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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 ON 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-18492
DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041-F HADLEY ROAD SOUTH PLAINFIELD NEW JERSEY 07080
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (908) 561-1200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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On January 9, 1996, the aggregate market value of the voting stock of
Digital Solutions, Inc. (consisting of Common Stock, $.001 par value per share)
held by non-affiliates of the Registrant was approximately $29,771,507 based
upon the average bid and asked price for such Common Stock on said date as
reported by NASDAQ. On such date, there were issued and outstanding 14,010,121
shares of Common Stock of the Registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1996 Annual Meeting of Shareholders
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Digital Solutions, Inc. ("DSI" or the "Company"), is a leading provider of
human resource management services to a wide variety of industries in 40 states
and internationally. These services may be divided into three general
categories: (1) professional employer organization ("PEO") services, also known
as employee leasing (2) employer administrative services, such as payroll
processing, personnel administration, benefits administration and tax filing;
and, (3) contract staffing, or the placement of temporary and permanent
employees.
DSI was founded in 1969 as a payroll service bureau which focused on the
construction industry. Using its proprietary software, it competed in the New
Jersey marketplace against large nationwide payroll service bureaus. In 1990,
under new management, the Company embarked upon a strategy of expansion by
offering a wide variety of human resource services, including contract staffing
and employee leasing, and establishing regional operational hubs in the south
and southwest through the acquisition of compatible businesses. Over the last
five years, DSI's acquisitions have included several companies in the contract
staffing and employee leasing industries in Florida, Texas and Mississippi.
Essentially, the Company functions as the personnel department of the small
to mid-sized companies which fully utilize the Company's services. The Company
believes that by offering services which relieve small and medium size
businesses of the ever increasing burden of employee related record keeping,
payroll processing, benefits administration, employment of temporary and
permanent specialized employees and other human resource functions, the Company
will position itself to take advantage of a major growth opportunity during this
and the next decade.
DSI currently furnishes employee leasing, payroll, and contract staffing
services to over 1,300 client organizations with approximately 3800 worksite
leasing and staffing employees, and believes that it currently ranks, in terms
of revenues and worksite employee base, as one of the largest professional
employer organizations in the United States. In addition, DSI places its leased
employees and temporary help in hospitals and clinics throughout the United
States through its Texas and Florida offices. The Company has three hubs
operating in South Plainfield, New Jersey; Houston, Texas and Clearwater,
Florida and eight sales service centers in New York City; Ridgeland,
Mississippi; Dallas, El Paso and Houston, Texas; Winter Park and Clearwater,
Florida; and South Plainfield, New Jersey.
In 1994, DSI employed a new president and chief operating officer, George
J. Eklund, to identify and capitalize on business growth opportunities for the
Company. Recognizing the desire by many small businesses to be relieved not only
of the human resource administrative functions, but also of the responsibility
to manage employees and oversee operational tasks ancillary to their core
business, the Company formulated a strategy of emphasizing PEO ("employee
leasing") and "outsourcing" services. In employee leasing, a service provider
becomes an employer of the client company's employees and leases these employees
to the client to perform their intended functions at the worksite. In
outsourcing, the service provider is not only responsible for human resource
administration but also assumes ultimate responsibility for management of the
employees and their job functions. For example, a provider of outsourcing
services could be engaged by a hospital or clinic to manage the maintenance and
operation of the facility. The medical staff would still be responsible for the
medical functions but the physical plant would be managed by the provider.
DSI is now committed to focusing on the PEO and outsourcing industry for
its future growth and to convert the healthcare division (Staff Rx) into more
than a contract staffing business by focusing on PEO, outsourcing and facilities
management. While DSI will continue to sell stand-alone employer services, such
as payroll and tax filing, it will emphasize the PEO component of its service
offerings with a goal of becoming the leading providers of employee leasing and
outsourcing in the United States. The Company also believes that the PEO
industry is characterized by relatively small and regionalized providers which
offer a limited range of
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services to their clients. Accordingly, a major component of the Company's
growth strategy is the acquisition of well situated independent PEO companies
whose business can be integrated into the Companies operations.
Digital Solutions, Inc. was organized under the laws of the State of New
Jersey on November 25, 1969 and maintains executive offices at 4041-F Hadley
Road, South Plainfield, New Jersey 07080 where its telephone number is (908)
561-1200.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
THE STAFF ACQUISITION
On November 21, 1994, the Company acquired certain business assets of
Staff-Rx and its subsidiaries, RADS Radiography Service, Inc., Relief Services,
Inc., Primedical Physician Services, Inc. and SkillMaster Management, Inc.
(collectively "Staff-RX") through DSI Staff Rx, Inc., a newly formed subsidiary
of DSI Contract Staffing, Inc., a subsidiary of the Company. Staff is engaged in
the contract staffing business and places permanent and temporary medical
personnel in hospitals, clinics and other medical facilities. Staff has offices
in Houston, Texas; Clearwater, Florida; Dallas, Texas and Winter Park, Florida
and conducts business in approximately 35 states. The assets acquired included
the customer accounts (the "Customer Accounts") of Staff-RX, all books and
records, and all owned and leased fixed assets utilized by Staff-Rx in its
business operations and the right to use the names SkillMaster, Staff RX, RADS
and Primedical (collectively the "Assets").
Certain principals and/or key managerial personnel of Staff-RX deemed
essential have entered into employment agreements which contain negative and
restrictive covenants for the term of the agreement and continuing for a period
of two years thereafter (one year in the event Employee is terminated without
cause), which will prohibit competitive conduct. Non-employee shareholders of
Staff-Rx and certain other persons entered into three (3) year noncompetition
agreements with the Company, which contain restrictive covenants during the term
of the agreement prohibiting competitive conduct (collectively the
"Noncompetition Agreements").
In exchange for the Assets and the Noncompetition Agreements, the Company
paid to Staff-Rx (i) $200,000 in cash; (ii) a convertible promissory note in the
principal amount of $1,300,000; (iii) an earnout payment (the "Earnout") as
defined below; and (iv) a profit payment (the "Profit Payment"), as defined
below (together, the "Purchase Price"). The Company also paid approximately
$266,000 representing expenses incurred by Staff in operating the business from
October 3, 1994 to the closing.
The Purchase Price between the Assets and the Noncompetition Agreement was
allocated $1,400,000 to goodwill and $50,000 each to the Non-Competition
Agreements and to the fixed assets acquired.
The Earnout is payable quarterly commencing on the date of the end of the
first calendar quarter following the closing that the cumulative gross margin
of DSI Staff RX, Inc., exceeds $5,000,000, and will be equal to 50% of the
gross margins derived from the customer accounts in excess of $5,000,000. The
Earnout is payable during during the two (2) year period commencing October 3,
1994 (the "Earnout Period"). Gross margins of DSI Staff RX, Inc. shall be equal
to gross revenues less cost of sales and certain investments made by the
Company into the business. The Profit Payment, payable quarterly commencing on
the date of the end of the first calendar quarter that the cumulative earnings
before taxes ("EBT") since the closing exceeds $600,000, shall be equal to 50%
of the amount of Staff-Rx, computed in accordance with generally accepted
accounting principles as modified by the agreement of the parties, in excess of
$600,000 in each of the two (2) year periods commencing on October 3, 1994
following the Closing Date, up to a cumulative aggregate maximum Profit Payment
of $600,000.
THE TURNKEY ACQUISITION
In May, 1995, the Company consummated the acquisition, through its
subsidiary, DSI Staff Connxions-Southwest, Inc., of certain employee leasing
assets and related liabilities of Turnkey Services Inc., a Texas corporation
("Turnkey") with operations in Texas and New Mexico. Additionally, certain
principals of Turnkey entered into non-competition agreements with the Company.
The Company acquired the Turnkey assets for an aggregate purchase price of
$950,000, payable through a combination of $783,750 in cash and
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68,205 shares of common stock. One-half of the purchase price was paid at
closing and one-half will be subject to certain earnout provisions, and will not
be payable by the Company until one year after the closing.
RECENT FINANCINGS
In February, 1995, the Company renewed its one-year revolving credit line
agreement with United Jersey Bank of New Jersey ("UJB"). The renewed line
provides credit to the Company at the lesser of $3,500,000 or 80% of accounts
receivable balances under 60 days. The terms call for interest at one and one
half percent over the bank s floating base rate. Interest is payable monthly.
The Company utilizes the proceeds to fund general working capital. The loan is
collateralized by all of the Company's receivables and contains certain
covenants. These covenants require the Company to maintain certain ratios on
interest coverage, current ratio, total tangible capital funds and total
non-subordinated liabilities to tangible net worth plus subordinated debt. As of
September 30th, 1995, the Company was in breach of its financial covenants. The
Company is presently negotiating with the bank to develop mutually agreeable
terms and conditions in response to the Company s request to UJB for forbearance
from declaring a default. While the Company believes it will be able to
negotiate such terms and renew the credit line, in the event that this does not
occur, the Company will pursue other financing alternatives.
In November 1994, the Company sold 39.5 Units of its securities, each Unit
consisting of a $50,000 Principal Amount 12% Convertible Promissory Note and
5,000 Common Stock Purchase Warrants. Cumulative semi-annual dividends are
payable on each Note at the rate of 12% per annum. Unless redeemed by the
Company by November 28, 1995, each Note is convertible into shares of the
Company's Common Stock commencing November 28, 1995 at a conversion rate equal
to 70% of the average closing bid price of the Common Stock for the thirty (30)
consecutive trading days immediately preceding the date of conversion. Each
Warrant entitles the holder to purchase one share of Common Stock during an
exercise period commencing on November 28, 1995 and terminating on January 5,
1999, at an exercise price of $2.59, subject to certain anti-dilution
adjustment. The Warrants are redeemable by the Company on 30 days prior written
notice for $.05 per Warrant at any time after the closing bid price of the
Company's Common Stock is at least 150% of the then current exercise price of
the Warrants for ten consecutive trading days ending within 15 days of the date
of the notice of redemption. As of January 10, 1996, $250,000 principal amount
of Notes were paid in full, $125,000 of the notes were converted into stock or
used to exercise Warrants, $600,000 principal amount of Notes were extended to
March 28, 1996, by agreement of the holders and in consideration of a reduction
in the Warrant exercise price, and $1,000,000 principal amount of Notes remain
outstanding.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area where management intends to
promote, is its PEO services (also known as "employee leasing" or
"outsourcing"). When a client utilizes the Company's PEO services, the client
administratively transfers all or some of its employees to DSI which leases them
back to the client. At that point, DSI is the recognized legal employer and is
responsible for all human resource functions, including payroll, benefits
administration, tax reporting and personnel record keeping. The client still
manages the employees and determines salary and duties in the same fashion as
any employer. However, the client is relieved of reporting and tax filing
requirements and other administrative tasks. Moreover, because of economies of
scale, DSI is able to negotiate favorable terms on workers compensation
insurance, health benefits, retirement programs, and other valuable services.
The client company benefits because it can now offer its employees the same or
similar benefits as its larger competitors, and successfully compete in
recruiting highly qualified personnel as well as build the morale and loyalty of
its staff.
The benefits DSI can offer include:
COMPREHENSIVE MAJOR MEDICAL PLANS -- Medical insurance costs have
forced small employers to reduce coverage provided to their employees and
to increase employee contributions to coverage payments. DSI is able to
leverage its large employee base and allow their clients to offer a variety
of
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health coverage plans from traditional indemnity plans to Health
Maintenance Organizations (HMO) or Preferred Provider Organizations (PPO).
DENTAL AND VISION COVERAGE -- Such coverage is generally beyond the
reach of most small groups, but it is a cost effective option which can be
provided by DSI.
LIFE INSURANCE -- Affordable basic coverage is available, plus
optional supplemental life.
SECTION 125 PREMIUM CONVERSION PLAN -- Employees can pay for benefits
with pre-tax earnings, reduce their taxable income and FICA payments, and
increase their take-home pay.
401(K) RETIREMENT PLANS -- DSI believes that most small groups are not
provided with any significant retirement benefits due to the administrative
and regulatory requirements associated with the establishment and
maintenance of retirement plans. DSI enables small business owners to offer
their employees retirement programs comparable to those of major
corporations. Such plans increase morale, productivity and promote employee
loyalty.
CREDIT UNION -- An opportunity for employees to borrow money at lower
interest than offered at most banks.
PAYROLL SERVICES -- Although ancillary to the services, clients no
longer incur the expense of payroll processing either through in-house
staff or outside service. DSI's PEO services include all payroll and
payroll tax processing.
WORKERS COMPENSATION PROGRAM -- DSI has obtained a national workers
compensation policy that affords the Company a significant advantage in
marketing its services, particularly in jurisdictions where workers
compensation policies are difficult to obtain at reasonable costs. DSI also
provides its clients with independent safety analysis and risk management
services to reduce worker's injuries and claims.
By relieving client companies of personnel administrative tasks, the
client is able to focus on its core business. The client is also able to
offer a broader benefits package for its employees, a competitive rate in
workers' compensation insurance, savings in time and paperwork previously
required in connection with personnel administration.
