**As filed with the Securities and Exchange Commissionon July 23 2002**

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D. C.  20549

# ****

# **FORM 10–Q/A**

 

| **(Mark  One)** |   |                                                                                                                                   |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                   |
| **ý**      |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF**                                                                               |
|            |   | **THE SECURITIES EXCHANGE ACT OF 1934.**                                                                                               |
|            |   |                                                                                                                                   |
|            |   | **For  the quarterly period ended March 31, 2002**                                                                                     |
|            |   | **or**                                                                                                                                 |
| **o**           |   | **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: 1-15177**

 

**DIGITAL ANGELCORPORATION**(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                   |   | **52-1233960**                     |
|----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (IRS Employer  Identification No.) |

**490 Villaume AvenueSouth Saint Paul, Minnesota 55075(651) 455-1621**(Address, including zip code, and telephone number,including area code, of registrant’s principal executive offices)

 

**Medical Advisory Systems, Inc., 8050Southern Maryland Blvd., Owings, Maryland, 20736  October 31**

(Former name, former address and former fiscal year, if changed sincelast report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch 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         ý            No           o

The number ofshares outstanding of each of the issuer’s classes of common stock as of theclose of business on May 7, 2002:

 

| **Class**                      |   | **Number of Shares** |
|--------------------------------|--------|----------------------|
| Common Stock;  $.005 Par Value |   | 26,320,311           |
|                           |   |                 |
|                           |   |                 |
|                           |   |                 |

 

 

 

 

1

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**EXPLANATORYNOTE**

This Amendment No.1 to Quarterly Report on Form 10Q/A amends and restates Part I, Items I and IIof the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter endedMarch 31, 2002, filed by the Registrant on May 20, 2002.  On May 15, 2002, the Registrant filed a Notificationof Late Filing on Form 12b-25. On May 14, 2002, Grant Thornton LLP notified theRegistrant that it was resigning as the Registrants certifying publicaccountant prior to completion of its review of the Registrants QuarterlyReport on Form 10-Q for the quarter ended March 31, 2002. Grant Thorntoninformed the Registrant that it was resigning as a result of disagreementbetween Grant Thornton and Applied Digital Solutions, Inc. (ADS), thebeneficial owner of approximately 77% of the Registrants issued and outstandingcommon stock, concerning ADSs financial statements for the quarter ended March31, 2002.   Grant Thornton LLP advisedthe Company that it has not completed its review of the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2002, and should not beassociated with that report in any way. Due to the timing of the resignation, the Registrant had not engaged anoutside auditing firm to replace Grant Thornton LLP.  As a result of the foregoing, the interim financial statementscontained in the Company’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2002, as filed on May 20, 2002, had not been reviewed by anindependent public accountant as required pursuant to Rule 10-01(d) ofRegulation S-X (SAS 71 review). Subsequently, the Registrant engaged Eisner LLP as its outside auditingfirm.  Eisner LLP has performed andcompleted its SAS 71 review of the Registrant’s first quarter financialstatements and, accordingly, the Registrant is filing this amended Form 10-Q/Ato present the reviewed financial statements.

The Registrants firstquarter results as reported on Form 10-Q/A for the fiscal quarter ended March31, 2002, reflect certain significant changes from the original Quarterlyreport on Form 10-Q for the same period. The impact of the changes is to increase net loss from the originalamount of $21.8 million as previously reported to $22.5 million as reported onthis amended Form 10-Q/A.  The followingdiscloses the differences between the originally filed Form 10-Q for thequarter ended March 31, 2002 and the results reported on the amended Form10-Q/A for the same period.

 

 

|                                                     |   | **(In  thousands)** |    |
|----------------------------------------------------------|--------|---------------------|---------|
| Net loss as originally reported                          |   | $                   | (21,824 | ) |
| Equity in net loss of affiliate                          |   | (234                | )       |
| Miscellaneous accruals and inventory adjustment          |   | (299                | )       |
| Option valuation                                         |   | (172                | )       |
| Amortization of intangible                               |   | (47                 | )       |
| Allocation of interest from Parent and minority interest |   | 65                  |    |
| Net loss amended                                         |   | $                   | (22,511 | ) |
|                                                     |   |                |    |   |
| Loss per share, as reported                              |   | $                   | (1.07   | ) |
| Change                                                   |   |                | (.11    | ) |
| Loss per share, amended                                  |   | $                   | (1.18   | ) |

 

The impact of the accounting changes and adjustments on the condensedconsolidated balance sheets is to decrease total assets from $145.4 million to$131.3 million, decrease total liabilities from $12.9 million to $11.1millionand to decrease stockholders’ equity from $132.1 million to $119.8 million

 

The $14.1 million decrease in assets includes the $12.7 milliondecrease in goodwill, $0.9 million decrease in accounts receivable, and a $0.7million decrease in investments in affiliates. The $1.8 million decrease inliabilities includes a decrease in accounts payable and accrued expenses. The$12.3 million decrease in stockholders’ equity is caused by the items describedabove.

 

Net loss previously reported for the three months ended March 31, 2001was restated from a net loss of $1,912 to a net loss of $2,011 to reflect arevision in expenses of a foreign subsidiary.

 

 

2

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**DIGITAL ANGEL CORPORATION**

 

TABLE OF CONTENTS

 

 
| **Item**  | **Description**                                                                                                                                      |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                 |
|      | PART I — FINANCIAL  INFORMATION                                                                                                                 |
|      |                                                                                                                                                 |
| 1.        | Financial Statements                                                                                                                                 |
|      | Independent  Accountants Review Report                                                                                                               |
|      | Condensed Balance Sheets as  of   March 31, 2002 (unaudited) (as restated) and December 31, 2001                                                     |
|      | Condensed Statements  of Operations — for the   three months ended March 31, 2002 (unaudited) (as restated) and 2001 (unaudited)  (as restated) |
|      | Condensed  Statement of Stockholders’ Equity — for the   three months ended March 31, 2002 (unaudited) (as restated)                       |
|      | Condensed Statements  of Cash Flows — for the  three months ended March 31, 2002 (unaudited) (as restated) and 2001 (unaudited)  (as restated)  |
|      | Notes to  Condensed Financial Statements                                                                                                             |
| 2.        | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations                                                    |
| 3.        | Quantitative  and Qualitative Disclosures About Market Risk                                                                                          |
|      |                                                                                                                                                 |
|      | PART  II — OTHER INFORMATION                                                                                                                    |
|      |                                                                                                                                                 |
| 1.        | Legal Proceedings                                                                                                                                    |
| 2.        | Changes  In Securities and Use of Proceeds                                                                                                           |
| 3.        | Defaults Upon  Senior Securities                                                                                                                     |
| 4.        | Submission  of Matters to a Vote of Security Holders                                                                                                 |
| 5.        | Other Information                                                                                                                                    |
| 6.        | Exhibits and  Reports on Form 8-K                                                                                                                    |
|      |                                                                                                                                                 |
| SIGNATURE |
| EXHIBITS  |

 

 

3

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INDEPENDENT ACCOUNTANTS REVIEW REPORT

 

To the Board of Directors and Stockholders of Digital AngelCorporation:

 

We have reviewed the accompanying condensed consolidated balance sheetof Digital Angel Corporation and subsidiaries as of March 31, 2002, and the relatedcondensed consolidated statements of operations, stockholders’ equity, and cashflows for the three-month period then ended. We have also reviewed the combined statements of operations and cashflows of the Advanced Wireless Group (predecessor of Digital Angel Corporation)for the three-month period ended March 31, 2001.  These condensed consolidated financial statements are theresponsibility of the Company’s management.

 

We conducted our reviews in accordance with standards established bythe American Institute of Certified Public Accountants.  A review of interim financial informationconsists principally of applying analytical procedures to financial data andmaking inquiries of persons responsible for financial and accountingmatters.  It is substantially less inscope than an audit conducted in accordance with auditing standards generallyaccepted in the United States of America, the objective of which is theexpression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to the accompanying financial statements as of and for thethree-month period ended March 31, 2002 and 2001 for them to be in conformitywith accounting principles generally accepted in the United States of America.

 

As disclosed in Note 1, the Company has restated its financialstatements.

 

As discussed in Note 1, certain conditions indicatethat the Company may be unable to continue as a going concern.  The accompanying financial statements do notinclude any adjustments to the financial statements that might be necessaryshould the Company be unable to continue as a going concern.

 

Eisner LLP

New York, New York

July 15, 2002

 

 

4

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PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements.

 

**DIGITAL ANGEL CORPORATION AND SUBSIDIARIES****CONDENSEDBALANCE SHEETS**(In thousands, except par value)

 
|                                                                                                                                                                              |   | **Digital Angel**   |        |              |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|-------------------|------------|
|                                                                                                                                                                              |   | **Corporation and** |        |              |       |
|                                                                                                                                                                              |   | **Subsidiaries**    |        | **Advanced**      |       |
|                                                                                                                                                                              |   | **(Consolidated)**  |        | **Wireless**      |       |
|                                                                                                                                                                              |   | **March 31,**       |        | **Group**         |       |
|                                                                                                                                                                              |   | **2002**            |        | **(Combined)**    |       |
|                                                                                                                                                                              |   | **(As Restated**    |        | **December  31,** |       |
|                                                                                                                                                                              |   | **See Note 1)**     |        | **2001**          |       |
|                                                                                                                                                                              |   | **(Unaudited)**     |        |              |       |
| **Assets**                                                                                                                                                                        |   |                |        |              |       |
| **Current  Assets**                                                                                                                                                               |   |                |        |              |       |
| Cash and cash  equivalents                                                                                                                                                        |   | **$**               | **882**     |              | $          | 596 |   |
| Accounts  receivable and unbilled receivables (net of allowance for doubtful accounts  of $403 in 2002 and $296 in 2001)                                                          |   | **4,590**           |        | 5,402             |       |
| Inventories                                                                                                                                                                       |   | **5,939**           |        | 5,819             |       |
| Due from Applied  Digital Solutions, Inc.                                                                                                                                         |   | **108**             |        | -                 |       |
| Other current  assets                                                                                                                                                             |   | **1,328**           |        | 733               |       |
| **Total  Current Assets**                                                                                                                                                         |   | **12,847**          |        | 12,550            |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Property  And Equipment, net**                                                                                                                                                  |   | **15,333**          |        | 14,476            |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Goodwill,  net**                                                                                                                                                                |   | **102,262**         |        | 72,876            |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Investment  In Affiliates**                                                                                                                                                     |   | **256**             |        | 6,779             |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Other  Assets, net**                                                                                                                                                            |   | **596**             |        | 698               |       |
|                                                                                                                                                                              |   |                |        |              |       |
|                                                                                                                                                                              |   | **$**               | **131,294** |              | $          | 107,379 |   |
|                                                                                                                                                                              |   |                |        |              |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                    |   |                | ** **  |              | ** ** |
|                                                                                                                                                                              |   |                |        |              |       |
| **Current  Liabilities**                                                                                                                                                          |   |                |        |              |       |
| Notes payable  and current maturities of long-term debt                                                                                                                           |   | **$**               | **254**     |              | $          | 82,643 |   |
| Accounts payable                                                                                                                                                                  |   | **4,117**           |        | 3,757             |       |
| Accrued expenses                                                                                                                                                                  |   | **4,373**           |        | 2,044             |       |
| **Total  Current Liabilities**                                                                                                                                                    |   | **8,744**           |        | 88,444            |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Long-Term  Debt And Notes Payable**                                                                                                                                             |   | **2,429**           |        | 2,425             |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Total  Liabilities**                                                                                                                                                            |   | **11,173**          |        | 90,869            |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Commitments  And Contingencies**                                                                                                                                                |   | **-**               |        | -                 |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Minority  Interest**                                                                                                                                                            |   | **353**             |        | 394               |       |
|                                                                                                                                                                              |   |                |        |              |       |
| **Stockholders’  Equity (See Note 1)**                                                                                                                                       |   |                |        |              |       |
| Preferred  shares: Authorized 1,000 in 2002, of $1.75 par value, no shares issued or  outstanding                                                                                 |   | **-**               |        | -                 |       |
| Common shares:  Authorized 95,000 shares in 2002, of $.005 parvalue; 25,493 shares issued and 25,443  shares outstanding in 2002and 18,750 shares issued and  outstanding in 2001 |   | **127**             |        | 94                |       |
| Additional  paid-in capital                                                                                                                                                       |   | **162,770**         |        | 37,929            |       |
| Accumulated  deficit                                                                                                                                                              |   | **(44,211**         | )           | (21,700           | )          |
| Common stock  warrants                                                                                                                                                            |   | **1,638**           |        | 300               |       |
| Treasury stock  (carried at cost, 50 shares in 2002)                                                                                                                              |   | **(43**             | )           | -                 |       |
| Accumulated  other comprehensive loss                                                                                                                                             |   | **(513**            | )           | (507              | )          |
| Total  Stockholders’ Equity                                                                                                                                                  |   | **119,768**         |        | 16,116            |       |
|                                                                                                                                                                              |   |                |        |              |       |
|                                                                                                                                                                              |   | **$**               | **131,294** |              | $          | 107,379 |   |

 

 

See the accompanying notes to condensedfinancial statements.

