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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO
COMMISSION FILE 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.)
300 ATRIUM DRIVE, SOMERSET, NEW JERSEY 08873
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 748-1700
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
[Cover Page 1 of 2 Pages]
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
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 / /
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. / /
On January 2, 1998, 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 $34,332,000 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 19,141,760
shares of Common Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1998 Annual Meeting of Shareholders
[Cover Page 2 of 2 Pages]
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Digital Solutions, Inc. ("DSI" or "the Company"), was founded in 1969
as a payroll service company and has evolved into a leading provider of human
resource management services to a wide variety of industries in 50 states.
DSI currently offers three general categories of services: (1)
professional employer organization ("PEO") services, (2) employer administrative
services, such as payroll processing, personnel and administration, benefits
administration and tax filing; and, (3) contract staffing, or the placement of
temporary and permanent employees. DSI currently furnishes PEO, payroll and
contract staffing services to over 1,438 client organizations with approximately
5,000 worksite PEO 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 temporary help in hospitals and clinics throughout the United States
through its Houston, Texas and Clearwater, Florida offices. The Company has
three regional offices in Somerset, New Jersey; Houston, Texas; and Clearwater,
Florida and five sales service centers in New York, New York; El Paso and
Houston, Texas; Clearwater, Florida; and Somerset, New Jersey.
Essentially, the Company provides services that function as the
personnel department for small to medium sized companies. 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 decade and the next.
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 has formulated a strategy of emphasizing PEO and
"outsourcing" services. In PEO, a service provider becomes an employer of the
client company's employees and provides 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 in some cases 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
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functions but the physical plant would be managed by the provider.
DSI is focusing its future growth on the PEO and outsourcing industry.
The Company's expansion program will focus on internal growth through the cross
marketing of its PEO services to its entire client base and the acquisition of
compatible businesses strategically situated in new areas or with a client base
serviceable from existing facilities.
DSI is now committed to focusing on the PEO and outsourcing industry
for its future growth and to convert Staff-Rx, the Company's medical contract
staffing subsidiary, into more than a 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
provider of PEO services in the United States. 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.
However, there can be no assurance any such acquisition will be consummated by
the Company.
Digital Solutions, Inc. was organized under the laws of the State of
New Jersey on November 25, 1969 and maintains executive offices at 300 Atrium
Drive, Somerset, New Jersey 08873 where its telephone number is (732) 748-1700.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
BANK CREDIT LINE
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended and
amended on seven occasions. Each loan extension has been for limited periods of
time. The fifth amendment executed as of December 31, 1996, restricted the
Company from borrowing any additional funds available on the Line and required
weekly principal payments of $10,000, effective February 24, 1997. Effective
October 31, 1997, the Company entered into the seventh amendment to the loan
agreement. Under the terms of this agreement, which expires October 31, 1998,
the Company was required to grant to the bank 500,000 warrants to purchase the
Company's common stock. The warrants will vest in amounts of 200,000 and 300,000
as of April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The warrants have
an exercise price of $2.4375 per share which was the fair market value of the
stock at the date of the agreement. The Company is obligated to make monthly
payments of interest on the outstanding amounts at the bank's floating base rate
plus three percent (11.5% at September 30, 1997). The Line is collateralized by
all of the
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Company's assets. On December 1, 1997, as a requirement of the extension of its
bank line of credit, the Company raised $250,000. These funds were an equity
investment provided by its directors, a former director and executive officers
and will be available for general corporate purposes.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no assurance that
the Company will be successful in its efforts to raise additional funds.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area management will continue to
promote, is its PEO services. When a client utilizes the Company's PEO services,
the client administratively transfers all or some of its employees to DSI which
then provides them to the client. DSI thereby becomes the recognized legal
co-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 -- DSI believes that medical
insurance costs have forced small employers to reduce coverage provided to its
employees and to increase employee contributions. DSI is able to leverage its
large employee base and allow their clients to offer a variety of 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.
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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 can be
used to 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 PEO 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.
UNEMPLOYMENT COMPENSATION COST CONTROL -- DSI provides an unemployment
compensation cost control program to aggressively manage unemployment claims.
HUMAN RESOURCES MANAGEMENT SERVICES -- DSI can provide clients with
expertise in areas such as personnel policies and procedures, hiring and firing,
training, compensation and performance evaluation.
WORKERS COMPENSATION PROGRAM -- DSI has a national workers compensation
policy which can provide DSI with 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 where
applicable 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, and savings in time and paperwork previously required in
connection with personnel administration.
PAYROLL SERVICES
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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 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 service.
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
27 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: (1) technical employees such as engineers, information systems
specialists and project managers primarily with Fortune 100 companies for
specific projects, and, (2) radiologists, therapists, nurses, doctors with
hospitals, clinics and therapy centers throughout the 50 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 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.
DSI 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
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employee for short-term or specialized projects without jeopardizing their
pension plan.
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 five
years. However, with the business and strategy of the Company further developed,
acquisitions in the future will be concentrated in the PEO 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.
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 management, operations and customer base,
which must complement or expand the Company's operations; financial stability,
including the company's profitability and cash flow. 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. However, there can be no assurance
that the Company will be able to successfully identify, acquire and integrate
into the Company operations, compatible PEO companies.
Although the Company did not consummate any acquisitions during fiscal
1997, management anticipates its acquisition activities will increase next
fiscal year. Any such acquisition activity will be subject to, among other
things, general economic conditions and the Company's ability to raise capital
or utilize its securities.
CUSTOMERS
The Company's customer base consists of over 1,438 client companies,
representing approximately 33,000 employees (including payroll services) as of
September 30, 1997. The Company's client base is broadly distributed throughout
a wide variety of industries; however, more than 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 cycles. All
prospective customers are
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also evaluated individually on the basis of workers' compensation risk, group
medical history, unemployment history and operating stability.
SALES AND MARKETING
The Company has established sales teams in all of its locations.
Sales personnel offer a full array of DSI services, professional
employment, payroll and contract staffing, which supports the cross-marketing of
DSI's products and enables the sales representative to employ a professional
consultative approach to satisfying clients needs rather than forcing a single
solution.
All sales personnel have quotas and are held accountable on a weekly
basis with a sales meeting held in each location where the activity for the week
is discussed.
The Company has also implemented several focused marketing activities
to increase sales opportunities. DSI has been licensed by the various state
Boards of Accountancy to hold continuing professional education seminars for
CPAs. In addition, the Company has become an active participant in many trade
and community associations and chambers of commerce.
COMPETITION
The PEO industry consists of approximately 2,500 companies, most of
which serve a single market or region. The Company believes that there are
several PEOs with annual revenue exceeding $500 million. The largest PEO is
Staff Leasing of Bradenton, Florida with revenue in excess of $1 billion. While
there are several other large PEOs among the approximately 2,500 companies, many
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., and Paychex, Inc., which each purchased
PEOs in Florida, will be major competitors in the future. 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
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such as Volt Information Services, Butler Arde, Olsten 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 cannot 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
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Company cannot predict with certainty the nature or direction of the development
of federal, state and local regulations.
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 a 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
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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 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 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 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.