PAYROLL SERVICES
DSI was established as a payroll service firm in 1969, and continues to
provide basic payroll services to its clients. Historically, DSI provided these
services primarily to the construction industry and currently approximately 60%
of the Company's approximately 1,000 payroll service clients are in the
construction industry. DSI offers most, if not all, of what other payroll
services provide, including the preparation of checks, government reports, W-2's
(including magnetic tape filings), remote processing (via modem) directly to the
clients offices, and tax payout service. The Company provides twelve hour
turn-around when required and a multitude of specialty reports. These reports
include:
WORKERS COMPENSATION REPORTS -- Accurate calculations of workers
compensation insurance premiums so that clients can monitor the
compensation rates and avoid costly accounting fees for audits.
UNION REPORTS -- DSI specializes in tailoring union reports to
exacting specifications, particularly in the construction industry.
JOB ANALYSIS REPORTS -- A critical function for clients whose jobs are
competitively bid. These reports enable a client to exert greater control
on labor costs, track budgets, and bid jobs more accurately with the
Company's comprehensive job-costing reports.
DEDUCTION REPORTS -- DSI monitors and reports 401(k) and Section 125
plans, and other medical and benefits deductions.
GOVERNMENT COMPLIANCE REPORTS -- DSI can prepare certified payroll,
EEO reports, and other detailed, regulatory reports, that assist a client
in meeting contractual and legal obligations.
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In addition, DSI offers a wide array of tax reporting services including
accrual of tax summaries, timely deposit of taxes, impounding of tax refunds,
filing of returns, distribution of quarterly and year-end statements and
responding to agency inquiries.
CONTRACT STAFFING SERVICES
DSI's contract staffing subsidiaries have, in the aggregate, more than 25
years of experience in placing permanent and temporary employees with
specialized skills and talents with regional, national and international
employers. Contract Staffing enables clients to attain management and
productivity goals by matching highly trained professionals and technical
personnel to specific project requirements. DSI works in two specific markets
where it places people on a temporary long term assignment, or on a permanent
basis: technical employees such as engineers, draftspersons and project managers
primarily with Fortune 100 companies for specific projects, and radiologists,
therapists, nurses, doctors with hospitals, clinics and therapy centers
throughout approximately 40 states. Clients whose staff requirements vary
depending on the level of current projects or business are able to secure the
services of highly qualified individuals on an interim basis.
DSI's services include:
ACCESS TO THOUSANDS OF PROFESSIONALS -- DSI's automated data retrieval
system allows quick access to a continually updated and expanded resume
pool.
RAPID TURNAROUND SERVICE -- DSI provides a quick response -- in many
cases, same-day service -- with referrals of qualified professionals within
a maximum of 48 hours. The client avoids the necessity of an expensive or
time consuming search for qualified personnel.
ADVANCED CANDIDATE SCREENING -- DSI screens each candidate for
qualifications and availability and provides only qualified prospects for
the client's consideration.
NATIONAL OR INTERNATIONAL ASSIGNMENTS -- DSI Contract Staffing, Inc.
has the expertise to recruit, select, and administer employees for overseas
positions.
DSI's contract staffing services provide clients with the ability to
"rightsize", that is, expand or reduce its workforce in response to changing
business conditions. DSI provides numerous benefits to the client such as saving
the costs of salary and benefits of a permanent employee whose services are not
needed throughout the year. The client also avoids the costs, uncertainty and
delays associated with searches for qualified interim employees. The Company
also provides insurance bonding where necessary and assumes all responsibility
for payroll tax filing and reporting functions, thereby saving the client
administrative responsibility for all payroll, workers' compensation,
unemployment and medical benefits.
Contract Staffing also increases the pool of qualified applicants for the
client since contract staffing employees have access to a wide array of benefits
such as health and life insurance, Section 125 premium conversion plans, and
401(k) retirement plans. These benefits provide interim employees with the
motivation of full-time workers without additional benefit costs to the client.
A client is also able to temporarily rehire a retired employee for short-term or
specialized projects without jeopardizing their pension.
ACQUISITION STRATEGY
A key component of the Company's growth strategy has been, and will
continue to be, the acquisition of compatible businesses to expand its
operations and customer base. Currently, the human resource service industry
includes numerous small companies seeking to develop services, operations and
customer base similar to those developed by the Company. The Company has
actively acquired companies in the human resource industry during the last three
years. However, with the business and strategy of the Company further developed,
acquisitions in the future will be concentrated in the employee leasing and
outsourcing business. The Company believes that with a limited number of key
acquisitions of regional PEO companies who possess a strong customer base and
regional reputation, the Company will be able to grow into an industry leader,
in not only revenue size but in scope of services offered.
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A prospective acquisition candidate may be either a public or private
company, but will be required to meet certain financial criteria and growth
potential established by the Company. The Company evaluates acquisition
candidates by analyzing the company's operations and customer base, which must
complement or expand the Company's operations; financial stability, including
the company's profitability and cash flow; and management. The Company's long
term plan is to expand sales and income potential by achieving economies of
scale as it expands and regionalizes its revenue base.
CUSTOMERS
The Company's customer base consists of over 1,300 client companies,
representing approximately 29,000 employees (including payroll services) as of
September 30, 1995. The Company's client base is broadly distributed throughout
a wide variety of industries; however, approximately 60% of the customers in the
payroll processing area are in the construction industry and substantially all
of Staff-Rx customers are in the healthcare industry.
The Company intends to maintain diversity within its client base to lower
its exposure to downturns or volatility in any particular industry and help
insulate the Company to some extent from general economic cyclicality. All
prospective customers are also evaluated individually on the basis of workers'
compensation risk, group medical history, unemployment history and operating
stability.
SALES AND MARKETING
During the last fiscal year, the Company has concentrated on the
restructuring and rebuilding of its sales force. After conducting an analysis of
the Company's approach to marketing and sales, management determined that the
sales force which, except for the operations in New Jersey, was derived from the
acquisitions, largely operated as a conglomerate of independent units. The sales
department was restructured and centralized in New Jersey and Houston. Moreover,
each member of the sales force was directed to market and sell all of the
Company's services -- not just the particular services offered by one
subsidiary. The Company believes that it has a strategic advantage over its
competitors in that the scope of services offered, from simple payroll to
employee leasing and outsourcing, are more comprehensive than most, if not all,
of its competitors. The Company believes that previously its sales force had not
effectively utilized this advantage.
DSI has also implemented a program of cross-marketing its varied services
to all of its clients with an emphasis on PEO services and outsourcing.
Traditionally, its clients in the construction industry used only the payroll
services. The Company is now aggressively marketing its PEO services to the
construction industry. Further, management believes DSI has a significant
resource of untapped potential of PEO and outsourcing clients in the healthcare
industry. DSI's Staff-RX provides temporary and permanent staffing to hospitals,
clinics and other healthcare providers in 42 states. The Company has just
commenced the marketing of its PEO and outsourcing services to these clients.
Moreover, healthcare providers are potentially a vast source of clientele for
facilities management services, which is a key component of the Company's
strategic growth plan.
DSI has significantly increased the size of its sales force and replaced
nonproductive members in the last fiscal year. In addition, it has retained
experienced sales management to implement its new marketing plan. The Company
now has a full-time sales manager and 16 sales representatives actively selling
new business. Each of these sales representatives has been trained to sell PEO
and outsourcing services in addition to their traditional concentrations, i.e.
payroll and contract staffing services.
DSI has established a formalized commission structure which compensates the
representatives very competitively as compared to the employer services industry
generally. The sales representatives also receive residual commissions as
incentive to maintain the client relationship after the sale.
The Company has also implemented a sales quota plan and fiscal year-end
sales contests to further motivate each of the sales representatives to achieve
their quotas. A formal weekly sales reporting process has been established which
provides management with reports of current performance to assist in the
monitoring of individual sales activity.
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COMPETITION
The PEO industry consists of approximately 2,200 companies, most of which
serve a single market or region. The Company believes that there are two PEOs
with annual revenue exceeding $500 million. The largest PEO is Staff Leasing of
Bradenton, Florida with approximately $800 million in revenue concentrated in
the state of Florida. The second largest, Administaff, has annual revenue of
approximately $650 million and is headquartered in Kingwood, Texas where, the
Company believes, a majority of its clients are located. While there are several
other large PEOs among the approximately 2200 companies, most are located in
Florida and other states in the Sunbelt. The Company considers its primary
competition to be these large national and regional PEO providers as well as the
traditional form of employment of employees.
The payroll services industry is characterized by intense competition. The
principal competitive factors are price and service. Management believes that
Automatic Data Processing, Inc., Ceridian and Paychex, Inc. are its major
competitors. The Company also competes with manual payroll systems sold by
numerous companies as well as other providers of computerized payroll services
including banks, and smaller independent companies. Some companies have in-house
computer capability to generate their own payroll documents and reports. The
increasing availability of personal computers at low cost may result in
additional businesses acquiring such capabilities. In the area of providing
temporary technical and medical personnel, the Company competes with companies
such as Volt Information Services, Butler Arde and Tech Aid, Inc., among others.
Many of these competitors have longer operating histories and greater financial
resources than the Company.
The Company competes with these companies by offering customized products,
personalized service, competitive prices and specialized personnel to satisfy a
client's particular employee requirements.
DSI believes that its broad scope of human resource management services and
its commitment to quality service will differentiate it from its competition.
Many companies compete in the various segments of the human resource and
financial services marketplace. However, the Company believes there are none
which compete in all of them and offer the broad range of services which the
Company offers. DSI believes that its concentration on providing comprehensive
services and moving into facilities management or outsourcing of human resource
management services will set it apart from its competitors. While many of the
PEOs entered the industry as a result of workers' compensation or health
insurance problems, DSI is establishing itself as a professional employer
organization which will assist companies, small and large, with all of their
human resource management challenges.
INDUSTRY REGULATION
INTRODUCTION
The Company's operations are affected by numerous federal and state laws
relating to labor, tax and employment matters. By entering into a co-employer
relationship with employees who are assigned to work at client company locations
(sometimes referred to as "worksite employees"), the Company assumes certain
obligations and responsibilities of an employer under these federal and state
laws. Many of these federal and state laws were enacted prior to the development
of nontraditional employment relationships, such as professional employer
organizations, temporary employment, and outsourcing arrangements, and do not
specifically address the obligations and responsibilities of nontraditional
employers. In addition, the definition of "employer" under these laws is not
uniform. Accordingly, the application of these laws to the Company's business
can not be assured.
Some governmental agencies that regulate employment and labor laws have
developed rules that specifically address labor and employment issues raised by
the relationship among clients and PEOs. Existing regulations are relatively new
and therefore, their interpretation and application by administrative agencies
and federal and state courts is limited or non-existent. The development of
additional regulations and interpretation of existing regulations can be
expected to evolve over time. The Company cannot predict with certainty the
nature or direction of the development of federal, state and local regulations.
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As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships.
FEDERAL EMPLOYMENT TAXES
The Company assumes the sole responsibility and liability for the payment
of federal and state employment taxes with respect to wages and salaries paid to
its employees, including worksite employees. There are essentially three types
of federal employment tax obligations: (i) withholding of income tax
requirements governed by Code Section 3401, et seq.; (ii) obligations under
FICA, governed by Code Section 3401, et seq.; and (iii) obligations under the
Federal Unemployment Tax Act (FUTA), governed by Code Section 3301, et seq.
Under these Code sections, employers have the obligation to withhold and
remit the employer portion and, where applicable, the employee portion of these
taxes. There is still considerable uncertainty as to the status of leased
employees in relation to these statutes. While the Company believes that it can
assume the client company's withholding obligations, in the event the Company
fails to meet these obligations, the client company may be held jointly and
severally liable for these payments. These interpretive uncertainties may have
an impact on the Company's PEO business.
EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its employees,
including its worksite employees. These plans include the 401(k) Plan (a
profit-sharing plan with a cash or deferred arrangement ("CODA") under Code
Section 401(k), a Section 125 plan, a group health plan, a group life insurance
plan and a group disability insurance plan. Generally, employee benefit plans
are subject to provisions of both the Code and the Employee Retirement Income
Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the plans
must be established and maintained by an employer for the exclusive benefit of
its employees. In addition to the employer/employee threshold, pension and
profit-sharing plans, including plans that offer CODAs under Code Section 401(k)
and matching contributions under Code Section 401(m), must satisfy certain other
requirements under the Code. These other requirements are generally designed to
prevent discrimination in favor of highly compensated employees to the detriment
of non-highly compensated employees with respect to both the availability of,
and the benefits, rights and features offered, in qualified employee benefit
plans.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines "employer" as "any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term "employee" as "any individual employed by an
employer." A definitive judicial interpretation of "employer" in the context of
a PEO or employee leasing arrangement has not been established. If the Company
were found not to be an employer for ERISA purposes, its plans would not comply
with ERISA and the level of services the Company could offer may be materially
adversely affected. Further, as a result of such finding, the Company and its
plans would not enjoy the preemption of state laws provided by ERISA and could
be subject to varying state laws and regulations, as well as to claims based
upon state common laws.
In addition to ERISA and the Code provisions discussed herein, issues
related to the relationship between the Company and its worksite employees may
also arise under other federal laws, including other federal income tax laws.