 

 

5

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**DIGITAL ANGEL CORPORATION ANDSUBSIDIARIES****CONDENSEDSTATEMENTS OF OPERATIONS**

(Inthousands, except per share data)

(Unaudited)

 
|                                                                      |   | **Digital Angel**               |      | **Advanced**     |   |
|---------------------------------------------------------------------------|--------|---------------------------------|-----------|------------------|--------|
|                                                                      |   | **Corporation and**             |      | **Wireless**     |   |
|                                                                      |   | **Subsidiaries**                |      | **Group**        |   |
|                                                                      |   | **(Consolidated)**              |      | **(Combined)**   |   |
|                                                                      |   | **(As Restated**                |      | **(As Restated** |   |
|                                                                      |   | **See Note 1)**                 |      | **See Note 1)**  |   |
|                                                                      |   | **For the Three   Months** |      |
|                                                                      |   | **Ended March 31,**             |      |
|                                                                      |   | **2002**                        |      | **2001**         |   |
|                                                                      |   |                            |      |             |   |
| Product revenue                                                           |   | **$**                           | **7,451** |             | $      | 9,134 |   |
| Service revenue                                                           |   | **303**                         |      | 1,070            |   |
| Total net  revenue                                                        |   | **7,754**                       |      | 10,204           |   |
|                                                                      |   |                            |      |             |   |
| Cost of products  sold                                                    |   | **4,300**                       |      | 5,361            |   |
| Cost of services  sold                                                    |   | **251**                         |      | 549              |   |
|                                                                      |   |                            |      |             |   |
| Gross profit                                                              |   | **3,203**                       |      | 4,294            |   |
|                                                                      |   |                            |      |             |   |
| Selling, general  and administrative expenses                             |   | **21,341**                      |      | 2,501            |   |
| Management fees  - Applied Digital Solutions, Inc.                        |   | **193**                         |      | 193              |   |
| Research and  development expenses                                        |   | **1,331**                       |      | 1,084            |   |
| Depreciation and  amortization                                            |   | **735**                         |      | 2,359            |   |
| Interest income                                                           |   | **-**                           |      | (3               | )      |
| Interest expense  - Applied Digital Solutions, Inc.                       |   | **1,806**                       |      | -                |   |
| Interest expense  - others                                                |   | **58**                          |      | 59               |   |
|                                                                      |   |                            |      |             |   |
| Loss before  taxes, minority interestand equity in net loss of affiliate  |   | **(22,261**                     | )         | (1,899           | )      |
|                                                                      |   |                            |      |             |   |
| Provision for  income taxes                                               |   | **-**                           |      | 115              |   |
|                                                                      |   |                            |      |             |   |
| Loss before  minority interest,and equity in net loss of affiliate        |   | **(22,261**                     | )         | (2,014           | )      |
|                                                                      |   |                            |      |             |   |
| Minority  interest                                                        |   | **(41**                         | )         | (21              | )      |
|                                                                      |   |                            |      |             |   |
| Equity in net  loss of affiliate                                          |   | **291**                         |      | 18               |   |
|                                                                      |   |                            |      |             |   |
| Net loss                                                                  |   | **(22,511**                     | )         | (2,011           | )      |
|                                                                      |   |                            |      |             |   |
| Net loss per  common share - basic and diluted                            |   | **$**                           | **(1.18** | )                | $      | (0.11 | ) |
|                                                                      |   |                            |      |             |   |
| Weighted average  number of common shares outstanding - basic and diluted |   | **19,063**                      |      | 18,750           |   |

 

Seethe accompanying notes to condensed financial statements.

 

6

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**DIGITAL ANGEL CORPORATION ANDSUBSIDIARIES**

 

**CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITYAs Restated See Note 1For The Three Months Ended March 31, 2002**(In Thousands)(Unaudited)

 

 
|                                                 |   |             |       |        |    |            |   |        |       |         |        |              |   | **Accumulated**   |       |       |    |
|------------------------------------------------------|--------|------------------|------------|-------------|---------|-----------------|--------|-------------|------------|--------------|-------------|-------------------|--------|-------------------|------------|------------|---------|
|                                                 |   |             |       |        |    | **Additional**  |   |        |       | **Common**   |        |              |   | **Other**         |       | **Total**  |    |
|                                                 |   | **Common Stock** |       | **Paid-In** |    | **Accumulated** |   | **Stock**   |       | **Treasury** |        | **Comprehensive** |   | **Stockholders'** |       |
|                                                 |   | **Number**       |       | **Amount**  |    | **Capital**     |   | **Deficit** |       | **Warrants** |        | **Stock**         |   | **Loss**          |       | **Equity** |    |
|                                                 |   |             |       |        |    |            |   |        |       |         |        |              |   |              |       |       |    |
| **Balance - December 31, 2001**                      |   | 18,750           |       | $           | 94      |            | $      | 37,929      |       | $            | (21,700     | )                 | $      | 300               |       | $          | -       |   | $ | (507 | ) | $ | 16,116 |   |
| Net loss                                             |   | -                |       | -           |    | -               |   | (22,511     | )          | -            |        | -                 |   | -                 |       | (22,511    | )       |
| Comprehensive loss -Foreign currency translation     |   | -                |       | -           |    | -               |   | -           |       | -            |        | -                 |   | (6                | )          | (6         | )       |
| Total comprehensive loss                             |   | -                |       | -           |    | -               |   | (22,511     | )          | -            |        | -                 |   | (6                | )          | (22,517    | )       |
| Transfer of MAS common shares to ADS                 |   | -                |       | -           |    | (6,488          | )      | -           |       | -            |        | -                 |   | -                 |       | (6,488     | )       |
| Contribution by ADS                                  |   | -                |       | -           |    | 2,789           |   | -           |       | -            |        | -                 |   | -                 |       | 2,789      |    |
| Exercise of stock options                            |   | 1,437            |       | 7           |    | 88              |   | -           |       | -            |        | -                 |   | -                 |       | 95         |    |
| Shares to be issued in settlement of liability       |   | 38               |       | -           |    | 225             |   | -           |       | -            |        | -                 |   | -                 |       | 225        |    |
| Merger consideration - MedicalAdvisory Systems, Inc. |   | 5,268            |       | 26          |    | 28,163          |   | -           |       | 272          |        | (43               | )      | -                 |       | 28,418     |    |
| Assumption of debt by ADS                            |   | -                |       | -           |    | 81,383          |   | -           |       | -            |        | -                 |   | -                 |       | 81,383     |    |
| Stock options remeasured in connectionwith merger    |   | -                |       | -           |    | 18,681          |   | -           |       | -            |        | -                 |   | -                 |       | 18,681     |    |
| Warrants remeasured in connectionwith merger         |   | -                |       | -           |    | -               |   | -           |       | 1,066        |        | -                 |   | -                 |       | 1,066      |    |
|                                                 |   |             |       |        |    |            |   |        |       |         |        |              |   |              |       |       |    |
| **Balance - March 31, 2002**                         |   | **25,493**       | ** ** | **$**       | **127** | ** **      | **$**  | **162,770** | ** ** | **$**        | **(44,211** | **)**             | **$**  | **1,638**         | ** ** | **$**      | **(43** | **)** | **$** | **(513** | **)** | **$** | **119,768** | ** ** |
|                                                      |        |                  |            |             |         |                 |        |             |            |              |             |                   |        |                   |            |            |         |  |  |  |  |  |  |  |  |  |

 

 

See the accompanying notes to condensedfinancial statements.

 

7

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**DIGITAL ANGEL CORPORATION ANDSUBSIDIARIES**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

(Inthousands)(Unaudited)

 
|                                                                        |   | **Digital Angel**               |        | **Advanced**     |   |
|-----------------------------------------------------------------------------|--------|---------------------------------|-------------|------------------|--------|
|                                                                        |   | **Corporation and**             |        | **Wireless**     |   |
|                                                                        |   | **Subsidiaries**                |        | **Group**        |   |
|                                                                        |   | **(Consolidated)**              |        | **(Combined)**   |   |
|                                                                        |   | **(As Restated**                |        | **(As Restated** |   |
|                                                                        |   | **See Note 1)**                 |        | **See Note 1)**  |   |
|                                                                        |   | **For the Three   Months** |        |
|                                                                        |   | **Ended March 31,**             |        |
|                                                                        |   | **2002**                        |        | **2001**         |   |
| **Cash  Flows From Operating Activities**                                   |   |                            |        |             |   |
| Net loss                                                                    |   | **$**                           | **(22,511** | )                | $      | (2,011 | ) |
|                                                                        |   |                            |        |             |   |
| Adjustments to  reconcile net loss to net cashused in operating activities: |   |                            |        |             |   |
| Non-cash compensation  expense                                              |   | **18,681**                      |        | -                |   |
| Interest  allocated by ADS and contributed to capital                       |   | **1,806**                       |        | -                |   |
| Deferred income  taxes                                                      |   | **-**                           |        | 34               |   |
| Depreciation and  amortization                                              |   | **735**                         |        | 2,359            |   |
| Minority  interest                                                          |   | **(41**                         | )           | (21              | )      |
| Equity in net  loss of affiliate                                            |   | **291**                         |        | 18               |   |
| Loss on sale of  equipment                                                  |   | **75**                          |        | 7                |   |
| Change in assets  and liabilities:                                          |   |                            |        |             |   |
| Decrease  (increase) in accounts receivable                                 |   | **1,086**                       |        | (485             | )      |
| Increase in  inventories                                                    |   | **(53**                         | )           | (418             | )      |
| Increase in  other current assets                                           |   | **716**                         |        | (221             | )      |
| Increase in due  from ADS                                                   |   | **(108**                        | )           |             |   |
| (Decrease)  increase in accounts payable andaccrued expenses                |   | **(338**                        | )           | 768              |   |
| **Net  Cash Used In Operating Activities**                                  |   | **(180**                        | )           | 30               |   |
|                                                                        |   |                            |        |             |   |
| **Cash  Flows From Investing Activities**                                   |   |                            |        |             |   |
| Decrease in  other assets                                                   |   | **52**                          |        | 143              |   |
| Payments for  property and equipment                                        |   | **(200**                        | )           | (653             | )      |
| Cash acquired  through acquisition, netof acquisition costs                 |   | **218**                         |        | -                |   |
| **Net  Cash Provided By (Used In) Investing Activities**                    |   | **70**                          |        | (510             | )      |
|                                                                        |   |                            |        |             |   |
| **Cash  Flows From Financing Activities**                                   |   |                            |        |             |   |
| Net amounts  borrowed on notes payable                                      |   | **7**                           |        | 36               |   |
| Payments on  long-term debt                                                 |   | **(17**                         | )           | -                |   |
| Other financing  costs                                                      |   | **-**                           |        | (10              | )      |
| Exercise of  stock options                                                  |   | **95**                          |        |             |   |
| Net transactions  with Applied Digital Solutions, Inc.                      |   | **682**                         |        | 276              |   |
| **Net  Cash Provided By Financing Activities**                              |   | **767**                         |        | 302              |   |
|                                                                        |   |                            |        |             |   |
| **Net  Increase (Decrease) In Cash And Cash Equivalents**                   |   | **286**                         |        | (178             | )      |
|                                                                        |   |                            |        |             |   |
| **Cash  And Cash Equivalents - Beginning Of Period**                        |   | **596**                         |        | 206              |   |
|                                                                        |   |                            |        |             |   |
| **Cash  And Cash Equivalents - End Of Period**                              |   | **$**                           | **882**     |             | $      | 28 |   |

 

 

Seethe accompanying notes to condensed consolidated financial statements.