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. The Company is currently licensed in Florida
and New Mexico as well as Texas.
EMPLOYEES
As of January 2, 1998, the Company employed 117 employees, both
full-time and part-time, including executive officers, a reduction from 133
during the previous
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fiscal year. The Company also employs approximately 4,500 leased employees and
500 temporary employees on client assignments. The Company believes its
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
OPERATIONS AND FACILITIES
The Company currently has three processing centers in Somerset, New
Jersey, Houston, Texas and Clearwater, Florida. The Company also has five sales
service centers which are located in New York City, Somerset, New Jersey,
Clearwater, Florida, Houston, and El Paso, Texas. A sales service center is an
office used primarily for sales efforts and client services. The Company's
strategy is to target acquisitions in the current areas of operation, whereby
the Company will acquire a business or business accounts and absorb these
accounts into the current operations with minimal additional overhead. The
Company intends to continue its national expansion efforts in fiscal years
1998-1999, most likely through additional acquisitions.
DSI leases its 15,000 square foot corporate headquarters in Somerset,
New Jersey, as well as offices in Clearwater, Florida and Houston, Texas. The
Company also leases sales offices in New York City and El Paso, Texas. The
facilities provide sufficient capacity to meet demands for the foreseeable
future. In fiscal year 1997, the Company's total lease expenses were $537,000.
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 Somerset, 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 client name, the employee, dates, as
well as the "Micro Encoding".
The following is summary information on DSI's facilities:
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET DATE TERMS
- -------- ----------- ---- -----
DSI Staff RX, Inc. (Houston) 5,398 9/30/99 $13,440 per month
2 Northpoint Drive, Suite 110 7,396 2/28/00
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Houston, TX 77060
DSI Staff RX, Inc. (Clearwater) 2,805 5/31/00 $ 3,272 per month
601 Cleveland Sreet Suite 350
Clearwater, FL 34615
Staff ConnXions Southwest (El Paso) 3,126 3/31/02 $ 3,759 per month
4050 Rio Bravo, Suite 151
El Paso, TX 79902
Corporate Office 15,244 9/30/07 $23,819 per month
300 Atrium Drive
Somerset, NJ 08873
New York Office 391 4/30/01 $ 3,082 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
ITEM 3. LEGAL PROCEEDINGS
In October 1995, the Company entered into a note and finance agreement
with LNB Investment Corporation (LNB) providing for the loan to the Company of
up to $3,000,000. The loan was for a term of 15 months and was to be secured by
shares of the Company's common stock having a market value of no less than four
times the outstanding balance of the loan. LNB agreed not to sell or otherwise
liquidate the shares unless the Company were to default under the loan agreement
and failed to cure such default after notice. A total of 7,500,000 shares to be
pledged as collateral were registered under a registration statement filed under
the Securities Act of 1933, as amended.
The Company issued 1,783,334 shares in the name of LNB and delivered
the shares to a depository to secure the first portion of the loan of
$1,000,000. In January 1996, the Company determined that the shares pledged as
collateral had been transferred and sold in violation of the loan and finance
agreement. As a result, the financing agreement was terminated and never funded.
Through the efforts of the Company, 1,258,334 of these shares were recovered and
the Company received proceeds of $229,000 for a partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to recover
damages on account of the wrongful sale of the Company's common stock. On July
2, 1997, the Company settled the action. Without admitting or denying the
allegations in the complaint, the defendants agreed to pay $676,000 of which
$426,000 has been paid with the balance of $250,000 to be paid by LNB
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on or before August 4, 1997. The payment was not made by LNB as of December 16,
1997. The Company has commenced collection proceedings. The subsequent payment
is secured by a confession of judgment and a mortgage in the amount of $625,000.
The payments under the settlement agreement are in addition to $229,000
previously received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and remits the
last payment of $250,000. The agreement also provides that upon payment of all
sums due under the settlement agreement, LNB shall be deemed to have made full
restitution to the Company for the claims alleged in the action.
The Company is engaged in no other litigation, the effect of which is
anticipated to have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
NOT APPLICABLE
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 SmallCap Market 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:
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Common Stock
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
1st Quarter 5 15/16 1 15/32
2nd Quarter 6 15/16 4 5/16
3rd Quarter 6 1/8 3 9/16
4th Quarter 6 1/4 3 5/8
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
1st Quarter 6 1/4 3 1/8
2nd Quarter 3 15/16 1 13/16
3rd Quarter 2 7/16 1 9/16
4th Quarter 2 5/16 1 9/16
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
1st Quarter 2 11/16 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.
D. Approximated Number of Equity Security Holders
The approximate number of record holders of the Company's common stock
as of January 2, 1998 was 329. 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
1997 1996 1995 1994 1993
OPERATING DATA:
Operating Revenues $122,695,000 $100,927,000 $73,821,000 $37,998,000 $14,681,000
Direct Costs 113,894,000 92,490,000 68,530,000 34,939,000 12,459,000
Gross Profit 8,801,000 8,437,000 5,291,000 3,059,000 2,222,000
Selling, General & Administrative
Expenses (includes Depreciation 11,316,000 8,801,000 7,547,000 2,695,000 1,962,000
and Amortization)
Income (Loss) From Continuing
Operations (2,515,000) (364,000) (2,256,000) 364,000 260,000
----------- --------- ----------- ------- -------
Net Income (Loss) $(2,832,000) $(597,000) $(3,316,000) $720,000 $301,000
============ ========== ============ ======== ========
Income (Loss) From Continuing
Operations Per Share of Common
Stock ($0.13) ($0.02) ($0.16) $0.03 $0.04
Net Income (Loss) Per Share ($0.15) ($0.04) ($0.24) $0.05 $0.04
Dividends Paid Per Preferred Stock
$0.00 $0.00 $0.00 $3.30 $4.00
BALANCE SHEET DATA:
Assets $14,163,000 $14,800,000 $13,816,000 $7,727,000 $4,264,000
Liabilities 9,291,000 7,632,000 10,967,000 2,671,000 1,079,000
Long Term Debt 89,000 100,000 175,000 107,000 241,000
Working Capital (Deficiency) (1,401,000) 286,000 (4,771,000) 1,146,000 1,920,000
Shareholders' Equity $4,872,000 $7,168,000 $2,849,000 $5,056,000 $3,195,000
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). The Company desires to avail itself of certain
"safe harbor" provisions of the 1995 Reform Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Report on Form 10-K involve known and unknown risks, uncertainties, and
other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) achievements expressed or implied by such
forward looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to, risks associated with
the Company's recent losses, the Company's ongoing need for a new credit
facility, need for additional capital, risks of recently consummated
acquisitions as well as future acquisitions, effects of competition and
technological changes and dependence upon key personnel.
Fiscal Year 1997 as Compared to Fiscal Year 1996
Operating revenues for the fiscal year 1997 were $122,695,000 as compared
to fiscal year 1996 of $100,927,000 which represents an increase of $21,768,000
or 21.6%. This increase is due to the efforts of the internal sales force to
continually bring in new business which accounted for all of the increase. PEO
services accounted for 83% of the growth, while the balance is attributed to the
Company's staffing business.