STATE REGULATION
As an employer, the Company is subject to all statutes and regulations
governing the employer-employee relationship. The Staff Leasing Services
Licensing Act (the "Act") now regulates PEOs in Texas. The Act, which became
effective on September 1, 1993, established a mandatory licensing scheme for
PEOs and
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expressly recognizes a licensee as the employer of the assigned employee for
purposes of the Texas Unemployment Compensation Act. The Company possesses a
license to offer PEO services in the state of Texas.
OTHER STATE REGULATION
While many states do not explicitly regulate PEOs, approximately 16 states
have passed laws that have licensing or registration requirements for PEOs and
other states are considering such regulation. Such laws vary from state to state
but generally provide for monitoring the fiscal responsibility of PEOs. Whether
or not a state has licensing, registration or certification requirements, the
Company faces a number of other state and local regulations that could impact
its operations.
EMPLOYEES
As of January 10, 1995 the Company employed 152 employees, both full-time
and part-time, including executive officers. The Company also employs
approximately 3800 leased employees and 230 temporary employees on client
assignments. The Company believes its relationship with its employees to be
satisfactory.
ITEM 2. PROPERTIES
OPERATIONS AND FACILITIES
The Company currently has three processing centers ("Hubs") in South
Plainfield, New Jersey, Houston, Texas and Tampa, Florida. The Company also has
nine sales service centers which are located in New York City, South Plainfield,
New Jersey, Clearwater and Winter Park, Florida, Houston, Dallas and El Paso,
Texas and Ridgeland, Mississippi. A sales service center is an office used
primarily for sales efforts and client services. The Company's short term
strategy is to target acquisitions in the Hub areas, whereby the Company will
acquire a business or business accounts and absorb these accounts into the Hub
with minimal additional overhead. The Company's strategic plan calls for limited
amount of acquisitions over the next year, and, again, targeted acquisitions in
the Hub areas. The Company intends to continue its national expansion efforts in
fiscal years 1997-1998, most likely through additional acquisitions.
DSI leases its 17,000 square foot corporate headquarters in South
Plainfield, New Jersey, as well as Hub offices in Tampa, Florida and Houston,
Texas. The Company also leases sales offices in New York City, Winter Park,
Florida, Ridgeland, Mississippi, Dallas and El Paso, Texas. The facilities
provide sufficient capacity to meet demands for the foreseeable future. However,
the Company anticipates entering into additional leases as a result of planned
acquisitions. In fiscal year 1995, the Company's total lease expenses were
$384,000.
Although DSI's offices are equipped with software and computer systems, the
Company is currently evaluating all systems including hardware and will upgrade
accordingly. At the Company's headquarters in South Plainfield, New Jersey, two
high speed Xerox printers produce 200,000 plus checks monthly for its client
base. These machines, which are integrated with the software system, do all of
the printing on the checks, including the clients name, the employee, dates, the
client name, as well as the "Micro Encoding".
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The following is summary information on DSI's facilities:
APPROXIMATE EXPIRATION LEASE
LOCATION SQUARE FEET DATE TERMS
-------------------------------------------- ----------- ---------- -----------------
DSI Staff RX, Inc. (Houston)................ 5,398 9/30/99 $17,895 per month
2 Northpointe Drive, Suite 110 7,396 2/28/00
Houston, TX 77060
DSI Staff RX, Inc. (Orlando)................ 771 Monthly $ 1,005 per month
1850 Lee Road, Suite 331
Winter Park, FL 32789
DSI Staff RX, Inc. (Dallas)................. 441 Monthly $ 409 per month
12850 Hillcrest Road, #222
Dallas, TX 75230
DSI Staff RX, Inc........................... 4,000 7/31/97 $ 3,221 per month
(Clearwater)
1940 Drew Street
Clearwater, FL 34625
Staff ConnXions of Mississippi.............. 850 7/31/97 $ 726 per month
525 Thomastown Lane, Suite C
Ridgeland, MI 39157
Staff ConnXions Southwest................... 4,540 2/28/97 $ 4,882 per month
(El Paso)
9440 Viscount, Suite 101
El Paso, TX 79925
Corporate Service Center.................... 17,180 8/31/97 $17,895 per month
4041-F Hadley Road
South Plainfield, NJ 07080
New York Office............................. 391 6/30/97 $ 2,120 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
ITEM 3. LEGAL PROCEEDINGS
Rick A. McMinn v. Digital Solutions, Inc., DSI Contract Staffing, Inc. and
DSI Staff ConnXions-Southwest, Inc. An arbitration proceeding was commenced by
Rick A. McMinn ("McMinn") who, in January 1994, executed two separate Stock
Purchase Agreements with the Company, pursuant to which DSI Contract Staffing,
Inc., a wholly-owned subsidiary of Digital Solutions, Inc., acquired all of the
common stock of RAM Technical Services, Inc. and MLB Medical Staffing, Inc., and
an Asset Purchase Agreement, pursuant to which DSI Staff ConnXions-Southwest,
Inc., a wholly-owned subsidiary of Digital Solutions, Inc., acquired
substantially all of the assets of the Alternate Source, Inc. In connection with
these transactions, McMinn alleges that the Company wrongfully terminated his
employment on July 19, 1995 and has failed to pay sums due to him under the
Stock Purchase Agreements and the Asset Purchase Agreement, and Employment and
Option Agreements executed in connection with the transactions. McMinn seeks
$459,259.00 in damages plus attorneys' and arbitration fees, and other expenses
incurred in connection with the arbitration. The Company has denied the material
allegations of McMinn's claims and is vigorously defending the arbitration. The
Company has alleged counterclaims against McMinn for, among other things,
federal and state securities law fraud, common law fraud and negligent
misrepresentation in connection with the sale of common stock to the Company,
breach of fiduciary duty, breach of the Stock Purchase Agreements and the Asset
Purchase Agreement, breach of Non-Competition Agreements executed by McMinn and
indemnification under the Stock Purchase Agreements and the Asset Purchase
Agreement. The Company seeks damages against McMinn which are estimated to be in
excess of $1,000,000.00, and seeks to enjoin McMinn and entities he controls
from selling or otherwise disposing of common stock of Digital Solutions, Inc.
issued in connection with the transactions. Discovery in the proceeding is
pending.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
NONE
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PART II
ITEM 5. MARKET OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
A. Principal Market
The Company's Common Stock is traded in the over-the-counter market and
included in the Automated Quotation System of the National Association of
Securities Dealers, Inc. ("NASDAQ") under the symbol "DGSI".
B. Market Information
The Company's Common Stock commenced trading in the over-the-counter market
on May 15, 1986. The range of high and low bid prices for such securities for
the periods indicated below, are:
COMMON STOCK
FISCAL YEAR 1994 HIGH LOW
----------------------------------------------------------------------- ---- ---
1st Quarter............................................................ 2 1/4 1 1/4
2nd Quarter............................................................ 3 5/8 1 5/8
3rd Quarter............................................................ 3 2 1/8
4th Quarter............................................................ 3 1/16 2 3/8
FISCAL YEAR 1995 HIGH LOW
----------------------------------------------------------------------- ---- ---
1st Quarter............................................................ 2 3/4 2 1/2
2nd Quarter............................................................ 3 1/16 2 1/4
3rd Quarter............................................................ 2 1/2 1 3/4
4th Quarter............................................................ 2 5/16 1 1/2
The above quotations, reported by NASDAQ, represent prices between dealers
and do not include retail mark-ups, mark-downs or commissions. Such quotations
do not necessarily represent actual transactions.
C. Dividends
The payment by the Company of cash dividends, if any, rests within the
discretion of its Board of Directors and, among other things, will depend upon
the Company's earnings, capital requirements and financial condition, as well as
other relevant factors. The Company has not declared any cash dividends on its
common stock since inception, and has no present intention of paying any cash
dividends on its Common Stock in the foreseeable future, and it intends to use
earnings, if any, to generate increased growth.
D. Approximated Number of Equity Security Holders
The approximate number of record holders of the Company's Common Stock as
of January 10, 1996 was approximately 310. Such number of record holders was
determined from the Company's stockholder records, and does not include
beneficial owners of the Company's Common Stock whose shares are held in the
names of various security holders, dealers and clearing agencies. The Company
believes there are in excess of 500 beneficial holders of the Company's Common
Stock.
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ---------- ----------
OPERATING DATA:
Operating Revenues.............. $73,621,000 $37,996,000 $14,661,000 $9,504,000 $6,600,000
Direct Costs.................... 66,530,000 34,939,000 12,459,000 7,643,000 6,641,000
Gross Profit.................... 5,291,000 3,059,000 2,222,000 1,661,000 2,158,000
Selling, General &
Administrative Expenses...... 6,702,000 2,695,000 1,962,000 2,248,000 2,224,000
Income (loss) from continuing
operations................... (2,256,000) 328,000 101,000 (695,000) (300,000)
---------- ---------- ---------- --------- ---------
Net Income (loss)............ $(3,316,000) $ 720,000 $ 301,000 $ (695,000) $ (407,000)
========== ========== ========== ========= =========
Income (loss) from continuing
operations per share of
common stock................. ($0.24) $0.06 $0.04 ($0.18) ($0.07)
Net income (loss) per
share...................... ($0.24) $0.05 $0.04 ($0.16) ($0.08)
Dividends paid per share of
preferred stock............ $0.00 $3.30 $4.00 $2.00
BALANCE SHEET DATA
Assets.......................... 13,630,000 7,727,000 4,264,000 2,677,000 2,639,000
Liabilities..................... 10,620,000 2,671,000 1,079,000 2,249,000 2,725,000
Long Term Debt.................. 175,000 107,000 241,000 461,000 581,000
Working Capital (deficiency).... (3,949,000) 1,146,000 1,920,000 (716,000) (743,000)
Shareholder's Equity
(deficiency)................. 3,210,000 5,056,000 3,195,000 326,000 (87,000)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1995 as compared to Fiscal Year 1994
Operating revenues for the fiscal year 1995 were $73,821,000 as compared to
fiscal 1994 of $37,998,000. This represents an increase of $35,823,000 or 94%.
This increase is attributable to the increased sales efforts of the internal
sales force ($15,700,000) as well as the acquisition of Staff Rx ($8,400,000),
Turnkey Services, Inc. ($6,200,000) and the full year effect of the other
leasing companies which were acquired in the second quarter of fiscal year 1994
($5,500,000).
Cost of sales for fiscal year 1995 was 92.8% as compared to 92.0% in fiscal
1994. This increase is due to the continued growth in the PEO business which has
a higher direct cost than any other segment, as a percentage of revenues.
Selling, general and administrative costs (SG&A) increased $4,007,000 from
fiscal 1994 and was primarily due to: (i) increased selling and marketing
expenses including direct mail, the addition of 15 senior account managers
(sales force); (ii) additions at the corporate level needed to help position and
transform the company into a national firm; (iii) the establishment of a Houston
Hub operation to support client and sales activities in the Southwest and
Florida; and (iv) establishment of certain necessary reserves and balances at
year end.
Net loss before tax benefits was $3,453,000 for fiscal 1995 as compared to
a net gain of $720,000 the prior year. In accordance with Statement of Financial
Accounting Standards 109 (SFAS 109), the Company has recorded an additional tax
asset of $160,000 in the current fiscal year of 1994, representing the expected
future utilization of existing net operating loss carryforwards against
operating income. As of September 30, 1995, the Company has recorded total
deferred assets of $760,000 which it believes, based on the current level of
sales activity and the positive impacts of recent acquisitions, will more likely
than not be realized in accordance with SFAS 109.
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With the increase in sales volume in the fiscal year ended September 30,
1995 combined with anticipated growth, management believes that the recognition
of the $760,000 of deferred tax assets is more likely than not, in accordance
with SFAS 109. Management's tax planning strategy is consistent with its goal of
continued maximization of shareholder value through revenue growth by producing
improved employee benefits coverage, arranging sales representation alliances
and acquiring existing bases of business, mostly in the employee leasing area.
Finally, the Company's current processing operations has enough capacity for
this growth with minimal capital expenditures or operating costs.
Fiscal Year 1994 as compared to Fiscal Year 1993
Operating revenues for the fiscal year 1994 were $37,998,000 compared to
fiscal 1993 of $14,681,000. This is an increase of $23,317,000 or 159%. The
increase was attributable to the acquisition of Staff Leasing of Mississippi,
Inc., ($8,611,000) and the acquisition of certain other leasing companies and
the associated staff contracting companies ($6,508,000) during fiscal year 1994.
Revenues from DSI's operations other than newly acquired companies mentioned
previously, were up approximately 50%. Payroll services increased $67,000, DSI
Staff Connxions increased $7,700,000 and DSI Contract Staffing increased
$387,000.
Cost of sales for fiscal 1994 was 92% of total revenue as compared to 85%
in fiscal 1993. This ratio increased because of the incremental impact of
increased sales of employee leasing which carries a lower margin than the
Company's other product lines.
Selling, general and administrative (SG&A) costs increased $733,000 from
fiscal 1993 and was primarily due to; (1) additions at the corporate level
needed to coordinate and control the functions of the acquired companies as the
Company transforms into a national firm; and (2) the associated overhead of
these acquired companies in the area of selling and client services especially
in the Texas acquisition which created the Company's hub in the southwest.
Net income before tax benefits increased $227,000 or 225% over prior fiscal
year 1993.