 

8

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**DIGITAL ANGEL CORPORATIONNOTES TO FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited)**

**1.         Basis of Presentation**

On March 27, 2002,Digital Angel Acquisition Co. (“Acquisition”), then a wholly-owned subsidiaryof Medical Advisory Systems, Inc. (“MAS”), merged with and into Digital AngelCorporation (“Digital Angel”), which was then a 93% owned subsidiary of AppliedDigital Solutions, Inc. (“ADS”).  In themerger, the corporate existence of Acquisition ceased, Digital Angel became awholly-owned subsidiary of MAS, and MAS was renamed “Digital AngelCorporation”.  In connection with themerger transaction, ADS contributed to MAS all of its stock in TimelyTechnology Corp., a wholly-owned subsidiary, and Signature Industries, Limited,an 85% owned subsidiary.  These twosubsidiaries along with Digital Angel comprised the Advanced Wireless Group(“AWG”).  As a result of thiscontribution by ADS, Timely Technology Corp. became a wholly-owned subsidiaryof the Company and Signature Industries, Limited became an 85% subsidiary.  Prior to the merger with Digital Angel, ADSowned 850,000 shares of MAS stock representing approximately 16.6% of theoutstanding stock of MAS.  (The terms“Company” and “Registrant” mean Digital Angel Corporation and itssubsidiaries.)  In the merger, theshares of Digital Angel owned by ADS were converted into a total of 18,750,000shares of MAS common stock.  As a resultof the merger, ADS owned 19,600,000 shares or 77.15% of the Company’s commonstock.  In connection with the merger,ADS transferred to Digital Angel Share Trust all shares of the MAS common stockowned by ADS. The trust is the owner of and, through its Advisory Board, votesall shares of MAS owned by ADS, including all shares of MAS issued to ADS inconsideration of the MAS merger, and has the ability to elect the Board ofDirectors of the Company. The Trust arose as a condition of the merger. Inconnection with certain obligations of ADS the shares owned by the Trust may besold or otherwise disposed of to satisfy such obligations.  Additionally, the Company has certaincovenant obligations in connection with the ADS obligations (see Note 8).

The merger has beentreated as a reverse acquisition for accounting purposes, with AWG treated asthe accounting acquirer.  The historicalcombined financial statements of AWG became those of the Registrant, and theassets and liabilities of MAS were accounted for as required under the purchasemethod of accounting.  Although theequity accounts of AWG survive the merger, the capital structure of MASsurvives the merger.  Accordingly, theequity accounts of AWG have been restated based on the common shares receivedby the former shareholders of AWG in the merger.

On March 27, 2002, ADSamended and restated its debt agreement with IBM Credit Corporation, which,among other amendments, provided for a release of AWG from the responsibilityto repay an existing obligation.  Accordingly,ADS assumed this obligation, which resulted in an increase to additionalpaid-in capital of $81.3 million net of deferred financing fees ofapproximately $1.1 million on March 27, 2002.

Pursuant to the terms ofthe merger agreement, options to acquire shares of Digital Angel common stockwere converted into options to acquire shares of MAS common stock effectiveMarch 27, 2002. The conversion resulted in a new measurement date for theoptions and, as a result, the Company recorded a charge of approximately $18.7million in non-cash compensation expense during the three months ended March31, 2002. For current employees of the Company, these options are consideredfixed awards under APB Opinion No. 25, and expense was recorded for theintrinsic value of the options converted. For all others, expense was recorded for the fair value of the optionsconverted using the Black-Scholes option-pricing model.

The accompanying unaudited consolidated financial statements of DigitalAngel Corporation and subsidiaries as of and for the three months ended March31, 2002 and the combined financial statements of AWG as of December 31,2001 and for the three months ended March 31, 2001 (unaudited) have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X under the SecuritiesExchange Act of 1934.

 

9

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Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofthe Company’s management, all adjustments (including normal recurringadjustments) considered necessary to present fairly the financial statementshave been made.

The consolidatedstatements of operations for the three months ended March 31, 2002 are notnecessarily indicative of the results that may be expected for the entireyear.  These statements should be readin conjunction with the AWG’s combined financial statements and related notesthereto for the year ended December 31, 2001 included as an exhibit to our Form8-K/A filed with the Securities and Exchange Commission on July 19, 2002.

Certain items inthe combined financial statements for the 2001 period have been reclassifiedfor comparative purposes.

Net losspreviously reported for the three months ended March 31, 2001 was restated froma net loss of $1,912 to a net loss of $2,011 to reflect a revision in expensesof a foreign subsidiary.

The Company hasmade certain adjustments to the quarter ending March 31, 2002 results fromthose previously reported.

The followingdiscloses the differences between the originally filed Form 10-Q for thequarter ended March 31, 2002 and the results reported on the amended Form10-Q/A for the same period.

 

 

|                                                     |   | **(In  thousands)** |    |
|----------------------------------------------------------|--------|---------------------|---------|
| Net loss as originally reported                          |   | $                   | (21,824 | ) |
| Equity in net loss of affiliate                          |   | (234                | )       |
| Miscellaneous accruals and inventory adjustment          |   | (299                | )       |
| Option valuation                                         |   | (172                | )       |
| Amortization of intangible                               |   | (47                 | )       |
| Allocation of interest from Parent and minority interest |   | 65                  |    |
| Net loss as amended                                      |   | $                   | (22,511 | ) |
|                                                     |   |                |    |   |
| Loss per share, as reported                              |   | $                   | (1.07   | ) |
| Change                                                   |   |                | (.11    | ) |
| Loss per share, amended                                  |   | $                   | (1.18   | ) |

 

The impact of the accounting changes and adjustmentson the condensed consolidated balance sheets is to decrease total assets from$145.4 million to $131.3 million, decrease total liabilities from $12.9 millionto $11.1million and to decrease stockholders’ equity from $132.1 million to$119.8 million

 

The $14.1 million decrease in assets includes the$12.7 million decrease in goodwill, $0.9 million decrease in accountsreceivable, and a $0.7 million decrease in investments in affiliates   The $1.8 million decrease in liabilitiesincludes a decrease in accounts payable and accrued expenses.  The items described above cause the $12.3million decrease in stockholders’ equity.

 

                Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company has suffered significant losses from operations and has notgenerated positive cash flows from operations. Additionally, the Company does not have an available line of credit.  These factors raise substantial doubt aboutthe Company’s ability to continue as a going concern.  The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.  The Company has conducted discussions withseveral banks regarding a credit facility.

 

 

10

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Our capital requirements depend on a variety offactors, including, but not limited to, the rate of increase or decrease in itsexisting business base; the success, timing, and amount of investment requiredto bring new products on-line; revenue growth or decline; and potentialacquisitions. Providing we are successful in obtaining the credit facility andin raising additional equity capital, of which there can be no assurance,management believes that we will have the financial resources to meet itsfuture business requirements for at least the next twelve months.

 

 

                The financial information in these financialstatements includes an allocation of expenses incurred by ADS on behalf of theCompany as discussed in Note 8. However, these financial statements may not necessarily be indicative ofthe results that may have occurred had AWG been a separate, independent entityduring the periods presented or of future results of the Company.

 

**Accounting Changes**

Effective January1, 2002, the Company adopted Statement of Financial Accounting Standard No.142, Goodwill and Other Intangible Assets (FAS 142).  FAS 142 requires that goodwill and certain intangibles no longerbe amortized but instead tested for impairment at least annually.  There was no impairment of goodwill uponadoption of FAS 142.  However, there canbe no assurance that future goodwill impairment tests will not result inimpairment charges.

The followingtable presents the impact of FAS 142 on net income (loss) and net income (loss)per share had the standard been in effect for the three months ended March 31,2001:

|                                               |   | **Three**           |   |
|----------------------------------------------------|--------|---------------------|--------|
|                                               |   | **Months  Ended**   |   |
|                                               |   | **March 31,  2001** |   |
| **Net income (loss):**                             |   |                |   |
| Net loss as restated                               |   | $                   | (2,011 | ) |
| Goodwill amortization                              |   | 1,935               |   |
| Equity method investment amortization              |   | 113                 |   |
| Adjusted net income                                |   | $                   | 37     |   |
|                                               |   |                |   |
| **Basis and diluted income (loss) per share:**     |   |                |   |
| Net loss per share, basis and diluted, as reported |   | $                   | (0.11  | ) |
| Goodwill amortization                              |   | 0.10                |   |
| Equity method investment amortization              |   | 0.00                |   |
| Adjusted net income per share, basic and diluted   |   | $                   | 0.01   |   |

Amortizationexpense of other intangible assets totaled $64 and $10 for the three monthsended March 31, 2002 and 2001, respectively.

 

 

11

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**2.             Principlesof Consolidation and Combination and Other Matters**

The March 31, 2002consolidated financial statements include the accounts of the Company and itswholly-owned and majority-owned subsidiaries from the date of acquisition.  The combined financial statements ofDecember 31, 2001 and for the three months ended March 31, 2001 include theaccounts of AWG entities under common control. All significant intercompany accounts and transactions have beeneliminated in consolidation and combination. AWG used the equity method of accounting for its investments which areless than majority owned, but over which it had significant influence.

 

**3.             Inventory**

|                                  |   | **March 31,  2002** |   | **December  31,  2001** |   |
|---------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Raw materials                         |   | $                   | 1,356  |                    | $      | 1,474 |   |
| Work in process                       |   | 190                 |   | 176                     |   |
| Finished goods                        |   | 5,668               |   | 5,611                   |   |
|                                  |   | 7,214               |   | 7,261                   |   |
| Allowance for excess and obsolescence |   | (1,275              | )      | (1,442                  | )      |
| Net inventory                         |   | $                   | 5,939  |                    | $      | 5,819 |   |

 

**4.**             **Loss PerShare**

The following is areconciliation of the numerator and denominator of basic and diluted loss pershare:

 

12

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|                                         |   | **Three Months Ended March 31,** |    |
|----------------------------------------------|--------|----------------------------------|---------|
|                                         |   | **2002**                         |    | **2001** |   |
| **Numerator:**                               |   |                             |    |   |   |
| Net loss                                     |   | $                                | (22,511 | ) | $ | (2,011 | ) |
|                                         |   |                             |    |   |   |
| **Denominator:**                             |   |                             |    |   |   |
| Denominator for basic loss  per share — |   |                             |    |   |   |
| Weighted-average shares                      |   | 19,063                           |    | 18,750 |   |
| Denominator for diluted loss per share(1)    |   | 19,063                           |    | 18,750 |   |
| **Basic and diluted loss per share:**        |   | $                                | (1.18   | ) | $ | (0.11 | ) |

----

(1) Potentially dilutivesecurities excluded from the computation of diluted loss per share because todo so would have been anti-dilutive are as follows.

|                   |   | **Three Months Ended March 31,** |   |
|------------------------|--------|----------------------------------|--------|
|                   |   | **2002**                         |   |
| Employee stock options |   | 4,923                            |   |
| Warrants               |   | 1,239                            |   |
|                   |   | 6,162                            |   |

 

 

 

13

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**5.**                                      Segment Information

The Company is engaged inthe business of developing and bringing to market proprietary technologies usedto identify, locate and monitor people, animals and objects.  Prior to March 27, 2002, the Company operatedin four segments — Animal Tracking, Digital Angel Technology, Digital AngelDelivery System, and Radio Communications and Other.  With the acquisition of Medical Advisory Systems, Inc. in March2002, the Company re-organized into four segments:  Animal Applications, Digital Angel Systems, GPS and RadioCommunications, and Physician Call Center and Other.  Animal Applications is the new name of our segment previouslyidentified as Animal Tracking.  Wecombined our Digital Angel Technology Segment with our Digital Angel DeliverySystem segment to form the new Digital Angel Systems segment, which is nowmanaged as a single business unit.  GPSand Radio Communications is the new name of our segment previously identifiedas Radio Communications and Other.  PhysicianCall Center and Other reflects the newly acquired Medical Advisory Systems,Inc. business.  Prior period segmentinformation has been restated to reflect our current segment structure.

The accounting policiesof the operating segments are the same as those described in the summary ofaccounting policies in the Company’s audited financial statements for the yearended December 31, 2001.  It is on thisbasis that management utilizes the financial information to assist in makinginternal operating decisions.  TheCompany evaluates performance based on stand-alone segment operating income.

Following is the selected segment data as of and forthe three months ended March 31, 2002:
|                                                                                                                     |   | **Animal Applications** |   | **Digital Angel Systems** |   | **GPS and Radio Communications** |   | **Physician Call Center and Other** |   | **Corporate / Unallocated** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------------|--------|----------------------------------|--------|-------------------------------------|--------|-----------------------------|--------|------------------|--------|
| Net revenue from  external customers:                                                                                    |   |                    |   |                      |   |                             |   |                                |   |                        |   |             |   |
| Product                                                                                                                  |   | $                       | 4,815  |                      | $      | —                           |   | $                                   | 2,636  |                        | $      | —           |   | $ | — |   | $ | 7,451 |   |
| Service                                                                                                                  |   | —                  |   | 303                       |   | —                           |   | —                              |   | —                      |   | 303              |   |
| Total revenue                                                                                                            |   | $                       | 4,815  |                      | $      | 303                              |   | $                                   | 2,636  |                        | $      | —           |   | $ | — |   | $ | 7,754 |   |
|                                                                                                                     |   |                    |   |                      |   |                             |   |                                |   |                        |   |             |   |
| Income (loss)  from operations before provision for income taxes, minority interest and  equity in net loss of affiliate |   | $                       | 288    |                      | $      | (1,791                           | )      | $                                   | (271   | )                           | $      | —           |   | $ | (20,487 | )(1) | $ | (22,261 | ) |
|                                                                                                                     |   |                    |   |                      |   |                             |   |                                |   |                        |   |             |   |
| Total assets                                                                                                             |   | $                       | 79,559 |                      | $      | 14,448                           |   | $                                   | 5,587  |                        | $      | 31,700           |   | $ | — |   | $ | 131,294 |   |

----

Two customers accounted for approximately 13.4% and 12.5% of our AnimalApplications revenue.  We buy most ofour syringe injectible microchips that are used in our electronic identificationproducts from one supplier.