Direct costs for fiscal year 1997 were $113,894,000 as compared to
$92,490,000 for fiscal year 1996 which represents an increase of $21,404,000, or
23.1%. The workers' compensation profit for the first four months of fiscal 1996
of $493,000 was recorded as a reduction of selling, general and administrative
expenses, whereas subsequent to that the revenue and direct costs for the
workers' compensation program were reflected in their respective accounts. In
addition, the first nine months of fiscal 1997 included $308,000 in
underbilled/excess charges for PEO medical expenses. After adjusting for the
treatment of the workers' compensation profit, one-time charges of $678,000
recorded in the second quarter of 1997 (primarily due to increased workers'
compensation charges) and medical expenses, direct costs increased $20,911,000
or 22.7%. As a percentage of revenue, and on an adjusted basis, direct costs for
fiscal 1997 and fiscal 1996 were 92% and 91.1% respectively. This increase is
attributed to the increase in the PEO business as well as the new workers'
compensation program, in which the Company is now expensing the maximum workers'
compensation exposure on a current basis.
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Gross profits were $8,801,000 and $8,437,000 for fiscal 1997 and 1996,
respectively, for an increase of 4.3%. Giving effect to the previously discussed
adjustments, gross profits for fiscal 1997 and 1996 would have been $9,787,000
and $8,930,000, respectively. As a percentage of revenue, adjusted gross profits
for fiscal 1997 and 1996 would have been 8% and 8.8%, respectively, reflecting
the increased PEO business in fiscal 1997 which has lower margins but adds more
dollars of gross profit.
Selling, general and administrative costs ("SG&A") for fiscal 1997
increased $2,334,000, or 29%, from $7,972,000 in fiscal 1996 to $10,306,000. Of
this increase, $1,973,000 pertains to charges recorded in the second quarter of
fiscal 1997, $1,000,000 of which was to increase the bad debt reserve with the
balance for other miscellaneous items. Giving effect to these adjustments, SG&A
increased 4.5%.
Depreciation and amortization increased $181,000 in fiscal 1997 due to the
write-off of all the intangible assets of Digital Insurance Services ($261,000)
recorded in the second fiscal quarter.
Net loss for fiscal 1997 was ($2,832,000) versus a net loss of ($597,000)
in fiscal 1996. The increased loss is due to $3,100,000 in adjustments recorded
in the second quarter of 1997.
Fiscal Year 1996 as Compared to Fiscal Year 1995
Operating revenues for the fiscal year 1996 were $100,927,000 as compared
to fiscal year 1995 of $73,821,000 which represents an increase of 36.7%. This
increase is attributable to the increased sales efforts of the internal sales
force as well as the full year impact of the acquisition of Turnkey Services
which was acquired in May, 1995.
Direct costs as a percentage of revenue for fiscal year 1996 was 91.6% as
compared to 92.8% for the prior fiscal year. These changes are attributable to
the increased margins in the PEO business due to reduced costs of the Company's
workers' compensation programs and the full year effect of the acquisition of
Turnkey Services. The Company provides management personnel services to certain
clients of Turnkey Services which generate higher than average administrative
fees. The reduction in workers' compensation costs were achieved through better
managed claims experience.
Selling, general and administrative costs ("SG&A") increased $1,270,000.
This growth in expenses includes $195,000 in charges for intangibles associated
with acquisitions that were not consummated during the year and $309,000 in an
increase in allowance for doubtful accounts attributable to accounts that have
aged beyond acceptable limits but which the Company continues to pursue.
Approximately $500,000 is attributable to the full year impact of Turnkey
Services which was acquired May 1, 1995. Additionally, the Company reversed
$515,000 in
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previously established reserves for claims which the Company resolved in its
favor. As a percentage of gross profit, SG&A expenses are 94.5% in fiscal 1996
as compared to 126.7% in fiscal 1995 and 88.1% in fiscal 1994. Management
believes that although there is improvement from 1995, it will continue to
improve this margin in the future.
Net loss before taxes was ($563,000) in fiscal year 1996 as compared to
loss of ($3,453,000) in fiscal year 1995. This decrease in net loss is primarily
attributable to the increase in gross profit and the decrease in SG&A as a
percentage of gross profit, explained above.
Fiscal Year 1995 as Compared to Fiscal Year 1994
Operating revenues for the fiscal year 1995 were $73,821,000 as compared to
fiscal year 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 PEO companies which were acquired in the second quarter of fiscal year
1994 $5,500,000.
Direct costs as a percentage of revenue for fiscal year 1995 was 92.8% as
compared to 92.0% in fiscal year 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 year 1994 and was primarily due to: (i) increased selling and
marketing expenses including the cost of direct mail efforts and 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 processing center 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 benefit was ($3,453,000) for fiscal year 1995 as
compared to a net gain of $720,000 the prior year. In accordance with Statement
of Financial 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.
Liquidity and Capital Resources
The Company's working capital for fiscal year 1997 was a deficit of
($1,401,000) versus
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$286,000 in fiscal 1996. At September 30, 1997, the Company had cash of
$841,000, restricted cash of $738,000 and net accounts receivable of $5,820,000.
In February 1995, the Company entered into a one year revolving credit line
facility (the "Line") with a bank which was subsequently extended and amended
on seven occasions. Each loan extension has been for limited periods of time.
The fifth amendment executed as of December 31, 1996, restricted the Company
from borrowing any additional funds available on the Line and required weekly
principal payments of $10,000, effective February 24, 1997. Effective October
31, 1997, the Company entered into the seventh amendment to the loan
agreement. Under the terms of this agreement, which expires October 31, 1998,
the Company was required to grant to the bank 500,000 warrants to purchase the
Company's common stock. The warrants will vest in amounts of 200,000 and
300,000 as of April 30, 1998 and October 31, 1998, respectively, if the
obligations under the loan agreement are not paid in full by these dates. The
warrants have an exercise price of $2.4375 per share, which was the fair
market value of the stock at the date of the agreement. The Company is
obligated to make monthly payments of interest on the outstanding amounts at
the bank's floating base rate plus three percent (11.5% at September 30,
1997). Under the present amendment, the Company can not borrow additional
funds and continues to make weekly principal payments of $10,000. The line is
collateralized by all of the Company's assets. At September 30, 1997 and
December 31, 1997, the total amount outstanding on the Line was $2,697,000 and
$2,567,000, respectively. In December 1997, the Company's directors and
executive officers, as well as a former director, made an equity investment of
$250,000 for general corporate purposes. The raising of these funds was a
requirement of the recently negotiated bank line of credit extension.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no assurance
that the Company will be successful in its efforts to raise additional funds.
At the present time, the Company does not have funds available to repay the
Line. Repayment of the Line is due in full on October 31, 1998.
In December 1996, due to the favorable trends in losses in its Workers'
Compensation program, the Company's former carrier reduced its letter of
credit requirement from $1,610,000 to $1,193,000 which resulted in $417,000 in
additional cash available. Of this availability, $344,000 has been added to
working capital during the quarter ended December 31, 1996 while the balance
of $73,000 was added to working capital during the quarter ended March 31,
1997.