Fiscal Year 1993 as compared to Fiscal Year 1992
Operating revenues increased from $9,504,000 in fiscal 1992 to $14,681,000
in fiscal 1993, resulting in a 54% increase. This increase was primarily the
result of the expansion of employee leasing services in New Jersey, New York and
Mississippi, expanded sales and marketing force activities and the acquisition
of the insurance brokerage services business on December 31, 1992. This increase
was offset by slightly lower revenues from payroll administration fees, which
were still affected by the down turn in the construction industry business in
the Mid Atlantic states.
Cost of sales as a percentage of sales was 85% in fiscal 1993 compared to
80% for the previous fiscal year. This increase in percentage is caused by the
revenue increases in employee leasing which provides a lower gross profit margin
due to the pass through nature of the payroll expense component. Although
payroll services revenue decreased, production costs were reduced which resulted
in an increase in its gross profit margin. The production cost reduction was
primarily attributable to salary reductions, salary freezes, reduction of staff
and increased staff productivity. Finally, insurance brokerage fees recognized
as revenue have little direct costs associated with them. Since the acquisition
took place on December 31, 1992 this positive effect did not exist in the
previous fiscal year.
Selling, general and administrative expenses decreased by $286,000 or 13%
as compared to the previous year. This decrease was the result of the cost
reduction actions by management referred to above. The percentage of selling,
general and administrative expense to sales revenue decreased from 24% to 13% in
the current fiscal year due to the volume increase in employee leasing without a
corresponding increase in selling, general and administrative expenses.
The Company reported net income of $301,000 or $.04 per share in fiscal
1993 as compared to a net loss of ($695,000) or ($.16) per share for fiscal
1992. This improvement was the result of the Company's ability to attract new
capital which enabled it to reduce interest expense by 35%, expand its services
and client base as reflected in the increased employee leasing revenue and
reduction of overall costs referred to above.
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With the adoption of Statement of Financial Accounting Standards 109 (SFAS
No. 109), the Company has recorded a deferred tax asset of $200,000 in the
current fiscal year, representing the expected future utilization of existing
net operating loss carryforwards against operating income. In addition, $136,000
of net operating losses have been utilized in the current year to offset tax
liabilities associated with operating income.
Liquidity and Capital Resources
Working capital for the fiscal year ended 1995 is ($3,949,000) as compared
to prior year of $1,146,000. This decrease is a result of 1) higher accruals
associated with employee leasing, 2) a bridge note issued January 1995 to repay
the Company's promissory note issued in connection with the Staff-Rx acquisition
due 11/28/95 of $1,887,500 and 3) increased use of the revolving credit line
needed to fund additional acquisitions and working capital needs due to
increased accounts receivable associated with the staffing businesses acquired.
Increased payroll and associated taxes as well as higher accrued workers
compensation is indicative of the nature of employee leasing. These cost factors
are a significant portion of the revenues associated with employee leasing. Also
associated with this product line is the Company's policy to retain a deposit
when possible from each leasing client equal to at least one week's payroll and
one month's medical insurance premium. Since these deposits are based on short
term contracts, the classification as a current liability is in compliance with
generally accepted accounting principles.
The Company entered into a new workers Compensation minimum premium
agreement with a nationally recognized insurance carrier. As part of this
program, the Company will share in any "claims not paid" pool. Generally
Accepted Accounting Principals require that all incurred but not paid claims as
well as an estimate for claims incurred but not reported (IBNR) be accrued on
the balance sheet as a current liability although a portion of the claims may
not be paid in the following twelve months. Additionally, the insurance company
develops reserve factors on each claim that may or may not materialize after the
claim is fully investigated. As of the balance sheet date, this accrual was
$785,000.
Current assets increased by $2,786,000 which is basically due to 1)
increased receivables of $2,337,000 associated with the acquisition of several
affiliated contract staffing firms, and TurnKey Services, Inc., a leasing
company with two major clients that have payment terms, and 2) an increase in
Loans Receivable -- Officers as certain officers exercised 523,532 stock options
from the Management Options Plan for a total purchase price of $556,000 at an
option price of $1.0625. This is offset by a decrease in cash of $158,000.
In addressing the capital needs of the Company, management has secured two
equity financings and is in the process of negotiating with other sources for
additional capital.
In November, 1995, the Company raised $500,000 through the issuance of
convertible preferred stock at a coupon rate of 6% and a 20% discount to market
at the date of conversion. Additionally, the Company has raised an additional
$448,000 through a private placement of common equity and is expected to raise
an additional $42,000 through this offering.
The Company has secured an additional $1,000,000 in debt financing through
an investment firm which is secured by stock in the Company. This is a 15 month
financing due in March 1997 and bears interest at the higher of prime plus one
or 9 7/8% payable monthly, in arrears. This financing source is being considered
for additional financing on a short term basis as needed until the major
financing is completed. In this regard, the Company has secured a letter of
intent from an investment banking firm to secure up to $5,000,000 in new debt
financing. This financing will be for 30 months, bear an interest rate of the
greater of 9% or Prime plus one and is payable quarterly. There will be warrants
attached which are still being negotiated. Management feels that this financing
will position the Company very strongly as it opportunistically looks forward
for expansion possibilities and working capital needs.
Management believes that the employee leasing business market is positioned
to grow substantially in the next decade. Management has addressed this
opportunity through geographic expansion into the Houston and Florida markets,
increased marketing and advertising through direct mail and product development.
Company policy of requiring good funds from clients prior to release of payroll
reports and checks indicate that little
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additional cash and credit would be needed for the growth in the leasing
business, except for costs associated with acquisitions.
Inflation and changing prices have not had a material effect on the
Company's net revenues and results of operations in the last three fiscal years,
as the Company has been able to modify its prices to respond to inflation and
changing prices.
ITEM 8. FINANCIAL STATEMENTS
See Attached Financial Statements appearing at pages F-1 through F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Arthur Andersen LLP would have caused them to make reference thereto in their
report on the financial statements for fiscal years 1994 and 1995.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
NAME AGE OFFICE
- --------------------------------- --- --------------------------------------------
Karl W. Dieckmann................ 67 Chairman of the Board of Directors
Raymond J. Skiptunis............. 52 Chief Executive Officer, Vice-Chairman,
Treasurer and Director
George J. Eklund................. 52 President and Chief Operating Officer and
Director
Kenneth P. Brice................. 49 Vice President and Chief Financial Officer
Louis J. Monari.................. 45 Vice President and Secretary
Marshall G. Webb................. 53 Corporate Officer
William J. Marino................ 52 Director
Senator John H. Ewing............ 75 Director
Steven B. Sands.................. 36 Director
Each director is elected for a period of one year at the Company's annual
meeting of shareholders and will serve until his successor is duly elected by
the shareholders. Officers serve at the will of the Board of Directors. Sands
Brothers & Co., Ltd., placement agent of the August and September 1993 private
offerings, has the right to nominate an individual for election to the Company's
Board of Directors. Steven B. Sands was the nominee of Sands Brothers & Co.,
Ltd. and on April 25, 1994 was elected to the Board of Directors
Karl W. Dieckmann, Director of the Company since April 1990 has been
Chairman of the Board since November, 1991. From 1980 to 1988 Mr. Dieckmann was
the Executive Vice President of Science Management Corporation and managed the
Engineering, Technology and Management Services Groups. From 1948 to 1980 Mr.
Dieckmann was employed by the Allied Corporation (now Allied Signal Corporation)
in various capacities including President, Semet Solvay Division; Executive Vice
President, Industrial Chemicals Division; Vice President Technical -- Fibers
Division; Group General Manager -- Fabricated Products Division; and General
Manager -- Plastics Division, as well as various positions with the Chemicals
Division.
Raymond J. Skiptunis, has been a Director of the Company since October 1985
and President and Chief Executive Officer from February 1989 to October 1989,
and Chief Executive Officer from April 1990 to the present. Since March 1984,
Mr. Skiptunis has been a Partner of Venray Capital Management Partners, a
limited partnership providing financial consulting and managerial support to
companies in which it invests. He was the chairman and President of Venray
Capital Management Corp., a financial management consulting firm from November
1982 to March 1984 and has held similar offices in Venray Capital Corp., both of
which are predecessors to Venray Capital Management Partners.
George J. Eklund is President and Chief Operating Officer of the Company
since September 21, 1994. From 1992 to 1994 Mr. Eklund was President of the
Human Resource Information Services division of Fiserv, Inc. which provides
outsourcing services. From 1977 to 1992, Mr. Eklund was employed by ADP
(Automatic Data Processing) in various positions eventually serving as Corporate
Vice President and Eastern Division President. His eastern division served the
northeast area of the country. From 1974 to 1977, Mr. Eklund was the Vice
President of Operations for Bucilla, Inc. Mr. Eklund obtained his BA in
Marketing in 1964 from St. John's University. He received his MBA from New York
University in Finance and Economics in 1969.
Marshall G. Webb joined DSI in November 1994 when his former company was
acquired by DSI. His current role is Division President-Southwest, and he was
appointed a corporate officer in March 1995. Prior to DSI, Mr. Webb served 15
years in the staffing industry as an owner/operator. From 1969 to 1979, Mr. Webb
was employed at Peat, Marwick, Mitchell & Co. (KPMG Peat Marwick) where he
served as Controller and Director of Administrative Services, Consultant for
private Business Advisory Services, and a member of the
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firm's internal accounting data processing committee. Mr. Webb is a past
president of the Texas Association of Staffing and a member of the National
Association of Temporary and Staffing Services.
Kenneth P. Brice, has been Chief Financial Officer since July 1, 1995 and
was Vice President of Finance since he started at DSI on February 8, 1995. From
1993 until 1995 he was vice-president of Mergers and Acquisitions for Interim
Services, Inc., a national provider of temporary help services. His other
industry experience includes 15 years with Automatic Data Processing where he
reached the position of Vice President and Group Controller of the Employer
Services division, ADP's largest operating Unit.
Louis J. Monari is Vice-President of Human Resources for DSI and Corporate
Secretary. He spent 16 years with Nabisco Brands in human resources positions
based in manufacturing, research and development and corporate headquarters. His
experience also includes seven years in Nabisco's international division. Prior
to joining DSI, he was with Goodrich and Sherwood, a major human resources
consulting firm headquartered in New York City. From 1988-1993 he served as
Co-Founder and President of Holgate Associates, Inc., a successful human
resources consulting firm.
William J. Marino, President and Chief Executive Officer of Blue Cross and
Blue Shield of New Jersey, joined the Board of Directors in October, 1995. He
joined Blue Cross and Blue Shield in 1992 and was named to his present post in
1994. From 1968 to 1991, Marino held a variety of sales, marketing and
management positions with the Prudential Insurance Company of America. He is
Chairman of the Board of Trustees of the United Way of Essex and West Hudson
(NJ) and is Chairman of the board of directors and executive committee of the
Regional Business Partnership, and a Trustee of the New Jersey Network
Foundation, St. Peter's College and the Newark Museum.
Senator John Ewing, has been a Director of the Company since April 1990.
Senator Ewing has been a State Senator for the State of New Jersey from 1978 to
the present. From 1968 to 1977 Senator Ewing was a New Jersey State Assemblyman.
From 1940 to 1968 he was employed by Abercrombie and Fitch Co., New York City,
and eventually rose to the position of Chairman of the Board. Senator Ewing is
also currently Chairman of New Jersey Senate Education Committee.
Mr. Steven Sands was elected to the board of directors on April 25, 1994.
Mr. Sands has been engaged in the investment banking business since 1980. From
1987 to 1990, Mr. Sands was employed at Rodman & Renshaw, New York, NY, an
investment banking firm. Since 1990, Mr. Sands has been Co-Chairman and Chief
Executive Officer of Sands Brothers & Co., Ltd., an investment banking firm. Mr.
Sands is a director of Semi-Conductor Packaging Materials Co. (semi-conductor
components manufacturer), Air Methods Corporation (emergency air medical
transport), The National Registry Inc. (fingerprint database technology),
Financing for Science International, Inc. (leasing of healthcare related
equipment); The Village Green Bookstore, Inc. ( bookstore owner and operator);
Command Security Corp. (security guards) and Wholesale Cellular USA Inc.
(cellular telephone distributor), each a publicly-held company.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
Karl W. Dieckmann, John H. Ewing and Stephen B. Sands served on the
Company's Compensation Committee during the last fiscal year.
See "Certain Relationships and Related Transactions" for transactions
between the Company and members of the Compensation Committee.
ITEM 11. EXECUTIVE COMPENSATION
The following provides certain summary information concerning compensation
paid or accrued by the Company during the years ended September 30, 1995, 1994
and 1993 to the Company's Chief Executive Officer and each of the executive
officers of the Company who received in excess of $100,000 in compensation.
ANNUAL COMPENSATION
LONG TERM
COMPENSATION
AWARDS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SAR'S
- ------------------------------------------- ---- -------- ------- --------------
Raymond J. Skiptunis....................... 1995 $193,542 $15,000 0
Vice-Chairman, Chief 1994 167,003 0 300,000
Executive Officer, 1993 133,160 0 9,000
and Director
George J. Eklund........................... 1995 $181,866 $50,000 0
Chief Executive Officer, and Director 1994(1) 200,000
Donald W. Kappauf.......................... 1995 $113,000 0 0
Executive Vice President 1994 115,999 0 100,000(2)
1993 109,078 0 8,250
- ---------------
(1) Mr. Eklund's employment with the Company commenced on September 19, 1994.