 

(1)  Consists of $18,681non-cash compensation expense associated with Digital Angel options convertedinto options to acquire MAS stock and $1,806 interest expense associated withADS obligations to IBM Credit Corporation.

 

14

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Following is theselected segment data as of and for the three months ended March 31, 2001:
|                                                                                                                     |   | **Animal Applications** |   | **Digital Angel Systems** |   | **GPS and Radio Communications** |   | **Physician Call Center and Other** |   | **Combined** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------------|--------|----------------------------------|--------|-------------------------------------|--------|--------------|--------|
| Net revenue from  external customers:                                                                               |   |                    |   |                      |   |                             |   |                                |   |         |   |
| Product                                                                                                                  |   | $                       | 6,382  |                      | $      | —                           |   | $                                   | 2,752  |         | $      | — |   | $ | 9,134 |   |
| Service                                                                                                                  |   | —                  |   | 1,070                     |   | —                           |   | —                              |   | 1,070        |   |
| Total revenue                                                                                                            |   | $                       | 6,382  |                      | $      | 1,070                            |   | $                                   | 2,752  |         | $      | —— |   | $ | 10,204 |   |
|                                                                                                                     |   |                    |   |                      |   |                             |   |                                |   |         |   |
| Income (loss)  from operations before provision for income taxes, minority interest and  equity in net loss of affiliate |   | $                       | (1,040 | )                         | $      | (565                             | )      | $                                   | (294   | )            | $      | — |   | $ | (1,800 | ) |
|                                                                                                                     |   |                    |   |                      |   |                             |   |                                |   |         |   |
| Total assets                                                                                                             |   | $                       | 93,874 |                      | $      | 11,441                           |   | $                                   | 6,691  |         | $      | — |   | $ | 112,006 |   |
|                                                                                                                          |        |                         |        |                           |        |                                  |        |                                     |        |              |        |  |  |  |  |  |  |

** **

**Three customers provided forapproximately 17%, 14% and 13% of our Animal Applications revenue.**

**15**

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** **

**6.             Acquisitions**

The following describesthe acquisition by the Company during the quarter ended March 31, 2002:
| **Company Acquired**            |   | **Date  Acquired** |   | **Acquisition  Price** |   | **Acquisition  Costs** |   | **Value of  Shares, Warrants & Options Issued or Issuable** |   | **Common/  Preferred Shares Issued** |   | **Goodwill  Acquired** |   | **Business  Description**                                           |   |
|---------------------------------|--------|--------------------|--------|------------------------|--------|------------------------|--------|-----------------------------------------------------------------|--------|--------------------------------------|--------|------------------------|--------|---------------------------------------------------------------------|--------|
| 2002 Acquisition:               |   | 03/27/02           |   | $31,208                |   | $2,790                 |   | $28,418                                                         |   | 5,218                                |   | 29,386                 |   | Provider  of medical assistance and technical products and services |   |
| Medical Advisory Systems,  Inc. |   |               |   |                   |   |                   |   |                                                            |   |                                 |   |                   |   |                                                                |

 

On February 27, 2001, ADSacquired approximately 16.6% of the capital stock of MAS (AMEX:DOC), a providerof medical assistance and technical products and services, in a transactionvalued at approximately $8.3 million in consideration for 3.3 million shares ofADS’s common stock.  ADS controlled twoof the seven seats on the Company’s Board of Directors and became the largestsingle shareholder.  This investment wasaccounted for under the equity method from February 27, 2001 through March 27,2002.  The excess of the purchase priceover the estimated fair value of the shares acquired was approximately $6.8million (goodwill) and was being amortized on a straight-line basis over fiveyears, through December 31, 2001.

On March 27, 2002,Digital Angel Corporation merged with a wholly-owned subsidiary of MAS.  For accounting purposes, AWG is treated asthe acquirer, and the assets and liabilities of MAS were recorded at fair valueunder the purchase method of accounting. The consolidated financial statements reflect the results of operationsof MAS from the date of acquisition. The costs of acquisitions include all payments according to theacquisition agreements plus costs for investment banking services, legal andaccounting services that were direct costs of acquiring these assets.

The cost of theMarch 27, 2002 acquisition consisted of 5.218 million shares of common stock valuedat $25.0 million, 1.2 million options and 75,000 warrants valued at $3.4million, and acquisition costs of $2.8 million.  The valuation of the stock is based on the fair value of theshares of MAS held by stockholders other than Applied Digital Solutions priorto the acquisition.  Included in theacquisition costs are certain severance liabilities of $2.5 million, related toemployment agreements of two officers of MAS. The value of the options and warrants is based on the fair value of theoptions and warrants of MAS at the date of acquisition.  The fair value was determined using theBlack-Scholes option pricing model.

In considering thebenefits of a merger of AWG and MAS, the management of AWG recognized thestrategic advantage of combining the advanced wireless technologies beingdeveloped by AWG with the physician staffed call center of relatedinfrastructure of MAS.  One of theprincipal benefits of such a combination would be the ability of AWG to offer acomplete “end-to-end solution” to the various vertical markets for DigitalAngelTM products.

 

 

16

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Unaudited pro formaresults of operations for the three months ended March 31, 2002 and 2001 areincluded below.  Such pro formainformation assumes that the above acquisition had occurred as of January 1,2002 and 2001, respectively.

 
|                                               |   | **Three  Months Ended   March 3l,** |    | **Three  Months Ended**

**March 3l,** |   |   |
|----------------------------------------------------|--------|-------------------------------------|---------|----------------------------------------|--------|--------|
|                                               |   | **2002**                            |    | **2001**                               |   |   |
| Net operating revenue                              |   | $                                   | 8,639   |                                   | $      | 11,802 |   |
| Net Loss                                           |   | $                                   | (23,965 | )                                      | $      | (2,346 | ) |   |
| Net Loss per common share — basic and diluted |   | $                                   | (1.00   | )                                      | $      | (0.10  | ) |   |
|                                                    |        |                                     |         |                                        |        |        |  |  |  |  |  |  |  |  |

 

 

**7.             Contingencies**

**Silva, et al. v. Customized Services Administrators,Incorporated, dba CSA Travel Protection, Inc. et al., No. CV798528 (Santa ClaraCounty Superior Court)**

On May 29, 2001, JanetSilva, individually and as Guardian*ad Litem*for Jonathan Silva, a minor, and the Estate of Clarence William Silva, Jr.(collectively, “Plaintiffs”) filed suit against Customized ServicesAdministrators, Incorporated (“CSA”), Pricesmart, Inc. (“Pricesmart”),Commercial Union Insurance Company (“Commercial Union”), CGU Insurance Group,and the Company (collectively the “Defendants”) in the Superior Court of theState of California in and for the County of Santa Clara.  The allegations of the complaint arise froma vacation guarantee insurance policy (the “Insurance Contract”) allegedlypurchased by Plaintiffs from Defendants on March 6, 2000.  The complaint alleges, among other things,that Defendants breached the Insurance Contract, defrauded Plaintiffs, acted inbad faith, engaged in deceptive and unlawful business practices, resulting inthe wrongful death of Clarence William Silva, Jr. (the “Deceased”) and theintentional infliction of emotional distress on Plaintiffs.  The complaint seeks the cost of funeral andburial expenses of the Deceased and amounts constituting the loss of financialsupport of the Deceased, general damages, attorney’s fees and costs, andexemplary damages.

 

CSA has filed a cross-claim against the Companyalleging that the Company should be held liable for any liability that CSA mayhave to Plaintiffs.  The Company hasdenied the allegations of the complaint and the CSA cross-claim and isvigorously contesting all aspects of this action.

 

The Company is party to various other legal proceedings.  In the opinion of management, theseproceedings are not likely to have a material adverse effect on the financialposition, cash flows or overall trends in results of the Company.  The estimate of potential impact on theCompany’s financial position, overall results of operations or cash flows forthe above legal proceedings could change in the future.

 

 

17

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** **

**8.             RelatedParty Activity**

                ADS provides certain general andadministrative services to the Company including finance, legal, benefits andother miscellaneous items.  The cost ofthese services are included in the Company’s Statements of Operations based onutilization, which management believes to be reasonable.  Cost of these services were $0.2 million and$0.2 million for the three months ended March 31, 2002 and 2001,respectively.  ADS also charged theCompany $1.8 million of interest expense in 2002, for which the liability wasconverted to a capital contribution.  Inaddition, accrued expenses of $302,000 were relieved and contributed to capitalby ADS.  Other transactions resulted ina due from ADS of $0.1 million at March 31, 2002.

In connection withcertain obligations of ADS, the Company has the following convenants.  Minimum Cumulative EBITDA, as defined, inthe credit agreement, excludes non-cash compensation expense, one-time charges,impairment losses and any liability or claim that will be satisfied by issuanceof the Company's common stock.
| **COVENANT**                          |   | **COVENANTS REQUIREMENT** |   |
|---------------------------------------|--------|---------------------------|--------|
|                                  |   |                      |   |
| Current Assets to Current Liabilities |   | June 30, 2002             |   | 1.8:1 |   |
|                                  |   | September 30, 2002        |   | 1.8:1 |   |
|                                  |   | December 31, 2002         |   | 2.0:1 |   |
|                                  |   |                      |   |   |   |
| Minimum Cumulative Modified EBITDA    |   | June 30, 2002             |   | 577,000 |   |
|                                  |   | September 30, 2002        |   | 1,547,000 |   |
|                                  |   | December 31, 2002         |   | 3,329,000 |   |

 

The Companybelieves that when the second quarter results are finalized, it may not be incompliance with certain of the covenants. Although ADS will request a waiver from its lender, there can be noassurances that a waiver will be obtained.

**9.             Investmentin Affiliates**

                The change in theCompany's investment in affiliates is as follows:
|                                              |   |   |   |
|---------------------------------------------------|--------|--------|--------|
| Balance December  31, 2001                        |   | 6,779  |   |
|                                              |   |   |   |
| Equity in net  loss of affiliate                  |   | (291   | )      |
|                                              |   |   |   |
| MAS common  shares transferred to ADS             |   | (6,488 | )      |
|                                              |   |   |   |
| MAS affiliates  obtained through merger (at cost) |   | 256    |   |
|                                              |   |   |   |
| Balance March  31, 2002                           |   | 256    |   |

 

**10.          SubsequentEvents**

On June 27, 2002, theCompany granted 3,910,000 options to employees and directors of theCompany.  The options have an exerciseprice of $3.39, the fair value of the Company’s common stock on the date ofgrant, and expire in 10 years. 3,000,000 of the options vest one year from the date of grant and theremaining vest one-third annually beginning on the first anniversary of thegrant date.

                The Company adopted the DigitalAngel Corporation Transition Stock Option Plan, which as amended, provides for11.2 million shares of common stock for which options and other grants may begranted.

 

18

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**Item2.****                                  ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with the accompanying financial statements and relatednotes thereto.

We consist of MAS and itsthree subsidiaries, which formerly were subsidiaries of Applied DigitalSolutions, Inc. (“ADS”) — Digital Angel Corporation (“DAC”), Timely TechnologyCorp. and Signature Industries, Limited. These three subsidiaries were known as the Advanced Wireless Group(“AWG”).  DAC is engaged in the businessof developing and bringing to market proprietary technologies used to identify,locate and monitor people, animals and objects.  DAC is the result of the merger in September 2000 of DestronFearing Corporation and Digital Angel.net Inc., which was then a wholly-ownedsubsidiary of ADS. Before March 27, 2002, the business of DAC was operated infour segments:  Animal Tracking, DigitalAngel Technology, Digital Angel Delivery System, and Radio Communications andOther.  With the acquisition of MAS inMarch 2002, the Company re-organized into four segments:  Animal Applications, Digital Angel Systems,GPS and Radio Communications, and Physician Call Center and Other.  Animal Applications is the new name of oursegment previously identified as Animal Tracking.  We combined our Digital Angel Technology Segment with our DigitalAngel Delivery System segment to form the new Digital Angel Systems segment,which is now managed as a single business unit.  GPS and Radio Communications is the new name of our segmentpreviously identified as Radio Communications and Other.  Physician Call Center and Other reflects thenewly acquired MAS business.  Priorperiod segment information has been restated to reflect our current segmentstructure.

