferred stock in October
2000, and have granted the purchasers the right to require us to issue
additional shares of convertible preferred stock in the future.

Our Stock Price May Continue to be Volatile. Our common stock is listed on The
Nasdaq National Market, which has experienced and is likely to experience in the
future significant price and volume fluctuations which could adversely affect
the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as the significant
changes to our business resulting from continued acquisitions and expansions,
quarterly fluctuations in our financial results or cash flows, shortfalls in
earnings or sales below expectations, changes in the performance of other
companies in our same market sectors and the performance of the overall economy
and the financial markets could cause the price of our common stock to fluctuate
substantially. During the 12 month period prior to September 30, 2000, the price
per share of our common stock has ranged from a high of $18.00 to a low of
$1.63.

We are Obligated to Make Termination Payments Upon a Change of Control. Our
employment agreements with Richard Sullivan, Garrett Sullivan and David Loppert
include change of control

provisions under which the employees may terminate their employment within one
year after a change of control and are entitled to receive specified severance
payments and/or continued compensation payments for sixty months. The employment
agreements also provide that these executive officers are entitled to
supplemental compensation payments for sixty months upon termination of
employment, even if there is no change in control, unless their employment is
terminated due to a material breach of the terms of the employment agreement.
Also, the agreements for both Richard Sullivan and Garrett Sullivan provide for
certain "triggering events," which include a change in control, the termination
of Richard Sullivan`s employment other than for cause, or if Richard Sullivan
ceases to hold his current positions with us for any reason other than a
material breach of the terms of his employment agreement. In that case, we would
be obligated to pay, in cash and/or in stock, $12.1 million and $3.5 million,
respectively, to Richard Sullivan and to Garrett Sullivan, in addition to
certain other compensation. Finally, the employment agreements provide for a
gross up for excise taxes which are payable by these executive officers if any
payments upon a change of control are subject to such taxes as excess parachute
payments.

Our obligation to make the payments described in this section could adversely
affect our financial condition or could discourage other parties from entering
into transactions with us which might be treated as a change in control or
triggering event for purposes of these agreements.

We are Involved in Litigation. We, and certain of our subsidiaries, are parties
to various legal actions as either plaintiff or defendant in the ordinary course
of business.

On April 7, 2000, we and IntelleSale filed a counterclaim against David Romano
and Eric Limont, the former owners of Bostek, Inc. and Micro Components
International Incorporated, two companies acquired by IntelleSale in June 1999,
in the U.S. District Court for the District of Delaware for, generally, breach
of contract, breach of fiduciary duty and fraud. Messrs. Romano and Limont had
filed their claim generally alleging that their earnout payment from IntelleSale
was inadequate. In July 2000, we and IntelleSale amended our counterclaim in the
U.S. District Court for the District of Delaware to seek damages for, among
other things, securities law violations. In addition, on May 19, 2000,
IntelleSale and two of its subsidiaries, Bostek, Inc. and Micro Components
International Incorporated, filed suits against Messrs. Romano and Limont in
Superior Court of Massachusetts to recover damages as a result of fraud,
misrepresentations, and breach of fiduciary duties. In July 2000, Messrs. Romano
and Limont amended their complaint in the U.S. District Court for the District
of Delaware to add a claim for $10 million for the $10 million payment not made
to them. We believe that the claims filed by Messrs. Romano and Limont are
without merit and we intend to vigorously defend against the claims. In
addition, we intend to vigorously pursue our claims against Messrs. Romano and
Limont.

While we believe that the final outcome of these proceedings will not have a
material adverse effect on our financial position, cash flows or results of
operations, we cannot assure the ultimate outcome of these actions and the
estimates of the potential future impact on our financial position, cash flows
or results of operations for these proceedings could change in the future. In
addition, we will continue to incur additional legal costs in connection with
pursuing and defending such actions.

Digital Angel may Not be Able to Develop Products From its Unproven Technology.
In December 1999, Digital Angel acquired the patent rights to a miniature
digital receiver named "Digital Angel(TM)." This technology is still in the
development stage. Digital Angel`s ability to develop and commercialize products
based on its proprietary technology will depend on its ability to develop its
products internally on a timely basis or to enter into arrangements with third
parties to provide these functions. If Digital Angel fails to develop and
commercialize products successfully and on a timely basis,

it could have a material adverse effect on Digital Angel`s business, operating
results and financial condition.