(2) Does not include warrants to purchase 25,000 shares of the Company's Common
Stock. Effective September 19, 1994, Mr. Kappauf was replaced as President
of the Company by George Eklund.
The Corporation provides normal and customary life and health insurance
benefits to all of its employees including executive officers. The Corporation
has no retirement or pension plan other than a 401(k) which is voluntary.
Compensation of Directors
Directors who are employees of the Company are not compensated for services
in such capacity except under the Director Plan, as defined below. Non-Employee
Directors receive $400 per meeting, $50 in travel expenses, and $250 for each
committee meeting. The Board has also proposed certain changes to the Director
Plan, discussed below.
Option/SAR Grants in Last Fiscal Year
No options or stock appreciation rights were granted to any named executive
officers during the fiscal year ended September 30, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning exercise of stock options and SARs during the last
fiscal year and the value of unexercised options and SARs held as of the year
ended September 30, 1995.
18
20
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS/SARS AS OF AT SEPTEMBER 30,
ACQUIRED SEPTEMBER 30, 1995 1995
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- --------------------------------- --------- -------- --------------------- --------------------
Raymond J. Skiptunis............. 0 0 294,000/15,000(2) $ 349,125/17,812.50
George J. Eklund................. 0 0 165,000/35,000(3) 0/0
Donald Kappauf................... 0 0 108,250/0 (4) $ 118,625/0
- ---------------
(1) Based upon a closing bid price of the Common Stock at $2.25 per share on
September 29, 1995.
(2) Exercise price of $1.0625 per share.
(3) Exercise price of $2.50 per share.
(4) Mr. Kappauf has 100,000 options at an exercise price of $1.1875 per share
and 8,250 options at an exercise price of $.75 per share.
1990 Stock Option Plans
In April, 1990, the Board of Directors adopted the 1990 Employees Stock
Option Plan (the "1990 Plan") which was approved by shareholders in August,
1990. The 1990 Plan provides for the grant of options to purchase up to
l,000,000 shares of the Company's Common Stock. Under the terms of the 1990
Plan, options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Code, or
options which do not so qualify ("Non-ISO's").
The 1990 Plan is administered by a Stock Option Committee designated by the
Board of Directors. The Stock Option Committee has the discretion to determine
the eligible employees to whom, and the times and the price at which, options
will be granted; whether such options shall be ISOs or Non-ISOs; the periods
during which each option will be exercisable; and the number of shares subject
to each option. The Committee has full authority to interpret the 1990 Plan and
to establish and amend rules and regulations relating thereto.
Under the 1990 Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent shareholder (as defined in the 1988 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to a
participant which are designated as ISOs and which become exercisable in any
calendar year shall not exceed $100,000.
The Stock Option Committee may, in its sole discretion, grant bonuses or
authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1990 Plan will expire in April 2000.
In April 1990, the Board of Directors adopted the Non-Executive Director
Stock Option Plan (the "Director Plan") which was approved by shareholders in
August, 199l. The Director Plan provides for issuance of a maximum of 500,000
shares of Common Stock upon the exercise of stock options arising under the
Director Plan. Options may be granted under the Director Plan until April 2000
to (i) non-executive directors as defined and (ii) members of any advisory board
established by the Company who are not full-time employees of the Company or any
of its subsidiaries. The Director Plan originally provided that each non-
executive director was automatically granted an option to purchase 20,000 shares
upon joining the Board and each September l, commencing September l, 1990
provided such person has served as a director for the 12 months immediately
prior to such September lst. Similarly, each eligible director of an advisory
board will receive on each September lst an option to purchase 10,000 shares of
the Company's Common Stock each September lst providing such person has served
as a director of the advisory board for the previous 12 month period. In
December 1995, subject to the approval of shareholders, the Plan was amended to
reduce the amount of directors' options from 20,000 to 5,000 per year (10,000 to
2,500 for advisors) vesting immediately
19
21
upon grant. The yearly options will be granted each year pro rata based on the
time such director served as a director during the previous year. The amendment
also provided that directors, upon joining the Board, and for one year
thereafter, will be entitled to purchase restricted stock from the Company at a
price equal to 80% of the closing bid price on the date of purchase up to an
aggregate purchase price of $50,000. Assuming the requisite shareholder approval
is obtained at the Annual Meeting of Stockholders to be held in March, 1996, the
amendments will be retroactive to all stock awards as of September 1, 1995.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. Until
otherwise provided in the Stock Option Plan the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of Common Stock of the Company or by a combination
of each. The term of each option commences on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. The Director Plan shall be administered by a committee of the
board of directors composed of not fewer than three persons who are officers of
the Company (the "Committee"). The Committee has no discretion to determine
which non-executive director or advisory board member will receive options or
the number of shares subject to the option, the term of the option or the
exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.
In April 1990, the Board of Directors adopted and in August, 1990, the
Company's shareholders approved the Senior Management Incentive Plan (the
"Management Plan") for use in connection with the issuance of stock, options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
It is contemplated that only those executive management employees
(generally the Chairman of the Board, Chief Executive Officer, Chief Operating
Officer, President and Vice Presidents of the Company or Presidents of the
Company's subsidiaries) who perform services of special importance to the
Company will be eligible to participate under the Management Plan. A total of
5,000,000 shares of Common Stock will be reserved for issuance under the
Management Plan. Awards made under the Management Plan will be subject to
three-year vesting periods, although the vesting periods are subject to the
discretion of the Administrator.
Unless otherwise indicated, the Management Plan is to be administered by
the Board of Directors or a committee of the Board, if one is appointed for this
purpose (the Board or such committee, as the case may be, shall be referred to
in the following description as the "Administrator"). The Management Plan
generally provides that, unless the Administrator determines otherwise, each
option or right granted under a plan shall become exercisable in full upon
certain "change of control" events as described in the Management Plan. If any
change is made in the stock subject to the Management Plan, or subject to any
right or option granted under the Management Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Administrator will make appropriate adjustments to such plans and the classes,
number of shares and price per share of stock subject to outstanding rights or
options. The Management Plan permits awards until April 2000.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan.
The Management Plan provides four types of awards: stock options, incentive
stock rights, stock appreciation rights (including limited stock appreciation
rights) and restricted stock purchase agreements, as described below.
Options granted under the Management Plan may be either incentive stock
options ("ISOs") or options which do not qualify as ISOs ("non-ISOs") similar to
the options granted under the 1990 Plan.
Incentive stock rights consist of incentive stock units equivalent to one
share of Common Stock in consideration for services performed for the Company.
If the employment or consulting services of the holder with the Company
terminate prior to the end of the incentive period relating to the units
awarded, the rights shall thereupon be null and void, except that if termination
is caused by death or permanent disability, the
20
22
holder or his heirs, as the case may be, shall be entitled to receive a pro rata
portion of the shares represented by the units, based upon that portion of the
incentive period which shall have elapsed prior to the death or disability.
Restricted stock purchase agreements provide for the sale by the Company of
shares of Common Stock at a price to be determined by the Board of Directors,
which shares shall be subject to restrictions on disposition for a stated period
during which the purchaser must continue employment with the Company in order to
retain the shares. Payment can be made in cash, a promissory note or a
combination of both. If termination of employment occurs for any reason within
six months after the date of purchase, or for any reason other than death or by
retirement with the consent of the Company after the six-month period but prior
to the time that the restrictions on disposition lapse, the Company shall have
the option to reacquire the shares at the original purchase price.
Restricted shares awarded under the Management Plan will be subject to a
period of time designated by the Administrator (the "restricted period") during
which the recipient must continue to render services to the Company before the
restricted shares will become vested. The Administrator may also impose other
restrictions, terms and conditions that must be fulfilled before the restricted
shares may vest.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 9, 1996
with respect to each director, each of the named executive officers as defined
in Item 402(a)(3), and directors and executive officers of the Company as a
group, and to the persons known by the Company to be the beneficial owner of
more than five percent of any class of the Company's voting securities.
NUMBER OF PERCENT OF
SHARES COMPANY'S
PRESENTLY OUTSTANDING
NAME OF SHAREHOLDER OWNED (1) STOCK
- ------------------------------------------------------------------- --------- -----------
Raymond J. Skiptunis............................................... 700,681(2) 5.1%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
George J. Eklund................................................... 165,000(9) 1.2%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
Donald W. Kappauf.................................................. 501,998(11) 3.7%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
Stephen Levine..................................................... 692,539(3) 5.1%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
Karl W. Dieckmann.................................................. 673,435(4) 4.9%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
Senator John Ewing................................................. 63,000(5) .5%
76 Claremont Road
Bernardsville, NJ 07924
Steven B. Sands.................................................... 923,066(6) 6.8%
c/o Sands Brothers & Co., Ltd.
101 Park Avenue
New York, NY 10178
21
23
NUMBER OF PERCENT OF
SHARES COMPANY'S
PRESENTLY OUTSTANDING
NAME OF SHAREHOLDER OWNED (1) STOCK
- ------------------------------------------------------------------- --------- -----------
Martin S. Sands.................................................... 923,066(7) 6.8%
c/o Sands Brothers & Co., Ltd.
101 Park Avenue
New York, NY 10178
Kenneth P. Brice................................................... 10,000(9) .1%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
Louis J. Monari.................................................... 21,000(10) .1%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
Marshall Webb...................................................... 10,000(12) .1%
c/o Digital Solutions, Inc.
4041-F Hadley Road
South Plainfield, NJ 07080
All officers and directors as a group (10 persons)................. 3,760,719(2)(3) 25.3%
(4)(5)(6)(7)
(8)(9)(10)(11)
- ---------------
(1) Ownership consists of sole voting and investment power except as otherwise
noted.
(2) Includes (i) 1,000 shares held by Venray Capital Management Partners, a
partnership of which Mr. Skiptunis is general partner; and (ii) options to
purchase 294,000 shares of the Company's Common Stock. Does not include
options to purchase 15,000 to be vested in future years.
(3) Includes (i) options to purchase 6,750 shares of the Company's Common
Stock; and (ii) warrants to purchase 12,000 shares of Common Stock.
(4) Includes (i) warrants to purchase 28,000 shares of the Company's Common
Stock; and options to purchase 505,000 shares of Common Stock.
(5) Includes options to purchase 60,000 shares of Common Stock and 2,500
warrants.
(6) Includes (i) 454,333 shares and warrants to purchase 200,000 shares owned
by Katie and Adam Bridge Partners, L.P., a private limited partnership of
which Mr. Sands may be deemed a beneficial owner; (ii) warrants to purchase
223,333 shares owned by Sands Brothers & Co., Ltd., a broker dealer of
which Mr. Steven Sands is a principal; (iii) 40,400 shares owned by Jenna
Partners II, L.P., a private limited partnership of which Mr. Steven Sands
may be deemed a beneficial owner; (iv) options to purchase 5,000 shares of
the Company's common stock.
(7) Includes (i) 454,333 shares and warrants to purchase 200,000 shares owned
by Katie and Adam Bridge Partners, L.P., a private limited partnership of
which Mr. Martin Sands may be deemed a beneficial owner; (ii) warrants to
purchase 223,333 shares owned by Sands Brothers & Co., Ltd., a broker
dealer of which Mr. Martin Sands is a principal; (iii) 40,400 shares owned
by Jenna Partners II, L.P., a private limited partnership of which Mr.
Martin Sands may be deemed a beneficial owner.
(8) Includes options to purchase 165,000 shares of the Company's common stock
in 1995, and 35,000 shares in 1996.
(9) Includes options to purchase 10,000 shares of the Company's common stock in
1995. Does not include options to purchase 32,500 shares in 1996 and 32,500
shares in 1997.
(10) Includes options to purchase 5,000 shares of the Company's common stock in
1995. Does not include options to purchase 15,000 shares in 1996.
22
24
(11) Includes warrants to purchase 25,000 shares of common stock and options to
purchase 108,250 shares of common stock.
(12) Includes options to purchase 10,000 shares of common stock. Does not
include options to purchase 40,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment agreements with and compensation of
the Corporation's executive officers and directors. See "Executive
Compensation".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements and schedules of the Company are included in Part
II, Item 8 of this report and appear as pages F-1 through F-15 and includes page
S-1.
2. All other schedules have been omitted since the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the notes thereto.
3. Exhibit List
The exhibits designated with an asterisk (*) are filed herewith. All other
exhibits have been previously filed with the Commission and, pursuant to 17
C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------
2.1 -- Agreement for purchase of Temp-Staff, Inc. (Exhibit 3 to Form 8-K dated May
17, 1990)
2.2 -- Agreement for purchase of X-L Technical Corp. (Exhibit 2a to Form 8-K dated
October 3l, 1990)
2.3 -- Agreement for the purchase of the business and assets of Anne Christine Clark,
Inc.