 

19

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        **RESULTS OF OPERATIONS**

The following tablesummarizes our results of operations as a percentage of net operating revenuefor the three months ended March 31, 2002 and 2001 and is derived from theaccompanying consolidated and combined statements of operations included inthis report.
|                                                                                                           |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                           |   | **2002**                          |   | **2001** |   |
|                                                                                                           |   | **%**                             |   | **%** | ** ** |
| Product revenue                                                                                                |   | 96.1                              |   | 89.5 |   |
| Service revenue                                                                                                |   | 3.9                               |   | 10.5 |   |
| Total revenue                                                                                                  |   | 100.0                             |   | 100.0 |   |
| Cost of products  sold                                                                                         |   | 55.5                              |   | 52.5 |   |
| Cost of services  sold                                                                                         |   | 3.2                               |   | 5.4 |   |
| Total cost of  products and services sold                                                                      |   | 58.7                              |   | 57.9 |   |
| Gross profit                                                                                                   |   | 41.3                              |   | 42.1 |   |
| Selling, general and administrative expenses                                                                   |   | 34.3                              |   | 24.5 |   |
| Management fees — Applied Digital Solutions, Inc.                                                         |   | 2.5                               |   | 1.9 |   |
| Research and development expenses                                                                              |   | 17.2                              |   | 10.6 |   |
| Non-cash compensation expense                                                                                  |   | 240.9                             |   | — |   |
| Depreciation and amortization                                                                                  |   | 9.5                               |   | 23.1 |   |
| Interest income                                                                                                |   | (0.0                              | )      | (0.0 | ) |
| Interest expense                                                                                               |   | 24.0                              |   | 0.6 |   |
| Loss from operations before provision for income  taxes, minority interest and equity in net loss of affiliate |   | (287.1                            | )      | (18.6 | ) |
| Provision for  income taxes                                                                                    |   | 0.0                               |   | 1.1 |   |
| Loss from  operations before minority interest and equity in net loss of affiliate                             |   | (287.1                            | )      | (19.7 | ) |
| Minority  interest                                                                                             |   | (0.6                              | )      | (0.2 | ) |
| Equity in net  loss of affiliate                                                                               |   | 3.8                               |   | 0.2 |   |
| Net loss                                                                                                       |   | (290.3                            | )      | (19.7 | ) |

 

 

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**Revenue**

Revenue from operationsfor the three months ended March 31, 2002 was $7.8 million, a decrease of $2.4million, or 24%, from $10.2 million in the three months ended March 31, 2001.

Revenue for each of theoperating segments was:

|                                        |   | **Three Months Ended   March 31,** |   | **Three Months Ended   March 31,** |   |
|---------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                        |   | **2002**                           |   | **2001**                           |   |
| Animal Applications — Product          |   | $                                  | 4,815  |                               | $      | 6,382 |   |
| Digital Angel Systems — Service        |   | 303                                |   | 1,070                              |   |
| GPS and Radio Communications — Product |   | 2,636                              |   | 2,752                              |   |
| Total                                       |   | $                                  | 7,754  |                               | $      | 10,204 |   |

 

The Animal Applicationssegment’s revenue decreased $1.6 million, or 24.6%, in the first three monthsof 2002 from the first three months of 2001. The decline is due primarily to the timing of sales of transponders tothe fisheries industry customers, as well as higher sales in the first quarterof 2001 to a large customer to prepare for the launch of the pet identificationproduct in France.

The Digital Angel Systemssegment’s revenue decreased $0.8 million, or 71.7%, in the first three monthsof 2002 from the first three months of 2001 due to completed client assignmentsthat were not replaced.

The GPS and RadioCommunications segment’s revenue decreased $0.1 million, or 4.2 %, in the firstthree months of 2002 compared to the first three months of 2001 primarily as aresult of seasonal order fluctuations.

**Gross Profit and Gross Profit Margin**

Gross profit for thethree months ended March 31, 2002 was $3.2 million, a decrease of $1.1 million,or 25.4%, from $4.3 million in the three months ended March 31, 2001.  As a percentage of revenue, the gross profitmargin was 41.3% and 42.1% for the three months ended March 31, 2002 and 2001,respectively.

Gross profit fromoperations for each operating segment was:

|                                        |   | **Three Months Ended   March 31,** |   | **Three Months Ended   March 31,** |   |
|---------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                        |   | **2002**                           |   | **2001**                           |   |
| Animal Applications — Product          |   | $                                  | 1,879  |                               | $      | 2,491 |   |
| Digital Angel Systems — Service        |   | 52                                 |   | 522                                |   |
| GPS and Radio Communications — Product |   | 1,272                              |   | 1,281                              |   |
| Total                                       |   | $                                  | 3,203  |                               | $      | 4,294 |   |

 

Gross profit margin fromoperations for each operating segment was:

|                                        |   | **Three Months Ended   March 31,** |   | **Three Months Ended   March 31,** |       |
|---------------------------------------------|--------|------------------------------------|--------|------------------------------------|------------|
|                                        |   | **2002**                           |   | **2001**                           |       |
|                                        |   | **%**                              |   | **%**                              | ** ** |
| Animal Applications — Product          |   | 39.0                               |   | 39.0                               |       |
| Digital Angel Systems — Service        |   | 17.2                               |   | 48.8                               |       |
| GPS and Radio Communications — Product |   | 48.3                               |   | 46.5                               |       |
| Total                                       |   | 41.3                               |   | 42.1                               |       |

 

 

 

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The AnimalApplications segment’s gross profit decreased $0.6 million in the first threemonths of 2002 from the first three months of 2001 due to the previouslymentioned sales decrease.  Marginsremained constant at 39.0%.

The Digital AngelSystems segment’s gross profit decreased $0.5 million, or 90.0%, in the firstthree months of 2002 as compared to the first three months of 2001.  Margins decreased to 17.2% in the firstthree months of 2002 from 48.8% in the first three months of 2001.  The gross profit decrease was primarily dueto the sales decline.  The marginpercentage declined due to the retention of personnel subsequent to the salesclient contract completion as resources were shifted to support the DigitalAngelTM products.

The GPS and RadioCommunications segment’s gross profit was $1.3 million for the first threemonths of 2002 and the first three months of 2001.  The gross margin percentage increased to 48.3% in the first threemonths of 2002 compared to 46.5% in the first three months of 2001 due to afavorable shift in the product mix.

**Selling, General and AdministrativeExpenses**

Selling general andadministrative expenses from operations increased $18.8 million, or 724.9% inthe first three months of 2002 as compared to the first three months of2001.  The increase was caused primarilyby an $18.7 million charge arising from the remeasurement of options inconnection with the merger.  Pursuant tothe terms of the merger agreement, options to acquire shares of Digital Angelcommon stock were converted into options to acquire shares of MAS common stockeffective March 27, 2002. The conversion resulted in a new measurement date forthe options and, as a result, the Company recorded a charge of approximately$18.7 million in non-cash compensation expense during the three months endedMarch 31, 2002. For current employees of the Company, these options areconsidered fixed awards under APB Opinion No. 25, and expense was recorded forthe intrinsic value of the options converted. For all others, expense was recorded for the fair value of the optionsconverted using the Black-Scholes option-pricing model.  As a percentage of revenue, selling, generaland administrative expenses were 275.2% and 23.5% for the three months endedMarch 31, 2002 and 2001, respectively.

Selling, general and administrative expenses for eachof the operating segments excluding the $18.7 million charge were:

|                         |   | **Three Months Ended   March 31,** |   | **Three Months Ended   March 31,** |   |
|------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                         |   | **2002**                           |   | **2001**                           |   |
| Animal Applications          |   | $                                  | 1,015  |                               | $      | 874 |   |
| Digital Angel Systems        |   | 228                                |   | 214                                |   |
| GPS and Radio Communications |   | 1,417                              |   | 1,413                              |   |
| Total                        |   | $                                  | 2,660  |                               | $      | 2,501 |   |

Selling, general andadministrative expenses as a percentage of revenue for each of the operatingsegments were:

|                         |   | **Three Months Ended   March 31,** |   | **Three Months Ended   March 31,** |       |
|------------------------------|--------|------------------------------------|--------|------------------------------------|------------|
|                         |   | **2002**                           |   | **2001**                           |       |
|                         |   | **%**                              |   | **%**                              | ** ** |
| Animal Applications          |   | 21.1                               |   | 13.7                               |       |
| Digital Angel Systems        |   | 75.2                               |   | 20.0                               |       |
| GPS and Radio Communications |   | 53.8                               |   | 53.6                               |       |
| Total                        |   | 34.3                               |   | 24.5                               |       |

 

The Animal Applicationssegment’s selling, general and administrative expenses increased $0.1 millionin the first three months of 2002 compared to the first three months of 2001and as a percentage of revenue increased to 21.1% from 13.7% in the samerespective periods.  The increase in thedollars was due to significant increases in non-personnel expenses, partiallyoffset by workforce cost reductions.

The Digital AngelSystems segment’s selling, general and administrative expenses remainedconstant at $0.2 million in the first three months of 2002 compared to thefirst three months of 2001.  Selling,general and administrative expenses increased as a percentage of revenue to75.2% in the first three months of 2002 compared to 20.0% in the first threemonths of 2001 as a result of lower revenues as previously discussed.

 

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The GPS and RadioCommunications segment’s selling, general and administrative expenses remainedapproximately the same in the first three months of 2002 compared to the firstthree months of 2001.    As a percentageof revenue, selling, general and administrative expenses increased to 53.8% inthe first three months of 2002 from 53.6% in the first three months of 2001.

**ManagementFees — Applied Digital Solutions, Inc.**

Managementfees charged by Applied Digital Solutions, Inc. amounted to $0.2 million forthe three months ended March 31, 2002 and 2001.  These fees were for general and administrative services performedfor us.  After March 31, 2002, we willno longer pay a management fee to ADS.

**Research and Development Expense**

Research and developmentexpense from operations was $1.3 million in the three months ended March 31,2002, an increase of $0.2 million, or 18.2%, from $1.1 million for the threemonths ended March 31, 2001.  As a percentageof revenue, research and development expense was 17.2% and 10.6% for the threemonths ended March 31, 2002 and 2001, respectively.

Research and development expense for each of theoperating segments was:

|                         |   | **Three Months Ended March 31,** |   | **Three Months Ended March 31,** |   |
|------------------------------|--------|----------------------------------|--------|----------------------------------|--------|
|                         |   | **2002**                         |   | **2001**                         |   |
| Animal Applications          |   | $                                | 244    |                             | $      | 302 |   |
| Digital Angel Systems        |   | 1,087                            |   | 782                              |   |
| GPS and Radio Communications |   | —                           |   | —                           |   |
| Total                        |   | $                                | 1,331  |                             | $      | 1,084 |   |

Thesignificant increase is due to research and development activities associatedwith the Digital AngelTM product.

**Depreciation and Amortization**

Depreciation andamortization expense from operations was $0.7 million in the three months endedMarch 31, 2002, a decrease of $1.7 million, or 70.8%, from $2.4 million in thethree months ended March 31, 2001.  As apercentage of revenue, the depreciation and amortization expense was 9.5% and23.1% for the three months ended March 31, 2002 and 2001, respectively.

The decrease wasprimarily due to the adoption of FAS 142, which took effect January 1,2002.  The adoption of FAS 142 requiresthe testing of goodwill for impairment at least annually, eliminating the needfor monthly amortization of goodwill. Accordingly, goodwill amortization was not recorded during the firstthree months of 2002.

Depreciation andamortization expense for each of the operating segments was:

 

23

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|                         |   | **Three Months Ended March 31,** |   | **Three Months Ended March 31,** |   |
|------------------------------|--------|----------------------------------|--------|----------------------------------|--------|
|                         |   | **2002**                         |   | **2001**                         |   |
| Animal Applications          |   | $                                | 95     |                             | $      | 2,110 |   |
| Digital Angel Systems        |   | 527                              |   | 93                               |   |
| GPS and Radio Communications |   | 113                              |   | 156                              |   |
| Total                        |   | $                                | 735    |                             | $      | 2,359 |   |

 

The increase in theDigital Angel Systems segment’s depreciation and amortization during the firstthree months of 2002 compared to the first three months of 2001 is a result ofincreased amortization related to amortization on purchased software associatedwith the Digital Angel Delivery System that was placed in service in April2001.