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-18.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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 69 Chairman of the Board of Directors
George J. Eklund 54 Director
Donald T. Kelly 48 Vice President, Chief Financial Officer
and Corporate Secretary
Senator John H. Ewing 77 Director
William J. Marino 54 Director
Donald W. Kappauf 51 President and Chief Executive Officer
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.
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.
George J. Eklund became President and Chief Operating Officer of the
Company on September 21, 1994, and President and Chief Executive Officer on
March 13, 1996. On December 16, 1997, Mr. Eklund's position changed for health
reasons but he remains active with the Company. From 1992 to 1994, Mr. Eklund
was President of the
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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.
Donald T. Kelly, has been Chief Financial Officer and Vice President of
Finance since he joined DSI on January 20, 1997. He was elected Corporate
Secretary in August of 1997. Mr. Kelly was Vice President and Chief Financial
Officer of Wireless Cable International and its predecessor company, Cross
Country Wireless, Inc. from 1993 to 1997. From 1987 to 1993, he was Vice
President of Finance and Administration at Potters Industries.
Senator John H. 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 the New Jersey Senate Education
Committee.
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, Mr. 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.
Donald W. Kappauf became President and Chief Executive Officer of
Digital Solutions, Inc. on December 16, 1997. Mr. Kappauf joined Digital
Solutions, Inc. in 1990 and has held several senior management positions
including Division President and Executive Vice President. From 1988 to 1990, Mr
Kappauf was President of Perm Staff/Temp Staff in Princeton, New Jersey. He was
Assistant Vice President of SMC Engineering and then President of SMC Personnel
Support from 1968 to 1988.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
Karl W. Dieckmann, John H. Ewing and William J. Marino served on the
Company's Compensation Committee during the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
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The following provides certain summary information concerning
compensation paid or accrued by the Company during the years ended September 30,
1997, 1996 and 1995 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 during the last fiscal year.
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LONG TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND YEAR SALARY BONUS OTHER OPTIONS/SAR'S
PRINCIPAL POSITION
Raymond Skiptunis (1) 1997 $0 $0 $210,000 0
1996 $214,061 $0 $0 0
1995 $193,542 $0 $0 0
George J. Eklund, (2) 1997 $210,000 $0 $0 0
Chief Executive Officer 1996 $207,924 $100,000 $0 300,000
1995 $181,866 $50,000 $0 0
Donald T. Kelly, (3) 1997 $90,865 $20,000 $0 30,000
Chief Financial Officer
Louis J. Monari, (4) 1997 $106,077 $0 $0 0
Vice President 1996 $91,539 $20,000 $0 30,000
1995 $90,538 $15,000 $0 0
Donald W. Kappauf, (5) 1997 $121,154 $0 $0 0
Executive Vice President
1996 $110,000 $20,000 $0 0
1995 $110,000 $0 $0 0
(1) Mr. Skiptunis was replaced as Chief Executive Officer by Mr. Eklund in
March, 1996. The other compensation of $210,000 during 1997 was
severance pay.
(2) Mr. Eklund's employment with the Company commenced on September
19,1994. He assumed the position of Chief Executive Office in March
1996.
(3) Mr. Kelly was granted a sign on bonus of $20,000 at employment, on
January 20, 1997.
(4) Mr. Monari's employment terminated in July, 1997.
(5) This includes Mr. Kappauf's compensation for the executive vice
president position he assumed on August 27, 1997. His compensation in
1997, prior to becoming executive
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vice president was $105,288. Compensation for 1996 and 1995 was for his
position as Division Vice President.
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. Effective October 1, 1997 the meeting and
committee meeting fees were increased to $1,000 and $500 respectively.
Employment Agreement
Effective March 12, 1996, the Company entered into a new employment
agreement with Mr. Eklund for a three year term. The employment agreement
provided for (i) annual compensation of $210,000 for the first year of the
agreement increasing at the discretion of the Company; (ii) a bonus in
accordance with a plan to be established by the Company; (iii) the award of
stock options to purchase 300,000 shares of the Company's common stock, subject
to vesting requirements; (iv) certain insurance and severance benefits; and (v)
a $700 per month automobile allowance. Effective December 16, 1997, Mr. Eklund's
position was changed for health reasons. The Company and Mr. Eklund have entered
into an agreement regarding the change in his position. Pursuant to this
agreement, Mr. Eklund no longer serves as President and Chief Executive Officer
of the Company. Mr. Eklund remains a Director. Mr. Eklund will continue to
receive his salary and certain other benefits as provided in his original
employment agreement.
Effective December 16, 1997, the Company entered into a verbal
agreement with Mr. Donald Kappauf wherein Mr. Kappauf assumed the duties of
President and Chief Executive Officer. The agreement provides for (i) annual
compensation of $165,000 for the first year of the agreement increasing at the
discretion of the Company; (ii) a bonus equivalent to 6% of the Company's
pre-tax profit for fiscal 1998 (8% of the amount over $2,500,000) provided the
Company's earnings before taxes are at least $1,500,000; (iii) the award of
stock options to purchase 100,000 shares of the Company's common stock, 50,000
of which will vest in one year while the remainder will vest in two years; (iv)
a two year term.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NO. OF PERCENTAGE
SECURITIES OF TOTAL
UNDERLYING OPTIONS/ EXERCISE OF
OPTIONS GRANTED IN BASE PRICE EXPIRATION
GRANTED FISCAL YEAR PER SHARE DATE
NAME
Donald T. Kelly 30,000 29% $1.875 01/20/02
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, 1997.
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS/SARS AS OF AT SEPTEMBER 30,
ACQUIRED SEPTEMBER 30, 1997 1997
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- -------- -------- ------------- ----------------
George J. Eklund 0 0 300,000/200,000 $0/$0
Louis Monari 0 0 30,000/20,000 $63,900/$0
Donald W. Kappauf 0 0 100,000/0 $213,000/$0
Donald T. Kelly 0 0 10,000/20,000 $21,300/$42,600
(1) Based upon a closing bid price of the Common Stock at $2.1300 per share
on September 30, 1997.
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
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1990 Plan provides for the grant of options to purchase up to 1,000,000 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 (10%) 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, 1991 and amended in March 1996. 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 provides that each non-executive director is
automatically granted an option to purchase 5,000 shares upon joining the Board
and each September lst, pro rata, based on the time the director has served in
such
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capacity during the previously year. Similarly, each eligible director of
an advisory board will receive on each September lst an option to purchase 5,000
shares of the Company's common stock each September lst. The Directors' Plan
also provides that directors, upon joining the Board, and for one (1) 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.
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 (5) 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-(3) 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
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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 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
30
31
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 2,
1998 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 Shares Percent of Company's
Name of Shareholder Presently Owned(1) Outstanding Stock
- ------------------- ------------------ -----------------
Karl W. Dieckmann(2) 310,743 1.6%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
George J. Eklund(3) 379,545 2.0%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Senator John H. Ewing(4) 120,625 *
76 Claremont Road
Barnardsville, NJ 07924
William J. Marino(5) 88,617 *
c/o Blue Cross/Blue Shield
of New Jersey
3 Penn Plaza East
Newark, NJ 07105
Donald W. Kappauf(6) 526,248 2.75%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
31
32
Donald T. Kelly(7) 18,850 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
All officers and directors as a group 1,444,628 7.55%
(6) persons (2,3,4,5,6,7)
* Less than 1 percent.