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3.2 -- Certificate of Designation of Series A Preferred Stock (Exhibit 3.2 to form
10-K for fiscal year ended September 30, 1991)
3.3 -- Certificate of Amendment changing the name of TSI to SCI (Exhibit 3.3 to form
10-K for fiscal year ended September 30, 1991)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.2 -- Employment Agreement with Donald Kappauf (Exhibit 3 to Form 8-K dated May 17,
1990)
10.4 -- Agreement between Registrant and First Fidelity Bank, N.A. (Exhibit 10.4 to
form 10-K for fiscal year ended September 30, 1991)
10.5 -- Agreement between Registrant and Midlantic Banks, Inc. dated October 11, 1991
(Exhibit 10.5 to form 10-K for fiscal year ended September 30, 1991)
10.6 -- Lease dated 10/15/91 for office space at 4041 Hadley Road, South Plainfield,
New Jersey (Exhibit 10.6 to form 10-K for fiscal year ended September 30,
1991)
10.7 -- Employment Agreement between Karl Dieckmann and the Company dated November 1,
1991 (Exhibit 10.7 to form 10-K for fiscal year ended September 30, 1991)
10.10 -- Employment Contract between David L. Clark and the Company dated January 1,
1993.
10.11 -- Bridge financing between Katie and Adam Bridge Partners, L.P. and the Company
in June 1993.
10.12 -- Sales representation agreement between Sid A. Robinson, III and the Company
dated April 14, 1993.
10.13 -- Agreement between Staff Leasing of Mississippi, Inc. and the Company for
purchase of business and assets dated November 4, 1993.
23
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EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------
10.14 -- Employment agreement between Raymond J. Skiptunis and the company dated
October 1, 1994.
10.15 -- Employment agreement between George J. Eklund and the Company dated September
19, 1994.
10.16 -- Agreement between Registrant and United Jersey Bank Central, NA on the
revolving loan facility
11.0 * -- Computation of Earnings per Share
21.0 * -- Subsidiaries
23.1 * -- Consent of Arthur Andersen, LLP to the incorporation of its report on the
Company's financial statements for the fiscal year ended 1995 into the
Company's registration Statement on form S-3 file number 33-85526.
23.2 * -- Consent of Arthur Andersen, LLP to the incorporation of its report on the
Company's financial statements for the fiscal year ended 1995 into the
Company's registration Statement on form S-3 file number 33-70928.
23.3 * -- Consent of Arthur Andersen, LLP to the incorporation of its report on the
Company's financial statements for the fiscal year ended 1995 into the
Company's registration Statement on form S-3 file number 33-62767.
27. * -- Financial Data Schedule.
(b) Reports on Form 8-K No 8-K reports were filed in the last fiscal quarter.
(c) See Item (a)(3) above.
(d) See Schedule II annexed hereto and appearing at page S-1.
24
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGITAL SOLUTIONS, INC.
/s/ Raymond J. Skiptunis
--------------------------------------
Raymond J. Skiptunis
Chief Executive Officer
and Director
Dated: January 15, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Raymond J. Skiptunis Chief Executive Officer January 15, 1996
- ----------------------------------- and Director
Raymond J. Skiptunis
/s/ Karl Dieckmann Chairman of the Board January 15, 1996
- -----------------------------------
Karl Dieckmann
/s/ George J. Eklund President, Chief Operating Officer, January 15, 1996
- ----------------------------------- and Director
George J. Eklund
/s/ William J. Marino Director January 15, 1996
- -----------------------------------
William J. Marino
/s/ John Ewing Director January 15, 1996
- -----------------------------------
Senator John Ewing
/s/ Stephen B. Sands Director January 15, 1996
- -----------------------------------
Steven B. Sands
- ----------------------------------- Chief Financial Officer January 15, 1996
Kenneth Brice
25
27
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report Of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets As Of September 30, 1995 And 1994......................... F-3
Consolidated Statements Of Operations For The Years Ended September 30, 1995, 1994
And 1993............................................................................ F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended September 30,
1995,
1994 And 1993....................................................................... F-6
Consolidated Statements Of Cash Flows For The Years Ended September 30, 1995, 1994
And 1993............................................................................ F-7
Notes To Consolidated Financial Statements............................................ F-9
Schedule II -- Valuation And Qualifying Accounts For The Years Ended September 30,
1995,
1994 And 1993....................................................................... S-1
Schedules other than the one listed above have been omitted as they are
either not required or because the related information has been included in the
notes to consolidated financial statements
F-1
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Digital Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Solutions, Inc. and subsidiaries as of September 30, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1995. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Solutions, Inc. and
subsidiaries as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years then ended in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the financial statements is the responsibility of the management of
Digital Solutions, Inc. and subsidiaries and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 29, 1995
F-2
29
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1995 AND 1994
1995 1994
----------- ----------
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 20,000 $ 178,000
Accounts receivable, net of allowance for doubtful accounts of
$150,000 at September 30, 1995 and $99,000 at September 30,
1994 (Note 6)................................................. 4,929,000 2,592,000
Notes due from officers (Note 4)................................. 698,000 140,000
Deferred tax asset (Note 5)...................................... 300,000 300,000
Other current assets............................................. 549,000 500,000
----------- ----------
Total current assets..................................... 6,496,000 3,710,000
EQUIPMENT AND IMPROVEMENTS:
Equipment........................................................ 2,619,000 2,231,000
Leasehold improvements........................................... 252,000 177,000
----------- ----------
2,871,000 2,408,000
Less -- accumulated depreciation and amortization................ 2,054,000 1,861,000
----------- ----------
817,000 547,000
DEFERRED TAX ASSET, net of current portion (Note 5)................ 460,000 300,000
GOODWILL, net of amortization of $481,000 in 1995 and $154,000 in
1994 (Notes 2 and 3)............................................. 5,050,000 2,852,000
OTHER ASSETS....................................................... 1,007,000 318,000
----------- ----------
$13,830,000 $7,727,000
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 6)................................... $ 5,019,000 $1,010,000
Current portion of long-term debt (Note 8)....................... 958,000 165,000
Accounts payable................................................. 1,629,000 493,000
Accrued expenses and other current liabilities (Note 7).......... 2,839,000 896,000
----------- ----------
Total current liabilities................................ 10,445,000 2,564,000
LONG-TERM DEBT, net of current portion (Note 8).................... 133,000 38,000
OTHER LIABILITIES (Note 9)......................................... 42,000 69,000
----------- ----------
Total liabilities........................................ 10,620,000 2,671,000
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, $.10 par value; authorized 5,000,000 shares;
none issued and outstanding................................... 0 0
Common stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding $14,010,121 in 1995 and $12,125,753 in
1994.......................................................... 14,000 12,000
Additional paid-in capital....................................... 8,307,000 6,839,000
Accumulated deficit......................................... (5,111,000)
(1,795,000)
----------- ----------
3,210,000 5,056,000
----------- ----------
$13,830,000 $7,727,000
=========== ==========
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
30
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
OPERATING REVENUES.................................. $73,821,000 $37,998,000 $14,681,000
DIRECT OPERATING COSTS.............................. 68,530,000 34,939,000 12,459,000
----------- ----------- -----------
Gross profit.............................. 5,291,000 3,059,000 2,222,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 6,702,000 2,452,000 1,787,000
DEPRECIATION AND AMORTIZATION....................... 845,000 243,000 175,000
----------- ----------- -----------
Income (loss) from operations............. (2,256,000) 364,000 260,000
----------- ----------- -----------
OTHER CREDITS (CHARGES):
Interest and other income......................... 124,000 40,000 49,000
Interest expense.................................. (935,000) (69,000) (208,000)
Other expense..................................... (386,000) (7,000) 0
----------- ----------- -----------
(1,197,000) (36,000) (159,000)
----------- ----------- -----------
Income (loss) before income taxes......... (3,453,000) 328,000 101,000
INCOME TAX BENEFIT.................................. 137,000 392,000 200,000
----------- ----------- -----------
Net income (loss)......................... $(3,316,000) $ 720,000 $ 301,000
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE.................. $ (0.24) $ 0.05 $ 0.04
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING....................................... 13,595,382 12,867,027 5,484,353
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
31
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------- ----------------------- ADDITIONAL
SHARES ISSUED SHARES ISSUED PAID-IN
(RETIRED) AMOUNT (RETIRED) AMOUNT CAPITAL DEFICIT
------------- ------- ------------- ------- ---------- -----------
BALANCE, September 30, 1992.................... 26,138 $3,000 4,694,922 $5,000 $2,927,000 $(2,607,000)
Common stock issued in connection with the
acquisition of Digital Insurance Services,
Inc........................................ 0 0 250,000 0 250,000 0
Common stock issued in connection with
private placement.......................... 0 0 416,000 0 258,000 0
Preferred stock issued in connection with
private placement.......................... 3,520 0 0 0 175,000 0
Exercise of stock warrants................... 0 0 100,000 0 62,000 0
Common stock issued in connection with
private placement.......................... 0 0 3,332,320 4,000 1,989,000 0
Retirement of common stock in connection with
loans to officers agreements............... 0 0 (50,000) 0 (73,000) 0
Exercise of stock options.................... 0 0 1,970 0 2,000 0
Dividends paid on preferred stock............ 0 0 0 0 0 (111,000)
Net income................................... 0 0 0 0 0 301,000
------- ------- ---------- ------- ---------- -----------
BALANCE, September 30, 1993.................... 29,658 3,000 8,745,212 9,000 5,590,000 (2,417,000)
Common stock issued in connection with the
acquisition of Staff Leasing of
Mississippi, Inc........................... 0 0 50,000 0 75,000 0
Expenses related to private placement of
common stock............................... 0 0 0 0 (282,000) 0
Common stock issued in connection with the
acquisitions of The Alternative Source,
Inc., Ram Technical Corp. and MLB Medical
Staffing, Inc. ............................ 0 0 416,221 1,000 722,000 0
Exercise of stock options.................... 0 0 250,000 0 175,000 0
Exercise of stock warrants................... 0 0 81,552 0 44,000 0
Common stock issued for services rendered.... 0 0 5,000 0 14,000 0
Dividends paid on preferred stock............ 0 0 0 0 0 (98,000)
Conversion of preferred stock into common
stock...................................... (29,658) (3,000 ) 2,372,640 2,000 1,000 0
Common stock issued in connection with the
acquisition of M&B Staff Management,
Inc. ...................................... 0 0 205,128 0 500,000 0
Net income................................... 0 0 0 0 0 720,000
------- ------- ---------- ------- ---------- -----------
BALANCE, September 30, 1994.................... 0 0 12,125,753 12,000 6,839,000 (1,795,000)
Exercise of stock options.................... 0 0 1,605,426 2,000 853,000 0
Exercise of stock warrants................... 0 0 206,500 0 110,000 0
Retirement of common stock in connection with
exercise of stock options and warrants..... 0 0 (249,255) 0 0 0
Common stock issued in connection with the
acquisition of Staff Rx.................... 0 0 360,000 0 743,000 0
Expenses related to private placement of
common stock............................... 0 0 0 0 (164,000) 0
Common stock issued in connection with the
acquisition of Turnkey Services, Inc. ..... 0 0 68,205 0 166,000 0
Common stock retired related to the
acquisitions of The Alternative Source,
Inc., Ram Technical Corp. and MLB Medical
Staffing, Inc.............................. 0 0 (106,508) 0 (240,000)
Net loss..................................... 0 0 0 0 0 (3,316,000)
------- ------- ---------- ------- ---------- -----------
BALANCE, September 30, 1995.................... 0 $ 0 14,010,121 $14,000 $8,307,000 $(5,111,000)
======= ======= ========== ======= ========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
32
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30
------------------------------------------
1995 1994 1993
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(3,316,000) $ 720,000 $ 301,000
Adjustments to reconcile net income (loss) to net cash used
in operating activities -- Deferred income taxes......... (160,000) (400,000) (200,000)
Depreciation and amortization............................ 845,000 243,000 175,000
Provision for doubtful accounts.......................... 153,000 56,000 50,000
Amortization of rent deferral............................ 28,000 28,000 28,000
Stock issued in connection with compensation and services
rendered................................................. 0 14,000 0
Changes in operating assets and liabilities -- Increase in
accounts receivable...................................... (2,490,000) (1,373,000) (336,000)
Increase in other assets................................. (909,000) (371,000) (213,000)
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities.......................... 2,806,000 502,000 (528,000)
Decrease in other liabilities............................ (55,000) (79,000) (42,000)
----------- ----------- ----------
Net cash (used in) operating activities.................. (3,098,000) (660,000) (765,000)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements..................... (355,000) (208,000) (32,000)
Collections on note receivable.............................. 0 176,000 36,000
Acquisitions of businesses, net of cash acquired............ (1,351,000) (605,000) 0
----------- ----------- ----------
Net cash (used in) provided by investing activities...... (1,706,000) (637,000) 4,000
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on revolving line of credit, net of
repayments............................................... $ 2,122,000 $ 1,010,000 ($ 297,000)
Principal payments on long-term debt........................ (443,000) (260,000) (163,000)
Proceeds from subordinated bridge loan, net of repayments... 1,887,000 0 0
Proceeds from other borrowings, net of repayments........... 837,000 (68,000) (127,000)
Net proceeds from issuance of common stock, net of
expenses................................................. 245,000 (63,000) 2,242,000
Proceeds from the issuance of preferred stock, net of
express.................................................. 0 0 175,000
Payment of dividends on preferred stock..................... 0 (98,000) (111,000)
Other increase (decrease)................................... (2,000) (43,000) (41,000)
----------- ----------- ----------
Net cash provided by financing activities................ 4,646,000 478,000 1,698,000
----------- ----------- ----------
Net increase (decrease) in cash.......................... (158,000) (819,000) 937,000
CASH AND CASH REQUIREMENTS AT BEGINNING OF PERIOD............. 178,000 997,000 60,000
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 20,000 $ 178,000 $ 997,000
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for Interest................. $ 705,000 $ 70,000 $ 206,000
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Common stock issued in a business acquisition............ $ 909,000 $ 1,297,000 $ 250,000
=========== =========== ==========
Reduction of common stock issued in a business
acquisition as a result of the final purchase price
calculation............................................ $ (240,000) $ 0 $ 0
=========== =========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
33
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Digital Solutions, Inc. (the Company) was incorporated under the laws of
the State of New Jersey on November 25, 1969. The Company, with its
subsidiaries, provides a broad spectrum of human resource services including
professional employee services (employee leasing), payroll processing, human
resource administration and placement of temporary and permanent employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include those of DSI, a
New Jersey Corporation and its wholly-owned subsidiaries; DSI Contract Staffing,
DSI Staff ConnXions, Digital Insurance Services, Inc., DSI Staff ConnXions of
Mississippi, DSI Staff ConnXions -- Southwest, MLB Medical Staffing, Inc., Ram
Technical Services, Inc. and DSI Staff Rx, Inc. The results of operations of
acquired companies ( see note 3) have been included in the consolidated
financial statements from the date of acquisition. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
Revenue Policy
The Company recognizes revenue in connection with its employee leasing
program and its temporary placement service program, when the services have been
provided. Revenues are recorded based on the Company's billings to customers,
with the corresponding cost of providing those services reflected as direct
operating expenses. Payroll services, commissions and other fees for
administrative services are recognized as revenue as the related service is
provided.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using straight-line and accelerated methods over the
estimated useful asset lives (3 to 5 years) and the shorter of the lease term or
estimated useful life for leasehold improvements.