**InterestExpense**

Interest expense was $1.9million and $59 thousand for the first three months of 2002 and 2001,respectively.  Interest expense in thefirst three months of 2002 includes interest expense of $1.8 million on thedebt owed to IBM Credit Corporation by Applied Digital Solutions, Inc.  As discussed in Note 1 to the financialstatements, on March 27, 2002, ADS restructured its loan agreement with IBMCredit Corporation.  The provisions ofthis restructuring included AWG being released from responsibility to repaythis debt.  Accordingly, ADS assumedthis liability on March 27, 2002.

**Income Taxes**

AWG had effective incometax rates of 0.0% and a negative 6.4% for the first three months of 2002 and2001, respectively.  Differences in theeffective income tax rates from the statutory federal income tax rate in 2002 ariseprimarily from valuation allowances recorded on deferred net operating lossesand in 2001 arise primarily from valuation allowances recorded on deferred netoperating losses, non-deductible goodwill amortization associated withacquisitions and state taxes net of federal benefits. The U.S. companies in AWGwere included in ADS’s consolidated federal income tax return through March 27,2002.  MAS and its subsidiaries file aseparate consolidated federal income tax return.  After March 27, 2002, AWG’s U.S. subsidiaries will file aconsolidated federal tax return with MAS.

**LIQUIDITYAND CAPITAL RESOURCES FROM OPERATIONS**

As of March 31,2002, cash and cash equivalents totaled $0.9 million, an increase of $0.3million, or 50.0%, from $0.6 million at December 31, 2001.  Through March 27, 2002, AWG used a cashmanagement system to apply excess cash on hand against advances due toADS.  Cash used in operating activitiestotaled $0.2 million and $0.4 million in the first three months of 2002 and2001, respectively.  In the first threemonths of 2002, the use of cash was due to the net loss, after adjusting fornon-cash charges, increases in other current assets, and decreases in accountspayable and accrued expenses.  Partiallyoffsetting these uses of cash were increases in cash from decreases in accountsreceivable. 

Accountsreceivable, net of allowance for doubtful accounts, decreased by $0.8 million,or 14.8%, to $4.6 million at March 31, 2002 from $5.4 million at December 31,2001.  This decrease was due to aseasonal reduction in sales from the three months ended December 31, 2001 tothe three months ended March 31, 2002, partially offset by an increase as aresult of our acquisition of MAS.

 

24

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Inventory levelsincreased by $0.1 million to $5.9 million at March 31, 2002 from  $5.8 million at December 31, 2001.  Inventory acquired from our acquisition ofMAS amounted to $0.1 million.

Investment inaffiliates decreased by $6.5 million, or 95.6%, to $0.3 million at March 31,2002 compared to $6.8 million at December 31, 2001.  This decrease was due to our transferring the shares representingour 16.5% ownership in MAS to ADS.  Thisdecrease was partially offset by equity method investments held by MAS thatwere acquired as part of the acquisition of MAS.

Accounts payableincreased by $0.3 million to $4.1 million at March 31, 2002 from $3.8 millionat December 31, 2001.   This was due topayables acquired from the acquisition of MAS.

Accrued expensesincreased by $2.4 million, or 120.0%, to $4.4 million at March 31, 2002 from$2.0 million at December 31, 2001.  Theincrease was due to accrued acquisition costs, and accrued expenses acquiredfrom the acquisition of MAS.

Investingactivities provided cash of $0.1 million in the first three months of 2002, andused cash of  $0.5 million in the firstthree months of 2001.  During the firstthree months of 2002 and 2001, $0.2 million and $0.7 million, respectively,were spent to acquire property and equipment. This was offset in the firstthree months of 2002 by cash acquired, net of acquisition costs, from theacquisition of MAS.

Financingactivities provided cash of $0.4 million and $0.7 million in the first threemonths of 2002 and 2001, respectively. During the first three months of 2002and 2001, cash was provided primarily by additional investments from ADS.

*Debt,Covenant Compliance and Liquidity*

ADS maintains a term and revolving credit agreementwith IBM Credit (IBM Credit). Under the credit agreement in effect throughMarch 27, 2002, IBM Credit maintained liens and security interests in theoutstanding capital stock of the three AWG subsidiaries and on their assets tocollateralize ADS’s obligations to IBM Credit under the IBM credit agreement.

 

ADS generated a significant loss from operations in2000. As a result, ADS was not in compliance with certain financial covenantsof the IBM credit agreement as of December 31, 2000. The IBM credit agreementwas amended and restated on October 17, 2000 and further amended on March 30,2001. In connection with the amendment on March 30, 2001, Digital Angel grantedIBM Credit Corporation warrants to acquire 1.2 million shares of DigitalAngel’s common stock valued at $0.3 million. As of the March 30, 2001amendment, ADS was in compliance with the revised covenants.

 

The IBM credit agreement contains certain quarterlyfinancial covenants, which became more restrictive during 2001. ADS anticipatedthat it would continue to comply in 2001 with the quarterly financial covenantsin the IBM credit agreement. However, ADS was not in compliance with itsminimum EBITDA (as defined in the IBM credit agreement) or collateral shortfallcovenants at June 30,

 

 

25

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2001. ADS was also not in compliance with the minimum EBITDA, TangibleNet Worth and Current Assets to Current Liabilities covenant requirements atSeptember 30, 2001 and it again had a collateral shortfall.  As of December 31, 2001, ADS was not incompliance with various financial covenants, including minimum Tangible NetWorth, EBITDA, the ratio of Current Assets to Current Liabilities, andcollateral. The IBM credit agreement was amended and restated on July 1, 2001,September 15, 2001, November 15, 2001, December 31, 2001, January 31, 2002 andFebruary 27, 2002.  These amendmentsextended the due dates of principal and interest payments under the creditagreement until April 2, 2002.

 

 

At December 31, 2001, ADS’s outstanding borrowingsunder the IBM credit agreement totaled $82.6 million. At that time, ADS did nothave the funds to repay the borrowings under the IBM credit agreement.Accordingly, the $82.6 million of outstanding borrowings was allocated to AWGeffective as of September 30, 2001 and was reflected as a current obligation inthe December 31, 2001 combined balance sheet. Interest associated with theborrowings was allocated to AWG for the period from September 30, 2001 to March27, 2002.  Under the terms of theagreement and plan of merger with MAS, the common stock and assets of the threeAWG subsidiaries were released from all liens and security interests under theIBM credit agreement, and the shares of the Company's common stock beneficiallyowned by ADS upon completion of the merger were transferred to the Digital AngelShare Trust as collateral for the debt. ADS assumed the debt which was treated as a capital contributionresulting in an increase in additional paid-in capital of approximately $81.4million.

 

On March 1, 2002, ADS andDigital Angel Share Trust, a newly created Delaware business trust, and IBMCredit entered into a Third Amended and Restated Term Credit Agreement. The newcredit agreement became effective on March 27, 2002, the effective date of themerger between Digital Angel and MAS. Amounts outstanding under the new creditagreement bear interest at an annual rate of 17% and mature on February 28,2003.  No principal or interest paymentsare due until the maturity date. However, the maturity date will be extendedfor consecutive one-year periods if ADS repays at least 40% of the originalprincipal amount outstanding plus accrued interest and expenses prior toFebruary 28, 2003 and an additional 40% of the original principal amountoutstanding plus accrued interest and expenses prior to February 28, 2004.  In any event, all amounts outstanding willbe required to be repaid by August 15, 2005. If all amounts are not repaid by February 28, 2003, the unpaid amountwill accrue interest at an annual rate of 25%, and if they are not repaid byFebruary 28, 2004, the interest rate increases to 35%.

ADS’s new creditagreement contains debt covenants made by ADS relating to its financialposition and performance, as well as the Company’s financial position andperformance.  The Company's ability tomeet its financial performance requirements and be in compliance throughout2002 with covenants in the new credit agreement that apply to the Companycannot be assured.  If businessconditions are other than as anticipated or other unforeseen events orcircumstances occur, these may impact the ability of ADS and the Company tomaintain compliance with the covenants. In the absence of waiver or amendment to such financial covenants, suchnoncompliance would constitute an event of default under the new creditagreement, and IBM Credit would be entitled to accelerate the maturity of allamounts ADS owes it.  If suchnoncompliance appears likely, or occurs, ADS may seek to renegotiate thecovenants and/or obtain waivers, as required. There can be no assurance, however, that ADS would be successful innegotiating such amendments or obtaining such waivers.

On March 27, 2002,upon completion of the merger between Digital Angel and MAS, in satisfaction ofa condition to the consent to the merger by IBM Credit, ADS transferred to aDelaware business trust controlled by an advisory board all of the shares ofour common stock owned by it and, as

 

26

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a result, the trust has legal title to approximately 77.15% of ourcommon stock.  The trust has votingrights with respect to our common stock until ADS’s obligations to IBM Creditare repaid in full.  The trust may beobligated to liquidate the shares of our common stock owned by it for thebenefit of IBM Credit if ADS fails to make payments, or otherwise defaults,under its new credit agreement with IBM Credit.

To date, financing from acquisitions, ADS’s advancesand revenue generated from operations have been our primary sources of funding.However, we do not anticipate receiving additional advances from ADS.  We estimate that we will need to obtainapproximately $5 million to $7 million in additional funding over the nexttwelve months in order to continue our efforts to implement our business plan.As a result, we will need to obtain additional capital in the near future. Asof the date of these statements, we have held discussions with several banksand an asset based lender regarding a credit facility. Our capital requirementsdepend on a variety of factors, including, but not limited to, the rate ofincrease or decrease in our existing business base; the success, timing, andamount of investment required to bring new products on-line; revenue growth ordecline; and potential acquisitions. If we are successful in obtaining thecredit facility and in raising additional equity capital, of which there can beno assurance, management believes that we will have the financial resources tomeet its future business requirements for at least the next twelve months. See“RISK FACTORS — We Will Need Additional Financing.”

 

**FORWARDLOOKING STATEMENTS AND ASSOCIATED RISKS**

**Forward—Looking Statements and Associated Risk**.

ThisForm 10-Q/A contains forward-looking statements within the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995 with respectto our financial condition, results of operations and business, and includestatements relating to:

•       our growthstrategies including, without limitation, our ability to deploy**newproducts and services;

•     anticipated trends in our business anddemographics;

•     our ability to successfully integrate thebusiness operations of recently acquired companies;

•     our future profitability and liquidity; and

•     regulatory, competitive or other economicinfluences.

Wordssuch as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”“estimates” and similar expressions also identify forward-lookingstatements.  These forward-lookingstatements are not guarantees of future performance and are subject to risksand uncertainties that could cause actual results to differ materially fromestimates or forecasts contained in the forward-looking statements.  Some of these risks and uncertainties arebeyond our control.

**RiskFactors**

Youshould carefully consider the risk factors listed below.  These risk factors may cause our futureearnings to be less or our financial condition to be less favorable than weexpect.  You should read this sectiontogether with the other information contained herein.

 

 

27

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***As a Result of the Merger and the Transfer of Shares of OurCommon Stock to the Digital Angel Share Trust, There is Uncertainty as to theFuture Control of Our Company.***

 

After the merger, in satisfaction of a condition tothe consent to the merger of IBM Credit Corporation, ADS transferred to theDigital Angel Share Trust (the “Trust”) all shares of our common stock owned byADS.  As a result, the Trust is thebeneficial owner of approximately 77% of our common stock, and it controls uswith respect to all matters upon which our stockholders may vote, including theselection of the Board of Directors and mergers, acquisitions and othersignificant corporate transactions. There can be no assurance as to how the Trust will exercise control overour Company.

 

Upon the request of IBM Credit Corporation, the Trustwill be obligated to sell the shares of our common stock owned by ADS for thebenefit of IBM Credit Corporation if ADS fails to make payments to IBM CreditCorporation beginning on February 28, 2003 or at such time ADS otherwisedefaults under the agreement. Such sales may be in private transactions or inthe public market. We can give no assurance as to when or how shares of ourcommon stock will be sold, as to who will purchase such shares, or as to thenumber of shares that may be sold at any given time. As a result, duration ofthe Trust’s control over us and the identity of any parties which may acquirecontrol of us if and when such sales commence is uncertain.

 

***Sales of Our Common Stock by the Trust May Cause a Reductionin the Market Value of Our Common Stock.***

 

If amounts due to IBM Credit Corporation by ADS arenot paid when due, including at least $33 million on February 28, 2003, plusaccrued interest and expenses, or if ADS or the Company is otherwise in defaultunder its credit agreement and its obligations are accelerated, IBM CreditCorporation will have the right to require shares of our common stock held inthe Trust to be sold to provide funds to satisfy the obligations of ADS. It is unlikelythat ADS will have the funds required for payment of such obligations. The saleof a significant amount of shares of our common stock owned by the Trust in asingle transaction or in a series of transactions over a short period of timecould result in a significant decline in the market value of our common stock.