(1) Ownership consists of sole voting and investment power except as
otherwise noted.
(2) Includes options to purchase 10,000 shares of the Company's common
stock, and warrants to purchase 10,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(3) Includes options to purchase 300,000 shares of the Company's common
stock, and excludes unvested options to purchase 200,000 shares of
common stock.
(4) Includes options to purchase 35,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(5) Includes options to purchase 10,000 shares of the Company's common
stock, and excludes unvested options to purchase 5,000 shares of common
stock.
(6) Includes options to purchase 150,000 shares of the Company's common
stock, and excludes unvested options to purchase 150,000 shares of
common stock.
(7) Includes options to purchase 10,000 shares of common stock, and
excludes unvested options to purchase 70,000 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".
32
33
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-18 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
EXHIBIT NO. DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.6.1 *-- Lease dated May 30, 1997 for office space at 300 Atrium, Somerset, New
Jersey
10.15.1 - Employment agreement between George J. Eklund and the Company dated March 12, 1996
10.15.2 *-- Amended employment agreement between George J. Eklund and the Company dated December 16, 1997
10.16.1 *-- Seventh Amended Loan Agreement between Registrant and Summit Bank and sixth amended Promissory
Note
33
34
21.0 -- Subsidiaries (Exhibit 21 to Form 10-K for fiscal 1996)
23.1 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 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 1997 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 1997 into the Company's registration
Statement on form S-3 file number 33-91700.
23.4 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-09313.
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.
34
35
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/Donald W. Kappauf
-------------------------------------
Donald W. Kappauf
President and Chief Executive Officer
Dated: January 13, 1998
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/George J. Eklund Director January 13, 1998
- ----------------------------
George J. Eklund
/s/Karl W. Dieckmann Chairman of the Board January 13, 1998
- ----------------------------
Karl W. Dieckmann
/s/John H. Ewing Director January 13, 1998
- ----------------------------
Senator John H. Ewing
/s/William J. Marino Director January 13, 1998
- ----------------------------
William J. Marino
/s/Donald W. Kappauf President & Chief January 13, 1998
- ---------------------------- Executive Officer
Donald W. Kappauf
/s/Donald T. Kelly Chief Financial Officer January 13, 1998
- ---------------------------- & Corporate Secretary
Donald T. Kelly
35
36
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report Of Independent Public Accountants F-2
Consolidated Balance Sheets As Of September 30, 1997 And 1996 F-3
Consolidated Statements Of Operations For The Years Ended
September 30, 1997, 1996 And 1995 F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 1997, 1996 And 1995 F-6
Consolidated Statements Of Cash Flows For The Years Ended
September 30, 1997, 1996 And 1995 F-7
Notes To Consolidated Financial Statements F-9
Schedule I -- Valuation And Qualifying Accounts For The Years Ended
September 30, 1997, 1996 and 1995 S-1
Schedules other than those 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
37
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 (the "Company") as of September 30, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 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 presented for purposes of complying with
the Securities and Exchange Commission's rules and regulations 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 23, 1997
F-2
38
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996
ASSETS 1997 1996
------ ---- ----
CURRENT ASSETS:
Cash $841,000 $0
Restricted cash (Note 8) 738,000 1,155,000
Accounts receivable, net of allowance for doubtful accounts
of $862,000 at September 30, 1997 and $339,000
at September 30, 1996 5,820,000 6,338,000
Notes due from officers 0 136,000
Other current assets 402,000 189,000
----------------- ----------------
Total current assets 7,801,000 7,818,000
----------------- ----------------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,170,000 2,883,000
Leasehold improvements 47,000 180,000
----------------- ----------------
3,217,000 3,063,000
Less - accumulated depreciation and amortization 2,310,000 2,226,000
----------------- ----------------
907,000 837,000
DEFERRED TAX ASSET (Note 4) 760,000 760,000
GOODWILL, net of accumulated amortization of $835,000 in 1997
and $713,000 in 1996 (Notes 2 and 3) 4,344,000 4,780,000
OTHER ASSETS 351,000 605,000
----------------- ----------------
$14,163,000 $14,800,000
================= ================
The accompanying notes to the consolidated
financial statements are an integral part of
these consolidated balance sheets.
F-3
39
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
CURRENT LIABILITIES:
Short-term borrowings (Notes 5 and 8) $2,697,000 $2,907,000
Current portion of long-term debt (Note 7) 113,000 88,000
Accounts payable 2,254,000 1,620,000
Accrued expenses and other current liabilities (Note 6) 4,138,000 2,917,000
----------------- ----------------
Total current liabilities 9,202,000 7,532,000
LONG-TERM DEBT, net of current portion (Note 7) 89,000 100,000
----------------- ----------------
Total liabilities 9,291,000 7,632,000
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Common stock, $.001 par value; authorized 40,000,000 shares; issued and
outstanding 19,141,760 in 1997 and 18,786,609 in 1996 19,000 19,000
Additional paid-in capital 13,393,000 12,857,000
Accumulated deficit (8,540,000) (5,708,000)
----------------- ----------------
4,872,000 7,168,000
----------------- ----------------
$14,163,000 $14,800,000
================= ================
The accompanying notes to the consolidated
financial statements are an integral part of
these consolidated balance sheets.
F-4
40
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
OPERATING REVENUES $122,695,000 $100,927,000 $73,821,000
DIRECT OPERATING COSTS 113,894,000 92,490,000 68,530,000
----------------- ----------------- -----------------
Gross profit 8,801,000 8,437,000 5,291,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 8) 10,306,000 7,972,000 6,702,000
DEPRECIATION AND AMORTIZATION 1,010,000 829,000 845,000
----------------- ----------------- -----------------
Loss from operations (2,515,000) (364,000) (2,256,000)
----------------- ----------------- -----------------
OTHER CREDITS (CHARGES):
Interest income 60,000 173,000 124,000
Interest expense (Notes 5 and 7) (377,000) (422,000) (935,000)
Other income (expense) 0 50,000 (386,000)
----------------- ----------------- -----------------
(317,000) (199,000) (1,197,000)
----------------- ----------------- -----------------
Loss before income taxes (2,832,000) (563,000) (3,453,000)
INCOME TAX (EXPENSE) BENEFIT (Note 4) 0 (34,000) 137,000
----------------- ----------------- -----------------
Net loss ($2,832,000) ($597,000) ($3,316,000)
================= ================= =================
NET LOSS PER COMMON SHARE ($0.15) ($0.04) ($0.24)
================= ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,070,349 16,840,371 13,595,382
================= ================= =================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
41
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Common Stock Additional
Shares Issued Paid-In
(Retired) Amount Capital Deficit
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1994 12,125,753 $ 12,000 $ 6,492,000 $ (1,795,000)
Exercise of stock options 1,605,426 2,000 853,000
Exercise of stock warrants 206,500 - 110,000
Retirement of common stock in connection with
exercise of stock options and warrants (249,255) - -
Common stock issued in connection with the
acquisition of Staff Rx 360,000 - 743,000
Expenses related to private placement of
common stock - - (164,000)
Common stock issued in connection with the
acquisition of Turnkey Services, Inc. 68,205 - 166,000
Common stock retired related to the
acquisition of The Alternative Source,
Inc., Ram Technical Corp. and MLB
Medical Staffing, Inc. (112,714) - (254,000)
Net loss - - - (3,316,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1995 14,003,915 14,000 7,946,000 (5,111,000)
Common stock issued in connection with
private placements, net of expenses 2,304,200 2,000 4,526,000 -
Common stock received and retired in
satisfaction of officer loans (107,130) - (679,000) -
Common stock issued 525,000 1,000 228,000 -
Exercise of stock options 794,157 1,000 48,000 -
Exercise of stock warrants 1,209,799 1,000 703,000 -
Stock issued for services rendered 56,668 - 85,000 -
Net loss - - - (597,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1996 18,786,609 19,000 12,857,000 (5,708,000)
Exercise of stock options 204,471 - 53,000
Exercise of stock warrants 117,347 - 181,000
Stock issued for employee bonus 33,333 - 100,000
Proceeds related to LNB settlement,
net of expenses - - 202,000
Net loss - - - (2,832,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1997 19,141,760 $ 19,000 $ 13,393,000 $ (8,540,000)
================= ================= ================= =================
The accompanying notes to consolidated
financial statements are an integral part of these consolidated statements.