Goodwill
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at dates of acquisition and is being amortized on
a straight line basis over 40 years for acquisitions completed through September
30, 1992. Commencing with the year ended September 30, 1993, the Company's
policy is to amortize any newly acquired goodwill over 20 years. Amortization
expense charged to operations was approximately $327,000 for 1995, $74,000 for
1994 and $18,000 for 1993. Amortization expense for 1995, includes a provision
for goodwill impairment, as described below.
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets"
("SFAS 121"). SFAS 121 requires, among other things, that an entity review its
long-lived assets and certain related intangibles for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. As a result of certain of the acquisitions described in
Note 3 experiencing operating cash flow losses for the current period, the
Company, utilizing the present value of estimated future cash flows from these
operations discounted at a rate of return (15%), determined that some impairment
had occurred in certain of these acquisitions. As a result, the Company charged
approximately $180,000 of additional amortization to depreciation and
amortization for the year ended September 30, 1995. Had the Company applied the
measurement criteria prescribed by SFAS 121 in prior years, the effect would not
have been material.
F-7
34
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Common Share
Earnings per common share are based upon the weighted average number of
shares outstanding as well as the dilutive effect of stock options and warrants
(Notes 10 and 11). Dividends on preferred stock of approximately $98,000 were
declared and paid in 1994 and deducted from earnings available for common
shares. Outstanding stock options and warrants have not been considered in the
computations of earnings per common share in 1995 since their effect was
anti-dilutive.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
liquid investments purchased with a maturity of three months or less to be cash
equivalents.
(3) ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method of accounting. Accordingly, the results of operations of these entities
have been included in the consolidated financial statements of the Company since
the date of acquisition.
Turnkey Services, Inc.
In May 1995, the Company, through its subsidiary, DSI Staff
ConnXions-Southwest, purchased certain assets of an employee leasing company
located in El Paso, Texas, Turnkey Services, Inc. The assets acquired included
the customer lists and all owned and leased assets utilized by Turnkey in its
business operations, subject to interest of equipment lessors. In consideration
for the assets, the Company paid to Turnkey $784,000 in cash and a note payable
(Note 8) and issued common stock in the amount of $166,000 (including $83,000
deposited in escrow as described below). In addition, the Company incurred
approximately $200,000 in transaction costs. The company recorded goodwill of
approximately $989,000, which is being amortized over 20 years.
The final purchase of this acquisition is contingent upon the profitability
of this entity during the twelve-month period ended May 1,1996. As of the
closing date of the acquisition, the Company recorded the maximum purchase price
under the agreement. As part of the purchase price, shares of DSI common stock
equal to $83,000 (determined by the closing bid price of a share on April 26,
1995) were deposited into an escrow account pending the fulfillment by the
sellers of certain sales and performance criteria. In the event that these
conditions are not fulfilled, all or a portion of the shares and the note
payable will be returned to the Company.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1995, the effect would not
have been significant.
Staff RX, Inc.
In November 1994, the Company acquired certain assets of several affiliated
contract staffing firms through the Company's wholly owned subsidiary DSI-Staff
Rx, Inc. in exchange for $200,000 in cash and a promissory note for $1,300,000.
In addition, the Company incurred approximately $266,000 in costs associated
with this acquisition. The Company recorded goodwill of approximately
$1,766,000, which is being amortized over 20 years.
In March 1995, the Company issued 360,000 shares of its common stock which
was valued at $743,000. This was used to satisfy part of the aforementioned
promissory note. The balance was paid in cash.
The final purchase of this acquisition is contingent upon the profitability
of the entity during the two year period ended November 21, 1996. As of the
closing date of the acquisition, the Company recorded the maximum purchase price
under the agreement.
F-8
35
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1995, the effect would not
have been significant.
M & B Staff Management, Inc.
In September 1994, the Company completed the acquisition of certain assets
of an employee leasing business, M & B Staff Management, Inc. ("M & B").
Pursuant to the terms of the acquisition, the Company also entered into
non-compete agreements with certain shareholders and employees of M & B. The
business assets of M & B and the non-compete agreements were acquired for
205,128 shares of the Company's common stock. As of the closing date of the
acquisition, the Company recorded approximately $740,000, which is being
amortized over 20 years.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1994, the effect would not
have been significant.
The Alternative Source, Inc., MLB Medical Staffing, Inc., and RAM Technical
Services, Inc.
In January 1994, the Company through its wholly-owned subsidiary
corporations, acquired the assets of The Alternative Source, Inc. ("TAS") and
the shares of MLB Medical Staffing, Inc. ("MLB") and RAM Technical Services,
Inc., three affiliated companies based in Houston, Texas. TAS is engaged in the
employee staffing business, MLB is engaged in the nurse staffing business and
RAM is engaged in contract employee staff leasing business. In consideration of
the foregoing, DSI paid the sellers $200,000 in cash, issued a note for $25,000
and issued an aggregate of 416,221 shares of the Company s stock.
The final purchase of these acquisitions was contingent upon the
profitability of these entities during the twelve-month period ended December
31, 1994. As of the closing date of acquisition, the Company recorded the
maximum purchase price under the agreement, which resulted in the Company
recording goodwill of approximately $1,201,000, which is being amortized over 20
years. Of the 416,221 shares to be issued, 277,480 were deposited into an escrow
account pending the fulfillment by the sellers of certain sales and performance
criteria.
In addition, the principal of the acquired businesses, entered into a
three-year employment agreement with the Company which provides for a base
salary plus an expense allowance and a three-year employee stock option to
purchase 50,000 shares of the Company's common stock at an exercise price of
$3.00 per share, which exceeded the market price of the Company's stock at the
date of grant.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1994, the effect would not
have been significant.
In accordance with the terms of the purchase agreement, in May 1995, the
Company, based upon the earn-out provisions contained in the purchase agreement,
retired 106,508 shares held in escrow and reduced the purchase price of this
acquisition by $240,000.
DSI Staff Leasing of Mississippi, Inc.
In November 1993, the Company purchased certain assets of Staff Leasing of
Mississippi, Inc., an employee leasing firm, in exchange for cash, a two year
promissory note and 50,000 shares of the Company's common stock.
In connection with this acquisition the Company recorded goodwill of
$244,000, which is being amortized over a period of 20 years and a covenant not
to compete in the amount of $25,000, which is being amortized over 5 years.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1994, the effect would not
have been significant.
F-9
36
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Digital Insurance Services
In December 1992, the Company acquired the business and assets of Anne
Christine Clark, Inc., an insurance agency brokerage business, which is
currently doing business as Digital Insurance Services, Inc.("DIS"). In
connection with this acquisition, the Company issued 250,000 shares of its
common stock which were valued at $1.00 per share, (the market price of the
Company s common stock at the closing date) and recorded goodwill of $231,000.
(4) DUE FROM OFFICERS
Due from officers at September 30, 1995 and 1994 consists of following:
1995 1994
-------- --------
Notes receivable, bearing interest at 8% per annum, with
interest and principal due March, 1996. The notes are secured
by 523,532 shares of the Company's common stock.............. $578,000 $ 0
Notes receivable, bearing interest at 8% and 10% per annum,
respectively, with interest and principal due January 1996.
The note is collateralized by 100,000 shares of common
stock........................................................ 82,000 70,000
Notes receivable bearing interest at 8% per annum, with
principal and interest due January, 1996. The notes are
collateralized by 35,000 shares of the Company's common
stock........................................................ 38,000 70,000
-------- --------
$698,000 $140,000
======== ========
(5) INCOME TAXES
Effective October 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method and adopted the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between financial statement and income tax
bases of assets and liabilities and to tax net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
At September 30, 1995, the Company had available net operating loss
carryforwards of approximately $4,858,000 to reduce future periods taxable
income. The Company's deductible temporary differences are not significant. The
carryforwards expire as follows:
YEAR AMOUNT
------------------------------------------------- ----------
2005............................................. $ 800,000
2006............................................. 810,000
2007............................................. 619,000
2010............................................. 2,629,000
----------
$4,858,000
==========
The Company has recorded a $760,000 deferred tax asset at September 30,
1995, which represents reductions in the deferred tax asset valuation allowance
of $160,000, $400,000 and $200,000 in 1995, 1994 and 1993, respectively. This
represents management's estimate of the income tax benefits to be realized upon
utilization of a portion of its net operating losses for which management
believes utilization to be more likely than not. In order for the Company to
realize a $760,000 tax benefit, the Company would have to generate approximately
$2,111,000 in future taxable income. Management believes the Company's
operations can generate sufficient taxable income to realize this tax asset as a
result of recent business developments, its
F-10
37
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ability to meet its operating plan as well as the resolution of significant past
problems which had adversely affected the Company in prior years.
The income tax benefit reflected in the consolidated statement of
operations represents the valuation reductions described above net of amounts
currently payable for state income tax purposes.
At September 30, 1995 an analysis of the Company's deferred income tax
asset is as follows:
Net Operating loss carryforwards available at September 30,
1994........................................................... $2,229,000
Net Operating loss carryforwards generated during 1995........... 2,629,000
Carryforwards utilized for the year ended September 30, 1995..... 0
----------
Net Operating loss carryforwards available at September 30,
1995........................................................... $4,858,000
Average combined Federal and State income tax rate............... 36%
----------
Gross deferred income tax asset.................................. $1,749,000
Less, valuation allowance........................................ (989,000)
----------
Deferred income tax asset........................................ $ 760,000
==========
(6) SHORT-TERM BORROWINGS
In February 1995, the Company entered into a one year revolving line
facility (the "Line") with a bank. Under the terms of the agreement the Company
may borrow up to the lesser of $3,500,000, or 80% of eligible accounts
receivable, as defined. The Company is obligated to make monthly payments of
interest on the outstanding amounts at the bank's floating base rate plus one
and one-half percent (10.25% at September 30, 1995). As of September 30, 1995,
the Company had $3,132,000 outstanding and no amounts available under this
facility based upon the borrowing base calculation.
The Line is collateralized by substantially all of the Company's accounts
receivable and contains certain covenants, including an interest coverage ratio,
current ratio, total liabilities (as defined) to tangible net worth (as defined)
ratio and total tangible capital funds (as defined). As of September 30, 1995,
the Company was in default of its financial covenants. The Company is presently
negotiating with the bank to develop mutually agreeable terms and conditions in
response to the Company's request for forbearance. While the Company believes it
will be able to negotiate such terms and renew the line, in the event that this
does not occur, the Company will pursue other financing alternatives, including
those described in Note 12.
During 1995, the Company issued approximately $1,975,000 of Subordinated
Bridge Notes to various investors. The notes bear interest at a rate of 12% per
annum and mature in November, 1995. In connection with the issuance of these
notes, the Company also granted these investors warrants to purchase the
Company's common stock at a price of $2.59 per share (the market value at the
date of the grant -- see Note 10). Subsequent to the issuance of the Notes, but
prior to maturity, $88,000 of principal amount was redeemed by the Company and
the proceeds were used by the investor to exercise the attached warrants.