 

***We May Face Operational and Strategic Challenges That MayPrevent Us From Successfully Integrating The MAS Business.***

 

The operation of our Company after the merger involvesrisks related to the integration and management of acquired properties andoperations. We may encounter substantial difficulties, costs and delays inintegrating the operations of our subsidiaries with our business, including:

 

•       perceivedadverse changes in business focus;

 

•       potentialconflicts in marketing or other important relationships;

 

•       loss ofkey employees or customers;

 

•       possibleinconsistencies in standards, controls, procedures and policies among thecompanies and the need to implement and harmonize company-wide financial,accounting, information and other systems;

 

•       failureto maintain the quality of products and services that such companies havehistorically provided;

 

 

28

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•       the needto coordinate geographically diverse organizations; and

 

•       thediversion of management’s attention from the day-to-day operations.

 

 

If we fail to integrate these businesses successfullyand/or if we fail to realize the intended benefits of the merger, our financialcondition and results of operations could be adversely affected and the marketprice of our common stock could decline from its current market price.

 

 

***We May Continue to Incur Losses.***

 

We incurred a net loss of $22.5 million for thethree-month period ended March 31, 2002. We also recorded a net loss of $17.4million and $3.9 million for the years ended December 31, 2001 and 2000,respectively. No assurance can be given as to whether or when we will beprofitable. Profitability depends on many factors, including the success ofmarketing programs, the maintenance and reduction of expenses and the abilityto coordinate successfully the operations of business units. If we becomeprofitable, of which there is no assurance, we may not be able to sustain orincrease profitability. If we fail to achieve and maintain profitability withinthe time frame expected by investors, the market price of our common stock maybe adversely affected.

 

***We Depend on the Protection of Our Proprietary Technology.***

 

Our success depends partly on our ability to maintainpatent and trade secret protection, to obtain future patents and licenses, andto operate without infringing on the proprietary rights of third parties. Therecan be no assurance that the measures we have taken to protect our intellectualproperty, including those relating to the Digital Angel Systems, will preventits misappropriation or circumvention. In addition, there can be no assurancethat any patent application, when filed, will result in an issued patent, orthat our existing patents, or any patents that may be issued in the future,will provide us with significant protection against competitors. Moreover,there can be no assurance that any patents issued to or licensed by us will notbe infringed upon or circumvented by others. Litigation to establish thevalidity of patents, to assert infringement claims against others, and todefend against patent infringement claims can be expensive and time-consuming,even if the outcome is in our favor. We also rely to a lesser extent onunpatented proprietary technology, and no assurance can be given that otherswill not independently develop substantially equivalent proprietaryinformation, techniques or processes or that we can meaningfully protect ourrights to such unpatented proprietary technology.

 

***Many Factors Can Negatively Affect the Animal IdentificationMarket.***

 

The electronic animal identification market can benegatively affected by such factors as food safety concerns, consumerperceptions regarding cost and efficacy, international technology standards,national infrastructures, United States Food and Drug Administration (FDA)reviews, United States Federal Communications Commission (FCC) approvals, andslaughterhouse removal of microchips. In addition, certain foreign governmentalstandards that require specific codes may limit our ability to sell microchipsfrom our current inventory in such countries. Many of the principal customersfor fish electronic identification devices are government contractors that relyon funding from the United States government, and this market could beadversely affected by any decline in the availability of government funds. Wemay be adversely affected by these and other factors affecting the animalidentification market, which could have an adverse effect on our financialcondition and results of operations.

 

 

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***We Depend on a Single Supplier For Our ElectronicIdentification Products.***

 

We rely largely on a production arrangement with RaytheonCorporation for the manufacture of our syringe-injectable microchips that areused in all of our electronic identification products. The termination, or anysignificant reduction, by Raytheon of its production of these microchips couldhave a material adverse effect on our financial condition and results ofoperations. In addition, Raytheon may not be able to produce sufficientquantities to meet any significant increased demand for our products or to meetany such demand on a timely basis. Any inability or unwillingness of Raytheonto meet potentially increased demand for our product could have a materialadverse effect on our financial condition and results of operations.  The Company also has its own microchip productionoperations located in another contract facility that we intend to use moreintensively to meet additional product demand.

 

***We Depend on Principal Customers.***

 

For the three months ended March 31, 2002, we hadthree customers of our Animal Applications segment that accounted for a large portionof our gross revenue.  Biomark, PacificStates Marine, and Schering-Plough Pharmaceutical accounted for approximately12.5%, 13.4%, and 8.7% of our gross revenues, respectively. In addition, theGPS and Radio Communications segment is heavily dependent on contracts withdomestic government agencies and foreign governments, including the UnitedKingdom, primarily relating to military applications. The loss of, or asignificant reduction in, orders from these or our other major customers couldhave a material adverse effect on our financial condition and results ofoperations.

 

***Significant Competition Exists in the Visual and ElectronicIdentification Markets.***

 

The market for visual and electronic identificationfor companion animals and livestock is highly competitive. We believe that ourprincipal competitors in the visual identification market for livestock areAllFlex and Y-Tex, and our principal competitor in the electronicidentification market that has developed permanent electronic identificationdevices for the companion animal market is AllFlex. In addition, othercompanies could enter this line of business in the future. Certain of ourcompetitors have substantially greater financial and other resources than wedo. We cannot ensure that we will compete successfully or that our competitorswill not succeed in developing or marketing technologies and products that aremore widely accepted than those being developed by us or that would render ourproducts obsolete or noncompetitive. We are not aware of competitors currentlymarketing products that would compete with the Digital Angel technology.However, we are aware of several potential competitors that have expressed aninterest in similar technologies. If such competitors enter the market and competewith the Digital Angel technology, such competition could have a materialadverse effect on our financial condition and results of operations.

 

***We Are Subject to Government Regulation.***

 

We are subject to federal, state and local regulationin the United States and other countries, and we cannot predict the extent towhich we may be affected by future legislative and other regulatorydevelopments concerning our products and markets. We are required to obtainregulatory approval before marketing most of our products. Our products aresubject to FCC regulations governing electromagnetic emissions, and ourinsecticide products have been approved by the United States EnvironmentalProtection Agency (EPA) and are produced in accordance with EPA regulations. Salesof insecticide products are incidental to our primary business and do notrepresent a material part of our operations. Our products also are subject tocompliance with foreign government agency requirements. Our contracts with ourdistributors generally require the distributor to obtain all necessaryregulatory approvals from the governments of the countries in which thedistributor sells our products. However, any such approval 

 

 

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may be subject to significant delays. Some regulators also have theauthority to revoke approval of previously approved products for cause, torequest recalls of products and to close manufacturing plants in response toviolations. Any actions by these regulators could have a material adverseeffect on our business, financial condition and results of operations.

 

***The Digital Angel Systems Segment is a Development StageEnterprise.***

 

The Digital Angel Systems segment is in the initialstage of operations and is a development stage enterprise. As a result, it hasno operating history upon which to base an evaluation of its current businessand future prospects. The first Digital Angel product was introduced inNovember 2001. Accordingly, this segment has generated no substantial revenues.Moreover, this segment does not currently have any contracts in place that willprovide any significant revenue. In addition, because of this segment’s lack ofan operating history, management has limited insight into trends that mayemerge and could materially adversely affect its business. This segment’sprospects must be considered in light of the risks, expenses and difficultiesfrequently encountered by companies in new and rapidly evolving markets.Stockholders should consider the risks and difficulties the Digital AngelSystems segment may encounter in its new and rapidly evolving market,especially given the segment’s lack of operating history. These risks includethe Digital Angel Technology segment’s ability to:

 

•       developand market the Digital Angel technology by integrating and miniaturizing newtechnologies into marketable products and services;

 

•       builda customer base;

 

•       generaterevenues;

 

•       competefavorably in a highly competitive market;

 

•       accesssufficient capital to support growth;

 

•       recruitand retain qualified employees;

 

•       introducenew products and services; and

 

•       buildtechnology and support systems.

 

***The Digital AngelTM Technology Is Not Proven AndWe May Not Be Able To Develop Products From This Unproven Technology.***

 

The Digital AngelTM Systems segment dependson the development, integration, miniaturization and successful marketing ofseveral pieces of advanced technology that have not previously been integratedor used as anticipated by this segment. The Digital AngelTM Systemssegment depends upon advanced technology, including: wireless communication,biosensors, motion determination and global positioning system capabilities.Many of these technologies are unproven or relatively new. In addition, thesetechnologies have not been previously integrated or miniaturized into acommercial product. No assurances can be given as to when or if the DigitalAngelTM technology will be successfully marketed. Our ability todevelop and commercialize products based on our proprietary technology willdepend on our ability to develop our products internally on a timely basis orto enter into arrangements with third parties to provide these functions. If wefail to develop and commercialize products successfully, it could have a materialadverse effect on our business, financial condition and results of operations.

 

 

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***The Digital Angel Systems Segment Expects to Incur FutureLosses and May Not Achieve Profitability.***

 

From the period from January 2000 until March 31,2002, approximately $7.7 million has been invested in research and developmentrelating to the Digital AngelTM technology. Our management expectsthe Digital Angel Systems segment to incur additional development, sales andmarketing, and other general expenses. As a result, the Digital Angel Systemssegment may incur losses for the foreseeable future and will need to generaterevenues to achieve profitability. Even if the segment achieves profitability,it may not be able to sustain it.

 

 

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***We Depend on a Small Team of Senior Management and We MayHave Difficulty Attracting and Retaining Additional Personnel.***

 

Our future success is highly dependent upon thecontinued services and performance of senior management and other keypersonnel.  If we lose the services ofany member of our senior management team, our overall operations could beadversely affected. In addition, our future success will depend on our abilityto identify, attract, hire, train, retain and motivate other highly skilledtechnical, managerial, marketing, purchasing and customer service personnelwhen they are needed. Competition for these individuals is intense. We cannotensure that we will be able successfully to attract, integrate or retainsufficiently qualified personnel when the need arises. Any failure to attractand retain the necessary technical, managerial, marketing, purchasing andcustomer service personnel could have a material adverse effect on ourfinancial condition and results of operations.

 

***We Will Need Additional Financing***

 

Our company, especially the Digital Angel Systemssegment, currently relies upon the revenue generated by our Animal Applicationssegment.  We estimate that we will needto obtain approximately $5.0 million to $7.0 million in additional funding overthe next twelve months in order to continue our efforts to implement ourbusiness plan. As of the date of these financial statements, we have helddiscussions with several banks and an asset based lender regarding creditagreements.

Our actual capital needs will depend on operatinglosses, development expenses, working capital needs and other factors.Forecasts of such factors are inherently uncertain, and any variation in thosefactors from the levels used in current forecasts could result in us needingmore capital, or capital earlier, than projected. Capital can be difficult andexpensive to obtain, and there can be no assurance that we will be able toobtain additional financing. If this capital is not raised, we may not be ableto execute our business plan, may not be able successfully to develop andmarket the Digital AngelTM technology and our financial conditionand results of operations may be materially adversely affected. To date, wehave not been able to obtain this capital. No assurance can be given that wewill be able to raise this additional necessary capital.

 

If funds are notavailable when required for working capital needs, our ability to carry out ourbusiness plan could be adversely affected and we may be required to scale backgrowth and operations to reflect the extent of available funding. Lendingarrangements will probably include limitations on our ability to incur otherindebtedness, pay dividends, create liens, sell or purchase shares of capitalstock, sell assets or make acquisitions or enter into other transactions. Suchrestrictions may adversely affect our ability to finance future operations orcapital needs or to engage in other business activities. If additional fundsare raised by issuing equity or convertible debt securities, the value of ourstockholders investment may be diluted. These securities may have rights,preferences or privileges senior to those of our common stockholders.

 

Moreover, we may issue additional shares:

 

•        toemployees;

 

•        inconnection with acquisitions and corporate alliances; and

 

•        toraise capital.

 

Pursuant to a registration rights agreement, the Digital Angel ShareTrust and any of its transferees of our common stock, subject to certain termsand conditions, have the right to require us to register shares of our commonstock beneficially owned by them upon demand and any other time we registerstock for 

 

 

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sale.

 

In addition, IBM Credit Corporation currently holds awarrant to acquire 1,163,906 shares of our common stock. The warrant isexercisable for five years beginning on April 5, 2002, or earlier under certaincircumstances. Under the warrant, IBM Credit Corporation, subject to certainterms and conditions, has the right to require us to register shares of ourcommon stock subject to the warrant.