F-6
42
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30
---------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,832,000) ($597,000) ($3,316,000)
Adjustments to reconcile net loss to net
cash used in operating activities-
Deferred income taxes 0 0 (160,000)
Depreciation and amortization 1,010,000 829,000 845,000
Provision for doubtful accounts 1,120,000 462,000 153,000
Amortization of rent deferral 0 0 28,000
Stock issued employee bonus 100,000 85,000 0
Changes in operating assets and liabilities-
Increase in accounts receivable (602,000) (1,871,000) (2,490,000)
Decrease (increase) in other assets (106,000) 239,000 (909,000)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 1,855,000 (278,000) 2,806,000
Decrease in other liabilities 0 (75,000) (55,000)
Decrease (increase) in restricted cash 417,000 (1,155,000) 0
----------------- ---------------- ----------------
Net cash provided by (used in)
operating activities 962,000 (2,361,000) (3,098,000)
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (361,000) (187,000) (355,000)
Acquisitions of businesses, net of cash acquired 0 0 (1,351,000)
----------------- ---------------- ----------------
Net cash used in investing activities (361,000) (187,000) (1,706,000)
----------------- ---------------- ----------------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
43
For the Years Ended September 30
----------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from borrowings on
revolving line of credit ($210,000) ($225,000) $2,122,000
Principal payments on long-term debt 0 (941,000) (443,000)
(Principal payments) proceeds on
subordinated bridge loan 0 (1,887,000) 1,887,000
Proceeds from other borrowings, net of repayments 14,000 71,000 837,000
Net proceeds from issuance of common stock,
net of expenses 0 4,528,000 245,000
Net proceeds from the exercise of stock options
and warrants 234,000 753,000 0
Net proceeds from common stock issued 0 229,000 0
Proceeds from LNB settlement, net of expenses 202,000 0 0
Other 0 0 (2,000)
----------------- ---------------- -----------------
Net cash provided by financing activities 240,000 2,528,000 4,646,000
----------------- ---------------- -----------------
Net increase (decrease) in cash 841,000 (20,000) (158,000)
CASH AT BEGINNING OF PERIOD 0 20,000 178,000
----------------- ---------------- -----------------
CASH AT END OF PERIOD $841,000 $0 $20,000
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $363,000 $412,000 $705,000
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Value of common stock issued in a business
acquisition $0 $0 $909,000
================= ================ =================
Value of common stock retired in satisfaction of
shareholder loans $0 $679,000 $0
================= ================ =================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-8
44
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 employer services, 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-Northeast, DSI Staff ConnXions Southwest,
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.
As more fully explained in Note 5, the Company has recently extended its
line of credit and is currently in discussion with several financial
institutions to receive additional financing for its capital needs. In
addition, management has instituted several cost reduction programs in an
effort to address its recurring operating losses. These management
initiatives have resulted in return to profitability of the Company in
the 4th quarter of fiscal 1997. Based upon the actions instituted and
forecast operating cash flows, management of the Company believes it can
sustain operations for at least twelve months from September 30, 1997.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Policy-
The Company recognizes revenue in connection with its professional
employer organization program (PEO) and its temporary placement service
program when the services have been provided. Revenues represent 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.
F-9
45
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 the acquisition date and is being
amortized on a straight line basis over 20 years for substantially all of
the Company's acquisitions (see Note 3). Goodwill amortization expense
charged to operations was approximately $434,000 for 1997, $415,000 for
1996 and $327,000 for 1995. Amortization expense for 1997 and 1996
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, 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 $195,000 and
$180,000 of additional amortization to depreciation and amortization for
the year ended September 30, 1996 and 1995, respectively.
In 1997, the Company decided not to remain in the insurance business and
elected to write off $261,000 in intangible assets of Digital Insurance,
Inc.
Insurance Programs-
The Company previously maintained a large deductible workers'
compensation insurance program which was replaced on April 1, 1997 with a
new program. Under the old program the Company still maintains a reserve
for claims that are outstanding as of the balance sheet date. However the
new program requires the funding of anticipated loss reserves on a
current basis. To be conservative the Company expenses the maximum loss
it can be held accountable for under this program which is greater than
the current funding requirement.
Net Loss Per Common Share-
Net loss per common share is based upon the weighted average number of
shares outstanding. Outstanding stock options and warrants have not been
considered in the computations of net loss per common share in 1997, 1996
and 1995 since their effect was antidilutive. In March, 1997 the
Financial Accounting Standards Board issued Statement on Financial
Accounting Standards Number 128, (Earnings Per Share) [(SFAS No. 128)].
SFAS No. 128 is effective for fiscal years ending after December 15,
1997, and when adopted, it will require restatement of prior year
earnings per share. If the Company had adopted SFAS No. 128 for the year
ended September, 1997 there would have been no effect on earnings per
share.
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.
F-10
46
(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 a PEO 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 and issued common stock in the amount of
$166,000. In addition, the Company incurred approximately $200,000 in
transaction costs and recorded goodwill of approximately $989,000
associated with this acquisition.
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 transaction costs and recorded goodwill of
approximately $1,766,000, associated with this acquisition.
In March 1995, the Company issued 360,000 shares of its common stock,
valued at $743,000, to satisfy part of the aforementioned promissory
note. The balance was paid in cash.
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
(4) INCOME TAXES:
At September 30, 1997, the Company had available operating loss
carryforwards of approximately $6,945,000 to reduce future periods'
taxable income. The carryforwards expire in various years beginning in
2004 and extending through 2012.
The Company has recorded a $760,000 deferred tax asset at September 30,
1997 and 1996. 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 $2,000,000 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 ability to meet its operating plan
as well as the resolution of significant past problems which had
adversely affected the Company in prior years.