Other information with respect to short term borrowings for 1995 and 1994
is as follows:
1995 1994
---------- ----------
Balance at end of period...................................... $5,019,000 $1,010,000
Maximum amount outstanding during period...................... 5,065,000 1,010,000
Weighted average balance outstanding during the period........ 3,277,000 660,000
Weighted average interest rate during the period.............. 10.98% 9.25%
F-11
38
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at September 30, 1995 and
1994 consist of the following:
1995 1994
---------- ----------
Payroll and payroll taxes..................................... $ 808,000 $ 291,000
Worker's compensation insurance reserves...................... 785,000 249,000
Legal and financing costs..................................... 400,000 0
Other......................................................... 846,000 356,000
---------- --------
$2,839,000 $ 896,000
========== ========
(8) LONG-TERM DEBT
Long term debt at September 30, 1995 and 1994 consists of the following:
1995 1994
---------- ----------
Note payable due to sellers as a result of the acquisition of
Turnkey Services, Inc. (See Note 3)......................... $ 391,000 $ 0
Note payable with a financing company dated July 1995. The
note bears interest at 7.9% and is payable in equal monthly
installments through March 1996............................. 385,000 0
Note payable with a financing company dated September 1995.
The note bears interest of 5.7% and is payable in equal
monthly installments through November 1995.................. 90,000 0
Other......................................................... 225,000 203,000
-------- ---------
1,091,000 203,000
Less -- Current portion....................................... (165,000)
(958,000)
-------- ---------
$ 133,000 $ 38,000
======== =========
Maturities of long-term debt as of September 30, 1995 are as follows:
YEAR ENDING
SEPTEMBER 30
-------------
1996............................................ $ 958,000
1997............................................ 67,000
1998............................................ 40,000
1999............................................ 16,000
2000............................................ 10,000
----------
$ 1,091,000
==========
(9) COMMITMENTS AND CONTINGENCIES
Leases
In November 1991, the Company entered into a lease for its corporate
headquarters facility. The lease term extends 69 months with fixed monthly
payments of $18,000. The lease agreement deferred rental payments until August,
1992 and specifies the payment of a percentage of real estate taxes, insurance
and maintenance as additional rent. As of September 30, 1995 and 1994, other
liabilities includes $42,000 and
F-12
39
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$69,000 of deferred rent associated with this transaction as a result of
amortizing the total rental payments on a straight line basis over the life of
the lease. The Company recognized rent expense of $253,000 under this lease in
1995 and 1994, respectively. Rent expense under all operating leases was
$384,000 in 1995, $290,000 in 1994, $253,000 in 1993.
Minimum payments under non cancelable lease obligations at September 30,
1995 are as follows:
YEAR ENDING OPERATING
SEPTEMBER 30 LEASES
-------------------------------------------------- ---------
1996......................................... $ 287,000
1997......................................... 263,000
1998......................................... 69,000
1999......................................... 72,000
--------
$ 691,000
========
Legal Proceedings
The Company is a defendant in an arbitration hearing brought by the former
president of The Alternative Source, Inc., MLB Medical Staffing, Inc. and RAM
Technical Services, Inc. (see Note 3) alleging that the Company wrongfully
terminated his employment. The former president is seeking damages of
approximately $460,000 plus costs for amounts allegedly due him under various
purchase and employment agreements. The Company has filed counterclaims against
the former president and is itself seeking damages of approximately $1,000,000.
The Company believes that the ultimate resolution of this case will not have a
material adverse effect on its consolidated financial position or the results of
its operations.
At September 30, 1995 the Company is involved in various legal proceedings
incurred in the normal course of business. In the opinion of management and its
counsel, none of these proceedings would have a material effect, if adversely
decided, on the consolidated financial position or results of operations of the
Company.
(10) STOCK WARRANTS
The following is a summary of the outstanding warrants to purchase the
Company's common stock at September 30, 1995 as a result of various debt and
equity offerings that have occurred since the Company's inception:
NUMBER OF
EXERCISE PRICE SHARES OF
EXERCISE PERIOD PER COMMON COMMON
FROM TO SHARE STOCK RESERVED
--------------------------------------- --------------- -------------- --------------
August 1991............................ August 1996 .625 235,500
September 1991......................... October 2001 .75 300,000
June 1993.............................. June 1998 .75 125,000
August 1993............................ August 1998 .75 331,833
September 1993......................... September 1998 1.06 50,000
November 1993.......................... November 1998 1.188 5,000
April 1995............................. April 2000 2.50 5,000
January 1995........................... January 1999 2.59 188,000
--------------
1,240,333
===========
F-13
40
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCK OPTION PLANS
In April 1990 the Company adopted three stock option plans, the 1990
Employees Stock Option Plan, the Non-Executive Director Stock Option Plan, and
the Senior Management Incentive Plan (collectively the "1990 Plans"). The 1990
Plans will remain in effect until April 2000 or unless terminated sooner by the
Board of Directors.
The 1990 Employees Stock Option Plan (the "Employee Plan") provides for
options to be granted to employees, including certain officers of the Company,
for the purchase of up to 1,000,000 shares of common stock. Some of the options
granted under the 1990 Plan are intended to qualify as incentive stock options
under the Internal Revenue Code. The exercise price of incentive stock options
granted may not be less than the fair market value of the shares on the date of
grant, or in certain circumstances, an option price at least equal to 110% of
the fair market value of the stock at the time the option is granted. Options
granted under the plan may not be exercised more than ten years from the date of
the grant (or in certain circumstances, five years from the date of grant).
The Non-Executive Director Stock Option Plan (the "Director Plan"),
provides for the issuance of options for the purchase of up to 500,000 shares of
common stock. Eligible participants are directors of the Company who are also
not employees of the Company and non-employee directors of any advisory board
established by the Company. Under the terms of the Director Plan, the exercise
price of options granted will equal 100% of the fair market value of the common
stock at the date the options are granted. Options will be granted to eligible
participants as follows: 5,000 upon becoming non-executive directors and 5,000
each September 1, commencing September 1, 1990 provided such person had been
eligible for the preceding 12 months. Directors of advisory boards will receive
on each September 1 an option to purchase 10,000 shares of common stock,
providing such director has served as a director of the advisory board for the
previous 12 month period. The term of each option commences on the date it is
granted and expires five years from grant date unless terminated sooner as
provided in the Director Plan.
The Senior Management Incentive Plan (the "Management Plan") provides for
the issuance of stock, options and other stock rights to executive officers and
other key employees who render significant services to the Company. Under the
terms of the Management Plan, the exercise price of options granted will equal
100% of the fair market value of the common stock at the date the options are
granted. A total of 5,000,000 shares of common stock have been reserved for
issuance under the Management Plan. Awards made under the Management Plan are
generally subject to three year vesting periods (subject to the discretion of
the Board of Directors), but may become exercisable in full upon certain "change
of control" events as defined in the Management Plan.
The following tables summarizes the activity in the Company's stock option
plans for the year ended September 30, 1995 and 1994.
OPTIONS OPTIONS
OUTSTANDING OUTSTANDING
SEPTEMBER 30, SEPTEMBER 30,
PLAN 1994 GRANTED CANCELED EXERCISED 1995
- --------------------------------------- ------------- ------- -------- ---------- -------------
Employee Plan.......................... 287,765 36,500 2,500 134,801 186,964
Director Plan.......................... 100,000 20,000 0 50,000 7,000
Management Plan........................ 2,439,625 482,500 50,000 1,420,625 1,451,500
--------- ------- ------ --------- ---------
2,827,390 539,000 52,500 1,605,426 1,708,464
========= ======= ====== ========= =========
F-14
41
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OPTIONS
OUTSTANDING OUTSTANDING
SEPTEMBER 30, SEPTEMBER 30,
PLAN 1994 GRANTED CANCELED EXERCISED 1995
- --------------------------------------- ------------- ------- -------- ---------- -------------
Employee Plan.......................... 365,512 99,267 46,974 130,040 287,765
Director Plan.......................... 120,000 0 0 20,000 100,000
Management Plan........................ 1,864,625 695,000 20,040 99,960 2,439,625
--------- ------- ------ --------- ---------
2,350,137 794,267 67,014 250,000 2,827,390
========= ======= ====== ========= =========
Options outstanding as of September 30, 1995 become exercisable as follows:
EXERCISE
PLAN PRICE TOTAL 1995 1996 1997 THEREAFTER
- --------------------------------- -------- ---------- ---------- -------- -------- ----------
Employee Plan.................... $ 0.75- 186,964 143,964 31,500 11,500 0
$ 1.19
Director Plan.................... $ 0.81- 70,000 70,000 0 0 0
$ 1.25
Management Plan.................. $ 0.75- 1,451,500 1,229,000 127,500 95,000 0
$ 3.00
-
--------- --------- ------- -------
1,708,464 1,442,964 159,000 106,500 0
========= ========= ======= ======= =
In 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation". The new standard specifies permissible methods for valuing
compensation attributable to stock options, as well as certain required
disclosures. The Company is required to adopt the new standard no later than
October 1, 1996. The Company has not yet determined which method it will follow
for measuring compensation cost attributable to stock options or the impact of
the new standard on its consolidated financial statements.
(12) SUBSEQUENT EVENTS
Subsequent to year-end the Company completed several financing
transactions, including raising approximately $950,000 through a private
placement of approximately 330,000 shares of its common stock for net proceeds
of approximately $450,000 as well as $500,000 of newly issued convertible
preferred stock. The preferred stock is convertible within 60 days of issuance
at a conversion rate based upon 80% of the then current price of the Company's
common stock. In addition, the Company raised approximately $1,000,000 in debt
financing secured by its common stock. The debt financing bears interest at the
greater of the prime interest rate plus 1% or 9 7/8% and matures in March 1997.
The Company has also secured a letter of intent from an investment banking
firm to raise up to $5,000,000 in long-term financing. The proposed financing
will have a term of 30 months from the date of issue and will bear interest at
the greater of the prime interest rate plus 1% or 9%.
F-15
42
SCHEDULE II
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(c)
(b) ADDITIONS (e)
BALANCE AT CHARGED TO (c) BALANCE AT
(a) BEGINNING OF COSTS AND DEDUCTIONS -- END OF
DESCRIPTION YEAR EXPENSES NET WRITE-OFFS YEAR
- ------------------------------------------- ------------ ---------- -------------- ----------
Allowance for doubtful accounts, year
ended --
September 30, 1995....................... $ 99,000 $153,000 $102,000 $150,000
======= ======== ======== ========
September 30, 1994....................... $ 43,000 $ 56,000 $ 0 $ 99,000
======= ======== ======== ========
September 30, 1993....................... $ 22,000 $ 50,000 $ 29,000 $ 43,000
======= ======== ======== ========
S-1
43
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------
2.1 -- Agreement for purchase of Temp-Staff, Inc. (Exhibit 3 to Form 8-K dated May
17, 1990)
2.2 -- Agreement for purchase of X-L Technical Corp. (Exhibit 2a to Form 8-K dated
October 3l, 1990)
2.3 -- Agreement for the purchase of the business and assets of Anne Christine Clark,
Inc.
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3.2 -- Certificate of Designation of Series A Preferred Stock (Exhibit 3.2 to form
10-K for fiscal year ended September 30, 1991)
3.3 -- Certificate of Amendment changing the name of TSI to SCI (Exhibit 3.3 to form
10-K for fiscal year ended September 30, 1991)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.2 -- Employment Agreement with Donald Kappauf (Exhibit 3 to Form 8-K dated May 17,
1990)
10.4 -- Agreement between Registrant and First Fidelity Bank, N.A. (Exhibit 10.4 to
form 10-K for fiscal year ended September 30, 1991)
10.5 -- Agreement between Registrant and Midlantic Banks, Inc. dated October 11, 1991
(Exhibit 10.5 to form 10-K for fiscal year ended September 30, 1991)
10.6 -- Lease dated 10/15/91 for office space at 4041 Hadley Road, South Plainfield,
New Jersey (Exhibit 10.6 to form 10-K for fiscal year ended September 30,
1991)
10.7 -- Employment Agreement between Karl Dieckmann and the Company dated November 1,
1991 (Exhibit 10.7 to form 10-K for fiscal year ended September 30, 1991)
10.10 -- Employment Contract between David L. Clark and the Company dated January 1,
1993.
10.11 -- Bridge financing between Katie and Adam Bridge Partners, L.P. and the Company
in June 1993.
10.12 -- Sales representation agreement between Sid A. Robinson, III and the Company
dated April 14, 1993.
10.13 -- Agreement between Staff Leasing of Mississippi, Inc. and the Company for
purchase of business and assets dated November 4, 1993.
10.14 -- Employment agreement between Raymond J. Skiptunis and the company dated
October 1, 1994.
10.15 -- Employment agreement between George J. Eklund and the Company dated September
19, 1994.
10.16 -- Agreement between Registrant and United Jersey Bank Central, NA on the
revolving loan facility
11.0 * -- Computation of Earnings per Share
21.0 * -- Subsidiaries
23.1 * -- Consent of Arthur Andersen, LLP to the incorporation of its report on the
Company's financial statements for the fiscal year ended 1995 into the
Company's registration Statement on form S-3 file number 33-85526.
23.2 * -- Consent of Arthur Andersen, LLP to the incorporation of its report on the
Company's financial statements for the fiscal year ended 1995 into the
Company's registration Statement on form S-3 file number 33-70928.
23.3 * -- Consent of Arthur Andersen, LLP to the incorporation of its report on the
Company's financial statements for the fiscal year ended 1995 into the
Company's registration Statement on form S-3 file number 33-62767.
27. * -- Financial Data Schedule.
The exhibits designated with an asterisk (*) are filed herewith. All other
exhibits have been previously filed with the Commission and, pursuant to 17
C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.