 

**IMPACT OF RECENTLY ISSUED ACCOUNTINGSTANDARDS**

In July 2001, the FASBissued FAS No. 141 *Business Combinations* and FAS No. 142 *Goodwill andOther Intangible Assets. *FAS141 requires business combinations initiated after June 30, 2001 to beaccounted for using the purchase method of accounting and broadens the criteriafor recording intangible assets separate from goodwill.  Recorded goodwill and intangibles will beevaluated against these new criteria and may result in certain intangiblesbeing included in goodwill, or alternatively, amounts initially recorded asgoodwill may be separately identified and recognized apart from goodwill.  FAS 142 requires the use of anon-amortization approach to account for purchased goodwill and certainintangibles.  Under a non-amortizationapproach, goodwill and certain intangibles will not be amortized into resultsof operations, but instead would be reviewed for impairment and written downand charged to results of operations only in the periods in which the recordedvalue of goodwill and certain intangibles is more than its fair value. Weadopted the provisions of each statement, which apply to goodwill and certainintangibles acquired prior to June 30, 2001, on January 1, 2002. The adoptionof these standards will have the impact of reducing our amortization ofgoodwill commencing January 1, 2002. There was no impairment of goodwill uponadoption of FAS 142.  Future impairmentreviews may result in periodic write-downs.

In August 2001, the FASBissued FAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  This standard supersedes FAS 121, *Accountingfor the Impairment of Long-Lived Assets to Be Disposed Of*, andprovides a single accounting model for long-lived assets to be disposed of.This standard significantly changes the criteria that would have to be met toclassify an asset as held-for-sale. This distinction is important becauseassets to be disposed of are stated at the lower of their fair values orcarrying amounts and depreciation is no longer recognized. The new rules willalso supercede the provisions of APB Opinion 30, *Reporting the Results of Operations-Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions*, with regard toreporting the effects of a disposal of a segment of a business and will requireexpected future operating losses from Discontinued Operations to be displayedin Discontinued Operations in the period in which the losses are incurred,rather than as of the measurement date as presently required by APB 30. Thisstatement is effective for fiscal years beginning after December 15, 2001. Weadopted this statement on January 1, 2002. The adoption of FAS 144 did not havea material impact on our operations or financial position.

 

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**Item3.****                                                          ****Quantitativeand Qualitative Disclosures About Market Risk**

Wehave operations and sales****in****various regions of the world. Additionally, wemay export and import to and from other countries.  Our operations may therefore be subject to volatility because ofcurrency fluctuations, inflation and changes in political and economicconditions in these countries. Sales and expenses may be denominated in localcurrencies and may be affected as currency fluctuations affect our productprices and operating costs or those of our competitors.

Wepresently do not use any derivative financial instruments to hedge our exposureto adverse fluctuations in interest rates, foreign exchange rates, fluctuationsin commodity prices or other market risks, nor do we invest in speculativefinancial instruments.

Dueto the nature of our borrowings and our short-term investments, we haveconcluded that there is no material market risk exposure and, therefore, noquantitative tabular disclosures are required.

 

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**PART II OTHER INFORMATION**

**Item 1.                    Legal Proceedings.**

**Silva, et al. v. Customized Services Administrators,Incorporated, dba CSA Travel Protection, Inc. et al., No. CV798528 (Santa ClaraCounty Superior Court)**

On May 29, 2001, JanetSilva, individually and as Guardian*ad Litem*for Jonathan Silva, a minor, and the Estate of Clarence William Silva, Jr.(collectively, “Plaintiffs”) filed suit against Customized ServicesAdministrators, Incorporated (“CSA”), Pricesmart, Inc. (“Pricesmart”),Commercial Union Insurance Company (“Commercial Union”), CGU Insurance Group,and the Company (collectively the “Defendants”) in the Superior Court of theState of California in and for the County of Santa Clara.  The allegations of the complaint arise froma vacation guarantee insurance policy (the “Insurance Contract”) allegedlypurchased by Plaintiffs from Defendants on March 6, 2000.  The complaint alleges, among other things,that Defendants breached the Insurance Contract, defrauded Plaintiffs, acted inbad faith, engaged in deceptive and unlawful business practices, resulting inthe wrongful death of Clarence William Silva, Jr. (the “Deceased”) and theintentional infliction of emotional distress on Plaintiffs.  The complaint seeks the cost of funeral andburial expenses of the Deceased and amounts constituting the loss of financialsupport of the Deceased, general damages, attorney’s fees and costs, andexemplary damages.

 

CSA has filed a cross-claim against the Companyalleging that the Company should be held liable for any liability that CSA mayhave to Plaintiffs.  The Company hasdenied the allegations of the complaint and the CSA cross-claim and isvigorously contesting all aspects of this action.

Weand our subsidiaries are party to various other legal actions as either aplaintiff or a defendant.  In ouropinion, as of the date of this Form 10-Q/A, these proceedings will not have amaterial adverse effect on our financial position, our cash flows or ouroverall trends in results. The estimate of the potential impact on ourfinancial position, our overall results of operations or our cash flows forthese proceedings could change in the future.

 

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**Item 2.                    Changesin Securities and Use of Proceeds.**

RecentSales of Unregistered Securities

Thefollowing table lists all unregistered securities sold by the Company betweenJanuary 1, 2002 and March 31, 2002. These shares were issued in acquisition transactions to the persons orentities indicated. These shares were issued without registration in relianceupon the exemption provided by Section 4(2) of the Securities Act of 1933, asamended, and Rule 506 of Regulation D promulgated thereunder.
| **Name/Entity/Nature**           |   | **Number of Persons** |   | **Note** |   | **Issued For** |   | **Number of Common Shares** |
|----------------------------------|--------|-----------------------|--------|----------|--------|----------------|--------|-----------------------------|
|                             |   |                  |   |     |   |           |   |                        |
| Applied Digital  Solutions, Inc. |   | 1                     |   | 1        |   | Acquisition    |   | 18,750,000                  |
| Richard J.  Sullivan             |   | 1                     |   | 2        |   | Acquisition    |   | 937,500                     |
| Garrett A.  Sullivan             |   | 1                     |   | 2        |   | Acquisition    |   | 468,750                     |
| Evan C. McKeown                  |   | 1                     |   | 2        |   | Acquisition    |   | 30,468                      |
| Total                            |   |                  |   |     |   |           |   | 20,186,718                  |

----

1.     Represents shares issued in connection withthe merger of Applied Digital Solutions, Inc.’s Advanced Wireless Group inexchange for shares of Digital Angel Corporation, which was a subsidiary ofApplied Digital Solutions, Inc.  No cashwas involved in the transaction.

2.     Represents shares issued to minorityshareholders of Applied Digital Solutions, Inc.’s Advanced Wireless Group toeffect the merger transaction.  No cashwas involved in the transaction.

**Item 3.                    Defaults Upon SeniorSecurities.**

**       **Not applicable.

 

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**Item 4.                    Submission of Matters to aVote of Security Holders.**

At a special meeting of the stockholders of MAS heldon March 18, 2002, the following matters were submitted to the stockholders fora vote:

•      The approval of an Agreement and Plan of Merger, dated as ofNovember 1, 2001, pursuant to which Digital Angel Acquisition Co., a Delawarecorporation and a wholly-owned subsidiary of MAS, would merge with and intoDigital Angel Corporation, a Delaware corporation and a wholly-owned subsidiaryof Applied Digital Systems, Inc. (3,396,247 shares voted for, 33,935 sharesvoted against, 14,120 shares abstained from voting, and no broker non-votes);

•      Amending MAS’s Certificate of Incorporation to change its nameto “Digital Angel Corporation” and to authorize 85,000,000 additional shares ofcommon stock, par value $0.005 per share (4,243,419 shares voted for, 40,514shares voted against, 10,369 shares abstained from voting, and no brokernon-votes); and

•      To transact such other business as may properly come before themeeting or any adjournment or postponement of the special meeting (4,246,403shares voted for, 6,635 shares voted against, 20,864 shares abstained fromvoting, and no broker non-votes).

 

        The meeting did not involvethe election of directors.

**Item 5.                    OtherInformation.**

None

 

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**Item 6.                    Exhibits and Reports on Form8-K.**
| **(a)** |   | **Exhibits**                                                                                                                                                                                                                                                                                                                                                  |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
|    |   | The following exhibits are  hereby incorporated into this Quarterly Report on Form 10-Q by reference to  the reports and schedules identified below filed with the Securities and  Exchange Commission (“Commission”)**:**                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 2.1     |   | Agreement and Plan of Merger by and between Applied  Digital Solutions, Inc., Digital Angel Corporation, Medical Advisory Systems,  Inc. and Acquisition Subsidiary, Inc. dated as of November 1, 2001  (incorporated herein by reference to Appendix A to final Proxy Statement  filed by MAS with the Commission on February 14, 2002).                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 2.2     |   | First Amendment to  Agreement and Plan of Merger by and among Applied Digital Solutions, Inc.,  Digital Angel Corporation, Medical Advisory Systems, Inc. and Digital Angel  Acquisition Co. dated as of March 26, 2002 (incorporated herein by reference to Exhibit 2.2 to  Current Report on Form 8-K filed by MAS with the Commission on April 11,  2002). |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 3.1     |   | Amended and Restated  Certificate of Incorporation of MAS (incorporated herein by reference to  MAS’s Registration Statement on Form S-18 (No. 2-98314) filed by MAS with the  Commission on June 7, 1985 and MAS’s Annual Report on Form 10-KSB filed by  MAS with the Commission on March 28, 1990).                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 3.2     |   | Bylaws of MAS  (incorporated herein by reference to MAS’s Registration Statement on Form  S-18 (No. 2-98314) filed by MAS with the Commission on June 7, 1985).                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
|    |   | The following exhibits are  filed with this Quarterly Report on Form 10-Q:                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 3.3     |   | Amendment to Certificate  of Incorporation of MAS filed with the Delaware Secretary of State on March  27, 2002.                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 3.4     |   | Amendment to Certificate  of Incorporation of Digital Angel Corporation filed with the Delaware  Secretary of State on May 14, 2002.                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 3.5     |   | Amendment to Bylaws of MAS  dated March 27, 2002.                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.1    |   | Employment Agreement dated  as of March 8, 2002 by and between Randolph K. Geissler and the Company                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.2    |   | Employment Agreement dated  as of April 1, 2002 by and between James P. Santelli and the Company                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| 10.3    |   | Amendment to Employment  Agreement dated as of March 8, 2002 by and between Randolph K. Geissler and  the Company                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                          |
| **(b)** |   | **Reports on Form  8-K**                                                                                                                                                                                                                                                                                                                                      |

** **

** **

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** **

**                Thefollowing are the Current Reports on Form 8-K filed by MAS or the Companyduring the quarter ended March 31, 2002 or during the period from March 31,2002 to the date of this Quarterly Report on Form 10-Q/A:**

(i)                                     On April 11, 2002, we filed a CurrentReport on Form 8-K which disclosed a change in control, an acquisition ofassets, information regarding a potential change in certifying accountants, anda change in fiscal year.

(ii)                                  On April 18, 2002, we filed a CurrentReport on Form 8-K which disclosed changes in our Board of Directors andOfficers.

(iii)                               On April 25, 2002, we filed a CurrentReport on Form 8-K which disclosed a change in certifying accountants.

(iv)                              On May 1, 2002, we filed a Current Reporton Form 8-K/A which disclosed a change in certifying accountants, and a changein fiscal year.

(v)                                 On May 20, 2002, we filed a CurrentReport on Form 8-K which disclosed a change in certifying accountants.

(vi)                              On May 20, 2002, we filed a CurrentReport on Form 8-K/A which disclosed required financial statements and proforma financial information.

(vii)                           On May 28, 2002, we filed a CurrentReport on Form 8-K which disclosed a change in certifying accountants.

(viii)                        On June 6, 2002, we filed a CurrentReport on Form 8-K/A which disclosed a change in certifying accountants.

 

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**SIGNATURE**

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|                 | Digital  angel corporation(Registrant) |
|----------------------|----------------------------------------|
|                 |                                   |   |
| Dated: July 23, 2002 | By:                                    | /S/ JAMES P. SANTELLI |
|                 |                                   | James P.  Santelli   Vice President — Finance, Chief   Financial Officer |

 

 

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**INDEX TOEXHIBITS**

 

The followingexhibits are filed with this Quarterly Report on Form 10-Q/A:

 

3.3           Amendmentto Certificate of Incorporation of MAS filed with the Delaware Secretary ofState on March 27, 2002.*

 

3.4           Amendmentto Certificate of Incorporation of Digital Angel Corporation filed with theDelaware Secretary of State on May 14, 2002.*

 

3.5           Amendmentto Bylaws of MAS dated March 27, 2002.*

 

10.1         Employment Agreement dated as of April 1, 2002 by andbetween Randolph K. Geissler and the Company*

 

10.2         Employment Agreement dated as of April 1, 2002 by andbetween James P. Santelli and the Company*

 

10.3         Amendment to Employment Agreement dated as of March 8, 2002by and between Randolph K. Geissler and the Company*

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* Filed previously.

 

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