F-11
47
The income tax benefit reflected in the consolidated statement of
operations for 1995 represents a portion of the recorded deferred tax
asset described above.
An analysis of the Company's deferred income tax asset is as follows-
1997 1996
-------------------- --------------------
Net operating loss carryforwards $2,500,000 $1,985,000
Accrued workers' compensation 476,000 278,000
Allowance for doubtful accounts 310,000 122,000
Other items, net 154,000 0
-------------------- --------------------
Gross deferred income tax asset 3,440,000 2,335,000
Valuation allowance (2,680,000) (1,575,000)
-------------------- --------------------
Deferred income tax asset $760,000 $760,000
==================== ====================
(5) SHORT-TERM BORROWINGS:
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended
and amended on seven occasions. Each loan extension has been for limited
periods of time. The fifth amendment executed as of December 31, 1996,
restricted the Company from borrowing any additional funds available on
the Line and required weekly principal payments of $10,000, effective
February 24, 1997. Effective October 31, 1997, the Company entered into
the seventh amendment to the loan agreement. Under the terms of this
agreement, which expires October 31, 1998, the Company was required to
grant to the bank 500,000 warrants to purchase the Company's common
stock. The warrants will vest in amounts of 200,000 and 300,000 as of
April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The
warrants have an exercise price of $2.4375 per share which was the fair
market value of the stock at the date of the agreement. The Company is
obligated to make monthly payments of interest on the outstanding amounts
at the bank's floating base rate plus three percent (11.5% at September
30, 1997). The Line is collateralized by all of the Company's assets. On
December 1, 1997, as a requirement of the Line, the Company raised
$250,000. These funds were an equity investment provided by its
directors, a former director and executive officers and will be available
for general corporate purposes.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no
assurance that the Company will be successful in its efforts to raise
additional funds.
During 1995, the Company issued approximately $1,975,000 of Subordinated
Bridge Notes to various investors. The notes bore interest at a rate of
12% per annum (which was increased to 16% in November, 1995 in
consideration for extending the maturity date) and were repaid in full in
1996. In connection with the issuance of these notes, the Company also
granted these investors warrants to purchase the Company's common stock
(see Note 9).
Other information with respect to short term borrowings for 1997 and 1996
is as follows-
1997 1996
----------------- ----------------
Balance at end of period $2,697,000 $2,907,000
Maximum amount outstanding during period 3,017,000 5,019,000
Weighted average balance outstanding during the
period 2,916,000 3,382,000
Weighted average interest rate during the period 11.16% 12.31%
F-12
48
(6) ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 1997 and
1996 consist of the following-
1997 1996
--------------- ---------------
Payroll and payroll taxes $2,271,000 $1,888,000
Worker's compensation insurance reserves 1,321,000 631,000
Legal 134,000 100,000
Other 412,000 298,000
--------------- ---------------
$4,138,000 $2,917,000
=============== ===============
(7) LONG-TERM DEBT:
Long-term debt at September 30, 1997 and 1996 consists of the following-
1997 1996
------------- -------------
Leases $202,000 $188,000
Less- Current portion (113,000) (88,000)
------------- -------------
$89,000 $100,000
============= =============
Maturities of long-term debt as of September 30, 1997 are as follows-
Year Ending
September 30
------------------
1998 $113,000
1999 48,000
2000 34,000
2001 7,000
---------------
$202,000
===============
(8) COMMITMENTS AND CONTINGENCIES:
Leases-
In November 1991, the Company entered into a lease for its corporate
headquarters facility. The lease term extended 69 months with fixed
monthly payments of $18,000. The Company recognized rent expense of
$253,000 under this lease in 1997, 1996 and 1995. Commencing September,
1997, the Company relocated its corporate headquarters to a new
facility. The lease for this facility extends through September, 2007
and provides for minimum annual payments of $286,000. The old lease was
a triple net lease resulting in actual total payments approximating the
lease payments in the new building. Rent expense under all operating
leases was $537,000 in 1997, $627,000 in 1996 and $384,000 in 1995.
F-13
49
Minimum payments under noncancellable lease obligations at September 30,
1997 are as follows-
Year Ending
September 30
------------------
1998 $ 567,000
1999 572,000
2000 434,000
2001 353,000
2002 308,000
Thereafter 1,601,000
-----------------------
$ 3,835,000
=======================
Workers' Compensation Policy-
In connection with the Company's former workers' compensation insurance
policy which expired on April 1, 1997, the insurance company developed
reserve factors on each claim that may or may not materialize after the
claim is fully investigated. Generally Accepted Accounting Principles
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 12 months. As of September 30, 1997 and September
30, 1996, this accrual amounted to $818,000 and $631,000, respectively.
On April 1, 1997, the Company entered into a workers' compensation policy
with a new carrier. Under the terms of the new workers' compensation
insurance program the Company fully accrues the maximum loss on a monthly
basis. During the twelve months ended September 30, 1997 and 1996, the
Company recognized approximately $868,000 and $1,332,000, respectively,
as its share of premiums collected from customers covered by these
policies in excess of claims and fees paid. The decrease in reported
workers' compensation profit is due to the revised methodology in
evaluating the Company's exposure as reported in the Company's second
fiscal quarter 10-Q and the new insurance program.
The Company has outstanding letters of credit amounting to $1,193,000 as
of September 30, 1997. The letters of credit are required to
collateralize unpaid claims in connection with the Company's former
workers' compensation insurance policy and can only be drawn upon by the
beneficiary if the Company does not perform according to the terms of the
related agreement. The Company has collateralized these letters of credit
by maintaining compensating restricted cash balances of $738,000 and
utilizing $455,000 of amounts available under its line of credit. The
Company's current policy does not require a letter of credit because the
Company funds the estimated loss reserves on a monthly basis.
Legal Proceedings-
In October 1995, the Company entered into a note and finance agreement
with LNB Investment Corporation (LNB) providing for the loan to the
Company of up to $3,000,000. The loan was for a term of 15 months and was
to be secured by shares of the Company's common stock having a market
value of no less than four times the outstanding balance of the loan. LNB
agreed not to sell or otherwise liquidate the shares unless the Company
were to default under the loan agreement and failed to cure such default
after notice. A total of 7,500,000 shares to be pledged as collateral
were registered under a registration statement filed under the Securities
Act of 1933, as amended.
The Company issued 1,783,334 shares in the name of LNB and delivered the
shares to a depository to secure the first portion of the loan of
$1,000,000. In January 1996, the Company determined
F-14
50
that the shares pledged as collateral had been transferred and sold in
violation of the loan and finance agreement. As a result, the financing
agreement was terminated and never funded. Through the efforts of the
Company, 1,258,334 of these shares were recovered and the Company
received proceeds of $229,000 for a partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to
recover damages on account of the wrongful sale of the Company's common
stock. On July 2, 1997, the Company settled the action. Without
admitting or denying the allegations in the complaint, the defendants
agreed to pay $676,000 of which $426,000 ($202,000, net of expenses)
has been paid with the balance of $250,000 to be paid by LNB on or
before August 4, 1997. The payment was not made by LNB as of December
16, 1997 and as a result, the Company has commenced collection
proceedings. The subsequent payment is secured by a confession of
judgment and a mortgage in the amount of $625,000. The payments under
the settlement agreement are in addition to $229,000 previously
received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and
remits the last payment of $250,000. The agreement also provides that
upon payment of all sums due under the settlement agreement, LNB shall
be deemed to have made full restitution to the Company for the claims
alleged in the action.