Digital Angel is Subject to Restrictions Imposed by Government Regulation.
Digital Angel is subject to federal, state and local regulation in the United
States and other countries, and it cannot predict the extent to which it may be
affected by future legislative and other regulatory developments concerning its
products and markets. Digital Angel is required to obtain regulatory approval
before marketing most of its products. Digital Angel`s readers must and do
comply with the FCC Part 15 Regulations for Electromagnetic Emissions, and its
insecticide products have been approved by the U.S. Environmental Protection
Agency and are produced under EPA regulations. Sales of insecticide products are
incidental to Digital Angel`s primary business and do not represent a material
part of its operations. Digital Angel`s products also are subject to compliance
with foreign government agency requirements. Digital Angel`s contracts with its
distributors generally require the distributor to obtain all necessary
regulatory approvals from the governments of the countries into which they sell
Digital Angel`s products. However, any such approval may be subject to
significant delays. Some regulators also have the authority to revoke approval
of previously approved products for cause, to request recalls of products and to
close manufacturing plants in response to violations. Any actions by these
regulators could materially adversely affect Digital Angel`s business.

Year 2000 Compliance. We have not experienced any significant internal Year 2000
related problems. During 1998 and 1999, we implemented a company wide program to
ensure that our internal systems would be compliant prior to the Year 2000
failure dates. We have not experienced any Year 2000 compliance problems.
However, we cannot make any assurances that unforeseen problems may not arise in
the future.

Software Sold to Customers. During 1998 and 1999, we identified what we believe
to be all potential Year 2000 problems with any of the software products we
develop and market. However, our management believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting our
software products have been identified or corrected due to the complexity of
these products. In addition, these products interact with other third party
vendor products and operate on computer systems which are not under our control.
For non-compliant products, we have provided and are continuing to provide
recommendations as to how an organization may address possible Year 2000 issues
regarding that product. Software updates are available for most, but not all,
known issues. Such information is the most currently available concerning the
behavior of our products and is provided "as is" without warranty of any kind.
However, variability of definitions of "compliance" with the Year 2000 and of
different combinations of software, firmware and hardware has led to, and could
lead to further lawsuits against us. The outcome of any such lawsuits and the
impact on us is not estimable at this time.

We do not believe that the Year 2000 problem has had or will continue to have a
material adverse effect on our business, results of operations or cash flows.
The estimate of the potential impact on our financial position, overall results
of operations or cash flows for the Year 2000 problem could change in the
future. Our ability to achieve Year 2000 compliance and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the availability and cost of programming and testing resources, a vendor`s
ability to modify proprietary software, and unanticipated problems identified in
the ongoing compliance review. The discussion of our efforts, and management`s
expectations, relating to Year 2000 compliance are forward-looking statements.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The statement is effective for fiscal years
commencing after June 15, 2000. In June 2000, the FASB issued FAS 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FAS statement 133, which addresses implementation issues
experienced by those companies that adopted FAS 133 early. We will adopt FAS
133, as well as its amendments and interpretations, in fiscal year 2001. We do
not believe that FAS 133 will have a material impact on our results of
operations, cash flows and financial condition.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. This Staff Accounting Bulletin
summarizes certain of the staff`s views on applying Generally Accepted
Accounting Principles to revenue recognition in financial statements. On June
26, 2000, the SEC staff issued SAB No. 101B, which delays the implementation
date of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. Therefore, we will adopt this statement no
later than the fourth quarter of 2000. We do not believe that SAB 101 will have
a material impact on our results of operations, cash flows and financial
condition.

In September 2000, the EITF reached a consensus in EITF Issues 00-10,
"Accounting for Shipping and Handling Fees and Costs," agreeing that shipping
and handling fees must be classified as revenues and comparable prior periods
should be restated. Further, they agreed that shipping and handling costs can be
classified anywhere in the statement of earnings, except they cannot be netted
against sales. If shipping and handling costs are not included in costs of goods
sold, the amount and classification of these expenses must be disclosed in the
footnotes to the financial statements. This consensus must be adopted no later
than the fourth quarter of fiscal years beginning after December 15, 1999.
Therefore, we will adopt EITF Issue 00-10 in the fourth quarter of 2000. We do
not anticipate that the adoption of EITF Issue 00-10 will have a material impact
on our results of operations, cash flows and financial condition.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

With our Canadian and United Kingdom subsidiaries, we have operations and sales
in various regions of the world. Additionally, we may export and import to and
from other countries. Our operations may therefore be subject to volatility
because of currency fluctuations, inflation and changes in political and
economic conditions in these countries. Sales and expenses may be denominated in
local currencies and may be affected as currency fluctuations affect our product
prices and operating costs or those of our competitors.

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. Borrowings under the Second IBM Agreement are
at the London Interbank Offered Rate which is adjusted monthly. Our interest
income is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term
investments.

Due to the nature of our borrowings and our short-term investments, we have
concluded that there is no material market risk exposure and, therefore, no
quantitative tabular disclosures are required.


(c) 1995-1999 Cybernet Data Systems, Inc. All Rights Reserved.

Received by Edgar Online: Nov. 14, 2000

CIK Code: 0000924642
SEC Accession Number: 0001068800-00-500018




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