At September 30, 1997 the Company is involved in various other 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.
(9) SHAREHOLDERS' EQUITY
Private Placements-
In November, 1995, the Company issued in a private placement 500 Shares
of $.10 par value Series B Convertible Preferred Stock. Holders of the
preferred stock were entitled to dividends of $60 per annum, payable
semiannually and had the right to convert up to 50% of their shares at
any time after 41 days from the date of issuance of the Series B
Preferred Stock and 100% after 60 days after issuance into the
Company's common stock at a conversion price equaled to 75% of the
average closing price at the date of conversion. In January 1996,
holders of the Company's preferred stock exercised their conversion
privilege and received 421,792 shares of the Company's common stock.
The Company realized net proceeds of $437,000 from the proceeds of this
offering.
Additionally, during 1996 the Company raised an additional $4,091,000,
net of expenses through a private placement of 1,882,408 shares of its
common stock. The proceeds from these offerings were used in part to
pay down the balance on the Subordinated Bridge Notes, collateralize
letters of credit issued to secure the Company's workers' compensation
program (see Note 8) and for working capital needs.
On December 1, 1997, as a requirement of the extension of its bank line
of credit, the Company raised $250,000. These funds were an equity
investment provided by its directors, a former director and executive
officers and will be available for general corporate purposes.
F-15
51
Stock Warrants -
The following is a summary of the outstanding warrants to purchase the
Company's common stock at September 30, 1997 as a result of various debt
and equity offerings that have occurred since the Company's inception:
Exercise Price Per Number of Shares of
Exercise Period From Exercise Period Common Share Common Stock Reserved
To
---------------------- ---------------------- --------------------- -------------------------
October 1991 October 2001 0.75 100,000
June 1993 June 1998 0.75 25,000
August 1993 August 1998 0.75 300
September 1993 September 1998 1.06 50,000
January 1995 January 2000 1.90 64,350
April 1995 April 2000 2.50 5,000
October 1995 October 2000 2.25 24,000
December 1995 December 2000 1.56 5,000
June 1996 June 2001 2.70 112,979
-------------
386,629
=============
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 nonemployee
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 nonexecutive 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.
F-16
52
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, 1997 and 1996.
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1996 Granted (1) Canceled Exercised 1997
------------------- ----------------- -------------- --------------- --------------- -----------------
Employee Plan 248,558 60,000 135,751 79,682 93,125
Director Plan 71,250 15,000 10,000 0 76,250
Management
Plan 977,540 30,000 207,751 124,789 675,000
----------------- -------------- --------------- --------------- -----------------
1,297,348 105,000 353,502 204,471 844,375
================= ============== =============== =============== =================
(1) Options granted during 1997 have a weighted average exercise price
and weighted average fair value of $1.875 and $1.12, respectively.
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1995 Granted(2) Canceled Exercised 1996
------------------- ----------------- -------------- --------------- --------------- -----------------
Employee Plan 186,964 131,500 6,655 63,251 248,558
Director Plan 70,000 31,250 0 30,000 71,250
Management
Plan 1,451,500 350,000 123,054 700,906 977,540
----------------- -------------- --------------- --------------- -----------------
1,708,464 512,750 129,709 794,157 1,297,348
================= ============== =============== =============== =================
(2) Options granted during 1996 have a weighted average exercise price
and weighted average fair value of $4.63 and $2.40, respectively.
During 1997, certain individuals exercised options by delivering to the
Company shares previously purchased in consideration for the option
price. The amounts reflected in additional paid in capital are net of
the fair market value of the shares redeemed by the Company.
F-17
53
Options outstanding as of September 30, 1997 become exercisable as
follows-
Exercise
Plan Price Total 1997 1998 1999 Thereafter
----------------- ------------- ------------- -------------- ----------- ------------ ---------------
Employee $0.75- 93,125 41,178 24,614 15,833 11,500
Plan $6.50
Director $0.81- 76,250 61,250 15,000 0 0
Plan $4.4375
Management $.875- 675,000 438,999 124,000 112,001 0
Plan $5.8125
------------- -------------- ----------- ------------ ---------------
844,375 541,427 163,614 127,834 11,500
============= ============== =========== ============ ===============
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), which was
effective October 1, 1996, the fair value of option grants is estimated
on the date of grant using the Black-Scholes option-pricing model for
proforma footnote purposes with the following assumptions used for
options granted subsequent to October 1, 1996; dividend yield of 0%,
risk-free interest rate of 6.31% and 6.64% in 1997 and 1996, and
expected option life of 4 years. Expected volatility was assumed to be
73.5% and 78% in 1997 and 1996, respectively.
As permitted by FAS 123, the Company has chosen to continue to account
for its employee stock-based compensation at their intrinsic value in
accordance with Accounting Principle Board Opinion No. 25. Accordingly
no compensation expense has been recognized for its stock option
compensation plans. Had the fair value method of accounting been
applied to the company's stock option plans, the tax-effected impact
would be as follows:
------------------ -------------------
(Thousands of dollars except per share amounts) 1997 1996
------------------ -------------------
Net loss as reported $2,832 $597
Estimated fair value of the year's option grants, net of tax
76 788
------------------ -------------------
Net loss adjusted
$2,908 $1,385
------------------ -------------------
Adjusted net loss per share
$.15 $.08
================== ===================
F-18
54
SCHEDULE I
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(c) Additions (d)
(b) Balance Charged to Deductions -
at Beginning Costs and Net (e) Other (f) Balance
(a) Description of Year Expenses Write-Offs Adjustment at End of Year
- ------------------------------ --------------- --------------- -------------- --------------- ---------------
Allowance for doubtful
accounts, year ended-
September 30, 1997 $339,000 $1,120,000 ($597,000) $0 $862,000
============= ============== ============== =============== =============
September 30, 1996 $150,000 $462,000 ($273,000) $0 $339,000
============= ============== ============== =============== =============
September 30, 1995 $99,000 $153,000 ($102,000) $0 $150,000
============= ============== ============== =============== =============
S-20
55
Exhibit Index
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
EXHIBIT NO. DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.6.1 *-- Lease dated May 30, 1997 for office space at 300 Atrium, Somerset, New
Jersey
10.15.1 - Employment agreement between George J. Eklund and the Company dated March 12, 1996
10.15.2 *-- Amended employment agreement between George J. Eklund and the Company dated December 16, 1997
10.16.1 *-- Seventh amended Loan Agreement between Registrant and Summit Bank and sixth amended Promissory
Note
21.0 -- Subsidiaries (Exhibit 21 to Form 10-K for fiscal 1996)
23.1 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 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 1997 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 1997 into the Company's registration
Statement on form S-3 file number 33-91700.
23.4 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-09313.
27. *-- Financial Data Schedule.